EXHIBIT
99.3
 PETROFLOW ENERGY LTD.
 CONSOLIDATED FINANCIAL STATEMENTS
 AS AT AND FOR THE YEAR ENDED DECEMBER 31, 2008




---



##### 



PETROFLOW ENERGY LTD.
 Managements Report
     SIGNED
    
    SIGNEDJohn Melton 
Chief Executive Officer
    
    Duncan Moodie
Chief Financial OfficerCalgary, Canada
April 22, 2009




---



##### 



Auditors Report




---



##### 



Petroflow Energy Ltd.
 2008
    
    2007AssetsCurrent assetsCash and cash equivalents
    
    $
    3,027,192
    
    
    $
    801,804Accounts receivable
    
    
    14,714,826
    
    
    
    4,931,126Risk management asset (note 12)
    
    
    6,620,773
    
    
    
    Pre-paids and other
    
    
    977,594
    
    
    
    289,72725,340,385
    
    
    
    6,022,657Risk management asset (note 12)
    
    
    1,338,144
    
    
    
    Investment in limited partnership (note 4)
    
    
    611,400
    
    
    
    498,450Property and equipment (note 5)
    
    
    167,820,260
    
    
    
    96,508,175$
    195,110,189
    
    
    $
    103,029,282Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    34,194,464
    
    
    $
    19,460,854Risk management liabilities (note 12)
    
    
    
    
    
    
    210,123Current portion of obligation under capital lease (note 8)
    
    
    10,746,665
    
    
    
    3,498,53144,941,129
    
    
    
    23,169,508Bank loan (note 7)
    
    
    101,764,599
    
    
    
    52,957,826Obligation under capital lease (note 8)
    
    
    13,550,669
    
    
    
    6,835,012Risk management liabilities (note 12)
    
    
    
    
    
    
    122,192Asset retirement obligations (note 6)
    
    
    1,520,690
    
    
    
    861,488Future Income Tax (note 10)
    
    
    419,000162,196,087
    
    
    
    83,946,026Shareholders equityShare capital (note 9)
    
    
    38,424,897
    
    
    
    36,900,052Warrants (note 9)
    
    
    103,935
    
    
    
    103,935Contributed surplus (note 9)
    
    
    6,221,881
    
    
    
    3,369,281Accumulated other comprehensive income (loss)
    
    
    2,232,397
    
    
    
    (2,930,825
    )Deficit
    
    
    (14,069,008
    )
    
    
    (18,359,187
    )32,914,102
    
    
    
    19,083,256$
    195,110,189
    
    
    $
    103,029,282
 See accompanying notes to consolidated financial statements.
 Approved by the Board of Directors
 Signed Richard Clark
    
    Director
    
    Signed Donald Rowden
    
    Director




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##### 



Petroflow Energy Ltd.
 Year ended December 31,2008
    
    2007RevenueOil and natural gas sales
    
    $
    54,715,516
    
    
    $
    21,993,334Royalties
    
    
    (11,837,460
    )
    
    
    (4,930,874
    )42,878,056
    
    
    
    17,062,460Interest and other
    
    
    88,804
    
    
    
    108,77042,966,860
    
    
    
    17,171,230ExpensesOperating
    
    
    11,018,376
    
    
    
    6,167,758Transportation
    
    
    206,645
    
    
    
    268,161Depletion and depreciation
    
    
    10,333,337
    
    
    
    5,940,961Write-down of property and equipment
    
    
    1,015,950
    
    
    
    Accretion
    
    
    63,360
    
    
    
    75,937General and administrative
    
    
    9,825,217
    
    
    
    5,101,582Stock-based compensation (note 9)
    
    
    3,172,349
    
    
    
    1,261,763Interest and financing costs
    
    
    6,101,430
    
    
    
    4,314,555Provision for doubtful receivables (note 12)
    
    
    2,159,181
    
    
    
    43,895,845
    
    
    
    23,130,717Loss before other items
    
    
    (928,985
    )
    
    
    (5,959,487
    )Realized loss on derivative instruments
    
    
    (1,517,232
    )
    
    
    (259,056
    )Unrealized gain (loss) derivative instruments
    
    
    7,300,422
    
    
    
    (454,062
    )Foreign exchange loss
    
    
    (12,423
    )
    
    
    (114,720
    )Income (loss) before income taxes
    
    
    4,841,782
    
    
    
    (6,787,325
    )Current income tax
    
    
    185,603
    
    
    
    Future income tax
    
    
    366,000
    
    
    
    Net income (loss) for the year
    
    
    4,290,179
    
    
    
    (6,787,325
    )Deficit, beginning of the year
    
    
    (18,359,187
    )
    
    
    (10,999,503
    )Change in accounting policy
    
    
    
    
    
    
    (572,359
    )Deficit, end of the year
    
    $
    (14,069,008
    )
    
    $
    (18,359,187
    )Net income (loss) for the period per common shareBasic
    
    $
    0.15
    
    
    $
    (0.25
    )Diluted
    
    $
    0.13
    
    
    $
    (0.25
    )Weighted average common shares outstandingBasic
    
    
    29,421,768
    
    
    
    26,815,379Diluted
    
    
    31,952,599
    
    
    
    27,311,508




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##### 



Petroflow Energy Ltd.
 Year ended December 31,2008
    
    2007Net income (loss)
    
    $
    4,290,179
    
    
    $
    (6,787,325
    )Other comprehensive income (loss)
Foreign currency translation adjustment
    
    
    5,163,222
    
    
    
    (3,209,243
    )Comprehensive income (loss)
    
    $
    9,453,401
    
    
    $
    (9,996,568
    )
  
 Year ended December 31,2008
    
    2007Accumulated other comprehensive income (loss),
beginning of year
    
    $
    (2,930,825
    )
    
    $
    278,418Foreign currency translation adjustment
    
    
    5,163,222
    
    
    
    (3,209,243
    )Accumulated other comprehensive income (loss), end of year
    
    $
    2,232,397
    
    
    $
    (2,930,825
    )




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##### 



Petroflow Energy Ltd.
 Year ended December 31,2008
    
    2007Cash provided by (used in):Operating activitiesNet income (loss)
    
    $
    4,290,179
    
    
    $
    (6,787,325
    )Non-cash items:Depletion and depreciation
    
    
    10,333,337
    
    
    
    5,940,961Accretion
    
    
    63,360
    
    
    
    75,937Write-down of property and equipment
    
    
    1,015,950
    
    
    
    Unrealized (gain) loss on derivative instruments
    
    
    (7,300,422
    )
    
    
    454,062Foreign exchange loss
    
    
    
    
    
    
    114,720Interest and financing costs
    
    
    
    
    
    
    (36,317
    )Non-cash common share compensation
    
    
    708,000
    
    
    
    Stock-based compensation
    
    
    3,172,349
    
    
    
    1,261,763Future income tax
    
    
    366,000
    
    
    
    12,648,752
    
    
    
    1,023,801Changes in non-cash working capital items
    
    
    (3,043,997
    )
    
    
    (3,256,456
    )9,604,755
    
    
    
    (2,232,655
    )Financing activitiesIncrease in bank loan
    
    
    31,787,362
    
    
    
    49,271,408Exercise of stock options
    
    
    497,096
    
    
    
    Issuance of common shares (net of share issue costs)
    
    
    
    
    
    
    7,940,915Capital lease payments
    
    
    (4,100,390
    )
    
    
    (1,187,107
    )Repayment of notes payable
    
    
    
    
    
    
    (15,045,800
    )28,184,068
    
    
    
    40,979,416Investing activitiesExpenditures on property, plant and equipment
    
    
    (69,839,326
    )
    
    
    (48,909,133
    )Disposals on property, plant and equipment
    
    
    28,249,927
    
    
    
    Net change in non-cash investing items
    
    
    3,956,833
    
    
    
    8,485,496(37,632,566
    )
    
    
    (40,423,697
    )Increase in cash and cash equivalents
    
    
    156,257
    
    
    
    (1,676,936
    )Effect of foreign currency rate changes on cash and cash equivalents
    
    
    2,069,131
    
    
    
    (686,516
    )Increase (decrease) in cash and cash equivalents
    
    
    2,225,388
    
    
    
    (2,363,452
    )Cash and cash equivalents, beginning of year
    
    
    801,804
    
    
    
    3,165,256Cash and cash equivalents, end of year
    
    $
    3,027,192
    
    
    $
    801,804Cash interest paid
    
    $
    3,819,868
    
    
    $
    4,605,845Cash interest received
    
    $
    49,323
    
    
    $
    108,770Non-Cash capital expenditure through leases
    
    $
    14,176,355
    
    
    $
    7,574,995




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##### 



Petroflow Energy Ltd.
 INCORPORATION
  1. SIGNIFICANT ACCOUNTING POLICIES
 (a) Consolidation and Basis of Presentation
   (b) Measurement Uncertainty
     (1)




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##### 



Petroflow Energy Ltd.
 (c) Cash and Cash Equivalents
  (d) Revenue Recognition
  (e) Property and Equipment
 Capitalized costs
  Depletion and Depreciation
  Ceiling Test
  (2)




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##### 



Petroflow Energy Ltd.
 (f) Joint Interests
  (g) Asset Retirement Obligations
  (h) Future Income Taxes
  (i) Earnings (Loss) Per Share
  (j) Stock-Based Compensation
  (3)




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##### 



Petroflow Energy Ltd.
 (k) Warrants
  (l) Financial Instruments
    
    
    Is a derivative, except for those derivatives that have been designated as effective
hedging instruments;
    
    Has been acquired or incurred principally for the purpose of selling or repurchasing in
the near future; or
    
    Is part of a portfolio of financial instruments that are managed together and for which
there is evidence of a recent actual pattern of short-term profit taking.
  Derivative Financial Instruments
   (4)




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##### 



Petroflow Energy Ltd.
  (m) Foreign Currency Translation
  2. CHANGES IN ACCOUNTING POLICIES
  Capital Disclosures
  Financial Instruments Disclosures and Presentation
  3. FUTURE ACCOUNTING STANDARD CHANGES
   (5)




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##### 



Petroflow Energy Ltd.
   4. INVESTMENT IN LIMITED PARTNERSHIP
  5. PROPERTY AND EQUIPMENT
 Accumulateddepletion &December 31, 2008
    
    Cost
    
    depreciation
    
    Net book valuePetroleum and natural gas interests
and the equipment thereon
    
    $
    191,191,160
    
    
    $
    (23,952,401
    )
    
    $
    167,238,759Office Equipment
    
    
    757,862
    
    
    
    (176,361
    )
    
    
    581,501$
    191,949,022
    
    
    $
    (24,128,762
    )
    
    $
    167,820,260December 31, 2007Petroleum and natural gas interests
and the equipment thereon
    
    $
    107,151,998
    
    
    $
    (10,818,198
    )
    
    $
    96,333,800Office Equipment
    
    
    247,121
    
    
    
    (72,746
    )
    
    
    174,375$
    107,399,119
    
    
    $
    (10,890,944
    )
    
    $
    96,508,175
  (6)




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##### 



Petroflow Energy Ltd.
    Crude Oil ($/bbl)
    
    Natural Gas ($/Mcf)As at December 31,
    
    2008
    
    2007
    
    2008
    
    2007United States2009
    
    $
    72.06
    
    
    $
    85.20
    
    
    $
    7.12
    
    
    $
    7.472010
    
    
    85.91
    
    
    
    91.91
    
    
    
    7.81
    
    
    
    7.422011
    
    
    100.41
    
    
    
    78.27
    
    
    
    8.58
    
    
    
    7.422012
    
    
    108.85
    
    
    
    77.12
    
    
    
    9.40
    
    
    
    7.532013
    
    
    117.51
    
    
    
    75.85
    
    
    
    10.14
    
    
    
    7.70Thereafter
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %Canada2009
    
    $
    76.64
    
    
    $
    100.81
    
    
    $
    8.34
    
    
    $
    9.962010
    
    
    91.36
    
    
    
    96.74
    
    
    
    8.88
    
    
    
    9.962011
    
    
    106.62
    
    
    
    92.56
    
    
    
    9.82
    
    
    
    9.942012
    
    
    115.75
    
    
    
    91.28
    
    
    
    10.69
    
    
    
    10.092013
    
    
    125.14
    
    
    
    89.88
    
    
    
    11.59
    
    
    
    10.35Thereafter
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
 6. ASSET RETIREMENT OBLIGATIONS
   December 31,
    
    2008
    
    2007Beginning of year
    
    $
    861,488
    
    
    $
    1,199,142Increase in liabilities
    
    
    111,822
    
    
    
    51,853Changes in estimate
    
    
    727,286
    
    
    
    (465,444
    )Disposal of asset and other
    
    
    (125,588
    )
    
    
    Asset retirement costs incurred
    
    
    (117,677
    )
    
    
    Accretion expense
    
    
    63,359
    
    
    
    75,937$
    1,520,690
    
    
    $
    861,488
 (7)




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##### 



Petroflow Energy Ltd.
 
 7. BANK LOAN
    8. OBLIGATION UNDER CAPITAL LEASE
  2009
    
    $
    13,437,9082010
    
    
    10,249,2432011
    
    
    4,635,725Total minimum lease payment
    
    
    28,322,876Less amount representing annual interest at 12.0%
    
    
    (4,025,542
    )24,297,334Less current portion
    
    
    (10,746,665
    )$
    13,550,669
   (8)




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##### 



Petroflow Energy Ltd.
 
 9. SHARE CAPITAL
    Number ofShares
    
    AmountBalance at December 31, 2006
    
    
    24,858,902
    
    
    $
    29,017,960Common shares issued for cash (b.1)
    
    
    4,280,842
    
    
    
    8,258,739Warrants shares issued for cash
    
    
    8,000
    
    
    
    4,000Transfer from contributed surplus on exercise of options
    
    
    94,600
    
    
    
    82,301Transfer of fair value of warrants exercised
    
    
    
    
    
    
    491Share issue costs
    
    
    
    
    
    
    (463,439
    )Balance at December 31, 2007
    
    
    29,242,344
    
    
    $
    36,900,052Shares issued to directors (b.2)
    
    
    100,000
    
    
    
    708,000Exercise of stock options
    
    
    228,750
    
    
    
    497,096Transfer from contributed surplus on exercise of options
    
    
    
    
    
    
    319,749Balance at December 31, 2008
    
    
    29,571,094
    
    
    $
    38,424,897
 (b.1)
    
    On July 23, 2007 the Company closed a private placement offering of 4,033,555 common shares
at a price of $1.90 per common share for aggregate proceeds of $7,663,755 and a private
placement offering of 247,287 common shares at a price of $2.10 per common share for aggregate
proceeds of $519,303. The common shares issued under these offerings were subject to a four
month hold period that expired on November 21, 2007.(b.2)
    
    On July 10, 2008 the Company issued 100,000 common shares to the directors of the Company as
compensation at a value of $7.08 per share.
  Number ofWarrants
    
    AmountBalance at December 31, 2006
    
    
    2,050,000
    
    
    $
    625,926Expired
    
    
    (350,000
    )
    
    
    (521,500
    )Exercised
    
    
    (8,000
    )
    
    
    (491
    )Balance at December 31, 2008 and 2007
    
    
    1,692,000
    
    
    $
    103,935
  (9)




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##### 



Petroflow Energy Ltd.
 
   2008
    
    2007Balance, beginning of year
    
    $
    3,369,281
    
    
    $
    1,668,319Stock-based compensation expense
    
    
    3,172,349
    
    
    
    1,261,763Expired Warrants
    
    
    
    
    
    
    521,500Exercise of stock options
    
    
    (319,749
    )
    
    
    (82,301
    )Balance, end of year
    
    $
    6,221,881
    
    
    $
    3,369,281
    2008
    
    2007WeightedNumber of
    
    average
    
    Number of
    
    Weighted averageOptions
    
    exercise price
    
    Options
    
    exercise priceOutstanding, beginning of year
    
    
    2,476,200
    
    
    $
    2.01
    
    
    
    2,080,300
    
    
    $
    1.93Granted
    
    
    672,000
    
    
    
    5.61
    
    
    
    638,500
    
    
    
    2.39Exercised
    
    
    (228,750
    )
    
    
    2.17
    
    
    
    (94,600
    )
    
    
    0.89Cancelled
    
    
    (20,850
    )
    
    
    3.21
    
    
    
    (148,000
    )
    
    
    3.36Outstanding, end of year
    
    
    2,898,600
    
    
    $
    2.82
    
    
    
    2,476,200
    
    
    $
    2.01
 (10)




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##### 



Petroflow Energy Ltd.
 
 Options outstanding
    
    Options exercisableWeighted
    
    
    
    
    
    
    
    
    
    Weightedaverage
    
    Weighted
    
    
    
    
    
    averageremaining
    
    Average
    
    
    
    
    
    remainingNumber
    
    contractual life
    
    exercise
    
    Number
    
    contractual lifeExercise prices
    
    outstanding
    
    (years)
    
    price
    
    outstanding
    
    (years)$0.00-$2.00
    
    
    1,099,100
    
    
    
    1.96
    
    
    
    1.06
    
    
    
    1,065,767
    
    
    
    1.89$2.01-$4.00
    
    
    1,327,500
    
    
    
    3.04
    
    
    
    2.95
    
    
    
    1,086,501
    
    
    
    2.86$4.01-$6.00
    
    
    110,000
    
    
    
    3.16
    
    
    
    4.61
    
    
    
    57,500
    
    
    
    2.51$6.01-$8.00
    
    
    362,000
    
    
    
    4.51
    
    
    
    7.16
    
    
    
    120,666
    
    
    
    4.51Total
    
    
    2,898,600
    
    
    
    2.82
    
    
    
    2.82
    
    
    
    2,330,434
    
    
    
    2.49
  Options outstanding
    
    Options exercisableWeighted
    
    
    
    
    
    
    
    
    
    Weightedaverage
    
    Weighted
    
    
    
    
    
    averageremaining
    
    Average
    
    
    
    
    
    remainingNumber
    
    contractual life
    
    exercise
    
    Number
    
    contractual lifeExercise prices
    
    outstanding
    
    (years)
    
    price
    
    outstanding
    
    (years)$0.00-$2.00
    
    
    1,114,100
    
    
    
    2.88
    
    
    
    1.02
    
    
    
    738,900
    
    
    
    2.87$2.01-$4.00
    
    
    1,362,100
    
    
    
    3.61
    
    
    
    2.81
    
    
    
    649,650
    
    
    
    3.33Total
    
    
    2,476,200
    
    
    
    3.28
    
    
    
    2.01
    
    
    
    1,388,550
    
    
    
    3.07
  2008
    
    2007Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    89
    %
    
    
    102
    %Risk Free rate of return
    
    
    1.09
    %
    
    
    3.87
    %Expected option life
    
    2- 5 years
    
    2- 5 years
 (11)




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##### 



Petroflow Energy Ltd.
 
 10. INCOME TAXES
  December 31,
    
    2008
    
    2007Income (loss) before income taxes
    
    $
    4,840,000
    
    
    $
    (6,787,000
    )Tax Rate
    
    
    29.50
    %
    
    
    32.12
    %Expected income taxes (recovery)
    
    
    1,428,000
    
    
    
    (2,180,000
    )State tax, net of federal benefit
    
    
    545,000
    
    
    
    Stock based compensation
    
    
    936,000
    
    
    
    405,000Other non-deductible expenses
    
    
    18,000
    
    
    
    5,000Impact of rate change and other
    
    
    936,000
    
    
    
    (3,006,000
    )Valuation allowance (Canada)
    
    
    1,345,000
    
    
    
    996,000Valuation allowance (United States)
    
    
    (4,524,000
    )
    
    
    4,524,000Other
    
    
    (132,397
    )
    
    
    Total income tax expense
    
    $
    551,603
    
    
    $
    
  December 31,
    
    2008
    
    2007Property and equipment
    
    $
    31,000,000
    
    
    $
    21,597,000Asset retirement obligation
    
    
    (573,000
    )
    
    
    (280,000
    )Risk Management
    
    
    3,121,000
    
    
    
    (98,000
    )Losses carried forward
    
    
    (34,849,000
    )
    
    
    (27,776,000
    )Valuation allowance
    
    
    2,163,000
    
    
    
    6,778,000Deferred financing charges
    
    
    (213,000
    )
    
    
    Alternative minimum tax
    
    
    (213,000
    )
    
    
    Other
    
    
    (17,000
    )
    
    
    Total Future tax liability
    
    $
    419,000
    
    
    $
    
  Canada2011
    
    $
    7,6712015
    
    
    266,2072016
    
    
    974,5912027
    
    
    2,073,4992028
    
    
    2,125,2092029
    
    
    3,000,000$
    8,447,177
 (12)




---



##### 



Petroflow Energy Ltd.
 
   United States2026
    
    $
    2,097,5192027
    
    
    30,499,3152028
    
    
    5,936,8512029
    
    
    45,900,000$
    83,433,685
 11. COMMITMENTS
  2009
    
    $
    309,7842010
    
    
    230,9562011
    
    
    80,2312012
    
    
    81,0862013
    
    
    34,040$
    736,097
 12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
  Fair value of Financial Instruments
   (13)




---



##### 



Petroflow Energy Ltd.
 
  As at December 31,
    
    2008
    
    2007Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    amount
    
    Fair ValueFinancial assetsHeld-for-trading:Cash and cash equivalents
    
    $
    3,027,192
    
    
    
    3,027,192
    
    
    
    801,804
    
    
    
    801,804Risk management assets*
    
    
    7,958,917
    
    
    
    7,958,917
    
    
    
    
    
    
    
    Loans and receivablesAccounts receivables
    
    
    14,714,826
    
    
    
    14, 714,826
    
    
    
    4,931,126
    
    
    
    4,931,126Financial LiabilitiesHeld-for-tradingAccounts payable and accrued liabilities
    
    
    34,194,464
    
    
    
    34,194,464
    
    
    
    19,460,854
    
    
    
    19,460,854Risk management liabilities*
    
    
    
    
    
    
    
    
    
    
    332,315
    
    
    
    332,315Long term debt
    
    
    101,764,599
    
    
    
    101,764,599
    
    
    
    52,957,826
    
    
    
    52,957,826
 *
    
    Including current portion
 Net risk management position
 As at December 31,
    
    2008
    
    2007Risk management assetsCurrent asset
    
    $
    6,620,773
    
    
    $
    Long term asset
    
    
    1,338,144
    
    
    
    7,958,917
    
    
    
    Risk management liability
Current liability
    
    
    
    
    
    
    210,123Long term liability
    
    
    
    
    
    
    122,192
    
    
    
    332,315Net risk management asset (liability)
    
    $
    7,958,917
    
    
    $
    332,315
 Summary of unrealized risk management positions
 As at December 31,
    
    2008
    
    2007Asset
    
    Liability
    
    Net
    
    Asset
    
    Liability
    
    NetCommodity PricesNatural Gas
    
    $
    6,023,612
    
    
    $
    
    
    
    $
    6,023,612
    
    
    $
    332,614
    
    
    $
    
    
    
    $
    332,614Crude Oil
    
    
    1,935,305
    
    
    
    
    
    
    
    1,935,305
    
    
    
    
    
    
    
    (664,929
    )
    
    
    (664,929
    )Total Fair Value
    
    $
    7,958,917
    
    
    $
    
    
    
    $
    7,958,917
    
    
    $
    332,614
    
    
    $
    (664,929
    )
    
    $
    (332,315
    )
 Commodity Price Risk
  (14)




---



##### 



Petroflow Energy Ltd.
 
       Volume per
    
    Call Price
    
    Put PricePeriod
    
    day (mmbtu)
    
    ($US)
    
    ($US)November 1, 2008  March 31, 2009
    
    
    1,750
    
    
    $
    11.40
    
    
    $
    7.50November 1, 2008  March 31, 2009
    
    
    2,000
    
    
    $
    11.20
    
    
    $
    8.00November 1, 2008  March 31, 2009
    
    
    3,000
    
    
    $
    13.55
    
    
    $
    8.00January 1, 2009  December 31, 2009
    
    
    1,000
    
    
    $
    
    
    
    $
    7.00April 1, 2009  September 30, 2009
    
    
    2,000
    
    
    $
    10.08
    
    
    $
    7.00April 1, 2009  October 31, 2009
    
    
    3,000
    
    
    $
    9.03
    
    
    $
    8.00October 1, 2009  December 31, 2009
    
    
    2,000
    
    
    $
    10.80
    
    
    $
    7.50November 1, 2009  November 30, 2010
    
    
    1,500
    
    
    $
    
    
    
    $
    6.50January 1, 2010  December 31, 2010
    
    
    2,000
    
    
    $
    10.05
    
    
    $
    6.50January 1, 2010  December 31, 2010
    
    
    500
    
    
    $
    
    
    
    $
    6.50January 1, 2010  December 31, 2010
    
    
    1,000
    
    
    $
    9.45
    
    
    $
    6.50
  Volume per
    
    Call Price
    
    Put PricePeriod
    
    day (bbls)
    
    ($US)
    
    ($US)January 1, 2008 - March 31, 2009
    
    
    75
    
    
    $
    72.80
    
    
    $
    65.00January 1, 2009  December 31, 2009
    
    
    75
    
    
    $
    100.50
    
    
    $
    75.00January 1, 2009  December 31, 2009
    
    
    100
    
    
    $
    89.70
    
    
    $
    70.00
 Risks associated with Financial Liabilities
  (15)




---



##### 



Petroflow Energy Ltd.
 
  Market Risk
  Interest Rate Risk
  Foreign Exchange Risk
   Credit Risk
    (16)




---



##### 



Petroflow Energy Ltd.
 
    Aging
    
    2008
    
    2007Not past due (less than 120 days)
    
    $
    12,020,236
    
    
    $
    4,931,126Past due (120 days to one year)
    
    
    2,694,590
    
    
    
    Total
    
    $
    14,714,826
    
    
    $
    4,931,126
  Liquidity Risk
    (17)




---



##### 



Petroflow Energy Ltd.
 
   March 31, 2009
    
    
    5.5:1June 30, 2009
    
    
    5.5:1September 30, 2009
    
    
    5.5:1December 31, 2009
    
    
    4.5:1
   13. CAPITAL STRUCTURE
 December 31,
    
    December 31,2008
    
    2007Bank debt
    
    $
    101,764,599
    
    
    $
    52,957,826Obligation under capital lease
    
    
    13,550,669
    
    
    
    6,835,012Working capital deficiency (1)
    
    
    26,221,517
    
    
    
    16,936,728Net debt
    
    
    141,536,785
    
    
    
    76,729,566Shareholders equity
    
    
    32,914,102
    
    
    
    19,083,256Total capitalization
    
    $
    174,450,887
    
    
    $
    88,977,810
 (1)
    
    Working capital excludes derivative contracts
   (18)




---



##### 



Petroflow Energy Ltd.
    14. RELATED PARTIES
      15. SEGMENTED INFORMATION
   (19)




---



##### 



Petroflow Energy Ltd.
 Twelve months ended December 31, 2008
    
    Canada
    
    USA
    
    ConsolidatedOil and gas sales
    
    $
    1,144,317
    
    
    $
    53,571,199
    
    
    $
    54,715,516Total revenue
    
    
    904,695
    
    
    
    42,062,166
    
    
    
    42,966,860Operating expenses
    
    
    393,630
    
    
    
    10,624,746
    
    
    
    11,018,376Depletion and depreciation
    
    
    961,032
    
    
    
    9,372,305
    
    
    
    10,333,337General and administrative expenses
    
    
    3,945,902
    
    
    
    5,879,315
    
    
    
    9,825,217Interest expense
    
    
    
    
    
    
    6,101,430
    
    
    
    6,101,430Current income tax expense
    
    
    
    
    
    
    185,603
    
    
    
    185,603Future income tax expense
    
    
    
    
    
    
    366,000
    
    
    
    366,000Income (loss) before income taxes
    
    
    (8,604,614
    )
    
    
    13,446,396
    
    
    
    4,841,782Capital expenditures
    
    
    77,303
    
    
    
    83,938,378
    
    
    
    84,015,681Proceeds on capital disposals
    
    
    
    
    
    
    (28,249,927
    )
    
    
    (28,249,927
    )Property and equipment
    
    
    3,156,447
    
    
    
    164,663,814
    
    
    
    167,820,260Total assets
    
    
    3,328,842
    
    
    
    191,781,347
    
    
    
    195,110,189
 Twelve months ended December 31, 2007
    
    Canada
    
    USA
    
    ConsolidatedOil and gas sales
    
    $
    1,144,960
    
    
    $
    20,848,374
    
    
    $
    21,993,334Total revenue
    
    
    818,220
    
    
    
    16,353,010
    
    
    
    17,171,230Operating expenses
    
    
    323,015
    
    
    
    5,844,743
    
    
    
    6,167,758Depletion and depreciation
    
    
    629,543
    
    
    
    5,311,418
    
    
    
    5,940,961General and administrative expenses
    
    
    3,129,582
    
    
    
    1,972,000
    
    
    
    5,101,582Interest expense
    
    
    147,541
    
    
    
    4,167,014
    
    
    
    4,314,555Loss before other income
    
    
    (3,532,198
    )
    
    
    (2,427,289
    )
    
    
    (5,959,487
    )Total Capital expenditures
    
    
    869,676
    
    
    
    55,157,160
    
    
    
    56,026,844Property and equipment
    
    
    5,023,435
    
    
    
    91,484,740
    
    
    
    96,508,175Total assets
    
    
    11,043,279
    
    
    
    91,986,003
    
    
    
    103,029,282
 16. SUBSEQUENT EVENTS
 Derivative Financial Instruments
   Volume per
    
    Swap Price
    
    Call Price
    
    Call PricePeriod
    
    day (mmbtu)
    
    ($US)
    
    ($US)
    
    ($US)September 1, 2009  September 30, 2010
    
    
    1,500
    
    
    $
    
    
    
    $
    
    
    
    $
    5.25January 1, 2010  November 30, 2010
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    6.50November 1, 2009  March 31, 2010
    
    
    2,500
    
    
    
    5.52
    
    
    
    
    
    
    November 1, 2010  March 31, 2011
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    6.25November 1, 2010  March 31, 2011
    
    
    750
    
    
    
    
    
    
    
    8.60
    
    
    
    6.25November 1, 2010  March 31, 2011
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    6.00January 1, 2011  March 31, 2011
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    6.25
 (20)




---



##### 



Petroflow Energy Ltd.
  Volume per
    
    Call Price
    
    Put PricePeriod
    
    day (bbls)
    
    ($US)
    
    ($US)May 1, 2009  August 31, 2009
    
    
    150
    
    
    $
    70.50
    
    
    $
    40.00September 1, 2009  March 31, 2011
    
    
    100
    
    
    
    
    
    
    
    47.50January 1, 2010  December 31, 2010
    
    
    100
    
    
    
    78.70
    
    
    
    65.00
 Bank Loan
  Normal Course Issuer Bid
   17. CONTINGENCIES
  18. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING
 Reconciliation of consolidated financial statements to United States generally accepted accounting
principles.
  (21)




---



##### 



Petroflow Energy Ltd.
 Reconciliation of net loss under Canadian GAAP to US GAAP:
 2008
    
    
    2007Net income (loss) for the year under Canadian GAAP
    
    $
    4,290,179
    
    
    $
    (6,787,325
    )AdjustmentsDepletion and depreciation (Note a)
    
    
    (549,758
    )
    
    
    (285,763
    )Write-down of property and equipment (Note a)
    
    
    (498,502
    )
    
    
    (1,754,743
    )Operating expenses (Note a)
    
    
    (44,446
    )
    
    
    (2,444
    )Future tax (expense) recovery (Note c)
    
    
    (115,000
    )
    
    
    Deferred financing charges (Note b)
    
    
    135,514
    
    
    
    (272,359
    )Net income (loss) for the year under US GAAP
    
    $
    3,217,987
    
    
    $
    (9,102,634
    )Net income (loss) per common share  US GAAPBasic
    
    $
    0.11
    
    
    $
    (0.34
    )Diluted
    
    $
    0.10
    
    
    $
    (0.34
    )
 Consolidated Statements of Comprehensive Loss  US GAAP
 2008
    
    
    2007Net income (loss)  US GAAP
    
    $
    3,217,987
    
    
    $
    (9,102,634
    )Other comprehensive income (loss):Foreign currency translation adjustment (Note a)
    
    
    4,235,575
    
    
    
    (3,041,061
    )Comprehensive income (loss)
    
    $
    7,453,562
    
    
    $
    (12,143,695
    )
 Accumulated Other Comprehensive Loss  US GAAP
 2008
    
    
    2007Accumulated other comprehensive income
(loss), beginning of year
    
    $
    (2,752,282
    )
    
    $
    288,779Foreign currency translation adjustment
    
    
    4,235,575
    
    
    
    (3,041,061
    )Accumulated other comprehensive income
(loss), end of year
    
    $
    1,483,293
    
    
    $
    (2,752,282
    )
 Condensed Consolidated Balance Sheets
 2008
    
    
    2007Canadian GAAP
    
    
    US GAAP
    
    
    Canadian GAAP
    
    
    US GAAPAssetsCash and cash equivalents
    
    $
    3,027,192
    
    
    $
    3,027,192
    
    
    $
    801,804
    
    
    $
    801,804Other current assets
    
    
    15,692,420
    
    
    
    15,692,420
    
    
    
    5,220,853
    
    
    
    5,220,853Deferred charges (Note b)
    
    
    
    
    
    
    543,007
    
    
    
    
    
    
    
    300,000Property and equipment (Note a)
    
    
    167,820,260
    
    
    
    164,118,485
    
    
    
    96,508,175
    
    
    
    94,917,247Investment in limited partnership
    
    
    611,400
    
    
    
    611,400
    
    
    
    498,450
    
    
    
    498,450Risk management assets
    
    
    7,958,917
    
    
    
    7,958,917
    
    
    
    
    
    
    
    $
    195,110,189
    
    
    
    191,951,421
    
    
    $
    103,029,282
    
    
    $
    101,738,354
 (22)




---



##### 



Petroflow Energy Ltd.
 2008
    
    
    2007Canadian GAAP
    
    
    US GAAP
    
    
    Canadian GAAP
    
    
    US GAAPLiabilities and shareholders equityAccounts payable and accrued
liabilities
    
    $
    34,194,464
    
    
    
    34,194,464
    
    
    $
    19,460,854
    
    
    $
    19,460,854Bank loan
    
    
    101,764,599
    
    
    
    101,764,599
    
    
    
    52,957,826
    
    
    
    52,957,826Asset retirement obligations
    
    
    1,520,690
    
    
    
    1,520,690
    
    
    
    861,488
    
    
    
    861,488Risk management liabilities
    
    
    
    
    
    
    
    
    
    
    332,315
    
    
    
    332,315Obligation under capital lease
    
    
    24,297,334
    
    
    
    24,297,334
    
    
    
    10,333,543
    
    
    
    10,333,543Future income tax (note c)
    
    
    419,000
    
    
    
    551,000
    
    
    
    
    
    
    
    162,196,087
    
    
    
    162,328,087
    
    
    
    83,946,026
    
    
    
    83,946,026Share capital (Note c)
    
    
    38,424,897
    
    
    
    37,972,925
    
    
    
    36,900,052
    
    
    
    36,448,080Warrants
    
    
    103,935
    
    
    
    103,935
    
    
    
    103,935
    
    
    
    103,935Contributed surplus
    
    
    6,221,881
    
    
    
    6,221,881
    
    
    
    3,369,281
    
    
    
    3,369,281Accumulated other comprehensive
loss (Note a)
    
    
    2,232,397
    
    
    
    1,483,293
    
    
    
    (2,930,825
    )
    
    
    (2,752,282
    )Deficit (Notes a,b,c)
    
    
    (14,069,008
    )
    
    
    (16,158,700
    )
    
    
    (18,359,187
    )
    
    
    (19,376,686
    )32,914,102
    
    
    
    29,623,334
    
    
    
    19,083,256
    
    
    
    17,792,328$
    195,110,189
    
    
    
    191,951,421
    
    
    $
    103,029,282
    
    
    $
    101,738,354
 a) Full cost accounting
    (23)




---



##### 



Petroflow Energy Ltd.
   b) Deferred financing charges
  c) Future income taxes
      December 31,
    
    2008
    
    2007Income (loss) before income taxes
    
    $
    3,885,000
    
    
    $
    (9,103,000
    )Tax Rate
    
    
    29.50
    %
    
    
    32.12
    %Expected income taxes (recovery)
    
    
    1,146,000
    
    
    
    (2,924,000
    )State tax, net of federal benefit
    
    
    545,000
    
    
    
    Stock based compensation
    
    
    936,000
    
    
    
    405,000
 (24)




---



##### 



Petroflow Energy Ltd.
 December 31,
    
    2008
    
    2007Other non-deductible expenses
    
    
    18,000
    
    
    
    5,000Impact of rate change and other
    
    
    927,000
    
    
    
    (2,620,000
    )Valuation allowance (Canada)
    
    
    1,535,000
    
    
    
    780,000Valuation allowance (United States)
    
    
    (4,354,000
    )
    
    
    4,354,000Other
    
    
    (85,397
    )
    
    
    Total income tax expense
    
    $
    667,603
    
    
    $
    
  December 31,
    
    2008
    
    2007Property and equipment
    
    $
    30,321,000
    
    
    $
    (21,520,000
    )Asset retirement obligation
    
    
    (612,000
    )
    
    
    (280,000
    )Risk Management
    
    
    3,121,000
    
    
    
    144,000Losses carried forward
    
    
    (34,788,000
    )
    
    
    (27,874,000
    )Valuation allowance
    
    
    2,740,000
    
    
    
    6,778,000Alternative minimum tax
    
    
    (213,000
    )
    
    
    Other
    
    
    (18,000
    )
    
    
    Future tax liability
    
    $
    551,000
    
    
    $
    
 d) Recent accounting pronouncements
  i)
    
    As of January 1, 2008, the Company adopted, for U.S. GAAP purposes, SFAS, Fair Value
Measurements. SFAS 157 provides a common definition of fair value establishes a framework
for measuring fair value under U.S. GAAP and expands disclosures about fair value
measurements. This standard applies when other accounting pronouncements require fair value
measurements and does not require new fair value measurements. The adoption of this standard
did not have a material impact on the Companys Consolidated Financial Statements.ii)
    
    As of January 1, 2008, the Company had adopted, for US GAAP purposes, SFAS 159 The Fair
Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB
Statement No. 115. This statement permits, but does not require, entities to measure many
financial instruments at fair value. The objective is to provide entities with an opportunity
to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. Entities electing
this option will apply it when the entity first recognizes an eligible instrument and will
report unrealized gains and losses on such instruments in current earnings. This statement
1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an
instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only
to entire instruments. The adoption of this standard did not have a material impact on the
Companys Consolidated Financial Statements.
 (25)




---



##### 



Petroflow Energy Ltd.
 iii)
    
    As of January 1, 2009, the Company will be required to adopt, for US GAAP purposes, SFAS No.
160, Non-controlling Interest in Consolidated Financial Statements, an Amendment of ARB No.
51. Under the standard, the non-controlling interest in a subsidiary is to be classified as
a separate component of equity. Also, the US consolidated statement of earnings presentation
will require net earnings to include the amounts attributable to both the parent and the non
controlling interest and to disclose these respective amounts. The Company has assessed the
impact of this standard and it does not have a material impact on the Companys Consolidated
Financial Statements.iv)
    
    As of January 1, 2009, the Company will be required to adopt for US GAAP purposes, SFAS
141(R), Business Combinations, which replaces SFAS 141. This revised standard requires
assets and liabilities acquired in a business combination, contingent consideration, and
certain acquired contingencies to be measured at fair value as of the date of acquisition.
Also, transaction costs are to be recognized separately from the business combination. The
Company will assess the impact of acquisitions occurring on or after January 1, 2009.v)
    
    As of January 1, 2009, the Company will be required to adopt for US GAAP purposes, SFAS 161,
Derivatives Disclosures, an amendment to SFAS 133. The revised disclosure requirements
provide financial statement users with a better understanding of 1) how and why an entity uses
derivative instruments, 2) how an entity accounts for derivative instruments and related
hedged items under Statement 133, and 3) the effect of derivative instruments and related
hedged items on an entitys financial position, financial performance, and cash flows.vi)
    
    As of December 31, 2009, the Company will be required to prospectively adopt the new reserves
requirements that arise from the completion of the SECs project, Modernization of Oil and Gas
Reporting. The new rules include provisions that permit the use of new technologies to
establish proved reserves if those technologies have been demonstrated empirically to lead to
reliable conclusions about reserves volumes. Additionally, oil and gas reserves will be
reported using an average price based upon the prior 12-month period rather than year end
prices. The new rules will affect the reserve estimated used in the calculation of DD&A and
the ceiling test for U.S. GAAP purposes. The Company is assessing the impact these new rules
will have on its Consolidated Financial Statements.
 19. COMPARATIVE FIGURES
  (26)




---



##### 



Petroflow Energy Ltd.
 CORPORATE INFORMATION
 Directors
    
    OfficersRichard Clark
    
    Richard ClarkChairman
    
    ChairmanPartner, Gowling Lafleur Henderson LLPJoseph BlandfordJoseph Blandford
    
    Vice ChairmanVice ChairmanChairman, Engineering Foundation
Advisory Board
    
    John MeltonChief Executive OfficerDonald J. RowdenChief Executive Officer, MacSema Inc.
    
    Sandy AndrewPresident & Chief Operating OfficerRichard Azar, IIDirector
    
    Duncan MoodieChief Financial OfficerDavid ElgieDirector
    
    Kevin DavisSenior Vice President, Corporate DevelopmentJohn MeltonChief Executive Officer
    
    Patricia LeesonCorporate SecretaryAuditorsPricewaterhouseCoopers LLP
    
    Louis SchottCalgary, Alberta
    
    Associate Corporate SecretaryRegistrar and Transfer Agent
    
    Sally FletchingerValiant Trust Company
    
    Corporate ControllerCalgary, AlbertaLegal CounselGowling Lafleur Henderson LLPHogan & Hartson LLP
    
    Corporate OfficePetroflow Energy Ltd.Bankers
    
    970, 717  7th Avenue SWNational Bank of Canada
    
    Calgary, Alberta T2P 0Z3Texas Capital BankGuaranty BankTelephone: (403) 539-4320Stock Exchange Listings
    
    Facsimile: (403) 705-0488TSX Venture Exchange
    
    Contact: Duncan MoodieSymbol: PEF
    
    Email: dmoodie@petroflowenergy.comNYSE AmexSymbol: PED
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Petroflow Energy Ltd.
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