Prospectus re Admission to the Official List - Heritage Oil

Years Ended 31 December 2005 and 2006 Prepared in Accordance with IFRSThe following table sets forth the Group’s cash flows for the years ended 31 December 2005 and 2006:Year ended 31 December2005 2006$ $Net cash flows used in operating activities ......................... (7,854,323) (12,737,451)Net cash used in investing activities .............................. (11,946,720) (28,823,833)Net cash from financing activities ............................... 9,020,147 58,031,186Discontinued operations ...................................... 4,313,817 21,324,969Foreign exchange gains (losses) on cash held in foreign currency ......... (1,185,123) 482,954Net increase (decrease) in cash and cash equivalents ................. (7,652,202) 38,277,825Cash and cash equivalents at the end of the year .................... 8,583,321 46,861,146Net cash outflows from continued operating activities increased from $7,854,323 in 2005 to $12,737,451 in2006 as a result of the increased loss from continuing operations.Net cash from financing activities increased from $9,020,147 in 2005 to $58,031,186 in 2006 and primarilyconsisted of the net proceeds of $57 million from the unsecured convertible bond issued in March 2006.Net cash used in investing activities increased from $11,946,720 in 2005 to $28,823,833 in 2006. Investingactivities principally comprises property, plant and equipment capital expenditures.Years Ended 31 December 2004 and 2005 Prepared in Accordance with Canadian GAAPYear ended 31 December2004 2005$ $Net earnings (loss) from continuing operations ..................... 28,364,368 (3,799,813)Items not involving cash ...................................... (26,498,359) 4,496,936Net cash flows from operating activities ........................... 1,866,009 697,123Net cash from financing activities ............................... 604,953 9,020,147Net cash used in investing activities .............................. (11,310,312) (16,184,349)Foreign exchange gains (losses) on cash held in foreign currency ......... 906,001 (1,185,123)Net increase (decrease) in cash and cash equivalents ................. (7,933,349) (7,652,202)Cash and cash equivalents at the end of the year .................... 16,235,523 8,583,32111. CRITICAL ACCOUNTING POLICIES11.1 Critical IFRS accounting policies(a) Exploration and evaluation expenditureThe Group applies a modified full cost method of accounting for E&E costs, having regard to therequirements of IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’. Under this method ofaccounting, costs of exploring for and evaluating petroleum and natural gas properties are capitalised on alicence or prospect basis and the resulting assets are tested for impairment by reference to appropriate costpools. Such cost pools are based on geographic areas and are not larger than a segment. The Group hadsix cost pools: Uganda, Russia, Oman, DRC, Pakistan and the Congo during the periods under review.E&E costs related to each licence or project are initially capitalised within ‘Intangible exploration assets’.Such E&E costs may include costs of licence acquisition, technical services and studies, seismic acquisition,exploration drilling and testing and the projected costs of retiring the assets (if any), but do not includecosts incurred prior to having obtained the legal rights to explore an area, which are expensed directly tothe income statement as they are incurred.Tangible assets acquired for use in E&E activities are classified as property, plant and equipment.However, to the extent that such a tangible asset is consumed in developing an intangible E&E asset, theamount reflecting that consumption is recorded as part of the cost of the intangible asset.160