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AN NU AL REPORT 2007

IN THE THICK OF THE ACTION


EXPLORATION LICENCES IN THE ST-LAWRENCE LOWLANDS JUNEX HYDROCARBON FIELDS NATURAL BRINE FIELD EXPLORATION LICENCES IN GASPÉSIE JUNEX PÉTROLIA HYDROCARBON FIELDS NATURAL BRINE FIELD

APPALACHIAN BASIN

Junex holds more than 1.1 million acres of permits in the St-Lawrence Lowlands where two gas fields have been discovered to-date. Stimulated by the spectacular developments which occurred in Shale gas production in the USA during of the last years, the main exploration target in this Basin is the production potential from the Utica Shales. On the other hand, the recent world class discoveries made by Talisman Energy in the State of New York has aroused interest for the potential of the Trenton/Black-River sedimentary zone which is present in the Lowlands.

Gaspésie is a vast territory where the presence of oil and gas has been confirmed long ago. However, the region is almost virgin in terms of exploration as only twenty wells have been drilled using modern techniques. The geological targets representing the greatest potential in the region are the Silurian and Devonian Sandstones; the hydrothermal breccias; and the Devonian and Silurian Reefs. Junex holds exploration rights on more than 3 million acres in Gaspésie, including 1.6 million acres held by Petrolia on which Junex has an option to participate in commercial production at 50% of Petrolia’s interest.

OUR PROFILE Junex holds exploration rights on more than 4 million acres1 of land located in the Appalachian basin in the province of Québec. Recent major discoveries in the United States and Eastern Canada have stimulated exploration in Québec, which is located in a favourable geological setting for oil and gas discovery. Junex’s strategy is to reduce exploration risks by entering into partnerships with other exploration companies. In parallel to its exploration efforts, Junex goal is to achieve positive cash flows from its natural brine and drilling services operations.

1

Excluding 1.8 million acres on which Junex holds a royalty of 1.5 percent.


JUNEX ANNUAL REPORT 2007

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OUR VISION At the beginning of the year 2000, Junex was within the first companies to believe in the oil and gas potential in Québec. It is at this moment that we’ve started to build a significant land position which now allows us to be in the heart of the action both in the regions of the St-Lawrence Lowlands as well as in Gaspésie.

OUR EXPERTISE Junex has developed throughout the years a significant expertise on the sedimentary basins of Québec. Several basic works including rock maturation analyses, seismic and High Resolution Aeromag (HRAM) surveys as well as drillings have been carried out in order to demonstrate the potential of our lands. All these scientific data, in addition to the expertise of our team of engineers, geologists and geophysicists, represent significant assets for our future successes.

OUR STRATEGY After having acquired an important quantity of lands and completed geological works which show the potential of our properties, we have put in place a partnership strategy aiming to develop, at the lowest risk, our oil and gas properties. This strategy has led to the oil discovery of Haldimand in Gaspésie and it allows us today to be able to count on Forest Oil’s expertise to pursue the development of the Utica Shale potential.

OUR FUTURE Junex’s objective remains to discover and to produce oil and gas resources in Québec. Now more than ever, we believe that we hold in our hands all the necessary tools to succeed. The coming months should bring us closer to our goal since our partner will carry out a significant horizontal drilling campaign in order to evaluate the Utica Shales. We will also be very active in the field in order to develop our properties having a development potential either for the Utica Shales as well as for the Trenton/Black-River section which is extremely prolific in the State of New York. Finally, we will begin a development campaign of the Haldimand property which will be determining in evaluating the long-term oil production capacity of this project.

Picture on the cover : Rig #2 owned by Foragaz, a division of Junex inc.


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JUNEX ANNUAL REPORT 2007

MESSAGE TO THE SHAREHOLDERS

Jacques Aubert Chairman of Board

Jean-Yves Lavoie, P. Eng. President and CEO

Dear Shareholders, As you know, for the last seven years, your company has been working to acquire a large mining estate and develop rigorous exploration projects in Québec. Working with a team of young professionals whom are first and foremost competent and enthusiast, we completed, during this period, projects which indicate the oil and gas potential of our different sedimentary basins. Fortunately, we were among the first explorers to believe in this potential and we are very proud today to note the enthusiasm of the petroleum industry over some very promising geological concepts such as the Utica Shales. More than ever, we are in the thick of the action and are confident that Junex is closer to its goal of becoming an oil or gas producer in the province of Québec.

Indeed, right after the completion of frac job on two wells in Québec, one of which being Bécancour #8, Forest Oil Corporation announced, at the beginning of April 2008, an estimate of more than 4.1 (Tcfe) trillion cubic feet of natural gas from recoverable resources on its parts of claims held in Québec . This amount of resources unveiled by Forest Oil testifies as to the significant potential which represent the Utica Shales in the St-Lawrence Lowlands. In addition to the permits we have in partnership with Forest Oil, Junex holds 100% of many other permits which are highly promising for the development of the Utica Shales. Thus, we can predict that we will make very important efforts to exploit the Shale gas in the St-Lawrence Lowlands, in the next years.

In 2007, we paved the way again in oil and gas exploration in Québec as we carried out the first well frac intended to evaluate the production capacity of Shale gas in this province, in partnership with Forest Oil Corporation. Completed at the end of December at Bécancour #8 well, this project was a success and has largely contributed to the turmoil raised at the beginning of 2008, around the high gas potential of the Utica Shales.

1

Forest Oil has disclosed on April 1st a resource estimate that is non-compliant under Canadian regulations.


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EXPLORATION WORKS CARRIED OUT IN 2007

EXPLORATION PARTNERSHIPS

In addition to continuing the evaluation of the Utica Shales, Junex carried out last year important exploration works in the St-Lawrence Lowlands as well as in Gaspésie. We completed two drillings in the Champlain region and one in Paspébiac, located in the region of Baie-des-Chaleurs. Moreover, Junex performed at the end of the year an important seismic survey on the permit of Bécancour/Champlain, plus having carried out a fracture work at Galt #3 well in Gaspésie.

For a few years now, the Company has counted on a partnership strategy in order to reduce the risks linked to exploration and accelerate the development of its large mining estate. One of these partnerships, with Pétrolia, led to the discovery of oil from Haldimand in 2006. Since then, we have been trying to come to a Joint Operating Agreement (JOA) with Pétrolia in order to start the development phase of Haldimand. Although the negotiation of this agreement is difficult, we believe we have made significant progress during the last months and we are confident this agreement will be concluded this year.

If none of these wells produced oil and gas, each one met more or less important shows of hydrocarbons. The two drillings carried out in Champlain, on the North shore of the St-Lawrence River, have indicated significant presence of natural gas in the Utica Shales and in the Trenton/Black-River limestones. Following these results, we’ve acquired 27.9 km of seismic survey on the north of Champlain #2 well and 39.3 km in the region of Bécancour. The objective of these surveys remains the identification of drilling targets in the limestones of Trenton/Black-River, similar to the one that led to the discovery of natural gas at Gentilly #1 well which was drilled by Questerre Energy and Talisman Energy. Junex holds the permits adjacent to those of Gentilly and we plan to drill at least one well in the region of Bécancour in 2008. The interpretation of the seismic surveys completed in 2007 is now in hand and it will provide us with the necessary information to better position our next drillings in the region. In Gaspésie, we carried out a first wildcat well in the region of Baiedes-Chaleurs where Junex holds more than one million of acres under permits in an almost virgin basin in terms of exploration. Paspébiac #1 well was implemented at the top of a large dome structure which was identified during previous seismic campaigns and particularly targeted a seismic anomaly at the level of Silurian limestones. The well revealed presence of hydrocarbons from 1,395 meters down to 1,800 meters in depth. We are satisfied with these results which indicate that the basin is promising for future exploration. Our next challenge consists in attracting a major oil and gas industry partner who will allow us to continue exploring this very promising basin. Finally, Junex carried on with the evaluation of the property of Galt in Gaspésie. As of now, we have produced a few thousand barrels of petroleum from this property where the hydrocarbon saturated column is impressive. We are currently working on an efficient method that would improve the productivity of our wells in this region where the permeability of the rock is very low.

Fortunately, we were among the first explorers to believe in this potential and we are very proud today to note the enthusiasm of the petroleum industry over some very promising geological concepts such as the Utica Shales. On the other hand, our partnership with Forest Oil, an American firm, went on in 2007 as this latter exercised its option to launch a pilot-project of 8M$ on our property of Bécancour/Champlain which aims to prove the gas production capacity from the Utica Shales. At the beginning of 2008, we also strengthened our business relations with Forest Oil, since we both concluded a new partnership which might lead to initial investments of 5 M$ on our property of Contrecoeur. With this second partnership, we also aim to evaluate the Utica Shale. Strategically, we can only benefit from the expertise and capital of a partner such as Forest Oil, well-known for its ability to successfully develop unconventional gas production projects. Finally, Junex put an end to its exploration partnership with the American company, AMQUE ULC, at the beginning of 2008. This latter did not fullfil its investment commitments by the deadline. Consequently, Junex has got back 100% of exploration rights on nearly 700,000 acres of lands located in the St-Lawrence Lowlands.


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JUNEX ANNUAL REPORT 2007

SCHEDULED WORKS FOR 2008

By December 31, 2007, the Company had a working capital totalling $9,747,281 which will allow us to put forward a major exploration campaign in 2008. As discussed previously, we will insist particularly on proving the value of our important position of prospective permits for the development of the Utica Shales. Consequently, such works as analysing rock maturity, as well as high-resolution aero-magnetic (HRAM) surveys and coring are going to be carried out in the next 12 to 18 months onto our properties held at 100%. Taking into account also that in order to produce the Utica Shales, our partner should perform works amounting to 12 million dollars on our properties.

In parallel to its exploration effort, Junex has continued to produce natural brine in order to evaluate Bécancour's reservoir caracteristics in light of a future development of underground storage for natural gas. Doing this, natural brine sales have generated more than $175,000 in cash flows this last year. Moreover, all the holes drilled by the company were performed with our own rigs, allowing us to better manage exploration costs. At the end of the year, our drilling services division also realized some mandates for Forest Oil during the frac job work performed on two wells in Québec. For Junex, these auxilliary activities represent additionnal tools to better manage the risks related to oil and gas exploration.

We also anticipate the drilling of two wells with various objectives in the St-Lawrence Lowlands. One of these wells will be drilled in the region of Contrecoeur while the other one will be established on one of our structures of Bécancour. The main geological objective of these two drillings is the evaluation of the Trenton/Black-River limestones, but at the same time these will give us the opportunity to go through and analyse the zone of the Utica Shales.

ACKNOWLEDGMENTS

In Gaspésie, we are confident of signing our JOA with Pétrolia and being in the field to achieve a seismic survey as well as two delineation wells with the objective of properly evaluating the oil discovery of Haldimand. We will also work to enhance the geological models of Baie-des-Chaleurs and Galt which have, according to us, a very promising oil and gas potential, even though they are geologically complicated.

Coming to the end, we want to thank our shareholders and financial partners for their patience and confidence. Finally, a special thanks to our team of drillers and professionals whose qualifications, aptitudes and continuous efforts are the essential elements of our success.

Jacques Aubert Chairman of Board

Jean-Yves Lavoie, P. Eng. President and CEO

In 2007, we paved the way again in oil and gas exploration in Québec as we carried out the first well fracture intended to evaluate the production capacity of Shale gas in this province, in partnership with Forest Oil Corporation.


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OVERVIEW OF EXPLORATION WORKS IN 2007 In Québec’s sedimentary basins, Junex has targeted, for its exploration activities the Utica Shales, the carbonates of Trenton/Black-River, the Devonian limestones of Gaspé and the Silurian and Devonian sandstones of Gaspésie. In 2007, the main exploration works of the Company were carried out in the St-Lawrence Lowlands and Baie-des-Chaleurs basins.

GAS POTENTIAL ANALYSIS OF THE UTICA SHALES In the St-Lawrence Lowlands, Junex owns exploration permits on more than 1.1 million acres. According to the Company, nearly 488,653 acres present a significant potential for unconventional resources of Shale gas type. From this area 252,496 net acres owned by Junex are located in the zone identified by Forest Oil as a prospect in thermogenic Shale gas. Other properties located in the North shore of the St-Lawrence offer a good potential for the development of biogenic Shale gas. Moreover, the Company expects carrying out during the coming months, geological works that will include analysis of rock maturity and drillings in order to evaluate the potential of the Utica Shales within more than 300,000 acres of land entirely held by Junex, located on both shores of the St-Lawrence River. The Company believes these permits are prospective for the exploration of the Utica Shales and these works will provide us with the extra knowledge which will enable us to confirm the validity of our interpretation. Macasty Shales

Antrim Shales

Utica Shales

New Albany Shales Ohio Shales

Eastern Overthrust Belt

GAS SHALES Barnett Shales

Ouachita thrust Belt

PRODUCING BASIN POTENTIAL BASIN GAS FIELD

Gas production from the Shale sedimentary sequence has known a spectacular growth in the United States over the last years, in particular in the Barnett Shales in Texas, which are the most prolific these days. At the beginning of April 2008, Junex’s American partner, Forest Oil, compared the Utica Shales, which are present in the St-Lawrence Lowlands, to those of the Barnett. Forest also announced their intention of drilling three horizontal wells in 2008 in order to test the validity of the concept play.


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JUNEX ANNUAL REPORT 2007

EVALUATION OF THE BÉCANCOUR/CHAMPLAIN PROPERTY

In July 2006, Junex signed an agreement with Forest Oil Corporation, a significant independent natural gas producer in the United States, for the development of shale gas in the Bécancour/Champlain region. The agreement specifically targeted the evaluation of the gas potential of the Utica shale section on four blocks of permits covering 143,138 acres located between Québec-City and Montréal, which are entirely held by Junex. Pursuant to this agreement, Junex’s partner has analysed a total of 34.15 meters of Utica shale coring cut from the Bécancour #8 well drilled by Junex. The cores were laboratory tested in order to better understand the physical and chemical properties of the sedimentary layer of the Utica shales and to evaluate their productivity potential. Based on the results of this analysis, Forest advised Junex in May 2007 that it would go forward with an $ 8 M pilot-project. The first step of this project consisted of a frac job performed on the Bécancour #8 well last December.

In order to earn its interest in the Bécancour/Champlain permit, Forest Oil shall invest $8,000,000 in work comitments on the land by the end of November 2008. After these investments are completed, Forest will be allowed to retain a 100% interest on the Shale section of the designated permit, subject to 5% royalties convertible into a 15% working interest in favour of Junex. Since the Bécancour/ Champlain permit covers 143,141 acres, Junex's net share of the Utica section may be 21,471 acres. Junex keeps all its rights on these permits in sedimentary layers deeper or less deep than the Utica and the Lorraine Shales, including the Trenton/Black-River.

Orleans/Beaupré 112,670 acres Quebec Region 77,420 acres

ANTRIM TYPE

Portneuf 145,513 acres

Québec

Trois-Rivières-Ouest 6,956 acres St-Barnabé/Ste-Ursule 75,426 acres JUNEX BÉCANCOUR #8

Lyster 108,360 acres

L’assomption/Lanoraie 145,406 acres

BARNETT TYPE GASTERM ST-FRANCOIS DU LAC #1

Montréal

St-Simon North 39,250 acres St-Simon South 17,876 acres

Richelieu North 55,240 acres Richelieu South 138,606 acres

100 % JUNEX JUNEX & FOREST JV GASTEM & FOREST JV

Junex entirely holds many prospective exploration permits for the development of the Utica Shales, together with two exploration partnerships in which the Company is involved with Forest Oil of Denver. Some of these permits are located on an important zone identified by Forest for its potential of thermogenic Shale gas. Over the next months, Junex expects to carry out exploring works intended to prove the high potential for gas discovery of these permits.


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THE « SHALE GAS » ON THE SPOTLIGHT The Utica Shale is a Sedimentary rock rich in organic matter which is acting as a source rock and a reservoir. Present in the St-Lawrence lowlands, this rock contains micro-porosity and low permeability. Over the course of these last years, Junex has performed some geological works to demonstrate that the Utica Shale may be a good gas producer just like many other Shales in the United-States. The most recent geological data collected in partnership with Forest Oil tend to support Junex beliefs regarding the gas potential of the Utica Shales.

The contact between the Utica and the Lorraine Shales is clearly visible at the Montmorency Falls near Québec-City.


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JUNEX ANNUAL REPORT 2007

EXPLORATION WORKS TO COME

Over the next months, the Company expects to make important efforts in order to develop the potential of the Utica Shales on its permits. In addition to works that will be carried out by our partner on Bécancour/Champlain block, Junex will keep on with an exploration campaign that will provide better knowledge of the geochemical features of the shales located on the South Richelieu and Lyster permits in the region of Lotbinière. Samples have been extracted from drilled wells in these regions by our technical team and the results of these analyses will contribute to a better planning of the next phase which will demonstrate the value of the Utica Shales on these permits located in a zone where gas, according to our internal interpretations, should be of thermogenic source (type Barnett). Similar works should also be completed on the properties located on the North shore in order to evaluate the biogenic Utica Shales (Antrim type). All these works will provide a better understanding of the global gas potential of the Utica Shales in Québec.

Moreover, Junex signed a second partnership with Forest at the beginning of year 2008. Pursuant to the terms of the farmout agreement the partner will pay to Junex an initial fee of US$ 1,000,000 to acquire an option to earn an interest in the shale sections of 55,000 acres of land in the Contrecoeur area located approximately 50 kilometers from the city of Montréal. In the event the partner elects to exercise the option, it shall invest US$ 4,000,000 in complete work commitments within a period of 18 months in order to become entitled to the assignment of up to a 60% working interest in the shale sections of the above-mentioned land. In such event, Junex will retain the balance of the working interest in the said land following such assignment along with a 100% working interest in all the other geological formations, including the Trenton/Black-River. Junex will start the drilling of an exploration well on the land before July 2008. Such exploration well will target the Trenton/Black-River and the Beekmantown Formations and Junex will provide the partner with all geological and logging information derived from the exploration well. Such information will be used by the partner in deciding whether or not to exercise the option to perform the work commitments.

Moreover, Junex signed a second partnership with Forest at the beginning of year 2008. Pursuant to the terms of the farmout agreement the partner will pay to Junex an initial fee of US$ 1,000,000 to acquire an option to earn an interest in the shale sections of 55,000 acres of land in the Contrecoeur area located approximately 50 kilometers from the city of Montreal.


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CONVENTIONAL EXPLORATION PROJECTS IN THE ST-LAWRENCE LOWLANDS The properties of Bécancour and Champlain owned by Junex are the most developed regarding exploration works and production infrastructures. Many significant gas shows have been crossed in the Trenton and Black-River limestones as well as in the Beekmantown dolomites, two geological units excluded from Forest partnership and where Junex keeps 100% of exploration rights. In 2007, Junex completed two drillings in the region of Champlain, on the North shore of the St-Lawrence River. First, we’ve redrilled to deepen the Champlain #1 well, down to 958 meters, which was interrupted in 2006 to 750 meters in depth. An important show of natural gas was met in the Utica Shales but the drilling did not come to a reservoir filled with natural gas in the Trenton/Black-River limestones. The interpretation of the high-resolution aeromagnetic survey obtained in Spring 2007, together with the reanalysis of the reprocessed seismic survey of Autumn 2005, has led Junex to perform a second drilling north to the first well of Champlain. The purpose of the Champlain #2 well was to test the Trenton/Black-River Formation. The well was drilled to a total depth of 930 meters and it has crossed indications of natural gas in the Shales of the Lorraine and Utica formations as well as in the limestones of the Trenton/Black-River group. The geological evaluation and the analyses performed on the well have permitted to demonstrate that the hydrocarbon saturated zone was over 150 meters thick. However, the well did not encounter any reservoir zone sufficiently developed to allow for a commercial production of natural gas. However, in November 2007, these results were encouraging enough so that Junex acquired 27.9 km of additional 2D seismic on the north section of the Champlain permit, in addition to 39.3 km on the south section of the Bécancour permit. In this zone, the limestone is located deeper in the ground and important structures have been identified. These latter represent for Junex new exploration targets and the Bécancour #9 well, expected for Summer 2008, will test one of these new targets. The well will be drilled in a structure similar to the one drilled by Talisman in Gentilly #1 well, located near the Bécancour permit held by Junex.

GASPÉSIE For the most part, the works performed over the last years took place in the Devonian basin of Gaspé, but Junex drilled the first exploration oil well in the Silurian basin of Baie-des-Chaleurs, in 2007.

Seismic lines covering the Baie-des-Chaleurs property.


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JUNEX ANNUAL REPORT 2007

BAIE-DES-CHALEURS

The basin of Baie-des-Chaleurs is a sedimentary one covering an area of just over 2,000,000 acres located in the South of Gaspésie. Junex owns exploration rights on 987,614 net acres, in other words the whole land part of the basin. Over the last five years, the Company has been performing coring and geophysical surveys, mainly focussing on proving the oil system validity of this basin. The works reveal the presence of a of good quality source rock, of structures and traps favourable to hydrocarbon accumulations. The drilling of Paspébiac #1 well was intended to test the hydrocarbon potential of limestones and Silurian sandstones of one of the structures identified in the seismic surveys. The anticline of Bonaventure where Paspébiac #1 well was drilled, is a dome structure of nearly 14 km2 of closure. It’s a matter of a major structure never explored, an exceptional phenomena in oil industry.

The drilling started at the beginning of Summer 2007 has encountered hydrocarbon shows in the Silurian Limestones and Silurian Sandstones from 1,400 meters through the total depth of 1,800 meters. The well was completed with a deviation of 38° and the Drill Stem Tests (DSTs) performed on the well suggest a low permeability of the tested zones. The presence of hydrocarbon in sedimentary units crossed while drilling indicates that the oil system of Baie-des-Chaleurs properly performed; analysis and additional works will be necessary in order to identify the zones having more significant reservoir characteristics. Junex is presently evaluating the possibility of appointing partners in order to go farther in exploration work in the region of Baie-des-Chaleurs.

Junex drilled in 2007 a first wildcat well in the Baie-des-Chaleurs basin. The Paspebiac #1 well encountered hydrocarbon shows but the DST's suggest a weak porosity of the tested zones. Junex believes that the Baie-des-Chaleurs basin is a very promising one and we are currently looking for partners to drill deeper wells in the area.


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GALT

HALDIMAND

Throughout the year, Junex kept on testing production in two wells located in the region of Galt. The entire production of these two wells for 2007 amounts to 1,237 barrels of high quality light petroleum. All drilling and testing results acquired up to now tend to illustrate that the Galt structure may contain an important resource of light petroleum since we’ve recognized the presence of a rocky column filled with petroleum in more than 2,000 meters of thickness.

Junex owns a 45% interest and acts as the Operator in the discovery of light oil from Haldimand near Gaspé port. Preliminary tests carried out in 2006 indicated that the well produced steadily 34 barrels of light oil per day from a reservoir zone located in the Devonian sandstones. Junex and its partners are now putting the finishing touches to their joint operating agreement that will allow development of this discovery. Over the last months, we asked for an external analysis of this project in order to proceed effectively and rapidly as soon as the letter of agreement is signed. We expect performing a seismic survey and two drillings on this project over the next months.

However, the rock features a low porosity and a limited permeability, which makes a sustained production of the resource extremely difficult. Junex believes that production could be increased by improving the highly fractured or grinded zones, in particular with massive fracture works and horizontal drillings. With this in mind, and with our partner Mr. Bernard Lemaire, we proceeded with stimulation works in some of the Galt wells. As of now, we did not get the expected results in terms of well productivity, but we keep on polishing up our geological model in order to bring our works to a successful conclusion and exploit the potential resource of Galt.

OTHER EXPLORATION WORKS IN GASPÉSIE AND EASTERN QUÉBEC

Junex has accumulated, on the block of permits of the Taconic Front (net area: 407,810 acres, entirely held by Junex), a hundred samplings for the evaluation of thermal maturity of this part of the basin of Gaspésie. Many analyses were performed and results showed presence of favourable source rocks, a very positive factor for the exploration of this region. Finally, a new block of permits covering a net area of 233,275 acres was acquired by Junex on the south coast of Anticosti Island.


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JUNEX ANNUAL REPORT 2007

MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

THIS ANALYSIS REVIEWS THE FINANCIAL STATEMENT AND CONSOLIDATED RESULTS OF JUNEX FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE RESULTS OF THE PREVIOUS YEAR. CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) OF CANADA. ALL FIGURES WRITTEN IN THIS REPORT ARE STATED IN CANADIAN DOLLARS. FORWARD-LOOKING STATEMENTS

1.2 EXPLORATION ACTIVITIES

Certain statements contained in this report must be taken as «forwardlooking statements». Such statements are subject to risks, uncertainty and other factors that could cause the actual results, performance or achievements of the Company, to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements.

Deferred exploration costs of Junex amounted to $12,761,522 on December 31, 2007, an increase of $3,332,208 compared to the expenses of previous year. These exploration expenses represent the net investments of the Company on its different projects in oil and gas exploration. Thus, they are deducted from the write-off which can occur during the year due to the abandonment of wells and/or projects; also net of tax credits which the Company receives from Québec government; and from partners’ contributions who are paying a quotashare of exploration expenses for some projects.

1.1 DATE

This report for the year ending December 31, 2007 was completed on April 25, 2008. ACTIVITIES OF THE COMPANY

The Company is incorporated according to Section lA of the Companies Act (Québec) and its main activities consist in oil and gas exploration in the province of Québec. The Company is also carrying on activities relating to exploration of natural resources such as selling natural brine as well as providing drilling services for oil and natural gas wells. Finally, the Company occasionally offers geophysical and geological consultation services to some of its active partners in oil and gas exploration. Including some permits of which Junex only holds royalties linked to future production or back-in rights following commercial discovery, the Company holds exploration rights on more than 4 million acres1 of land located in the Québec Appalachian geological basin. Many recent major discoveries in the United-States and Eastern Canada have stimulated exploration in Québec, which sedimentary basins are located in a favourable geological setting for oil and gas discovery. The strategy of Junex is to reduce exploration related risks by entering into partnerships with other exploration companies. While continuing its exploration efforts, Junex goal is to achieve positive cash flows from its natural brine and drilling services operations.

1

Excluding 1.8 million acres on which Junex holds a royalty of 1.5 percent.

The annual increase of the exploration expenses in financial statement is linked to the number of exploration projects carried out by the Company and can vary enormously year after year, mainly according to given geological results and our financial position. In 2007, Junex deferred exploration expenses were higher than those of 2006, which amounted to $3,037,483 and up to $3,947,475. This difference mainly comes from two elements: 1) the company’s exploration activity was more important due to an improved financial position, in particular due to a private placement completed in November; 2) at the end of the year, Junex carried out an important seismic survey which allowed better planning of the 2008 exploration campaign. Junex expects exploration investments of approximately $6,000,000 for next year.


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Details of exploration net investments for year 2007 are detailed as follows: PROJECT

Gaspé

DEFERRED EXPLORATION EXPENSES IN 2007 $84,442

Baie des Chaleurs

$1,237,482

Bande Taconique

$6,645

Galt et Baillargeon

$1,116,093

Rivière-du-Loup

$3,714

Appalachian Basin

$59,754

Bécancour

$617,241

Richelieu

$26,604

North Shore

Total

$795,500

SUMMARY OF CARRIED OUT WORKS

Various analyses and preparation of next exploration campaign in Gaspé region, particularly on Haldimand project. Drilling and analyses of Paspébiac #1 well. Various analyses. Drilling and analyses of Baillargeon #1 well. Fracturation of Galt #3 well. Development and understanding of global geological model. Various analyses. Various analyses, mainly with St-Simon project. Seismic survey in the region of Bécancour/Champlain. Various analyses. Deeper drilling and analyses of Champlain #1 well. Drilling and analyses of Champlain #2 well.

$3,947,475

Detailed results of exploration activities which have brought deferred exploration expenses are indicated in the section entitled «Summary of exploration activities in 2006» from page 7 to page 13 of the Annual report.


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JUNEX ANNUAL REPORT 2007

1.3 SELECTED FINANCIAL INFORMATION FOR FISCAL YEARS ENDED DECEMBER 31, 2007, 2006, 2005

(Thousands of dollars, except per share amounts)

EXPLOITATION Sales per sector Oil and natural gas Natural brine Drilling business Total sales

2007 $

2006 $

2005 $

69 366 233 668

68 529 2,095 2,692

91 515 2,251 2,857

Gross profit Net loss of fiscal year Basic and deferred net loss per share

74 (848) (0,018)

1,045 (573) (0,014)

940 (144) (0,004)

BALANCE SHEET DATA Working capital Total assets Long-term debt Total liabilities Shareholders’ equity

9,747 29,997 1,147 2,819 27,178

7,709 23,393 1,259 2,312 21,080

3,330 16,811 768 2,106 14,704

(586) 4,091

123 3,605

CASH FLOWS & OTHERS Cash flows from exploitation activities Deferred exploration costs

(734) 2,344


JUNEX ANNUAL REPORT 2007

17

1.4 EXPLOITATION RESULTS

Net Revenue and Profit Margin Company’s gross sales for 2007 fiscal year reached $667,763 which represents an important diminution compared to the gross sales of 2006, which amounted to $2,692,343. This decrease is mainly due to the drop in sales of drilling services which went from $2,094,651 in 2006 to $232,770 in 2007. The decrease in sales of drilling services is related to the fact that this division of Junex has carried out less thirdparties contracts than the year before. The external drilling activities performed in 2007 were minor ones, this explains the notable diminution of sales. Consequently, gross margin on these sales indicates a slight diminution in 2007, being 35.2 % compared to 41.5 % in 2006. These low figures are also due to the fact that drilling rates were not increased in 2007, whereas main expenses such as workforce, drilling material and gas increased from 5 % to 10 %. It is important to specify that Junex gives priority to its own exploration projects as well as to those of its partners, thus insuring better management of expenses related to the exploration of its oil and gas properties. However, only revenues generated by third parties are consolidated in net revenue of the Company. External sales of drilling services are directly related to the level of activity in oil and gas exploration in Québec and the capacity of Junex to obtain contracts from third parties. In this respect, Junex has the advantage of being the only company in Québec which owns rigs for petroleum exploration. On the other hand, exploration context in Québec may bring some third parties to hesitate contracting drilling services to Junex as we own many oil and gas rights in this province and external customers may see us as a competitor. So, it is difficult to anticipate the volume of external sales that could be carried out by our drilling division.

Furthermore, sales of natural brine reached $365,872 in 2007, much less than figures registered in 2006 as they totalled $529,170 and $515,207 in 2005. This drop is mainly due to the low demand from our two main distributors which had to face up to the arrival of a new competitor in the market of dust control in Québec and in Ontario. Consequently, sales came down to more than 30 % and the average sale price for a litre went from 7.7 cents in 2006 to 7.3 cents in 2007. The reduction in sales of natural brine has had an impact on the gross profit margin which had reached 15.2 % in 2006 and was reduced to 4.8 % in 2007. Sales of oil and gas reached $69,121 in 2007 compared to $68,522 in 2006. These sales were carried out within tests performed with our exploration wells and are not yet profitable for the company. We believe that this sector could increase for the coming years with the development and production of Haldimand #1 well. Net Loss and Cash Flows In 2007, Junex recorded a net loss of $848,309 compared to the net loss of $573,099 in 2006. The increase of the loss can be mainly explained by the slowing down of drilling business as well as the reduction of natural brine sales. These two elements led to a significant diminution of the gross profit which amounted to $1,045,468 in 2006 and considerably dropped to $73,557 in 2007. Furthermore, administration expenses were reduced to $159,583 or 10.4 %. This reduction is mainly due to the stock-options compensation which amounted to $175,875 in 2006 and lowered to $87,516 in 2007. Moreover, investment income significantly increased in 2007, amounting from $104,765 to $255,465 last year. Finally, the write-off of deferred exploration expenses was of minor importance this year. In 2006, the company had wroteoff up to $330,723 for the abandonment of Junex-Bécancour #2 well, while in 2007 we wroteoff only $18,336. Cash flows exploitation activities followed a downward trend due to the diminution of sales in natural brine and drilling services. All of these reasons brought the Company to generate negative cash flows totalling $586,394 from the exploitation activities in 2007, compared to positive cash flows of $123,358 in 2006.


18

JUNEX ANNUAL REPORT 2007

1.5 SUMMARY OF QUARTERLY RESULTS

Quarterly results of the company largely fluctuate according to sales of natural brine and mainly according to drilling services. Drilling business is related to the number of contracts the Company receives from third-parties clients. Every drilling contract may indicate sales varying between $500,000 and $1,500,000 per well, having a major and direct impact on quarterly results of the Company. Between the first quarter of year 2006 and third quarter of same year, the Company carried out three different consecutive drilling contracts, which significantly increased sales and consequently, quarterly profits. During this period, one should note that second quarter of 2006 registered lower sales because our drilling subsidiary did not exactly sign any contract with third parties. Moreover, sales of natural brine are rather cyclic and they are normally registered between second and third quarter of the year, meaning when dust control products are spread over roads in QuĂŠbec and in Ontario. One should note that profit recorded during the last quarter of 2007 is due to adjustment of future income tax resulting from Flow-through private placement completed in November 2007. Without this adjustment, Junex would have registered a loss of $310,871 during the last quarter of 2007.

Financial Data for the Last Eight Quarters December 31 September 30 2007 2007 $ $ Total sales Net income (Net loss) Net income (Net loss) per share beforeto dilution

June 30 2007 $

March 31 December 31 September 30 2007 2006 2006 $ $ $

205,028

120,880

317,794

24,061

317,538

723,274

70,792

(346,005)

(224,209)

(348,887)

110,761

(14,305)

0.001

(0.007)

(0.005)

(0.007)

0.003

0.000

June 30 2006 $

March 31 2006 $

471,301 1,180,230 (701,845)

32,290

(0.017)

0.001

1.6 WORKING CAPITAL

1.8 OFF-BALANCE SHEET ARRANGEMENTS

As for December 31, 2007, Junex working capital amounted to $9,747,281, a significant improvement compared to $7,708,245 at the end of 2006 fiscal year and to the one of 2005 which was $3,330,123.

The Company has no significant off-balance sheet arrangement other than financial commitments specified in Note 25 of annual financial statement.

By December 31, 2007, the Company’s liquid assets amounted to $9,334,031, which is sufficient to pursue its short-term development plan as well as its commitments mentioned in Note 25 of its annual financial statement. There is no risk of illiquidity regarding to financial instruments.

1.9 TRANSACTIONS WITH RELATED PARTIES

1.7 FINANCING SOURCES

In 2007, financing activities generated net cash flows of $5,995,771, which explains the increase of the working capital. This cash flows results from two private placements completed by the Company in the course of 2007: in July, Junex issued 800,000 shares for a net proceeds of $1,000,000 and in November, the Company issued 4,423,076 common shares for a gross proceeds of $5,749,999.

Transactions between related parties up to $17,579 have been concluded during current year. These expenses stayed for the rental of a warehouse and they were concluded with a company having a significant influence. Moreover, fees totalling an amount of $33,125 have been paid to officers and directors of the Company who are also main shareholders. Transactions with related parties have been concluded with a firm controlled by a shareholder exercising a noteworthy influence within the normal course of business and these transactions were calculated at the exchange amount, meaning established and accepted amount by the parties. The commercial goal of the transaction is the rental of warehouses that allow optimizing drilling services activities and there is no contractual obligation between Junex and the firm controlled by a shareholder exercising a significant influence within the normal course of business. Invoicing is done monthly.


JUNEX ANNUAL REPORT 2007

19

1.10 FOURTH QUARTER

1.16 OTHER INFORMATION

Revenues for last quarter in 2007 reached $205,028. Sales are described as follows: $21,367 for oil and gas sector; $34,947 for natural brine and $148,714 for drilling services. Administration fees added up to $342,425, amount that can be compared to the three previous quarters. The net profit registered during last quarter of 2007 results from the adjustment of future income taxes related to the Flow-Through private placement completed in November 2007. Without this adjustment, the Company would have recorded a loss of $310,871 for last quarter of year 2007. During this same period, Junex completed an important placement by issuing 4,423,076 shares for a gross proceeds of $5,749,999.

Common Shares On December 31, 2007, there were 52,204,170 outstanding common shares.

1.11 PLANNED ACTIVITIES

89,800 warrants exercisable for $1.10 per share until December 15, 2008

No planned activity will have a significant impact on financial position, exploitation results and cash flows of the Company.

162,796 warrants exercisable for $1.10 per share until December 22, 2008

1.12 CRITICAL ACCOUNTING ESTIMATES

287,500 warrants exercisable for $1.30 per share until November 9, 2009

In order to prepare financial statements in conformity with Canadian Generally Accepted Accounting Principles, management must present estimates and raise assumptions which can affect amount recorded in the financial statements and notes thereto. These estimates are based on the best knowledge of management of current events and measures that the Company may adopt in the future. Actual results could be different from such estimates. The Company did not use accounting estimates that would have an important impact over the financial position of the Company. 1.13 CHANGES IN ACCOUNTING POLICIES

Changing in accounting policies are described in the Notes to the audited financial statements available at Sedar (www.sedar.com). Accounting changes only result from the adoption of new accounting policies. 1.14 FINANCIAL INSTRUMENTS AND OTHERS

The analysis of financial instruments used by the Company is indicated in Note 28 of the annual financial statements. 1.15 ADDITIONAL INFORMATION REQUIRED BY EMERGING ISSUERS WITHOUT SIGNIFICANT EXPLOITATION RESULTS

The detail of deferred exploration expenses for fiscal years ending December 31, 2007 and 2006 is presented in the deferred exploration expenses outlined in Note 12 of financial statements.

Warrants The following warrants were issued by December 31, 2007: 333,333 warrants exercisable for $1.50 per share until May 4, 2008 526,316 warrants exercisable for $1.10 per share until June 10, 2008 157,895 warrants exercisable for $1.10 per share until July 11, 2008

2,211,538 warrants exercisable for $1.60 per share until November 9, 2009 1,243,181 warrants exercisable for $1.45 per share until December 22, 2009


20

JUNEX ANNUAL REPORT 2007

1.16 OTHER INFORMATION (CONTINUED)

RISKS AND UNCERTAINTIES

Outstanding Stock Options

There is no certainty as to the future net income the Company can earn on its oil, gas and natural brine reserves. The determination of the actual reserves is based on a complex process relying on numerous decisions and assumptions to evaluate geological, geophysical, engineering and economical data available for each reserve. Actual data for future production, oil and gas market prices, natural brine volume sales, development expenses, operating costs and recoverable oils, gas and natural quantities could vary considerably. Moreover, these reserves could be subject to increase or decrease on the basis of the results of future exploration and development operations, oil and gas price list, natural brine market prices and other factors that are beyond the Company’s control.

VOLUME

EXERCISE PRICE

EXPIRY DATE

16,750

$1.10

12-22-2008

10,000

$1.00

06-16-2010

30,000

$0.90

04-08-2012

80,000

$2.00

10-23-2012

105,000

$1.00

10-23-2012

60,000

$2.00

12-16-2012

30,000

$2.00

03-20-2013

25,000

$1.00

03-20-2013

ADDITIONAL INFORMATION

30,000

$0.80

09-30-2014

80,000

$0.90

10-18-2014

Complete financial statements of the Company are available at Sedar: www.sedar.com. Additional information regarding the Company’s activities are also available on Internet at: www.junex.ca.

90,000

$1.28

05-04-2016

55,000

$1.18

08-31-2016

90,000

$0.97

08-31-2017

701,750

MANAGEMENT CERTIFICATION ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company has analysed the efficiency of its disclosure procedures and controls of information (as described in Multilateral Instrument 52-109 of Canadian Securities Administrators), under supervision and assistance of both the president and chief executive officer and the vice-president - finance chief-manager by December 31, 2007. Management concluded that as of December 31, 2007, the Company’s disclosure procedures and controls were effective to provide reasonable assurance that important material information relating to the Company and its consolidated subsidiaries would be communicated to them by others, particularly during the period this annual statement was being prepared. Management is responsible for establishing and has developed internal controls over financial reporting, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements, on purpose of their publication in conformity with Canadian GAAP. There were no modifications in internal controls of the Company over financial reporting that have materially affected, or might reasonably materially affect, our internal controls over financial reporting.


JUNEX ANNUAL REPORT 2007

21

AUDITORS' REPORT To the Shareholders of Junex Inc. We have audited the balance sheets of Junex Inc. as at December 31, 2007 and 2006 and the statements of earnings, comprehensive income, deficit, contributed surplus, accumulated other comprehensive income and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants QuĂŠbec City February 22, 2008

MANAGEMENT RESPONSABILITY Junex Inc. financial statements and all the information contained in this Annual Report are the responsibility of the management and have been approved by the Board of Directors. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The financial statements contain some amounts that are based on the use of estimates. The management believes that these amounts have been established in a prudent and reasonable manner in order to reflect, in all important matters, a fair view of the Company on December 31, 2007 and 2006. Raymond, Chabot, Grant, Thornton, the external auditors named by the shareholders of the Company, have audited the financial statements in accordance with Canadian generally auditing standards.

Jacques Aubert Chairman of the Board QuĂŠbec City April 17, 2008

Jean-Yves Lavoie, P.Eng. President and CEO


22

JUNEX ANNUAL REPORT 2007

EARNINGS YEARS ENDED DECEMBER 31, 2007 AND 2006 2007

2006

$

$

Sales

667,763

2,692,343

Cost of sales

594,206

1,646,875

Gross profit

73,557

1,045,468

1,360,817

1,520,400

186,363

129,849

1,547,180

1,650,249

Administrative expenses Financial expenses

Loss before other revenue (expense) and income taxes

(1,473,623)

(604,781)

Other revenue (expense) Investment income held for trading Management fees Write-off of deferred exploration costs

255,465 14,574

21,130

(18,336)

(330,723)

251,703 Loss before income taxes

104,765

(1,221,920)

(204,828) (809,609)

Income taxes Current Future

Net loss Basic and diluted net loss per share Weighted average number of common shares outstanding

8,052

40,106

(381,663)

(276,616)

(373,611)

(236,510)

(848,309)

(573,099)

(0,018) 47,909,989

(0,014) 41,627,131

The accompanying notes are an integral part of the financial statements and Note 5 provides other information on earnings.

COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2007 AND 2006 2007 $ Net loss

(848,309)

2006 $ (573,099)

Other comprehensive income Unrealized gain on available-for-sale financial assets (net of taxes of $32,965) Comprehensive income

The accompanying notes are an integral part of the financial statements.

187,529 (660,780)

(573,099)


JUNEX ANNUAL REPORT 2007

DEFICIT / CONTRIBUTED SURPLUS YEARS ENDED DECEMBER 31, 2007 AND 2006

2007

2006

$

$

4,189,836

3,613,460

DEFICIT Balance, beginning of year As previously reported Impact of applying new accounting policies (Note 2) As restated

(66,537) 4,123,299

3,613,460

848,309

573,099

Net loss Accrued interest on debentures paid in common shares

4,966

Future interest relating to interest on debentures Balance, end of year

(1,689) 4,971,608

4,189,836

727,390

551,515

87,516

175,875

CONTRIBUTED SURPLUS Balance, beginning of year Stock-based compensation and other stock-based payments Warrants expired during the year

146,754

Balance, end of year

961,660

727,390

2007

2006

$

$

Impact of applying new accounting policies (Note 2)

558,554

-

Balance, beginning of year as restated

558,554

-

Other comprehensive income

187,529

-

Balance, end of year

746,083

-

The accompanying notes are an integral part of the financial statements.

ACCUMULATED OTHER COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2007 AND 2006

Balance, beginning of year

The accompanying notes are an integral part of the financial statements.

23


24

JUNEX ANNUAL REPORT 2007

CASH FLOWS YEARS ENDED DECEMBER 31, 2007 AND 2006 2007

2006

$

$

OPERATING ACTIVITIES Net loss

(848,309)

(573,099)

Non-cash items Loss (gain) on disposal of property, plant and equipment Amortization of property, plant and equipment

4,417 147,740

Amortization of deferred financing costs

(4,897) 199,394 77,464

Amortization of deferred development costs

63,933

63,936

Write-off of deferred exploration costs

18,336

330,723

Income from the Immigrant Investor Program Future income taxes Stock-based compensation and other stock-based payments

(87,562) (381,663)

(276,616)

87,516

175,875

168,840

108,174

Sales discounts paid in common shares Interest on debentures Changes in working capital items (Note 7) Cash flows from operating activities

15,489

152,796

94,477

(586,394)

123,358

INVESTING ACTIVITIES Temporary investments Property, plant and equipment Disposal of property, plant and equipment Deferred exploration costs

(5,961,251)

(2,753,826)

(106,200)

(312,045)

1,141 (4,091,476)

10,000 (3,605,232)

Exploration costs tax credits

662,539

520,711

Deferred investment income and partners' contributions

629,561

300,955

Cash flows from investing activities

(8,865,686)

(5,839,437)

FINANCING ACTIVITIES Deferred financing costs Repayment of long-term debt

(24,683) (50,000)

Issue of convertible debentures Issue of shares and warrants

(50,000) 1,000,000

6,749,999

7,077,049

Redemption of class "C" shares

(90,000)

(90,000)

Issue of capital stock expenses

(614,228)

(416,788)

Cash flows from financing activities Net increase (decrease) in cash Cash, beginning of year Cash, end of year

The accompanying notes are an integral part of the financial statements.

5,995,771

7,495,578

(3,456,309)

1,779,499

4,075,263

2,295,764

618,954

4,075,263


JUNEX ANNUAL REPORT 2007

BALANCE SHEETS DECEMBER 31, 2007 AND 2006 2007

2006

$

$

ASSETS Current assets Cash

618,954

4,075,263

Temporary investments (Note 8)

8,715,077

2,753,826

Accounts receivable (Note 9)

1,886,020

1,686,884

Inventories Prepaid expenses

106,689

103,311

92,587

142,399

11,419,327

8,761,683

Investments (Note 10)

2,228,715

1,351,487

Property, plant and equipment (Note 11)

2,159,952

2,327,061

Oil and gas properties (Note 12)

1,228,480

1,228,480

12,761,522

9,429,314

Deferred exploration costs (Note 13) Deferred development costs (Note 14)

63,933

Deferred financing costs

31,643

Goodwill

198,951

198,951

29,996,947

23,392,552

1,647,046

963,332

LIABILITIES Current liabilities Accounts payable (Note 17) Income taxes payable

40,106

Instalments on long-term debt

25,000

50,000

1,672,046

1,053,438

120,000

160,000

Long-term debt (Note 18)

25,000

Redeemable common shares (Note 19 and Note 22) Redeemable class "C" shares (Note 20 and Note 22)

110,000

200,000

Liability component of convertible debenture (Note 21)

917,015

873,844

SHAREHOLDERS' EQUITY (Note 23)

The accompanying notes are an integral part of the financial statements. On behalf of the Board,

Director

Director

2,819,061

2,312,282

27,177,886

21,080,270

29,996,947

23,392,552

25


26

JUNEX ANNUAL REPORT 2007

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 1 - GOVERNING STATUTES AND NATURE OF OPERATIONS The Company is incorporated under Part IA of the Companies Act (Québec) and its main activity is oil and natural gas exploration in Québec. It also carries on certain complementary activities such as the sale of brine and oil and gas well drilling services. Occasionally, it offers geophysics and geology consulting services to some of its partners operating in oil and gas exploration.

2 - CHANGES IN ACCOUNTING POLICIES Accounting standards in effect On January 1, 2007, in accordance with the applicable transitional provisions, the Company applied the recommendations of new Section 1506, "Accounting Changes", of the Canadian Institute of Chartered Accountants' Handbook. This new section, effective for the years beginning on or after January 1, 2007, prescribes the criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. Furthermore, the new standard requires the communication of the new primary sources of generally accepted accounting policies (GAAP) that are issued but not yet effective or not yet adopted by the Company. The new standard has no impact on the Company's financial results. Moreover, on January 1, 2007, the Company adopted the new recommendations in Sections 3855, "Financial Instruments – Recognition and Measurement", 1530, "Comprehensive Income", 3861, "Financial Instruments – Disclosure and Presentation", and 3251, "Equity", of the Canadian Institute of Chartered Accountants' Handbook. Sections 3855 and 3861 deal with the recognition, measurement, presentation and disclosure of financial instruments and non-financial derivatives in the financial statements. The transitional provisions of these sections require that the Company remeasure the financial assets and liabilities as appropriate, at the beginning of its fiscal year. Any adjustment of the previous carrying amount is recognized as an adjustment of the balance of the deficit or accumulated other comprehensive income, as appropriate. The financial statements of prior fiscal years are not restated. Adoption of these new recommendations resulted in the following impacts on the classification and measurement of the Company's financial instruments:

Financial instruments – recognition and measurement Financial assets are classified in one the following classes: instruments held for trading, available for sale, held to maturity or loans and receivables. Financial liabilities are classified in one of the following classes: held for trading or other. Held-for-trading financial instruments are measured at their fair value and gains and losses are recognized in net earnings. Available-for-sale financial instruments are measured at fair value and unrealized gains and losses are recognized in other comprehensive income. Held-to-maturity financial instruments, loans and receivables and other financial liabilities are measured at amortized cost using the effective interest method. The new standard enables entities to designate any financial instrument as held for trading upon initial recognition or adoption of this standard, even if this financial instrument does not correspond to the definition of a held-for-trading financial instrument. Upon acquisition, financial instruments should be recorded in the balance sheet at the fair value. The valuation during subsequent periods is determined by the category in which the financial instrument is initially classified. The fair value of financial instruments is the amount at which this financial instrument could be negotiated between knowledgeable and willing parties.

Comprehensive income Further to adoption of Section 1530, unrealized gains and losses, net of income taxes, related to available-for-sale financial instruments are presented in a new statement of comprehensive income. Moreover, a new item, accumulated other comprehensive income, is presented under shareholders’ equity and annual changes in this item are presented in a statement of accumulated other comprehensive income.

Equity Section 3251, "Equity" establishes standards for the presentation of equity and changes in equity during the reporting fiscal year. Components are the convertible debenture, capital stock, warrants, contributed surplus, the deficit and accumulated other comprehensive income.

Impact of adopting the new standards Adjustments resulting from the remeasurement of available-for-sale financial instruments are recognized in the opening balance of accumulated other comprehensive income as at January 1, 2007. The impact is an increase of $558,554, net of future income taxes of $98,180, which is recognized in the opening balance of the deficit. Moreover, the Company wrote off $31,643 in deferred financing costs in the opening balance of the deficit.


JUNEX ANNUAL REPORT 2007

27

2 - CHANGES IN ACCOUNTING POLICIES (Continued) Future accounting standards The Accounting Standards Board of the Canadian Institute of Chartered Accountants (CICA) has published the following new sections: 1400, "General Standards of Financial Statement Presentation", 1535, "Capital Disclosures", 3031, "Inventories", 3862, "Financial Instruments – Disclosures", 3863, "Financial Instruments – Presentation" and 3864, "Goodwill and Intangible Assets". In June 2007, the CICA amended Section 1400, "General Standards of Financial Statement Presentation", under which management is required to make an assessment of the Company’s ability to continue as a going concern over a period, which is at least, but not limited to, twelve months from the balance sheet date. These new requirements are effective for fiscal years beginning on or after January 1, 2008, and the Company will apply them as of that date. The new requirement only addresses disclosures and will have no impact on the Company's financial results. Sections 3862, "Financial Instruments – Disclosures", and 3863, "Financial Instruments – Presentation" replace current section 3861, “Financial Instruments – Disclosure and Presentation”. Presentation standards have not been changed. Disclosure standards stipulate that additional information will be provided. These new standards are effective for fiscal years beginning on or after October 1, 2007 and the Company will apply them as of January 1, 2008. The new accounting standards only address disclosures and will have no impact on the Company's financial results. Section 3064, "Goodwill and Intangible Assets", which establishes standards for the recognition, measurement, presentation and disclosure of intangible assets will replace Section 3062, "Goodwill and Other Intangible Assets" and Section 3450, "Research and Development Costs". Management is currently determining the impact of adopting this section on its financial statements. Section 3031, "Inventories", which will replace Section 3030 of the same title provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. The changes to this section affect the following, in particular: - Certain costs, such as storage costs and general and administrative expenses that do not contribute to bringing the inventories to their present location and condition, are precisely excluded from the cost of inventories and expensed during the year in which they are incurred; - The reversal of the write-down to net realization value amounts when there is a subsequent increase in the value of the inventories is now required; - The valuation of inventory at the lower of cost and replacement cost is no longer allowed; - The new standard also requires additional disclosures. This new standard is effective for fiscal years beginning on or after January 1, 2008 and the Company will apply it as of that date. The Company's management is not able to determine the impact that application of this new standard will have on the financial statements. Section 1535, "Capital Disclosures" establishes standards for disclosing information about an entity's capital and how it is managed. This new standard is effective for fiscal years beginning on or after October 1, 2007 and the Company will implement it as of January 1, 2008. The new accounting standard only addresses disclosures and will have no impact on the Company's financial results.

3 - ACCOUNTING POLICIES Basis of presentation The financial statements are prepared using the historical cost method, except for the re-measurement of certain financial instruments. In this respect, refer to the financial assets and liabilities measurement basis accounting policy. Accounting estimates The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts recorded in the financial statements and notes to financial statements. These estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future. Actual results may differ from these estimates. Financial assets and liabilities measurement basis Initial measurement On initial recognition, all financial assets and liabilities are measured and recorded at fair value.

Subsequent measurement Subsequent to initial recognition, the financial assets and liabilities are measured as follows: - Held-for-trading financial assets Cash and temporary investments are classified as held-for-trading assets. Held-for-trading financial assets are measured at their fair value and related unrealized gains or losses are recognized in net income. Interest income is presented under investment income.


28

JUNEX ANNUAL REPORT 2007

3 - ACCOUNTING POLICIES (Continued) - Available-for-sale financial assets Share investments in public companies are classified as available-for-sale investments. Availablefor- sale financial assets are measured at their fair value. Related unrealized gains or losses are excluded from net earnings and recognized in other comprehensive income until these gains or losses are realized or a decline in value of the financial asset is other than temporary. Fair value is determined using the bid price in an open market. - Loans and receivables Trade accounts receivable and partners’ contributions receivable are classified as loans and receivables. Loans and receivables are measured at amortized cost, which is generally the initially recognized amount, less any allowance for doubtful accounts. - Held-for-trading liabilities The redeemable common shares have been designated as held-for trading financial liabilities. Heldfor-trading financial liabilities are measured at fair value and the related unrealized losses or gains are recognized in net earnings. - Financial liabilities Accounts payable, the long-term debt, redeemable class "C" shares and the liability component of the convertible debenture are classified as other financial liabilities. They are measured initially at fair value. Subsequent measurements are recognized at amortized cost using the effective interest method. Transaction costs Transaction costs relating to financial assets and liabilities are expensed as incurred. Cash and cash equivalents The Company's policy is to present cash and investments having a term of three months or less from the acquisition date with cash and cash equivalents. Revenue recognition Revenue from the sale of natural gas and brine is recognized when the product is delivered, all the significant risks and benefits of ownership are transferred and recovery is reasonably certain. Revenue from drilling and consulting fees is recorded under the percentage-of-completion method. Under this method, contract income and profit are recognized proportionately with the degree of completion of work. The Company uses the efforts expended method to calculate the degree of completion of work based on direct labour cost incurred at the date of the financial statements. Losses are recorded once they can be acquainted. Investment income is recognized as it is earned. Inventory valuation Inventories are valued at the lower of cost and net realizable value. Cost is determined by the average cost method. Amortization Property, plant and equipment are amortized over their estimated useful lives according to the diminishing balance method at the following annual rates: Rates Furniture, fixtures and double-drop lowbed semi-trailers

20 %

Machinery and equipment

10 %

Computer equipment, software and automotive equipment

30 %

Deferred financing costs relating to Immigrant Investor Loans are amortized on a straight-line basis over five years until 2006. Deferred financing costs relating to debentures were previously amortized over the debenture term. Deferred financing costs were written off following application of new Section 3855, "Financial Instruments – Recognition and Measurement" (Note 2). Stock options The Company can grant stock options under the stock option plan for employees, officers, directors and consultants of the Company and its subsidiaries. The Company uses the fair value method to account for options granted. A compensation expense is recorded in earnings over the vesting period for stock options and the consideration is recorded in contributed suplus. When holders exercise their options, any consideration received and the related contributed surplus are credited to capital stock. Goodwill Goodwill is the excess of the cost of an acquired enterprise over the net of the amounts assigned to assets acquired and liabilities assumed. Goodwill is not amortized. It is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is impaired. Goodwill is allocated to reporting units and any potential goodwill impairment is identified by comparing the carrying amount of a reporting unit with its fair value. If any potential impairment is identified, it is quantified by comparing the carrying amount of goodwill to its fair value. The fair value of a reporting unit is calculated using discounted cash flows.


JUNEX ANNUAL REPORT 2007

29

3 - ACCOUNTING POLICIES (Continued) Research and development costs and investment tax credits Research and development costs are expensed as they are incurred. However, development costs are deferred when they meet the generally accepted criteria to the extent that their recovery can reasonably be regarded as assured. Amortization will commence with commercial production or use of the product. Each year, management re-evaluates future benefits of deferred development costs by comparing the amortized balance to future revenue net of related costs. Oil and gas properties and deferred exploration costs The Company adopted the full cost accounting method, under which costs associated with the acquisition, exploration and development of properties, net of partners' contributions, are capitalized, by property, until the commencement of commercial activities. If economically profitable oil and gas reserves are developed, the capitalized costs of the properties in question are transferred to property, plant and equipment and amortized using units of production for the year based on probable and proved oil and gas reserves. If it is determined that capitalized exploration and development costs are not recoverable over the estimated useful life of the property, or if the project is abandoned, the project is written down to its net realizable value. The recovery of amounts recorded as oil and gas properties and the related deferred exploration costs depend on the discovery of economically recoverable reserves, the Company's ability to obtain the necessary financing to complete development and future profitable production or the proceeds of disposal of such properties. Amounts recorded as oil and gas properties and deferred exploration costs do not necessarily represent the present or future value. Subsidies and tax credits Subsidies relating to oil and gas properties are applied against such properties. Tax credits for exploration costs are applied against deferred exploration costs. Investment tax credits are applied against research and development costs or deferred development costs in the year the costs are incurred. Tax credits for exploration costs and investment tax credits must be examined and approved by the tax authorities and accordingly, the amount granted may differ from the amount recorded. Income taxes The Company uses the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined according to differences between the carrying amounts and tax bases of assets and liabilities. They are measured by applying enacted or substantively enacted tax rates and laws at the date of the financial statements for the years in which the temporary differences are expected to reverse. The Company has recorded a valuation allowance for future income taxes if, based on available information, it is more likely than not that some or all of the future income tax assets will not be realized. Under the provisions of tax legislation, resource expense deductions relating to exploration and development activities which are financed by flow-through shares are renounced to the benefit of investors. Under the tax liability method, future income taxes relating to variances resulting at the time of renunciation are recognized with a corresponding charge to share issue expenses. Site restoration costs A site restoration costs provision is recorded if such costs are reasonably determinable. This provision is calculated on estimated costs according to the expected method and the extent of environmental remedial work, in accordance with legislative requirements, industry practice and current technology. In addition, a provision is recorded at the time there is a legal obligation for the Company and is recognized at its fair value in exchange for the increase in the cost of the related assets. Share issue expenses Share issue expenses are applied against capital stock, net of related future income taxes.

4 - EARNINGS PER SHARE Basic earnings per common share are calculated by dividing net earnings available for common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated taking into account the dilution that could result if the debentures were converted into common shares and if stock options and warrants for the issuance of common shares were exercised or converted into common shares at the beginning of the period or at the time of issuance, if later. The "if converted" method for convertible debentures and the treasury stock method for stock options and warrants are used to determine the dilutive effect. The convertible debentures referred to in Note 21 and the stock options and warrants mentioned in Notes 19, 22 and 23 were not included in calculating diluted earnings per share in 2007 and 2006 because the Company sustained losses and because including such options, warrants and debentures would be anti-dilutive.


30

JUNEX ANNUAL REPORT 2007

5 - INFORMATION INCLUDED IN EARNINGS AND RELATED-PARTY TRANSACTIONS 2007

Stock-based compensation and other stock-based payments Loss (gain) on disposal of property, plant and equipment

2006

$

$

87,516

175,875

4,417

Amortization of property, plant and equipment

(4,897)

147,740

199,394

63,933

63,936

168,840

108,174

Company exercising significant influence Cost of goods sold - Warehouse rental

17,579

16,106

Directors Administrative expenses - Management fees

33,125

17,500

Amortization of deferred financing costs

77,464

Amortization of deferred development costs Interest on long-term debt

21,090

Interest on debenture Related party transactions in the normal course of operations (a)

(a) These transactions were measured at the exchange amount, which is the amount.

6 - INCOME TAXES The provision for income taxes is detailed as follows: 2007 $ Income taxes according to statutory rates Difference between the statutory rate and rates used for future income taxes Impact of federal tax rate change Deductibility of share issue expenses Non-deductible stock-based compensation and other stock-based payments Valuation allowance Other

2006 %

(391,259)

32.02

32,014

(2.62)

20,455

(1.67)

(143,997)

11.78

$

%

(259,237)

32.02

(7,125)

0.88

8,903

(1.10)

(119,386)

14.74

28,023

(2.29)

56,315

(6.95)

(103,652)

8.48

132,865

(16.41)

184,805

(15.12)

(48,845)

6.03

(373,611)

30.58

(236,510)

29.21

Future income tax assets and liabilities result from differences between the tax basis and carrying amount of the following items: 2007

2006

$

$

251,225

146,308

Future income tax liabilities resulting from the following items: Current Exploration cost tax credits Long-term Deferred exploration costs

860,180

654,696

Property, plant and equipment and oil and gas properties

417,260

261,844

Investments

132,776 1,410,216

916,540

1,661,441

1,062,848

1,350,147

879,575

340,507

316,138

1,690,654

1,195,713

Future income tax assets resulting from the following items: Tax losses Capital stock-related costs

Net future income tax assets Valuation allowance Net future income tax liabilities recorded

29,213

132,865

(29,213)

(132,865)

-

-


JUNEX ANNUAL REPORT 2007

6 - INCOME TAXES (CONTINUED) As at December 31, 2007, tax losses available are as follows: FÉDÉRAL

PROVINCIAL

$

$

2008

485,000

485,000

2009

887,800

887,800

2010

447,700

932,200

2014

601,500

768,800

2025

21,000

9,900

2026

451,000

445,800

2027

1,209,000

1,273,000

4,103,000

4,802,500

2007

2006

$

$

182,081

611,630

Losses which may be carried forward until:

7 - INFORMATION INCLUDED IN CASH FLOWS The changes in working capital items are detailed as follows:

Accounts receivable, except for partners' contributions receivable and income tax credits receivable Inventories

(3,378)

(27,588)

Prepaid expenses

49,812

(62,525)

(35,613)

(431,333)

Accounts payable, except for accrued interest on debentures payable in common shares Income taxes payable

(40,106)

4,293

152,796

94,477

2007

2006

Cash flows relating to interest and income taxes on operating activities are detailed as follows:

$ Interest paid Income taxes paid

$ 8,720

48,158

35,813

120,011

81,240

Non-cash items are detailed as follows: Amortization capitalized property, plant and equipment Future income taxes on capitalized amortization Future income taxes on expenses waived for investors Future income taxes on share issue expenses Accounts payable for deferred exploration costs Accounts payable for issue expenses Tax credits receivable for deferred exploration costs

(4,722) 504,657

632,772

(155,939)

(141,791)

938,814

126,440

23,689

116,382

840,217

444,706

31


32

JUNEX ANNUAL REPORT 2007

8 - TERM DEPOSITS 2007

2006

$

$

Term deposits, progressive rates varying between 3.25% and 3.9% (3.25% as at December 31, 2006), redeemable monthly, maturing at different dates until August 2009

2,753,826

Banker's acceptances, rates varying between 4.45% and 4.77%, maturing at different dates until May 2008

4,174,547

Money market funds

4,540,530 8,715,077

2,753,826

2007

2006

$

$

9- ACCOUNTS RECEIVABLE

Trade accounts

275,678

485,772

Partners' contributions receivable

593,145

607,439

Tax credits receivable

840,217

444,706

Sales taxes receivable

176,980

78,876

1,886,020

1,686,884

2007

2006

$

$

1,548,715

1,251,487

Other

70,091

10 - INVESTMENTS

Petrolia inc. 3,128,718 common shares, representing 10% (11% in 2006) of the voting shares (market value $1,658,221 in 2006; original cost of $1,251,487) Gastem inc. 1,000,000 common shares, representing 2.5% (3% in 2006) of the voting shares (market value $350,000 in 2006; original cost of $100,000)

680,000

100,000

2,228,715

1,351,487


33

JUNEX ANNUAL REPORT 2007

11 - PROPERTY, PLANT AND EQUIPMENT 2007

Furniture and fixtures Double-drop lowbed semi-trailers Machinery and equipment Computer equipment Software Automotive equipment

COST

ACCUMULATED AMORTIZATION

NET

$

$

$

29,589

15,589

14,000

450,000

177,764

272,236

2,642,997

940,307

1,702,690

95,517

56,760

38,757

18,288

12,065

6,223

378,473

252,427

126,046

3,614,864

1,454,912

2,159,952

COST

ACCUMULATED AMORTIZATION

2006

Furniture and fixtures Double-drop lowbed semi-trailers

NET

$

$

$

26,656

12,699

13,957

450,000

158,319

291,681

2,601,400

754,032

1,847,368

Computer equipment

76,693

43,414

33,279

Software

18,288

9,398

8,890

346,673

214,787

131,886

3,519,710

1,192,649

2,327,061

Machinery and equipment

Automotive equipment

12 - OIL AND GAS PROPERTIES 2007 BALANCE, BEGINNING OF YEAR

ACQUISITIONS

DISPOSITIONS

$

$

$

BALANCE,END OF YEAR $

Gaspé Peninsula

869,178

869,178

Lowlands

359,302

359,302

1,228,480

1,228,480

2006

Gaspé Peninsula Lowlands

BALANCE, BEGINNING OF YEAR

ACQUISITIONS

DISPOSITIONS

$

$

$

869,178

BALANCE,END OF YEAR $ 869,178

359,302

359,302

1,228,480

1,228,480

Some properties are subject to royalty payments in the event that commercial production begins. Other information relating to oil and gas property commitments is outlined in Note 25.


34

JUNEX ANNUAL REPORT 2007

13 - DEFERRED EXPLORATION COSTS 2007 BALANCE, BEGINNING OF YEAR

EXPLORATION COSTS

INCOME FROM INTEREST

BALANCE, END OF YEAR

$

$

$

$

443,298

84,442

527,740

Baie des Chaleurs

1,107,613

1,237,482

2,345,095

Bande Taconique

191,147

6,645

2,089,981

1,116,093

12,122

3,714

Gaspé Peninsula Gaspé

Galt

197,792 (401,660)

2,804,414

Bas-Saint-Laurent Rivière-du-Loup

15,836

Lowlands Appalaches Bécancour Richelieu Rive-Nord

521,795

59,754

3,470,128

617,241

581,549 (76,597)

4,010,772

111,685

26,604

1,481,545

795,500

(137,010)

2,140,035

138,289

9,429,314

3,947,475

(615,267)

12,761,522 2006

BALANCE, BEGINNING OF YEAR

EXPLORATION COSTS

INCOME FROM INTEREST

BALANCE, END OF YEAR

$

$

$

$

Gaspésie Gaspé

443,298

443,298

Baie des Chaleurs

965,338

142,275

1,107,613

Bande Taconique

184,555

6,592

191,147

1,278,345

1,249,471

8,915

3,207

303,663

218,132

521,795

3,235,016

235,112

3,470,128

Galt

(437,835)

2,089,981

Bas-Saint-Laurent Rivière-du-Loup

12,122

Basses-terres Appalaches Bécancour Richelieu

82,516

29,169

Rive-Nord

791,877

710,227

(20,559)

1,481,545

111,685

6,850,225

3,037,483

(458,394)

9,429,314

During the year, the Company applied a tax credit of $1,058,050 ($444,706 in 2006) against exploration costs. The Company abandoned some projects, after which it wrote off deferred exploration costs of $18,336 ($330,723 in 2006).

14 - DEFERRED DEVELOPMENT COSTS

Balance, beginning of year Amortization

2007

2006

$

$

63,933

127,869

(63,933)

(63,936)

-

63,933


JUNEX ANNUAL REPORT 2007

35

15 - BANK LOAN The bank loan, which was not renewed, for an authorized amount of $100,000 in 2006, bore interest at the prime rate plus 1.125% (7.125% in 2006) and was renegotiable in August every year.

16 - BANK GUARANTEES As at December 31, 2006, issued letters of guarantee in the amount of $75,600 were secured by a portion of cash. As at December 31, 2007, there were no letters of guarantee issued.

17 - ACCOUNTS PAYABLE

Accounts payable of company controlled by a shareholder exercising significant influence Accrued interest on debenture payable in common shares Loans from directors Accounts payable and accrued liabilities

2007

2006

$

$

1,647

2,956

82,585

82,939

951

18,759

1,561,863

858,678

1,647,046

963,332

2007

2006

$

$

18 - LONG-TERM DEBT

Note payable, without interest, payable in semi-annual instalments of $25,000, maturing in May 2008

25,000

75,000

Instalments due within one year

25,000

50,000

-

25,000

2007

2006

$

$

120,000

160,000

19 - REDEEMABLE COMMON SHARES

Issued and fully paid 300,000 common shares (400,000 in 2006) (Note 22)

Pursuant to an out-of-court settlement and a deposit agreement with the trustee, a former director granted the Company options on a total of 1,530,000 common shares of the Company that he held personally. According to the agreement, the Company has agreed to exercise options on a minimum of 300,000 shares in 2002 and a minimum of 100,000 shares for each of the following years until 2010, at prices varying each year. Any number of shares acquired in excess of the minimum annual number will be deducted from the minimum number to be acquired at subsequent dates. If the Company fails to acquire the annual minimum number of shares required, the number of shares corresponding to the difference between the number of shares to be acquired at a given date and the number acquired will be remitted in full to the former director by the trustee. In June 2002, the Company recorded a $440,000 liability based on the exercise price in 2002, i.e. $0.40 per share. The expenses relating to this transaction total $122,563. In exchange, an amount of $188,853 was applied against capital stock and another amount of $373,710 was added to the deficit as a capital stock redemption premium and cost. The stock options are to be exercised for 1,100,000 shares. In the past two years, the Company has not exercised any options. In 2006 and 2005, the Company should have exercised 100,000 options annually. Since the Company did not exercise these 200,000 options, the common shares relating to these options were transferred to capital stock. The common shares transferred, in the amount of $40,000 in 2007 and 2006, are fully released and can be sold on the market.


36

JUNEX ANNUAL REPORT 2007

In the coming years, the option exercise price is as follows:

Exercise price per share $ 2008 to 2010

60% of the maximum reference share price of $1.50

The liability increase relating to the higher exercise price will be accounted for as a financial cost. Each time a stock option is exercised, the transaction must be approved by the regulatory authorities.

20 - REDEEMABLE CLASS "C" SHARES 2007

2006

$

$

110,000

200,000

Issued and fully paid 110,000 class "C" shares (200,000 in 2006) (Note 22)

In 2007, the Company redeemed 90,000 shares (90,000 shares in 2006) for $90,000 in cash ($90,000 in 2006).

21 - CONVERTIBLE DEBENTURE On May 4, 2006, the Company issued a debenture of a total value of $1,000,000, bearing interest at a rate of 12.25%, (effective rate of 20%) payable on a quarterly basis in common shares at the average price of transactions during the 20 days preceding the issue, maturing on May 4, 2009. The debenture is convertible at the bolder's option into common shares, at any time, at a conversion price of $1.25 per share for the first two years and $1.375 for the third year. The liability component of the convertible debenture is equal to the discounted value, at the issue date, of required cash payments of interest and of capital in accordance with the convertible debenture, discounted at an interest rate applicable as a loan, with no conversion option, and including the same maturity date and comparable risks. The equity component is the value attributed to the difference between the amount issued and the liability component and related warrants ($114,060). The following table shows the changes that occurred during the year:

LIABILITY COMPONENT

Balance, beginning of year Accrued interest Balance, end of year

EQUITY COMPONENT

$

$

873,844

37,331

43,171 917,015

37,331

Pursuant to the terms of one of the clauses of the agreement, on February 2, 2007, the Company issued 54,460 common shares for $1.17 per share as settlement of the payment of $63,718 in semiannual interest and on September 26, 2007, issued 58,778 common shares for $1.06 per share as settlement of the payment of $62,305 in semi-annual interest.

22 - CAPITAL STOCK Authorized Unlimited number of shares without par value Common shares, voting and participating Class "B", non-voting non-participating shares, preferential non-cumulative dividend varying between 1% and 12%, redeemable at the paid-up capital amount Class "C", non-voting non-participating shares, preferential non-cumulative monthly dividend of 1% of the redemption price, redeemable or retractable at the fair value of the consideration received upon issuance under certain conditions. The maximum redemption cannot exceed one-third of the shares held, provided that the Company's working capital is greater than $1,000,000


37

JUNEX ANNUAL REPORT 2007

22 - CAPITAL STOCK (Continued) 2007

2006

Number

$

Number

$

46,467,856

23,309,299

39,485,319

16,875,531

113,238

126,023

Issued and fully paid Common shares Balance, beginning of year

22,909

24,197

Conversion of convertible debenture

In exchange for interest on convertible debentures

342,660

400,000

In consideration for sales discounts

11,305

15,489

6,505,663

6,587,049

For cash consideration Issue of flow-through shares

5,223,076

6,201,095

100,000

40,000

Private issues Release of unredeemed shares (Note 19) Issue expenses Balance, end of year

100,000

(959,502) 51,904,170

28,716,915

40,000 (632,967)

46,467,856

23,309,299

Warrants As at December 31, 2007, the following warrants, issued in connection with financing and entitling the holder to subscribe for an equivalent number of common shares, were outstanding and could be exercised as follows: 333,333 warrants exercisable for $1.50 per share until May 4, 2008 526,316 warrants exercisable for $1.10 per share until June 10, 2008 157,895 warrants exercisable for $1.10 per share until July 11, 2008 89,800 warrants exercisable for $1.10 per share until December 15, 2008 162,796 warrants exercisable for $1.10 per share until December 22, 2008 287,500 warrants exercisable for $1.30 per share until November 9, 2009 2,211,538 warrants exercisable for $1.60 per share until November 9, 2009 1,243,181 warrants exercisable for $1.45 per share until December 22, 2009 Common stock options In 2002, the Company implemented a stock option plan for its employees, officers, directors and consultants for up to 20% of the issued and outstanding shares at the grant date. The exercise price of each option is equivalent to the price set at the time that each option is awarded. This price cannot be less than the share price at the grant date. Each option has a maximum term of 10 years. During the year, the Company granted its directors 90,000 stock options (90,000 in 2006) with a weighted average exercise price of $0.97 ($1.28 in 2006) and no options (55,000 options to employees of an exercise price of $1.18) to employees and 16,750 options to a consultant at an exercise price of $1,10. As at December 31, 2007 and 2006, no options were exercised. The changes in the stock options granted by the Company are as follows: 2007

2006

Options Weighted average exercise price $

Options Weighted average exercise price $

Outstanding, beginning of year

595,000

1.31

450,000

1.34

Awarded

106,750

0.99

145,000

1.24

Outstanding, end of year

701,750

1.26

595,000

1.31


38

JUNEX ANNUAL REPORT 2007

22 - CAPITAL STOCK (Continued) The features of the outstanding stock options as at December 31, 2007 are as follows: 2007 OPTIONS OUTSTANDING NUMBER

WEIGHTED AVERAGE EXERCISE PRICE

2006 OPTIONS EXERCISABLE

NUMBER

WEIGHTED AVERAGE EXERCISE PRICE

NUMBER

WEIGHTED AVERAGE EXERCISE PRICE

(years)

$

30,000

6.8

0.80

30,000

0.80

30,000

0.80

110,000

6.1

0.90

110,000

0.90

110,000

0.90

110,000

4.8

2.00

110,000

2.00

94,000

2.00

75,000

4.4

1.00

75,000

1.00

60,000

1.00

55,000

8.8

1.18

36,668

1.18

18,334

1.18

90,000

8.3

1.28

90,000

1.28

90,000

1.28

Employees, officers and directors

WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE

OPTIONS EXERCISABLE

$

$

90,000

9.7

0.97

90,000

0.97

-

-

560,000

6.0

1.22

541,668

1.04

402,334

1.27

16,750

1.0

1.10

16,750

1.10

-

-

60,000

4.8

2.00

60,000

2.00

60,000

2.00

65,000

5.2

1.00

65,000

1.00

59,000

1.00

701,750

6.4

1.26

683,418

1.27

521,334

1.32

Consultants

Rights vest either when the options are granted or at the rate of 20% to 33% per year. The fair value of the options granted was estimated on the grant date using the Black-Scholes optionpricing model with the following weighted average assumptions for the awards granted since the beginning of the year:

Risk-free interest rate

2007

2006

4.42 %

4.33 %

10

10

Expected life (in years) Expected share volatility

65 %

68 %

Expected dividends

None

None

The weighted average fair value of stock options granted since the beginning of the year is $0.66 ($0.96 in 2006). 23 - CAPITAL STOCK 2007

Convertible debenture (Note 21) Capital stock (Note 22)

2006

$

$

37,331

37,331

28,716,915

23,309,299

Warrants (Note 24)

1,687,505

1,196,086

Contributed surplus

961,660

727,390

31,403,411

25,270,106

(4,971,608)

(4,189,836)

Deficit Accumulated other comprehensive income

746,083 4,225,525

4,189,836

27,177,886

21,080,270


JUNEX ANNUAL REPORT 2007

39

24 - WARRANTS In 2007, in connection with its financing activities, the Company issued 287,500 warrants to underwriters entitling them to acquire one common share at an exercise price of $1.30 per share. Moreover, as part of a share issue, the Company issued 2,211,538 warrants entitling the holder to acquire one common share at an exercise price of $1.60 per share. The fair value of the warrants issued in connection with the share financing was applied against capital stock as issue expenses. The consideration is recognized as warrants under capital stock on the balance sheet. In 2006, in connection with its financing activities, the Company issued to underwriters 252,596 warrants and 333,333 warrants for a convertible debenture entitling the holder to acquire common shares at a weighted average exercise price of $1.40 per share. Furthermore, in connection with a share issue, the Company also issued 1,243,181 warrants entitling the holder to acquire common shares at an exercise price of $1.45 per share. The weighted average fair value of each warrant granted for 2007 is $0.255 ($0.392 in 2006). 2007

2006

Expected volatility

65.0 %

61.9 %

Risk-free interest rate

4.03 %

4.00 %

24 months

26 months

Nil

Nil

Expected life Expected dividends

Moreover in 2006, management retroactively changed its method of recognizing warrants issued to compensate underwriters or for a debt financial instrument. The Company recognizes separately the warrant component of capital stock on the issuance of units comprising a share and a warrant. This change led to a decrease in the share capital of $490,000 and an equivalent increase in its warrants.

25 - COMMITMENTS The Company has entered into a long-term lease agreement expiring in February 2013, which calls for lease payments of $304,934 for the rental of a building. Minimum lease payments for the next five years are $59,019 from 2008 to 2012. This lease comprises a renewal option for an additional five-year period, which the Company can exercise by giving a nine-month notice. The Company has also entered into long-term lease agreements expiring on various dates until August 2012, which call for lease payments of $100,140 for the rental of equipment and automotive equipment. Minimum lease payments for the next five years are $32,920 in 2008, $29,920 in 2009, $14,920 in 2010 and 2011 and $7,460 in 2012. Under the terms of research permits granted by the Ministère des Ressources naturelles to ensure the validity of its permits, the Company should pay rent of $468,629 until 2011; minimum payments for the next four years are $126,007 in 2008 and $121,468 in 2009 and 2010 and $99,686 in 20011. In addition, the Company is required to carry out, each year, on the land covered by its permit, work for a minimum cost which varies according to the age of the permit; for the first year, such work must be no less than the greater of $0.50 per hectare or $3,000 and for the fifth year of the permit, it must be no less than the greater of $2.50 per hectare or $15,000. For subsequent renewal years, minimum cost are the greater of $2.50 per hectare or $20,000. Minimum expenses are $1,024,413 in 2008, $1,311,242 in 2009, $1,764,057 in 2010, $2,216,871 in 2011 and $236,008 in 2012. Under the terms of an agreement concluded in December 2001, the Company acquired the residual 50% interest in permits on four Lowlands properties, thereby bringing its interest to 100% and a 100% interest in another property, in exchange for royalties of 5% of wellhead revenues. This entitlement to royalties can be converted into a 15% interest in the permits acquired once production income corresponding to costs incurred in respect of the permits has been obtained. Under an agreement signed in May 2002, the Company acquired a 100% interest on permits for the GaspÊ Peninsula in exchange for 7.5% royalties on wellhead revenues. The Company granted a 10% interest to Gastem inc. and PÊtrolia Inc. respectively in the Saint-Simon well located in the Lowlands. The Company has agreed to grant them an option to acquire a 10% interest in the structure resulting from the definition drilling.

26 - CONTINGENCY The Company's operations are governed by government environment protection legislation. Environmental consequences are difficult to identify in terms of results, timetable and impact. At this time, to management's best knowledge, the Company's operations are in compliance with current laws and regulations. Furthermore, a lawsuit in the amount of $100,000 has been filed against the Company for unfinished work relating to an agreement previously signed for the same permit. Management is of the opinion that this lawsuit is unwarranted and accordingly, no provision has been recorded in this respect.

27 - ECONOMIC DEPENDENCE The Company provided services to two businesses which generated 35% (77% in 2006) of revenues. At the balance sheet date, 51% (90% in 2006) of accounts receivable are from these customers.


40

JUNEX ANNUAL REPORT 2007

28 - FINANCIAL INSTRUMENTS The fair value of accounts receivable, partner contributions receivable and accounts payable approximates the carrying amount given the short period to maturity. The fair value of the noninterest bearing note payable and the class "C" shares could not be determined since it is practically impossible to find financial instruments on the market having substantially the same economic characteristics. The fair value of the liability component of the convertible debentures was determined by discounting contractual cash flows at market interest rates at the balance sheet date for similar loans and does not differ significantly from the carrying amount.

29 - CREDIT RISK The Company’s financial instruments that are subject to credit risk concentration are cash, temporary investments and trade accounts receivable. The Company has deposited its cash with a financial institution and its temporary investments are with two reputable financial institutions, which, in the opinion of management, reduces the credit risk. Risk related to trade accounts receivable is limited as a result of controls over the management of customer relationships and because accounts receivable are monitored.

30 - SEGMENTED INFORMATION The industry segments are dividend among petroleum and natural gas, brine and drilling and substantially all of the Company's activities are carried on in Canada. Other activities are primarily administrative activities.The accounting policies of the various segments are identical to those described in the note on accounting policies. Intersegment sales are recognized at the exchange amount.

2007 NATURAL GAS $

BRINE $

DRILLING $

69,121

365,872

232,770 2,571,923

(2,571,923 )

69,121

365,872

2,804,693

(2,571,923 )

667,763

36,127

81,547

131,174

(120,011 )

128,837

48,539

266,581

1,687,469

(1,541,637 )

460,952

OTHER $

ELIMINATIONS $

TOTAL $

Sales External customers (a) Intersegment

667,763

Cost of sales Amortization of property,plant and equipment Loss on disposal of property, plant and equipment External suppliers Intersegment

Gross profit (loss)

4,417

1,655

6,277

86,321

354,405

1,818,643

(17,200)

11,467

986,050

4,417

(7,932 ) 4,417 (4,417)

(1,669,580 )

594,206

(902,343 )

73,557

Administrative expenses External suppliers Financial expenses Amortization of property, plant and equipment

1,341,914

1,341,914

186,363

186,363

18,903

18,903

1,547,180

1,547,180

Investment income

255,465

255,465

Management fees

14,574

14,574

Write-off of deferred exploration costs

Income (loss) before income taxes Assets Investments in property,plant and equipment Goodwill

11,467

986,050

27,827,709

(17,200)

852,940

1,316,298

6,297

19,700

58,445 198,951

(18,336)

(18,336 )

251,703

251,703

(1,299,894)

(902,343 )

(1,221,920 ) 29,996,947

21,758

106,200 198,951


41

JUNEX ANNUAL REPORT 2007

30 - SEGMENTED INFORMATION (Continued) 2006 NATURAL GAS $

BRINE $

68,522

529,170

DRILLING $

OTHER $

ELIMINATIONS $

TOTAL $

Sales External customers (a) Intersegment

2,094,651 2,647,321

68,522

529,170

4,741,972

38,488

90,839

134,783

2,692,343 -

(2,647,321 ) (2,647,321 )

2,692,343

(81,240 )

182,870

Cost of sales Amortization of property, plant and equipment Gain on disposal of property, plant and equipment External suppliers Intersegment

Gross profit (loss)

(4,897)

(4,897 )

112,174

357,717

2,639,757

(1,640,746 )

3,343

173,600

292,573

(469,516 )

154,005

622,156

3,067,113

(4,897)

(85,483)

(92,986)

1,674,859

4,897

1,468,902

(2,191,502 )

1,646,875

(455,819 )

1,045,468

Administrative expenses External suppliers

1,503,876

Intersegment

99,254

Financial expenses

129,849

Amortization of property, plant and equipment

1,503,876 (99,254 ) 129,849

16,524 1,749,503

16,524 (99,254 )

1,650,249

Investment income

104,765

104,765

Management fees

21,130

21,130

(330,723)

(330,723 )

Write-off of deferred exploration costs

(204,828) Income (loss) before income taxes Assets Investments in property, plant and equipment Goodwill

(85,483)

(92,986)

1,674,859

20,669,750

775,661

1,947,141

13,545

16,994

256,443 198,951

(1,949,434)

(204,828 ) (356,565 )

(809,609 ) 23,392,552

25,063

312,045 198,951

(a) Sales with the main customer in the natural gas segment amount to $51,121 ($68,522 in 2006). Sales with the main customer in the brine segment amount to $265,026 ($248,281 in 2006). Sales with the main two customers in the drilling segment amount to $230,770 ($2,075,880 in 2006).


42

JUNEX ANNUAL REPORT 2007

GENERAL INFORMATION Board of directors

Shareholders information

Roberto Aguilera Ph. D., P.Eng. President and CEO Servipetrol inc.

AUDITORS

Jacques Aubert Chairman of the Board and CEO Junex inc. Daniel Courteau Lawyer and Tax Specialist De Grandpré, Chait Jean-Yves Lavoie, P.Eng. President and Chief of Exploitation Junex inc.

Raymond, Chabot, Grant, Thornton, LLP 140, Grande-Allée Est, bureau 200 Québec (QC) G1R 5P7 Telephone: (418) 647-3151 Fax: (418) 647-5939 TRANSFER AGENT AND REGISTAR

Société de fiducie Computershare du Canada 1 500, rue University, bureau 700 Montréal (Québec) H3A 3S8 Telephone: (514) 982-7888 Fax: (514) 982-7580

Laurent Lemaire Board Executive vice-president Cascades inc.

TRADING

Gérald Riverin Ph. D. President and CEO Woodruff Capital Management

CAPITAL STOCK

TSX Venture Exchange Symbole: JNX

Outstanding common shares as at December 31, 2007 52 204 170 ANNUAL GENERAL MEETING

The Annual General Meeting of shareholders will be held on June 3, 2008 at 11:00 a.m. at the St-James Club, 1145 Union Avenue in Montreal. HEAD OFFICE

Junex inc. 2795, boulevard Laurier, Bureau 200 Québec (Québec) G1V 4M7


Junex - Annual Report 2007  

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