CALGARY, Aug. 13 /CNW/ - Iteration Energy Ltd. (TSX-ITX) ("Iteration" or

the "Company") announced today its unaudited financial and operating results

as at and for the three and six months ended June 30, 2009.

<<

CORPORATE SUMMARY

-------------------------------------------------------------------------

Three months ended Six months ended

Financial Highlights June 30, June 30,

($ thousands, except

as noted) 2009 2008 2009 2008

-------------------------------------------------------------------------

Production revenue

before royalties $44,936 $127,175 $103,629 $182,739

Funds from operations(1) $5,378 $52,824 $20,278 $81,337

Per share ($) - basic $0.03 $0.32 $0.11 $0.63

- diluted $0.03 $0.31 $0.11 $0.62

Net earnings (loss) ($22,978) $672 ($37,253) $2,362

Per share ($) - basic ($0.12) $0.00 ($0.21) $0.02

- diluted ($0.12) $0.00 ($0.21) $0.02

Net capital expenditures $4,196 $31,408 $39,556 $73,181

As at June 30,

2009 2008

-------------------------------------------------------------------------

Total assets $986,421 $1,236,662

Bank debt and working capital deficiency $241,371 $241,519

Common shares outstanding 210,985,384 166,020,387

Stock options outstanding 9,847,708 8,498,045

Warrants outstanding - 116,667

-------------------------------------------------------------------------

(1) "Funds from operations" and "funds from operations per share" are

financial measures that are not determined in accordance with GAAP.

See "Non-GAAP Measures" in the Company's Management Discussion and

Analysis.

-------------------------------------------------------------------------

Operating Highlights Three months ended Six months ended

June 30, June 30,

2009 2008 2009 2008

------------------------- -------------------------

Production

Natural gas (mcf/d) 74,650 76,563 76,934 62,180

Light oil (bbls/d) 3,017 3,840 3,196 2,725

Heavy oil (bbls/d) 203 168 190 192

Natural gas liquids

(bbls/d) 1,474 1,377 1,431 1,237

------------ ------------ ------------ ------------

Total production

(boe/d) 17,137 18,146 17,640 14,517

Prices

Natural gas ($/mcf) $3.46 $10.50 $4.45 $9.62

Light oil ($/bbl) $59.41 $129.54 $54.55 $119.31

Heavy oil ($/bbl) $49.32 $89.54 $44.80 $77.47

Natural gas liquids

($/bbl) $31.13 $58.68 $33.11 $53.09

------------ ------------ ------------ ------------

Average price ($/boe) $28.82 $77.02 $32.46 $69.16

Operating Netback

($/boe) $8.58 $47.06 $10.53 $41.60

Net Undeveloped Land

('000acres as at

June 30) 851 748

-------------------------------------------------------------------------

>>

PRESIDENT'S MESSAGE

The second quarter of 2009 included some positive milestones for

Iteration; we successfully completed a $57.5 million equity offering, our bank

credit facilities were refinanced and a non-core property disposition program

was initiated with the majority of the transactions closed by the end of July

2009. The operating environment continued to be a challenge in the quarter as

gas prices weakened, while stronger oil prices provided some benefit, and

production expenses increased.

Capital expenditures were curtailed in the quarter in response to weak

gas prices and limited activity due to spring break-up. Net capital

expenditures were $4.2 million for the quarter, a 90% decrease from the first

quarter of 2009. Approximately $2.2 million of dispositions were completed in

the second quarter.

Average production for the quarter was 17,137 boed, down six percent from

the first quarter of 2009 as a result of facility maintenance turnarounds,

particularly at Gold Creek in northwest Alberta, and natural declines due to

lack of activity. In addition, approximately 750 boed of production was

shut-in due to low commodity prices in the second quarter of 2009. Of this

amount approximately 300 boed was oil, most of which we expect to bring back

on stream in the last half of the year. However given current gas prices we

are expecting to shut-in an additional 350 boed of gas production.

Funds from operations for the quarter were $5.4 million ($0.03 per basic

and diluted share), 64% lower than in the first quarter of 2009 primarily due

to a decrease in average commodity prices and a decrease in production.

Production expenses continue to be a concern as prior period costs have

exceeded previous estimates and the fixed cost components of shut-in

production are increasing per unit costs. Initiatives are underway on two

fronts; one is improving the estimation process, and two is pursuing cost

savings with our various service providers in light of the economic

environment. In addition, the SemGroup receivable was written down by a

further $1.8 million to bring the total provision to $15.7 million, which

anticipates a recovery of 4% or $0.7 million of the initial receivable.

Without the additional SemGroup provision, funds from operations would have

been $7.2 million. The net loss for the quarter of $23.0 million ($0.12 per

basic and diluted share) is up from the $14.3 million net loss in the first

quarter and is consistent with the lower funds from operations.

Progress was made during the quarter to improve the Company's financial

position even though funds from operations decreased. During the second

quarter, Iteration completed a $57.5 million equity financing at $1.28 per

share issuing approximately 45.0 million common shares, the net proceeds of

which were used to repay debt. In May 2009 a new $265 million credit facility

was also put in place to replace the previous $260 million facility. In July

2009 we completed $39.8 million in property dispositions with proceeds used to

reduce bank debt. The dispositions resulted in a $12.5 million reduction to

the borrowing base, which is now $252.5 million. Pro forma the dispositions,

total debt outstanding would have been approximately $200 million at the end

of the second quarter of 2009.

Total proceeds from the Company's 2009 non-core property disposition

program are approximately $42 million (prior to closing adjustments; $2.2

million completed in the second quarter of 2009 and $39.8 million completed in

July 2009). Approximately 1,000 boed of production and 3.2 million boe of

proved plus probable reserves were disposed of through this initiative.

Looking forward we have updated our guidance to reflect the property

dispositions, shut-in production, lower capital expenditures, higher

production expenses and changes to commodity prices. These changes result in

forecasted funds from operations for 2009 of approximately $40 million ($0.20

per basic share) based on annual capital expenditures of $65 million (net of

drilling incentive credits) and an average production range for the year of

15,600 to 16,100 boed. Economic parameters used for the last six months of

2009 in this forecast are; AECO gas price of $3.75/mcf, WTI oil price of

US$65.00/bbl and foreign exchange rate of Cdn$0.90 to US$1.00.

Annual capital expenditures of $65 million have been reduced from our

previous guidance of $75 million due to lower funds from operations. Given the

increase in oil prices and the extension of the Alberta royalty and drilling

credit program we are altering our spending profile on oil prospects and have

cut spending on our remaining gas prospects. The extension of the Alberta

royalty and drilling credit program has allowed us to develop our Manyberries

(southeast Alberta) program in a more efficient manner by delaying part of the

capital program to 2010. This will permit us to drill wells after several of

the waterflood pools have been properly pressured up and still earn the

drilling credits. The higher oil prices have also made the economics on

several other areas more attractive, particularly at Rainbow (northwest

Alberta). Given the limited access to this area we will now shift part of our

capital spending from Manyberries to this area and expect drilling to commence

in October/November 2009. As activities for both Manyberries and Rainbow don't

begin until later in this year, we do not expect to see new production until

the first quarter of 2010.

Previously we had forecasted funds from operations to exceed capital

expenditures in the second half of the year so that on an annual basis they

would be about equal. However given we have disposed of non-core properties,

we are directing additional capital to our oil prospects in core areas. We now

expect capital expenditures to be slightly higher than funds from operations

for the last half of the year, and as a result, exceed them by $25 million on

a full year basis.

Our Company possesses a large inventory of gas prospects and a solid

inventory of oil prospects, some of which we are pursuing in the last half of

the year. While gas prices are currently too low to warrant capital

investment; a significant part of our gas inventory does make economic sense

at prices as low as $5.00/mcf at AECO. The forward commodity market currently

gives us the opportunity to establish prices at or in excess of this level.

The majority of our oil inventory is economic at today's prices and similar to

gas, the forward market allows us to lock in these prices. Given the

volatility we have experienced in commodity prices we expect to implement a

hedging program shortly to secure prices by way of either fixed price swaps or

options that meet or exceed our economic criteria. On average we expect to

ultimately hedge up to one third of our base production up to two years

forward. Ideally we will build this hedge portfolio over time and continue to

roll it forward.

Effective August 12, 2009 Mr. Howard Crone resigned from the Board of

Directors in order to pursue other interests. On behalf of the Company I would

like to thank Howie for his valuable contribution to the Board and wish him

all the best in his future endeavors.

The current gas operating environment is challenging and we expect it to

continue until a more robust economic recovery increases demand and the effect

of spending cuts starts to have a meaningful impact on supply. The oil

operating environment is more promising and we look forward to developing

these prospects in the second half of the year. We have been active in

improving our financial position and look to further secure that position

through some hedging activities. Our plans for the remainder of the year

provide a balance of capital spending to projected funds from operations.

<<

On behalf of the Board of Directors,

(Signed) Brian Illing

President & CEO

August 12, 2009

MANAGEMENT'S DISCUSSION AND ANALYSIS

August 12, 2009

>>

The following is Management's Discussion and Analysis ("MD&A") of

Iteration Energy Ltd.'s (the "Company" or "Iteration") operating and financial

results as at and for the three and six months ended June 30, 2009 as well as

information and estimates concerning the Company's future outlook based on

currently available information. This discussion should be read in conjunction

with Iteration's unaudited interim consolidated financial statements as at and

for the three and six months ended June 30, 2009 and the audited consolidated

financial statements as at and for the years ended December 31, 2008 and 2007,

together with accompanying notes. Readers should also refer to Iteration's

Annual Information Form ("AIF") for the year ended December 31, 2008. All

financial information is reported in Canadian dollars, unless noted otherwise,

and in accordance with Canadian generally accepted accounting principles

("GAAP").

Natural gas is converted to crude oil equivalent at a ratio of six

thousand cubic feet of natural gas to one barrel of oil equivalent ("boe").

Boe's may be misleading, particularly if used in isolation. A boe conversion

ratio of 6 mcf: 1 boe is based on an energy equivalency conversion method

primarily applicable at the burner tip and does not represent a value

equivalency at the wellhead.

Additional information about Iteration filed with Canadian securities

commissions, including periodic quarterly and annual reports and the AIF, is

available on-line at www.iterationenergy.com and at www.sedar.com.

The following MD&A contains forward looking information and statements.

We refer you to the end of the MD&A for our discussion on forward looking

information and statements in the section "ADVISORY - FORWARD LOOKING

INFORMATION".

ITERATION OVERVIEW

Iteration is a Canadian oil and gas company with focus areas in Northeast

British Columbia/Northwest Alberta, East Central Alberta and Southern Alberta.

The most significant currently producing properties are Boundary Lake in

Northeast British Columbia and Gold Creek, Knopcik and Manyberries in Alberta.

NON-GAAP MEASURES

This MD&A refers to "funds from operations" and "funds from operations

per share" which do not have any standardized meaning prescribed by Canadian

GAAP and therefore they may not be comparable with the calculation of similar

measures for other entities. Management uses "funds from operations" and

"funds from operations per share" (before changes in non-cash working capital)

to analyze operating performance and leverage. Funds from operations as

presented is not intended to represent operating cash flow or income from

operations for the period nor should it be viewed as an alternative to cash

flow from operating activities, net earnings or other measures of financial

performance calculated in accordance with Canadian GAAP. All references to

funds from operations and funds from operations per share throughout this MD&A

are based on cash flow from operating activities before changes in non-cash

working capital. The table below provides a reconciliation between cash flow

from operations and funds from operations.

<<

-------------------------------------------------------------------------

Three months ended Six months ended

($ thousands) June 30, June 30,

------------------------- -------------------------

2009 2008 2009 2008

------------------------- -------------------------

Funds from operations $5,378 $52,824 $20,278 $81,337

Changes in non-cash

working capital 3,286 (16,114) 9,195 (101)

------------------------- -------------------------

Cash flow from

operations $8,664 $36,710 $29,473 $81,236

-------------------------------------------------------------------------

>>

OUTLOOK FOR 2009

Iteration is updating its guidance for 2009 results issued on May 14,

2009 due to property dispositions of approximately 1,000 boed of production,

additional shut-in gas production of approximately 350 boed, changes in

commodity prices and reduced capital expenditures. The information below

presents the Company's expected results for the full year of 2009 (which

incorporates the actual results for the first six months of 2009, and the

forecast for the balance of the year), the May 14, 2009 guidance and the

difference between the two.

<<

-------------------------------------------------------------------------

2009 Forecast 2009 Previous May Change

14 Forecast

-------------------------------------------------------------------------

Production

(boe/d)(1)

Annual average 15,600 - 16,100 17,000 - 17,500 (8%)

Capital program(2)

Expenditures

($ million) 65 75 (13%)

Net wells drilled 24 25 (4%)

Funds from

operations(2)

Annual ($ million) 40 80 (50%)

Annual per basic

share ($) 0.20 0.41 (51%)

Year end net debt

($ million) 205 220 (7%)

Average Pricing: (July - Dec 2009) (April - Dec 2009)

Natural gas -

AECO (Cdn$/mcf) 3.75 4.65 (19%)

Oil - WTI

(US$/bbl) 65.00 60.00 8%

Foreign exchange

rate (Cdn$/US$) 0.90 0.82 10%

-------------------------------------------------------------------------

Notes:

(1) Production guidance reduced by 500 boed or 3% due to property

dispositions and 175 boed or 1% due to expected additional shut-in

gas production.

(2) Previous guidance included Alberta drilling credits as a reduction of

royalties. This guidance has applied the Alberta drilling credits to

reduce capital expenditures. The amount of drilling credits included

in this forecast is $4.7 million ($4.6 million in the previous

guidance). Funds from operations include a $1.8 million additional

provision for bad debts related to SemGroup's trade receivables in

connection with its Companies' Creditors Arrangement Act ("CCAA")

proceedings.

>>

Gas prices have continued to weaken from our previous forecast and

although WTI crude prices are projected to be higher, the stronger Canadian

dollar has left crude realizations slightly lower. A non-core disposition

program was initiated in the second quarter with the majority of the

transactions occurring in July resulting in approximately $42 million of

dispositions (prior to closing adjustments) consisting of approximately 1,000

boed of production (80% gas) with the proceeds used to repay debt. In addition

the Company expects to shut-in an additional 350 boed of gas production in the

second half of 2009 if current pricing persists.

Funds from operations are expected to be lower mainly due to lower

production and commodity prices, partially offset by lower interest costs. As

a result, planned capital expenditures have been reduced with cuts to gas

drilling and delaying of some oil drilling at Manyberries in southern Alberta

to 2010. The extension of the Alberta drilling incentives allows Iteration to

follow a more efficient capital plan for this area. The recently announced

B.C. drilling incentives are not expected to affect capital spending plans for

the balance of the year based on our projection for gas prices.

Royalty rates are forecasted to be approximately 19% for the year (versus

previous guidance of 18%) primarily due to lower commodity prices offset by

removing the Alberta drilling credits and which are now shown as a reduction

of capital expenditures. Production expenses continue to be affected by

non-operated prior period costs and are expected to average approximately

$14.25 per boe for 2009, about 13% higher than the previous forecast.

Production expenses for the last six months of 2009 are expected to average

approximately $13.00 per boe.

General and Administrative ("G&A") expense is expected to average $2.20

per boe in 2009 versus previous guidance of $1.95 per boe primarily due to

lower production volumes. Interest expense is expected to be based on an

average interest rate of about 6% to reflect increased borrowing costs and

financing charges.

Year-end debt is expected to decline to about $205 million as the

proceeds from the property dispositions have been applied to debt repayment

and funds from operations are expected to be slightly below capital

expenditures for the last six months of 2009.

Should realized gas prices strengthen, the Company has an inventory of

drilling opportunities that can be undertaken. However, should realized prices

further weaken, the Company intends to scale back operations to ensure that

the projected capital program remains in line with projected funds from

operations for the last half of the year.

The impact on the Company's 2009 funds from operations of a $1.00/mcf

increase in average AECO price for natural gas for the last six months of 2009

would be approximately $8.1 million. The impact of a US$5.00/bbl increase in

WTI for oil for the last six months of 2009 would be approximately $2.8

million. The impact of a one cent weakening of the Canadian Dollar versus the

U.S. dollar for the last six months of 2009 would be approximately $0.8

million. Using forward market pricing of $3.90/mcf for AECO gas, US$72.50 for

WTI oil and Canadian/US dollar exchange rate of 0.93, funds from operations

would be $5 million higher or $45 million.

<<

OPERATING RESULTS

Production

-------------------------------------------------------------------------

Daily Three months ended Six months ended

production June 30, June 30,

----------------------------- -----------------------------

Average for

the period 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Natural gas

(mcf/d) 74,650 76,563 (2) 76,934 62,180 24

Natural gas

liquids

(bbls/d) 1,474 1,377 7 1,431 1,237 16

Light oil

(bbls/d) 3,017 3,840 (21) 3,196 2,725 17

Heavy oil

(bbls/d) 203 168 21 190 192 (1)

------------------------------------------- -----------------------------

Total

production

(boed) 17,137 18,146 (6) 17,640 14,517 25

-------------------------------------------------------------------------

>>

Average daily production for the three months ended June 30, 2009 was 6%

below the same period in 2008 primarily due to lower drilling activity over

the past six months and natural production declines. Shut-in production due to

low commodity prices averaged approximately 750 boed for the second quarter of

2009. Both periods were impacted by facility maintenance turnarounds.

Average daily production for the six months ended June 30, 2009 was 25%

higher than the prior year period primarily due to the acquisition of Cyries

Energy Inc. ("Cyries") which was completed March 7, 2008. As a result, the

prior year period only includes approximately 4 months of Cyries production.

<<

Commodity Prices

-------------------------------------------------------------------------

Industry Three months ended Six months ended

benchmarks June 30, June 30,

----------------------------- -----------------------------

Average for

the period 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Natural gas

(AECO $/mcf) $3.46 $10.22 (66) $4.21 $9.10 (54)

Edmonton Light

crude ($/bbl) $65.90 $126.07 (48) $57.78 $111.79 (48)

Hardisty Lloyd

blend ($/bbl) $60.29 $103.05 (41) $51.27 $89.66 (43)

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Realized

commodity Three months ended Six months ended

prices June 30, June 30,

----------------------------- -----------------------------

Average for

the period 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Natural gas

($/mcf) $3.46 $10.50 (67) $4.45 $9.62 (54)

Natural gas

liquids

($/bbl) $31.13 $58.68 (47) $33.11 $53.09 (38)

Light oil

($/bbl) $59.41 $129.54 (54) $54.55 $119.31 (54)

Heavy oil

($/bbl) $49.32 $89.54 (45) $44.80 $77.47 (42)

------------------------------------------- -----------------------------

Total ($/boe) $28.82 $77.02 (63) $32.46 $69.16 (53)

-------------------------------------------------------------------------

>>

Natural gas prices realized for the three and six months ended June 30,

2009 decreased 67% and 54% respectively from the same periods in the prior

year, which is consistent with the average benchmark price decreases.

Similarly the light oil realized price for the second quarter and first half

of 2009 decreased by 54% as compared to the same periods of 2008, which is

slightly higher than the 48% decrease in average benchmark prices.

<<

Revenue

-------------------------------------------------------------------------

Production

revenue

before Three months ended Six months ended

royalties June 30, June 30,

----------------------------- -----------------------------

($ thousands) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Production

revenue $44,936 $127,175 (65) $103,629 $182,739 (43)

-------------------------------------------------------------------------

>>

Production revenue for the three months ended June 30, 2009 decreased 65%

compared to the corresponding period in 2008 primarily due to the 63% decrease

in realized commodity prices. For the six months ended June 30, 2009

production revenue decreased 43% compared to the same period in 2008 as the

reduction in commodity prices was partially offset by an increase in

production.

For the three months and six months ended June 30, 2009 and 2008 gas

represented a little over 70% of the Company's production and ranged between

52% and 60% of the Company's revenue.

<<

Royalties

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

----------------------------- -----------------------------

($ thousands)

except where

noted) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Royalties $6,517 $27,199 (76) $18,659 $38,878 (52)

Per boe ($/boe) $4.18 $16.47 (75) $5.84 $14.71 (60)

Percentage of

revenue (%) 14.5 21.4 (32) 18.0 21.3 (15)

-------------------------------------------------------------------------

>>

Royalty expenses on an absolute, per boe and percentage of revenue basis

all decreased in 2009 compared to the corresponding periods in 2008 primarily

due to lower commodity prices, particularly gas prices, and the new Alberta

Royalty Framework which was enacted in 2009. The new royalty framework is more

sensitive to prices; the average rate dropped from 20.7% in the first quarter

of 2009 to 14.5% in the second quarter of 2009. Royalties represent amounts

paid by the Company for crown, freehold and gross overriding royalties. The

vast majority of the Company's royalty expenses are for crown royalties.

<<

Production Expenses

-------------------------------------------------------------------------

Production Three months ended Six months ended

expenses June 30, June 30,

----------------------------- -----------------------------

($ thousands) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Total

production

expenses $23,752 $20,291 17 $48,633 $30,488 60

Per boe

($/boe) $15.23 $12.29 24 $15.23 $11.54 32

-------------------------------------------------------------------------

>>

Production expenses have increased in 2009 over the 2008 periods due to

higher per unit costs and for the first half of 2009 due to a 25% increase in

production compared to the first half of 2008. Per unit production costs have

increased in the 2009 periods compared to the previous year largely due to the

inclusion of revisions of estimates of prior period costs and the fixed cost

component associated with shut-in production volumes. The Company continues to

experience late charges from vendors and partners particularly for processing,

workover and labour costs. Excluding these costs, operating costs for the

first half of 2009 would have been $12.54 per boe. The implementation of

processes and systems that began earlier this year to improve the timeliness

of data and analysis relating to operating costs is progressing and is

expected to be fully operational by the end of 2009.

<<

Transportation Expenses

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

----------------------------- -----------------------------

($ thousands)

except where

noted) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Transportation

expenses $1,301 $1,982 (34) $2,735 $3,451 (21)

Per boe ($/boe) $0.83 $1.20 (31) $0.86 $1.31 (34)

-------------------------------------------------------------------------

Transportation expenses for the quarter and six months ended June 30, 2009

were lower compared to the prior year periods on an absolute and per boe basis

primarily as a result of a better allocation of the Company's production

between firm and interruptible transportation contracts.

Operating Netback

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

----------------------------- -----------------------------

($/boe) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Production

revenue $28.82 $77.02 (63) $32.46 $69.16 (53)

Royalties (4.18) (16.47) (75) (5.84) (14.71) (60)

Production

expenses (15.23) (12.29) 24 (15.23) (11.54) 32

Transportation

expenses (0.83) (1.20) (31) (0.86) (1.31) (34)

------------------------------------------- -----------------------------

Operating

netback $8.58 $47.06 (82) $10.53 $41.60 (75)

-------------------------------------------------------------------------

>>

The operating netback per boe (before general and administrative

expenses) realized for the three and six months ended June 30, 2009 has

decreased significantly compared to the same periods in 2008 largely due to

the drop in commodity prices. Increased production expenses were more than

offset by lower royalties and transportation expenses.

<<

General and Administrative Expenses

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

----------------------------- -----------------------------

($ thousands)

except where

noted) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

General

and admin-

istrative

costs

before the

following: $4,145 $4,285 (3) $9,001 $7,390 22

Capitalized

overhead (1,047) (1,020) 3 (2,707) (1,790) 51

Overhead

recoveries (35) (70) (50) (105) (128) (18)

------------------------------------------- -----------------------------

General and

administrative

expense $3,063 $3,195 (4) $6,189 $5,472 13

------------------------------------------- -----------------------------

Per boe ($/boe) $1.96 $1.93 2 $1.94 $2.07 (17)

-------------------------------------------------------------------------

>>

G&A expenses for the three months ended June 30, 2009 decreased compared

to the corresponding period in 2008 due to the absence of initially higher

costs included in the 2008 period immediately following the acquisition of

Cyries. On a per boe basis the costs are relatively similar between the two

periods.

For the six months ended June 30, 2009 the absolute G&A costs are higher;

however per boe costs are lower than the prior year period. Costs are higher

because the first quarter of 2008 includes less than one month of Cyries

operations while the entire 2009 period has costs for the combined entity.

However per boe costs are lower in 2009 due to a higher production base.

SemGroup Receivable

During the second quarter of 2009 the Company increased the provision for

the un-collectability of the SemCanada and SemCams trade receivables by $1.8

million reflecting an ultimate recovery of 4% or $0.6 million. A provision of

$15.7 million ($13.9 million at December 31, 2008) had been provided for as a

result of these companies filing for CCAA protection.

Stock Based Compensation Expense

The Company's stock option plan provides option holders the right to

request, upon exercise, to receive a cash payment in exchange for surrendering

the option, provided the request is accepted by the Company. The cash payment

is equal to the appreciated value of the option, as determined by the

difference between the option's exercise price and the Company's closing share

price on the Toronto Stock Exchange the day prior to surrendering the option.

On June 20, 2008, with the approval of shareholders, the stock option plan was

amended and restated to limit the total number of common shares that may be

issued under the stock option plan to a maximum of 16,000,000. This

represented and continues to represent less than 10% of the then and currently

issued and outstanding common shares of the Company. In June of 2009 the

Company provided employees (excluding officers and directors) the option to

surrender options they held with a strike price above $3.50 per share and in

turn receive 40% of their surrendered number of options with a strike price at

the then prevailing share price of $1.40. As a result 3.4 million options were

surrendered and 1.3 million options were issued. At June 30, 2009 and August

12, 2009, options to purchase 9.8 million common shares were outstanding,

which represents 4.6% of the outstanding common shares of the Company at that

time.

For the three and six months ended June 30, 2009, $35,000 of stock based

compensation expense was recorded by the Company compared to $13.8 million and

$20.9 million respectively for the corresponding periods in 2008.

Future fluctuations in the stock based compensation expense or recoveries

are dependent on the movement of the Company's share price and the number of

options vested and outstanding. Based on the June 30, 2008 share price of

$1.17, had all of the 9,847,708 stock options outstanding been vested,

aggregate stock-based compensation expense and a corresponding liability of

$276,000 would have been recognized.

<<

Interest and Financing Expense

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

----------------------------- -----------------------------

($ thousands)

except where

noted) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Interest and

financing

expense $3,215 $3,067 5 $4,833 $4,179 16

Per boe ($/boe) $2.06 $1.86 11 $1.51 $1.58 (4)

-------------------------------------------------------------------------

>>

Interest and financing expense primarily represents interest on bank debt

but also includes financing charges and expenses related to bank debt.

Interest and financing expense has increased in the 2009 periods compared to

2008 due to overall higher debt levels, partially offset by lower interest

costs. Debt levels have increased as capital expenditures have exceeded funds

from operations, equity financings and property disposition proceeds. The

majority of the Company's bank debt is borrowed by way of Bankers'

Acceptances. The second quarter of 2009 also includes costs related to the

refinancing of the Company's bank debt facility.

<<

Depletion, Depreciation, and Accretion

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

----------------------------- -----------------------------

($ thousands)

except where

noted) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Depletion,

depreciation

and accretion $36,800 $39,045 (6) $72,500 $60,600 19

Per boe ($/boe) $23.60 $23.65 (0) $22.71 $22.94 (1)

-------------------------------------------------------------------------

Depletion, depreciation, and accretion ("DD&A") expense is lower for the

second quarter of 2009 compared to the prior year period primarily due to

lower production. For the first half of 2009 higher production is increasing

DD&A expense compared to the prior year period. On a per boe basis DD&A

expense is within 1% of each other between the 2009 and 2008 periods.

Funds from Operations and Net Income/(Loss)

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

----------------------------- -----------------------------

($ thousands)

except where

noted) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Funds from

operations $5,378 $52,824 (90) $20,278 $81,337 (75)

per share -

basic ($) $0.03 $0.32 (91) $0.11 $0.63 (83)

per share -

diluted ($) $0.03 $0.31 (90) $0.11 $0.62 (82)

per boe

($/boe) $3.45 $31.99 (89) $6.35 $30.79 (79)

Net (Loss)

/income ($22,978) $672 (3,319) ($37,253) $2,362 (1,677)

per share -

basic ($) ($0.12) $0.00 - ($0.21) $0.02 (1,150)

per share -

diluted ($) ($0.12) $0.00 - ($0.21) $0.02 (1,150)

per boe

($/boe) ($14.73) $0.41 (3,692) ($11.66) $0.89 (1,410)

Weighted

average shares

outstanding

basic ('000) 193,197 165,812 17 179,684 129,266 39

diluted

('000) 193,197 168,413 15 179,684 131,242 37

-------------------------------------------------------------------------

>>

Iteration's funds from operations for the three months ended June 30,

2009 was $5.4 million compared to $52.8 million for the same period in 2008.

For the six months ended June 30, 2009 the Company's funds from operations of

$20.3 million compares to $81.3 million for the prior year period. The

reduction was primarily a result of significantly weaker commodity prices

combined with higher production expense and the additional provision for the

SemGroup receivable partially offset by lower royalties.

Iteration's net loss for the three months ended June 30, 2009 was $23.0

million, as compared to a net income of $0.7 million for the three months

ended June 30, 2008. For the six months ended June 30, 2009 the Company's net

loss of $37.3 million compares to net income of $2.4 million for the prior

year period. The losses primarily arise as a result of lower funds from

operations and, higher DD&A expense for the six months ended June 30, 2009,

partially offset by a recovery of future income taxes.

Weighted average shares outstanding in the second quarter of 2009

increased approximately 17% over the prior year period primarily due to the

45.0 million common share equity issue completed in May 2009. For the six

months ended June 30, 2009 weighted average shares outstanding increased over

the prior year period due to the equity issue completed in May 2009 and the

94.0 million shares issued in conjunction with the Cyries acquisition in March

2008 being outstanding for the entire period.

<<

Selected Quarterly Data

-------------------------------------------------------------------------

2009 2008

-------------------------------------------------------------------------

Quarter

ended June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31

-------------------------------------------------------------------------

Production

(boe/d) 17,137 18,165 18,001 18,507 18,146 10,890

Revenues

($000) $44,936 $58,693 $70,656 $108,444 $127,175 $55,564

-------------------------------------------------------------------------

Average

realized

prices

($/boe) $28.82 $35.93 $43.08 $64.32 $77.02 $56.08

Royalties

($/boe) $4.18 $7.43 $7.61 $13.71 $16.47 $11.79

Production

expense

($/boe) $15.23 $15.23 $11.02 $10.99 $12.29 $10.29

Transportation

expense

($/boe) $0.83 $0.88 $0.71 $0.77 $1.20 $1.48

Operating

netback

($/boe) $8.58 $12.39 $23.75 $38.85 $47.06 $32.52

Net G&A expense

($/boe) $1.96 $1.92 $1.19 $1.62 $1.93 $2.30

Net interest

expense

($/boe) $2.06 $0.99 $1.58 $1.48 $1.86 $1.12

-------------------------------------------------------------------------

Funds from

operations

($000) $5,378 $14,900 $31,152 $59,338 $52,824 $28,511

per boe

($/boe) $3.45 $9.11 $18.81 $34.85 $31.99 $28.77

per share -

basic ($) $0.03 $0.09 $0.19 $0.36 $0.32 $0.31

per share -

diluted ($) $0.03 $0.09 $0.19 $0.35 $0.31 $0.31

-------------------------------------------------------------------------

Net income

(loss) ($22,978) ($14,275) ($244,894) $26,696 $672 $1,689

per boe

($/boe) ($14.73) ($8.73) ($147.87) $15.68 $0.41 $1.70

per share -

basic ($) ($0.12) ($0.09) ($1.48) $0.16 $0.00 $0.02

per share -

diluted ($) ($0.12) ($0.09) ($1.48) $0.16 $0.00 $0.02

-------------------------------------------------------------------------

Net capital

expenditures

($000) $4,196 $35,360 $74,043 $68,837 $31,408 $41,774

-------------------------------------------------------------------------

Bank debt and

working

capital

deficiency

($000)

as at $241,652 $296,726 $276,130 $232,467 $222,129 $216,959

-------------------------------------------------------------------------

--------------------------------

2007

--------------------------------

Quarter

ended Dec 31 Sept 30

--------------------------------

Production

(boe/d) 7,989 6,304

Revenues

($000) $29,265 $22,161

--------------------------------

Average

realized

prices

($/boe) $39.84 $38.21

Royalties

($/boe) $8.12 $9.29

Production

expense

($/boe) $11.97 $6.53

Transportation

expense

($/boe) $1.09 $1.29

Operating

netback

($/boe) $18.66 $21.10

Net G&A expense

($/boe) $2.37 $2.19

Net interest

expense

($/boe) $1.37 $0.69

--------------------------------

Funds from

operations

($000) $11,103 $10,561

per boe

($/boe) $15.11 $18.21

per share -

basic ($) $0.16 $0.16

per share -

diluted ($) $0.16 $0.16

--------------------------------

Net income

(loss) ($3,149) ($1,985)

per boe

($/boe) ($4.28) ($3.42)

per share -

basic ($) ($0.05) ($0.03)

per share -

diluted ($) ($0.05) ($0.03)

--------------------------------

Net capital

expenditures

($000) $17,610 $71,316

--------------------------------

Bank debt and

working

capital

deficiency

($000)

as at $61,012 $82,938

--------------------------------

>>

Compared to the immediately preceding quarter Iteration's second quarter

2009 production declined 6% primarily due to facility maintenance turnarounds

and natural declines. Revenues have decreased 23% as commodity prices continue

to fall (down 20% from the preceding quarter) and lower production. With lower

commodity prices, royalties decreased 44% on a per boe basis and fell to 14.5%

from 20.7% on a percentage of revenue basis compared to the first quarter of

2009. Production and transportation expense were relatively flat on a per boe

basis between the first and second quarter of 2009 as prior period costs are

included in both quarters. Operating netback on a per boe basis in the second

quarter of 2009 has fallen 31% compared to the first quarter of 2009 primarily

due to lower commodity prices partially offset by lower royalties. Between the

first and second quarters of 2009 net G&A expense on a per boe basis is

relatively unchanged while net interest expense per boe has increased due to

overall higher borrowing costs and financing charges related to the new

borrowing facility. Funds from operations for the second quarter of 2009 is

64% lower than the first quarter of 2009 due to lower operating netback,

higher net interest expense and an additional $1.8 million provision for the

SemGroup receivable. Similarly the net loss between the periods increased 61%.

Capital expenditures decreased 88% from the first quarter to the second

quarter of 2009 as spring breakup reduced capital activities (traditionally

the second quarter is a slower capital activity period absent acquisitions)

and the Company curtailed expenditures due to lower funds from operations.

Total debt fell $55 million or 19% between the first and second quarters of

2009 as the Company completed an equity issue for net proceeds of

approximately $54 million in the second quarter and funds from operations

exceeded capital expenditures for the quarter.

<<

Capital Expenditures

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

----------------------------- -----------------------------

($ thousands) 2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Acquisition/

(disposi-

tions) ($2,151) $2,929 (227) ($2,378) $4,546 (248)

Land 874 18,622 (95) 3,798 21,129 (82)

Seismic 967 1,478 (35) 2,222 4,014 (45)

Drill, complete

& facilities 3,459 7,359 (53) 33,207 41,702 (19)

Capitalized G&A 1,047 1,020 3 2,707 1,790 22

-------------------------------------------------------------------------

Total $4,196 $31,408 (87) $39,556 $73,181 (46)

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Wells drilled Three months ended Six months ended

(net) June 30, June 30,

----------------------------- -----------------------------

2009 2008 % Change 2009 2008 % Change

------------------------------------------- -----------------------------

Gas - 2.1 n/a 4.8 21.6 (78)

Oil - 4.0 n/a 1.1 6.9 (84)

Injector - - n/a - 1.0 n/a

Dry - - n/a - 1.7 n/a

------------------------------------------- -----------------------------

Total - 6.1 n/a 5.9 31.2 (81)

------------------------------------------- -----------------------------

Success rate (%) - 100.0 n/a 100.0 94.6 (46)

-------------------------------------------------------------------------

>>

The Company completed $2.2 million of property dispositions in the second

quarter of 2009 compared to $2.9 million of property acquisitions in the same

period of 2008. Land expenditures have decreased significantly in 2009 from

the prior year periods in 2008 as the second quarter of 2008 included

successful land sales in the BC and West Alberta core areas. Lower overall

activity levels have reduced seismic expenditures approximately 20% in 2009

from the prior year periods in 2008. Similarly drill, complete, equip and

facility expenditures were significantly reduced in the second quarter of 2009

compared to the prior year period as the Company did not participate in any

wells in the second quarter compared to 6.1 net wells in the prior year

period. Costs for the second quarter of 2009 primarily relate to complete and

equipping activities from first quarter 2009 activities.

CAPITAL AND LIQUIDITY RESOURCES

The Company's liquidity depends upon cash flow from operations,

supplemented as necessary by equity and debt financings, and its new credit

facility.

As an oil and gas company, the Company has a declining asset base and

therefore relies on ongoing exploration, development and acquisitions to

replace production and add additional reserves. Future oil and natural gas

production and reserves are highly dependent on the success of exploiting the

Company's existing asset base and in acquiring additional reserves. To the

extent the Company is successful or unsuccessful in these activities, funds

from operations could be increased or reduced.

The Company currently has budgeted for a drilling and exploration program

of $65 million for 2009. Of this amount approximately $40 million has been

spent in the first half of 2009. For the balance of the year the Company is

forecasting funds from operations of approximately $20 million versus capital

expenditures of $25 million. The $5 million of capital expenditures in excess

of funds from operations for the last half of the year is expected to be

funded through the Company's credit facility. The Company continually monitors

its capital spending program in light of the recent volatility with respect to

commodity prices and Canadian dollar exchange rates to ensure the Company

expects to be able to meet future anticipated obligations incurred from normal

ongoing operations with funds from operations and draws on the Company's

syndicated facility.

The Company's financial position improved during the quarter due to a

$57.5 million common share equity financing and the establishment of a new

credit facility. As at June 30, 2009, the Company had drawn $246.0 million on

its $265 million credit facility. At that time, the Company had a working

capital surplus of $4.6 million, for a total net debt of $241.3 million.

Subsequent to the quarter end the Company closed $40 million of non-core

property dispositions, the proceeds of which were used to repay the credit

facility. As a result of the dispositions the Company's borrowing base was

reduced by $12.5 million to $252.5 million. On a pro forma basis total net

debt at the end of the second quarter would have been approximately $200

million including the net proceeds from the dispositions.

Operating Leases

The Company has entered into various operating leases with respect to its

office space. The leases expire between September 30, 2012, and June 30, 2014,

and require the following future minimum lease payments, by calendar year;

<<

-------------------------------------------------------------------------

Gross Commitment Sublet Recovery Net Commitment

($000) ($000) ($000)

-------------------------------------------------------------------------

2009 $1,769 ($634) $1,135

2010 $3,537 ($1,268) $2,269

2011 $3,537 ($1,268) $2,269

2012 $3,220 ($951) $2,269

2013 $2,269 - $2,269

2014 $1,135 - $1,135

-------------------------------------------------------------------------

>>

The office space previously occupied by Cyries has been sublet on a full

recovery flow through basis commencing June 1, 2008 through to September 30,

2012. Currently the subtenant has been awarded CCAA protection, however the

Company continues to receive rent payments on time.

Related Party Transactions

There were no related party transactions during the three months ended

June 30, 2009.

Outstanding Common Shares, Warrants and Options

As at June 30, 2009 and August 12, 2009, there were 210,985,384 common

shares and 9,847,708 million options outstanding.

CRITICAL ACCOUNTING ESTIMATES

In the application of accounting policies, management is often required

to make judgments based on underlying estimates and assumptions about future

events and their effects. Underlying estimates and assumptions are based on

historical experience and other factors that management believes to be

reasonable under the circumstances. These estimates and assumptions are

subject to change as new events occur and additional information is obtained.

Reference should be made to the MD&A for the year ended December 31, 2008 for

a description of the Company's most critical accounting estimates used in

determining its financial results.

<<

Impact of New Accounting Pronouncements

Goodwill and Intangible Assets

------------------------------

Effective January 1, 2009, the Company adopted the Section 3064 Goodwill

and Intangible Assets, which converges Canadian GAAP for goodwill and

intangible assets with IFRS. The new standard provides more comprehensive

guidance on intangible assets, particularly for internally developed

intangible assets but had no current impact on the Company's financial

reporting.

New Accounting Standards issued Subsequent to Year End

------------------------------------------------------

>>

In January 2009, the CICA issued three new accounting standards, Section

1582 Business Combinations, Section 1601 Consolidated Financial Statements and

Section 1602 Non controlling interests each of which are effective for fiscal

years beginning on or after January 1, 2011 and further align Canadian GAAP

with IFRS. Earlier adoption of these recommendations is permitted.

<<

International Financial Reporting Standards ("IFRS")

----------------------------------------------------

>>

The Canadian Accounting Standards Board has now confirmed that the use of

IFRS will be required in 2011 for publicly accountable, profit-oriented

enterprises. IFRS will replace current Canadian GAAP followed by the Company.

The Company will be required to begin reporting under IFRS effective January

1, 2011 and will be required to provide information following IFRS for the

comparative period. The Company is currently developing a changeover plan to

complete the transition to IFRS by January 1, 2011, including the preparation

of required comparative information. The key elements of the plan include:

<<

- determine appropriate changes to accounting policies and required

amendments to financial disclosures;

- identify and implement changes in associated processes and

information systems;

- comply with internal control requirements;

- educate and train internal and external stakeholders.

At June 30, 2009, the Company had completed a diagnostic study of the

anticipated impact of the transition to IFRS. The Company is currently

analyzing the accounting policy alternatives and identifying implementation

options for the corresponding process changes. As IFRS is expected to change

prior to 2011, the impact of IFRS on the Company's consolidated financial

statements is not reasonably determinable at this time.

Disclosure Controls and Procedures and Internal Controls over Financial

Reporting

>>

The Company has implemented disclosure controls and procedures, as

defined in National Instrument 52-109-Certification of Disclosure in Issuer's

Annual and Interim Filings ("NI52-109"), to ensure that information required

to be disclosed by the Company is accumulated and communicated to the

Company's management, as appropriate, to allow timely decisions regarding

required disclosures.

Management is also responsible for establishing and maintaining adequate

internal control over the Company's financial reporting. The Company's

internal control system was designed to provide reasonable assurance that all

transactions are accurately recorded, that transactions are recorded as

necessary to permit preparation of financial statements in accordance with

GAAP, and that the Company's assets are safeguarded. Internal control systems,

no matter how well designed, have inherent limitations. Therefore, even those

systems determined to be effective can provide only reasonable assurance with

respect to financial statement preparation and presentation. Also, projections

of any evaluation of effectiveness to future periods are subject to the risk

that controls may become inadequate because of changes in conditions, or that

the degree of compliance with policies or procedure may deteriorate.

The CEO and CFO are required to certify on the effectiveness of the

Company's disclosure controls and procedures concurrent with filing its

interim financial statements to the first half of 2009 in accordance with NI

52-109. The Company's CEO and CFO, together with management, have concluded,

based on their evaluation of the effectiveness of the Company's disclosure

controls and procedures as of June 30, 2009, that information required to be

disclosed by the Company is (i) recorded, processed, summarized and reported

within the time periods specified in Canadian securities legislation and (ii)

accumulated and communicated to the Company's management, including its CEO

and CFO, to allow timely decisions regarding required disclosure.

The CEO and CFO have also assessed the effectiveness of the Company's

internal control over financial reporting as at December 31, 2008. In making

its assessment, management engaged an external third party to evaluate the

operating effectiveness of the internal controls to support their

certifications. This evaluation identified certain duties within the

accounting and finance department that could not be properly segregated, given

the Company's limited staff level. However, none of the segregation of duty

deficiencies are believed to have resulted in a misstatement in the financial

statements as the Company relies on certain compensating controls, including a

substantive periodic review of the financial statements and other financial

information by the CEO and the audit committee. This weakness is considered to

be a common deficiency for many smaller listed companies in Canada.

During the three months ended June 30, 2009, there were no material

changes in the Company's disclosure controls and procedures or internal

control over financial reporting, other than the addition of senior accounting

personnel, including a Controller and Manager of Financial Accounting, which

will aid the Company in improving its segregation of duties. In addition a new

information management system is being implemented which, once fully

functional, will allow management to obtain financial and operational

information in a more timely manner. This system is expected to be fully

functional prior to the end of 2009.

It should be noted that while the Company's CEO and CFO believe that the

Company's disclosure controls and procedures and internal controls over

financial reporting provide a reasonable level of assurance that they are

effective, they do not expect that the disclosure controls and procedures or

internal controls over financial reporting will necessarily prevent all errors

and fraud. A control system, no matter how well conceived or operated, can

provide only reasonable, not absolute, assurance that the objectives of the

control system are met.

ADVISORY - FORWARD-LOOKING INFORMATION

This MD&A was prepared on August 12, 2009 and is management's assessment

of Iteration's historical operating and financial results for the three and

six months ended June 30, 2009. The reader should be aware that historical

results are not necessarily indicative of future performance. This MD&A

contains certain forward-looking statements and forward-looking information

(collectively referred to herein as "forward-looking statements") within the

meaning of Canadian securities laws. All statements other than statements of

historical fact are forward-looking statements. In some cases, forward-looking

statements can be identified by terminology such as "may", "will", "should","

expects", "projects", "plans", "anticipates" and similar expressions. In

particular, this discussion contains forward-looking statements pertaining to

the following:

<<

- the timing and amount of production;

- natural gas, natural gas liquids and crude oil production levels;

- commodity prices for natural gas, natural gas liquids and crude oil;

- royalties payable and future royalty rates under the New Alberta

Royalty Regime;

- royalties payable and future royalty rates under the Transitional

Alberta Royalty program;

- the Alberta royalty incentive program including drilling credits

announced on March 3, 2009;

- production expenses;

- transportation expenses;

- operating netbacks;

- general and administrative expenses;

- interest expenses and interest rates;

- Canadian dollar exchange rates;

- capital expenditures;

- capital and liquidity;

- funds from operations;

- debt levels;

- ratio of debt to funds from operations;

- number of net wells; and

- outlook for 2009.

>>

Certain forward-looking statements may constitute "financial outlooks" as

contemplated by National Instrument 51-102 - Disclosure Obligations, which are

provided for the purpose of forecasting Iteration's financial position for the

last six months of 2009 and as at December 31, 2009. Please note that the

financial outlook in this MD&A may not be appropriate for purposes other than

as stated above.

Forward-looking statements and information are based on the Company's

current beliefs as well as assumptions made by, and information currently

available to, the Company concerning anticipated financial performance,

business prospects, strategies, regulatory developments, future natural gas,

natural gas liquids and crude commodity prices, future natural gas, natural

gas liquids and crude oil production levels, the ability to obtain equipment

in a timely manner to carry out development activities, the ability to market

natural gas successfully to current and new customers, the impact of

increasing competition, the ability to obtain financing on acceptable terms,

and the ability to add production and reserves through development and

exploration activities. Although management considers these assumptions to be

reasonable based on information currently available to it, they may prove to

be incorrect.

Undue reliance should not be placed on these forward-looking statements,

which are based upon management's assumptions and are subject to known and

unknown risks and uncertainties, including the business risks discussed below,

which may cause actual performance and financial results in future periods to

differ materially from any projections of future performance or results

expressed or implied by such forward-looking statements. Iteration's actual

results could differ materially from those anticipated in our forward-looking

statements as a result of the risk factors set forth below and noted elsewhere

in this MD&A which include but are not limited to:

<<

- volatility in market prices for oil and natural gas;

- risks inherent in Iteration's operations;

- uncertainties associated with estimating reserves;

- competition for, among other things: capital, acquisitions of

reserves, undeveloped lands and skilled personnel;

- incorrect assessments of the value of acquisitions;

- geological, technical, drilling and process problems;

- general economic conditions including fluctuations in the price of

oil and natural gas;

- royalties payable in respect of Iteration's production;

- governmental regulation of the oil and gas industry, including

environmental regulation;

- fluctuation in foreign exchange or interest rates;

- unanticipated operational events that can reduce production or cause

production to be shut-in or delayed;

- stock market volatility and market valuations;

- counterparty credit risk;

- the need to obtain required approvals from regulatory authorities;

- environmental risks;

- insurance limitations risks;

- risks inherent in replacing reserves;

- reliance on operators and key employees;

- access to funding and issuance of debt;

- aboriginal claims; and

- availability of drilling equipment, access restrictions and cost

inflation.

>>

Further information regarding these factors may be found under the

heading "Risk Factors" in the AIF. Readers are cautioned that this list of

risk factors is not exhaustive.

The Company undertakes no obligation, except as required by applicable

securities legislation, to update publicly or to revise any of the included

forward looking statements, whether as a result of new information, future

events or otherwise. The forward looking statements contained herein are

expressly qualified by this cautionary statement.

<<

Iteration Energy Ltd.

Consolidated Balance Sheets (unaudited)

As at June 30, December 31,

(in thousands of dollars) 2009 2008

-------------------------------------------------------------------------

ASSETS

Current

Cash $ 139 $ 6,832

Accounts receivable (Note 9(f)) 32,422 43,996

Prepaids and other current assets 12,100 10,846

-------------------------------------------------------------------------

44,661 61,674

Property, plant and equipment (Note 4) 941,760 973,529

-------------------------------------------------------------------------

$ 986,421 $ 1,035,203

-------------------------------------------------------------------------

-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current

Bank indebtedness (Note 5) $ 246,000 $ 266,800

Accounts payable and accrued liabilities

(Note 6) 39,997 71,004

Stock based compensation payable (Note 8(c)) 35 -

-------------------------------------------------------------------------

286,032 337,804

Future income taxes 77,395 92,539

Leasehold inducements 127 193

Asset retirement obligation (Note 7) 43,532 43,323

-------------------------------------------------------------------------

407,086 473,859

-------------------------------------------------------------------------

Commitments and contingencies (Note 10)

Shareholders' equity

Share capital (Note 8 (b)) 860,545 805,301

Deficit (281,210) (243,957)

-------------------------------------------------------------------------

579,335 561,344

-------------------------------------------------------------------------

$ 986,421 $ 1,035,203

-------------------------------------------------------------------------

-------------------------------------------------------------------------

See accompanying notes to the unaudited interim consolidated financial

statements.

Iteration Energy Ltd.

Consolidated Statements of Earnings (Loss), Comprehensive Earnings (Loss)

and Deficit (unaudited)

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

-------------------------------------------------------------------------

(in thousands of

dollars, except per

share amounts) 2009 2008 2009 2008

-------------------------------------------------------------------------

Revenue

Production revenue $ 44,936 $ 127,175 $ 103,629 $ 182,739

Royalties (6,517) (27,199) (18,659) (38,878)

Other production

revenue 222 629 217 958

-------------------------------------------------------------------------

38,641 100,605 85,187 144,819

-------------------------------------------------------------------------

Expenses

Production 23,752 20,291 48,633 30,488

Transportation 1,301 1,982 2,735 3,451

General and

administrative 3,063 3,195 6,189 5,472

Stock based

compensation

(Note 8(c)) 35 13,799 35 20,908

Interest on debt 3,215 3,067 4,833 4,179

Depletion,

depreciation and

accretion 36,800 39,045 72,500 60,600

-------------------------------------------------------------------------

68,166 81,379 134,925 125,098

-------------------------------------------------------------------------

Income (loss) before

the following (29,525) 19,226 (49,738) 19,721

Non-cash charge

related to warrants - (3,546) - (3,546)

Provision for

bankruptcy:

SemGroup LP

(Note 9 (f)) (1,812) (9,348) (1,812) (9,348)

Recovery of

investment tax

credits - - - 1,820

-------------------------------------------------------------------------

Earnings (loss) before

income taxes (31,337) 6,332 (51,550) 8,647

-------------------------------------------------------------------------

Income taxes

Current income tax

expense 1 171 13 671

Future income tax

expense (recovery) (8,360) 5,489 (14,310) 5,614

-------------------------------------------------------------------------

(8,359) 5,660 (14,297) 6,285

-------------------------------------------------------------------------

Net earnings (loss)

and comprehensive

earnings (loss) (22,978) 672 (37,253) 2,362

Deficit, beginning

of period $ (258,232) $ (16,716) $ (243,957) $ (18,406)

Charge on

modification of

warrant terms - (10,029) - (10,029)

-------------------------------------------------------------------------

Deficit, end of

period $ (281,210) $ (26,073) $ (281,210) $ (26,073)

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Basic and diluted

earnings (loss) per

common share

(Note 8(d)) $ (0.12) $ - $ (0.21) $ 0.02

-------------------------------------------------------------------------

-------------------------------------------------------------------------

See accompanying notes to the unaudited interim consolidated financial

statements

Iteration Energy Ltd.

Consolidated Statements of Cash Flows (unaudited)

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

-------------------------------------------------------------------------

(in thousands of

dollars) 2009 2008 2009 2008

-------------------------------------------------------------------------

OPERATING ACTIVITIES

Net earnings (loss) $ (22,978) $ 672 $ (37,253) $ 2,362

Add (deduct) non-cash

items:

Depletion,

depreciation and

accretion 36,800 39,045 72,500 60,600

Recovery of

investment tax

credits - - - (1,820)

Future income tax

expense (recovery) (8,360) 5,489 (14,310) 5,614

Amortization of

leasehold inducements (33) (41) (66) (95)

Stock-based

compensation expense

(Note 8 (c )) 35 4,130 35 11,240

Non-cash charge

related to warrants - 3,546 - 3,546

Asset retirement

expenditures (86) (17) (628) (110)

-------------------------------------------------------------------------

5,378 52,824 20,278 81,337

Net change in

non-cash operating

working capital

(Note 11) 3,286 (16,114) 9,195 (101)

-------------------------------------------------------------------------

8,664 36,710 29,473 81,236

-------------------------------------------------------------------------

INVESTING ACTIVITIES

Proceeds on sale of

property plant and

equipment 2,151 105 2,378 646

Acquisition of

subsidiary - (176) - (778)

Acquisition of oil and

gas properties - (2,858) - (4,414)

Additions to oil and

gas properties (6,347) (28,479) (41,934) (68,635)

Additions to other

capital assets (200) (475) (335) (515)

Net change in

non-cash investing

working capital

(Note 11) (19,125) (27,286) (29,746) (31,650)

-------------------------------------------------------------------------

(23,521) (59,169) (69,637) (105,346)

-------------------------------------------------------------------------

FINANCING ACTIVITIES

Proceeds from (repayment

of) bank indebtedness (39,545) 78,960 (20,800) 80,630

Common shares issued 57,555 2,900 57,555 2,900

Exercise of warrants - (20,851) - (20,851)

Share issue costs (3,146) (4) (3,146) (30)

Net change in non-cash

financing working

capital (Note 11) (146) - (138) -

-------------------------------------------------------------------------

14,718 61,005 33,471 62,649

-------------------------------------------------------------------------

Increase (decrease)

in cash (139) 38,546 (6,693) 38,539

Cash, beginning of period 278 1,223 6,832 1,230

-------------------------------------------------------------------------

Cash, end of period 139 39,769 139 39,769

-------------------------------------------------------------------------

-------------------------------------------------------------------------

See Note 11 for supplemental disclosure

See accompanying notes to the unaudited interim consolidated financial

statements

Iteration Energy Ltd.

Notes to the Unaudited Interim Consolidated Financial Statements

As at and for the Three and Six Months Ended June 30, 2009 and 2008

(Tabular amounts in thousands of dollars, unless otherwise noted)

1. NATURE OF OPERATIONS

Iteration Energy Ltd. ("Iteration" or the "Company") is a public company

that trades on the Toronto Stock Exchange and is incorporated under the

Business Corporations Act (Alberta). Iteration is engaged in the

exploration, development and production of petroleum and natural gas in

Canada.

2. SIGNIFICANT ACCOUNTING POLICIES

The unaudited interim consolidated financial statements of Iteration

Energy Ltd. have been prepared in accordance with Canadian generally

accepted accounting principles and are consistent with those policies set

out in the audited consolidated financial statements for the year ended

December 31, 2008, except as disclosed below. These interim consolidated

financial statements do not include all disclosures provided in the

December 31, 2008 financial statements and should be read in conjunction

with those financial statements. The timely preparation of financial

statements requires that management make estimates and assumptions, and

use judgment regarding assets, liabilities, revenues and expenses. Such

estimates primarily relate to unsettled transactions and events as of the

date of the financial statements. Accordingly, actual results may differ

from estimated amounts. In the three and six months ended June 30, 2009

the Company recorded additional production expenses for 2008 as costs

accrued at year-end 2008 did not reflect late invoices from vendors and

higher than expected recent charges from partners relating to 2008. In

the opinion of management, these unaudited interim consolidated financial

statements have been properly prepared within reasonable limits of

materiality and within the framework of the significant accounting

policies summarized below.

Basis of Consolidation

----------------------

These unaudited interim consolidated financial statements include the

accounts of Iteration Energy Ltd., its wholly owned subsidiaries (Cyries

Energy Inc, Iteration Energy Inc. and Cyries Wyoming Inc.) and its wholly

owned partnerships (Iteration Energy and Iteration Energy Partnership

2007). All inter-company transactions are eliminated on consolidation.

Changes in Accounting Policies

------------------------------

Effective January 1, 2009, the Company adopted the new CICA Handbook

Section 3064, Goodwill and Intangible Assets, which converges Canadian

GAAP for goodwill and intangible assets with International Financial

Reporting Standards ("IFRS"). The new standard provides more

comprehensive guidance on intangible assets, particularly for internally

developed intangible assets. This new standard has no impact on the

Company's current financial reporting.

Future Accounting Policies

--------------------------

The Canadian Accounting Standards Board ("AcSB") has now confirmed that

the use of IFRS will be required in 2011 for publicly accountable,

profit-oriented enterprises. IFRS will replace current Canadian GAAP

followed by the Company. The Company will be required to begin reporting

under IFRS effective January 1, 2011 and will be required to provide

information following IFRS for the comparative period. The Company is

currently developing a changeover plan to complete the transition to IFRS

by January 1, 2011, including the preparation of required comparative

information. The key elements of the plan include:

- determine appropriate changes to accounting policies and required

amendments to financial disclosures;

- identify and implement changes in associated processes and

information systems;

- comply with internal control requirements;

- educate and train internal and external stakeholders.

At June 30, 2009, the Company had completed a diagnostic study of the

anticipated impact of the transition to IFRS. The Company is currently

analyzing the accounting policy alternatives and identifying

implementation options for the corresponding process changes. Until this

analysis is complete and as IFRS is expected to change prior to 2011, the

impact of IFRS on the Company's consolidated financial statements is not

reasonably determinable at this time. The Company will continue to

monitor standards development as issued by the International Accounting

Standards Board ("IASB") and AcSB as well as regulatory developments as

issued by the Canadian Security Administrators, which may affect the

timing, nature or disclosure of its adoption of IFRS.

3. ACQUISITIONS AND DISPOSITIONS

Cyries Acquisition

On March 7, 2008, Iteration acquired Cyries Energy Inc. ("Cyries"), by

Plan of Arrangement (the "Arrangement"). Under the Arrangement, Iteration

issued 93,990,604 Iteration common shares to acquire the issued and

outstanding common shares, warrants and performance shares of Cyries. The

value attributed to each Iteration common share was $5.99 per share,

representing the volume weighted average trading price on the Toronto

Stock Exchange for an Iteration common share for the period from

February 27, 2008 to March 6, 2008. This period includes the three

trading days before and after Iteration's announcement on March 3, 2008

of the increase in the exchange ratio.

Upon completion of the Arrangement, Cyries became a wholly owned

subsidiary of Iteration with the existing Iteration shareholders, option

holders and warrant holders holding approximately 47% of the combined

entity. Although Cyries shareholders held 53% of the Iteration Common

Shares on a diluted basis following the arrangement, the transaction has

been accounted for as an acquisition of Cyries by Iteration, recognizing

that Iteration is the surviving legal entity, Iteration paid a premium to

acquire Cyries and Iteration's existing management and Board of Directors

retained their positions. The financial statements for the six month

period ended June 30, 2008 incorporate the operations of Iteration Energy

Ltd., Iteration Energy Inc., Iteration Energy and Iteration Energy 2007

Partnership for the period from January 1, 2008 to June 30, 2008 and the

operations of Cyries Energy Inc. for the period from March 8, 2008 to

June 30, 2008.

The acquisition is being accounted for using the purchase method and, the

purchase price was allocated as follows:

-------------------------------------------------------------------------

($000's)

-------------------------------------------------------------------------

Furniture and equipment $969

Property, plant and equipment 599,448

Goodwill 205,208

Bank Debt (111,223)

Working capital deficiency (29,827)

Future income tax liability (75,950)

Asset retirement obligation (14,275)

-------------------------------------------------------------------------

Total purchase price $574,350

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Consideration was comprised of:

Common shares $563,004

Transaction costs 11,346

-------------------------------------------------------------------------

Total consideration $574,350

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Note: Goodwill was written off at December 31, 2008.

4. PROPERTY PLANT AND EQUIPMENT

-------------------------------------------------------------------------

June 30, December 31,

2009 2008

($000's) ($000's)

-------------------------------------------------------------------------

Oil and gas properties $ 1,329,193 $ 1,290,246

Other 3,260 2,925

-------------------------------------------------------------------------

1,332,453 1,293,171

Less accumulated depletion and depreciation 390,693 319,642

-------------------------------------------------------------------------

$ 941,760 $ 973,529

-------------------------------------------------------------------------

-------------------------------------------------------------------------

At June 30, 2009, unproved properties and seismic expenditures amounting

to $122,032,000 (June 30, 2008: $129,876,000) have been excluded from the

depletion calculation. Future development costs on proven undeveloped

reserves of $84,800,000 (June 30, 2008: $33,695,000) are included in the

depletion calculation.

For the three and six months ended June 30, 2009, the Company capitalized

$1,047,000 and $2,182,000 (three and six months ended June 30, 2008:

$1,020,000 and $1,790,000) of overhead directly related to exploration

and development activities.

5. BANK INDEBTEDNESS

Bank Indebtedness represents the drawn portion of a syndicated facility,

net of any actual cash balances on hand. The credit facility is with a

syndicate of lenders, consisting of Canadian Imperial Bank of Commerce,

Bank of Nova Scotia, Bank of Montreal and Alberta Treasury Branch. The

borrowing base on this facility was established at $265 million and

consists of a $12.5 million operating facility and a $252.5 million

extendible revolving term facility. Subsequent to June 30 the Company

sold properties and the borrowing base was reduced by $12.5 million (See

Note 13 for details). This facility is secured by a $500 million floating

charge demand debenture. This facility will mature April 30, 2010, and,

at the Company's request, such Credit Facilities may be renewed for a

period of not more than 364 days on agreement of the lenders. The pricing

on this facility is as follows:

a) For Canadian prime based loans or US base rate loans, at

applicable prime plus a margin ranging from 175 to 325 basis

points, depending on the ratio of consolidated debt to annualized

earnings before interest, taxes and

depletion/depreciation/accretion for the preceding four quarters;

b) For borrowings by way of Bankers' Acceptances or LIBOR loans, at

the Bankers' Acceptance or LIBOR rate plus a stamping fee ranging

from 275 to 425 basis points, depending on the ratio of

consolidated debt to annualized earnings before interest, taxes

and depletion/depreciation/accretion for the preceding four

quarters, and

c) A standby fee on the unutilized portion of the facility of between

82.5 and 127.5 basis points depending on the ratio of consolidated

debt to annualized earnings before interest, taxes and

depletion/depreciation/accretion for the preceding four quarters.

As at June 30, 2009, bank indebtedness was $246 million. The effective

interest rate for the six month period ended June 30, 2009 is 3.6%.

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The accounts payable and accrued liabilities consist of the following:

June 30, December 31,

2009 2008

($000's) ($000's)

-------------------------------------------------------------------------

Trade accounts payable $ 32,329 $ 57,474

Joint venture accounts payable 3,892 3,790

Royalties payable 3,776 9,740

-------------------------------------------------------------------------

Total $ 39,997 $ 71,004

-------------------------------------------------------------------------

-------------------------------------------------------------------------

7. ASSET RETIREMENT OBLIGATION

The total future asset retirement obligations were estimated by

management based on the Company's net working interest in all wells and

facilities, estimated costs to reclaim and abandon wells and facilities

and the estimated timing of the costs to be incurred in future periods.

The Company estimates the undiscounted cash flows related to asset

retirement obligations, adjusted for inflation, to be incurred over the

estimated reserve life of the underlying assets (which is estimated to be

from 2009 through 2036) will total approximately $97,073,000

(December 31, 2008: $98,079,000). The book value of the obligation at

June 30, 2009 is 43,532,000 (December 31, 2008: $43,323,000) using a

discount rate of eight and one half percent for obligations incurred

subsequent to September 30, 2008 (six and one half percent prior thereto)

and an inflation rate of two percent. As at June 30, 2009, no funds have

been set aside to settle this obligation.

June 30, December 31,

2009 2008

($000's) ($000's)

-------------------------------------------------------------------------

Balance, beginning of period $ 43,323 $ 18,897

Liabilities incurred on acquisition of

properties (note 3) - 19,854

Change in estimate (712) -

Increase in liabilities from drilling activity 100 2,848

Accretion expense 1,449 2,271

Settlement of liabilities (628) (547)

-------------------------------------------------------------------------

Balance, end of period $ 43,532 $ 43,323

-------------------------------------------------------------------------

-------------------------------------------------------------------------

8. SHARE CAPITAL

(a) Authorized

Unlimited number of voting common shares without par value.

Unlimited number of preferred shares issuable in series

(b) Common Shares Issued

-------------------------------------------------------------------------

Six months ended Year ended

June 30, 2009 December 31, 2008

----------------------------------------------------

Number of Amount Number of Amount

Shares ($000's) Shares ($000's)

-------------------------------------------------------------------------

Balance, beginning of

period 166,020,384 $ 805,301 71,029,780 $ 238,586

Shares issued on

public offerings 44,965,000 57,555 - -

Shares issued on

corporate

acquisition

(note 3) - - 93,990,604 563,004

Shares issued on

exercise of warrants - - 1,000,000 3,733

Share issue costs,

net of tax effect

of $834 (2008: $9) - (2,311) - (22)

-------------------------------------------------------------------------

Balance, end of

period 210,985,384 $ 860,545 166,020,384 $ 805,301

-------------------------------------------------------------------------

(c) Stock Options

The Company has a stock option plan which provides for the issuance of

options to its officers, employees and consultants allowing for the

acquisition of up to a fixed maximum of 16,000,000 common shares. The

dates on which options vest are set by the Compensation Committee of the

Board of Directors at the time of grant. The exercise price of an option

granted is the closing price of the Company's stock on the last trading

date prior to the grant date. The dates on which options expire are also

set by the Compensation Committee of the Board of Directors at the time

of grant and cannot exceed ten years. Outstanding stock options to

acquire common shares through the stock option plan are as follows:

-------------------------------------------------------------------------

Six months ended Year ended

June 30, 2009 December 31, 2008

-------------------------------------------------------------------------

Weighted Weighted

average average

Number of exercise Number of exercise

Options price Options price

$ $

-------------------------------------------------------------------------

Outstanding, beginning

of period 9,782,445 $4.55 6,568,789 $3.49

Granted 3,126,291 1.19 5,343,065 5.47

Granted in

conjunction with

surrender 1,306,707 1.40 - -

Exercised for cash - - (1,642,409) (2.94)

Forfeited or cancelled (4,367,735) (4.00) (487,000) (5.70)

-------------------------------------------------------------------------

Outstanding, end

of period 9,847,708 $2.82 9,782,445 $4.55

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Options exercisable,

end of period 3,487,430 $3.56 3,759,285 $3.36

-------------------------------------------------------------------------

In June of 2009 the Company provided employees (excluding officers and

directors) the option to surrender options they held with a strike price

above $3.50 per share and in turn receive 40% of their surrendered number

of options with a strike price at the then prevailing share price of

$1.40. As a result 3.4 million options were surrendered and 1.3 million

options were issued

The following table summarizes information about the stock options

outstanding at June 30, 2009:

-------------------------------------------------------------------------

Weighted

average

Number remaining Weighted Number Weighted

Range of outstanding contractual average exercisable average

exercise June 30, life exercise June 30, exercise

prices 2009 (years) price $ 2009 price $

-------------------------------------------------------------------------

$0.70 to

$2.89 4,650,277 3.80 1.31 - -

$2.90 to

$4.00 2,977,638 1.02 2.99 2,728,637 2.96

$4.01 to

$5.00 422,334 1.88 4.68 141,445 4.57

$5.01 to

$9.00 1,797,459 2.74 6.02 617,348 5.99

-------------------------------------------------------------------------

9,847,708 2.68 2.82 3,487,430 3.56

-------------------------------------------------------------------------

-------------------------------------------------------------------------

The Company's stock option plan provides stock option holders the right

to request, upon exercise, to receive a cash payment in exchange for

surrendering the option provided the request is accepted by the Ccompany.

The cash payment is equal to the appreciated value of the stock option as

determined based on the difference between the option's exercise price

and the Company's share price at the time of exercise. For the three and

six month periods ended June 30, 2009, stock based compensation expense

of $35,000 (2008: $4,065,000 and $11,175,000 respectively), was

recognized based on the change in value of the outstanding stock options.

Future fluctuations in the stock based compensation expense or recoveries

are dependent on the movement of the Company's share price and the number

of options vested and outstanding. Based on the June 30, 2008 share price

of $1.17, had all of the 9,847,708 stock options outstanding been vested,

aggregate stock-based compensation expense and a corresponding liability

of $276,000 (December 31, 2008: $nil) would have been recognized. Of this

amount, $35,000 has been recognized as stock-based compensation payable

at June 30, 2009 (December 31, 2008: $nil).

(d) Per Share Amounts

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

2009 2008 2009 2008

-------------------------------------------------------------------------

Weighted average

common shares

outstanding 193,197,035 165,811,596 179,683,785 129,265,758

-------------------------------------------------------------------------

Weighted average

diluted common

shares outstanding 193,197,035 168,412,603 179,683,785 131,241,651

-------------------------------------------------------------------------

-------------------------------------------------------------------------

The options outstanding for the quarter and six months ended June 30,

2009 are not included in the computation of diluted common shares

outstanding as the Company realized a net loss during these periods.

9. FINANCIAL INSTRUMENTS

The Company is exposed to a number of different financial risks arising

from normal course business exposures, as well as the Company's use of

financial instruments. These risk factors include market risks relating

to commodity prices and interest rate risk, as well as liquidity risk and

credit risk.

a) Market Risk

Market risk is the risk or uncertainty arising from possible market price

movements and their impact on the future performance of the business. The

market price movements that could adversely affect the value of the

Company's financial assets, liabilities and expected future cash flows

include commodity price risk and interest rate risk.

b) Commodity Price Risk

The Company's financial performance is closely linked to oil and natural

gas prices. A change of $1.00 Cdn/mcf in natural gas prices at the

wellhead would have changed the net loss for the six months ended

June 30, 2009 by approximately $8.2 million. A $5.00/bbl change in WTI

for oil would have the effect of changing the net loss for the six months

ended June 30, 2009 by approximately $1.8 million.

From time to time, the Company employs the use of various financial

instruments to manage these price exposures, and at this time, has not

entered into any financial instruments.

c) Interest Rate Risk

The Company is exposed to interest rate risk as changes in interest rates

may affect future cash flows and the fair value of its financial

instruments. The Company's primary debt facility has a floating interest

rate that will fluctuate based on prevailing market conditions and the

Company's ratio of funded debt to trailing earnings before interest,

taxes, and depletion/depreciation/accretion. Cash flows are sensitive to

changes in interest rates on this instrument. Given the amount of debt

employed, the Company's strategy is to manage interest rate risk within

the current economic environment framework. If interest rates on the

floating instrument were to change by 1.0% it is estimated that net loss

for the six months ended June 30, 2009 would change by approximately

$0.8 million.

d) Liquidity Risk

Liquidity risk is the risk that an entity will encounter difficulty in

meeting obligations associated with financial liabilities. The Company

believes that it has access to sufficient capital through internally

generated cashflows and external equity sources, as well as undrawn

committed borrowing facilities to meet current spending forecasts. All of

the trade liabilities mature in 2009 and the Company's bank loan is due

on April 30, 2010.

Scheduled reviews of the credit facility focus on the borrowing base

supporting lending limits and are influenced by the lenders' willingness

to lend in general, commodity price forecasts used to determine the

lending base, lenders interest in particular business sectors, such as

energy and the relative strength of the borrower. Given these

constraints, there is no assurance that Iteration will be able to sustain

its current borrowing base and may be required to reduce its outstanding

loans. Should there be a requirement of the Company to reduce its

outstanding loans, there are a number of options available including, but

not limited to:

1) Issuance of additional equity;

2) Negotiation of incremental borrowings with subordinated lenders;

3) Divestiture of assets: and

4) Dedication of funds from operations.

e) Foreign Exchange Risk

Foreign exchange risk is the risk that the fair value of the future cash

flows will fluctuate because of changes in foreign exchange rates. The

benchmark pricing for most natural gas and crude oil is based on

US Dollars. Changes in the exchange rate of the Canadian dollar relative

to the US dollar will indirectly impact the Canadian dollar commodity

price realized by the Company and, as a result, cash flow. If foreign

exchange rates were to change by 1% over the course of the quarter, it is

estimated that net loss for the quarter would change by approximately

$0.6 million.

f) Counterparty Credit Risk

Counterparty credit risk is the risk that a customer or counterparty will

fail to perform an obligation or fail to pay amounts due causing a

financial loss. The Company's accounts receivable are with customers and

joint venture partners in the oil and gas industry and are subject to

normal credit risks. A small portion of the Company's production is

currently sold through a joint venture partner to purchasers under normal

industry sale and payment terms; the balance is sold to twenty five

marketers also under normal industry terms. Of these twenty five

marketers, sales to four account for approximately 80% of the Company's

production revenue.

As at June 30, 2009, the Company had an allowance for doubtful accounts

of $17.3 million (December 31, 2008 $15.4 million) including a provision

of $15.7 million relating to the filing for CCAA protection by SemCanada

and SemCAMS), on trade accounts receivable that in the estimation of the

Company may be impaired.

As at June 30, 2009, the aging analysis of trade receivables, net of the

allowance for doubtful accounts, is as follows:

-------------------------------------------------------------------------

($000's)

-------------

Current $ 18,690

30 - 60 days 2,579

60 - 90 days 797

Greater than 90 days 27,687

-------------

Total 49,753

Less allowance for doubtful accounts (17,331)

-------------

Total $ 32,422

-------------------------------------------------------------------------

Note: Greater than 90 days includes amounts receivable from for SemCanada

and SemCAMS.

g) Fair Value of Financial Instruments

Section 3855 of the CICA Handbook requires the initial measurement of all

financial instruments at fair value with classification into one of five

categories: loans and receivables, assets held to maturity, assets

available for sale, other financial liabilities, and held for trading.

The Company has elected to classify its financial instruments as follows:

-------------------------------------------------------------------------

June 30, December 31,

2009 2008

Carrying Estimated Carrying Estimated

($000's) Value Fair Value Value Fair Value

-------------------------------------------------------------------------

Loans and receivables

Accounts receivable 32,422 32,422 43,996 43,996

Other financial

liabilities

Bank indebtedness 246,000 246,000 266,800 266,800

Accounts payable and

accrued liabilities 39,997 39,997 71,004 71,004

-------------------------------------------------------------------------

The carrying value of financial instruments included in current assets

and current liabilities approximate their fair value, reflecting the

short term maturity, normal trade credit terms, and/or the nature of

these instruments.

10. CONTINGENCIES

The Company is party to various lawsuits as at June 30, 2009. It is

management's opinion that, based on the best currently available

information, the amount of any potential exposure and the outcome of

these law suits is not determinable at this time. As a result, no

provisions for these items have been recorded in these financial

statements.

Pursuant to a purchase and sale agreement, the Company has indemnified

the purchaser of a former subsidiary company for up to $1,000,000 of

income tax and legal expenses incurred with respect to specifically

identified income tax returns. The Company accrued this obligation in the

first quarter of 2008 and correspondingly increased the purchase price of

related property, plant and equipment acquired as part of a series of

transactions which occurred in conjunction with the disposition of the

former subsidiary.

The Company indemnifies its directors and officers against any and all

claims or losses reasonably incurred in the performance of their service

to the Company to the extent permitted by law. The Company has acquired

and maintains liability insurance for its directors and officers.

11. SUPPLEMENTAL DISCLOSURE ON CONSOLIDATED STATEMENTS OF CASH FLOWS

Changes in non-cash working capital were comprised of the following:

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

($000's) 2009 2008 2009 2008

-------------------------------------------------------------------------

Accounts receivable $ 6,488 $ 15,849 $ 11,553 $ 9,792

Prepaids and other

current assets (2,213) (1,748) (1,245) (761)

Accounts payable and

accrued liabilities (20,260) (57,671) (30,996) (41,240)

Income taxes payable - 170 - 458

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Net change $ (15,985) $ (43,400) $ (20,688) $ (31,751)

-------------------------------------------------------------------------

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

($000's) 2009 2008 2009 2008

-------------------------------------------------------------------------

Net change by

activity:

Operating $ 3,286 $ (16,114) $ 9,195 $ (101)

Investing (19,125) (27,286) (29,746) (31,650)

Financing (146) - (138) -

Net change $ (15,985) $ (43,400) $ (20,690) $ (31,751)

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Additional information:

-------------------------------------------------------------------------

Three months ended Six months ended

June 30, June 30,

($000's) 2009 2008 2009 2008

-------------------------------------------------------------------------

Cash interest paid $ 3,215 $ 3,067 $ 4,833 $ 4,179

----------------------------------------------------

Cash taxes paid 1 171 13 671

----------------------------------------------------

Included in cash interest paid during the three month period ended

June 30, 2009 are initial commitment fees of $347,000 related to the

syndicated facility.

12. CAPITAL MANAGEMENT

The Company's principal business of the exploration, exploitation and

development of oil and gas requires ongoing access to capital in order to

allow the Company to successfully implement its growth strategy; and to

provide adequate returns for shareholders and benefits for other

stakeholders.

The Company defines capital as share capital and bank indebtedness, net

of cash and cash equivalents. The consolidated capital structure of the

Company is as follows:

-------------------------------------------------------------------------

As at As at

June 30, 2009 December 31, 2008

($000's) % ($000's) %

----------------------------------------------- -------------------------

Bank indebtedness $ 245,861 22.2 259,968 24.4

Share capital 860,545 77.8 805,301 75.6

-------------------------- -------------------------

Total $ 1,106,406 100.0 $ 1,065,269 100.0

-------------------------------------------------------------------------

-------------------------------------------------------------------------

As at June 30, 2009, the Company had a bank credit facility that

contained covenants which limit the amount of debt that can be incurred

by the Company. Throughout the periods presented, the Company has met

those covenants.

The Company actively manages its capital structure with the objective of

maintaining sufficient flexibility to allow it to execute on its capital

investment program, including investing in oil and gas acquisitions,

exploration and development, which may or may not be successful. For this

objective to be achieved, the Company continually strives to balance the

proportion of debt to equity in its capital structure to take into

account the level of risk being incurred through capital expenditures.

In order to maintain or adjust the capital structure, the Company

considers various factors including, but not limited to:

a) projected debt to projected funds from operations ratio while

attempting to finance an acceptable investment program, including

incremental investment and acquisition opportunities;

b) the current level of bank credit available from the banking

syndicate;

c) the level of bank credit that may be available from the banking

syndicate as a result of anticipated changes in reserves;

d) the availability of other sources of debt with different

characteristics from the existing bank debt;

e) the sale of assets;

f) limiting the size of the investment or capital program; and

g) issuing new common equity if available on favorable terms.

13. SUBSEQUENT EVENTS

In July 2009, the Company disposed of oil and gas properties for proceeds

of $39.8 million, prior to closing adjustments. These proceeds were

applied against bank debt. Accordingly, the bank borrowing base was

decreased by $12.5 million to $252.5 million.

Directors, Officers and Auditors

Current Officers and Directors of the Company are as follows;

Officers

---------

Brian Illing President and CEO

Mark Ariss VP Exploration East

Jane Mactaggart VP Exploitation

Carmen McKay-Illing VP Corporate Affairs

Myron Rak VP Production

Tony Sabelli VP Drilling & Completions

Peter Scott VP Finance and CFO

Kevin Stromquist VP Exploration West

Directors

---------

Don Archibald (Chairman) Independent Businessman (former Chairman &

CEO - Cyries)

Pat Breen P. Eng. President - Foremost Income Fund

Dallas Droppo Q.C. Partner - Blake, Cassels and Graydon LLP

Jim Grenon President - TOM Capital Associates

Michael Hibberd President - MJH Services Inc.

Brian Illing P. Geol President and CEO- Iteration Energy Ltd.

Garry Peddle Independent Businessman (former VP Corporate

- Cyries)

Robert Waters, CA Senior VP and CFO - Enerplus Resources Fund

Corporate Secretary

-------------------

Tony Grenon Managing Director - TOM Capital Associates

Auditors

--------

Ernst & Young LLP

Corporate Counsel

-----------------

Bennett Jones LLP

Additional Information

The TSX has not reviewed this press release and does not accept

responsibility for the accuracy of any of the data presented here-in.

Other information about the Company, including the AIF, is available

through the internet on the Company's website at www.iterationenergy.com and

on the Company's SEDAR profile at www.sedar.com.

>>　

-30-

/For further information: Mr. Brian Illing, President and CEO, or Mr.

Peter Scott, Vice President, Finance and CFO, at (403) 261-6883/