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WE HAVE THE

BUILDING BLOCKS...

P E A R L E X P L O R A T I O N A N D P R O D U C T I O N L T D . 2 0 0 8 A N N U A L R E P O R T

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2008 HIGHLIGHTS

FINANCIAL

($000s, except per share data) Twelve months ended

December 31, 2008 Fifteen months ended December 31, 2007

Total revenue 183,536 128,524

Funds from operations 72,120 21,646

Per common share

Basic and diluted ($) 0.38 0.16

Net earnings (loss) (78,862) (227,206)

Per common share

Basic and diluted ($) (0.42) (1.73)

Capital expenditures (1) 107,367 229,246

Total assets 472,143 575,865

Long-term debt

Working capital 6,451 (34,152)

Shareholders’ equity 413,635 489,380

Weighted average shares outstanding (basic) 189,241,716 131,223,521

Common shares outstanding at period-end 189,241,716 189,241,716

OPERATIONAL

Daily Production

Oil (bbls/d) 6,182 5,310

Natural gas – net production (mcf/d) 8,942 10,309

Total production (boe/d) 7,692 7,029

Sales Prices

Oil – average selling price per bbl ($) 68.97 40.31

Natural gas – average selling price per mcf ($) 8.11 6.39

Operating Costs

Operating costs ($000s) 49,907 50,531

Operating costs per boe ($) 17.77 15.73

IFC Highlights 2 President’s Letter 5 Management Q & A 8 Operations Review 13 Reserves Information

16 Management’s Discussion and Analysis 39 Consolidated Financial Statements 42 Notes to the

Consolidated Financial Statements IBC Corporate Information

(1) Excludes non-cash acquisitions cost.

(3)

TO BE A SUCCESSFUL HEAVY OIL COMPANY.

In late 2008, Pearl transitioned from being a resource company with widespread heavy oil assets to a focused growth company with an objective of building production and reserves. Our long-term strategy embraces a multi-dimensional team

capable of operating excellence and an ability to execute projects on a timely basis while remaining financially strong.

(4)

LONG-TERM DEBT

I joined Pearl as President and CEO in January 2009, together with Don Cook as CFO, Ed Sobel as Vice President Exploration and Chris Hogue as Vice President Operations. Previously Don and I formed part of the executive team while Ed and Chris led the technical team at BlackRock Ventures Inc., a successful, publicly-traded Canadian heavy oil company that was sold to Shell Canada in 2006 for $2.4 billion. In our seven years at BlackRock, the share price increased from $0.50 to $24.

I am excited to be back and fully engaged in the exploration and development of heavy oil. While these are trying economic

PRESIDENT’S LETTER JOHN FESTIVAL,

PRESIDENT AND CEO

I am very pleased to be writing my inaugural letter to shareholders at a critical juncture in the Company’s history – the point at which we are transitioning Pearl from a company of widespread heavy oil assets to one that fully realizes the value of those assets.

times, we have seen this before. In fact, the industry faced similar circumstances when we joined BlackRock in 1999.

We learned some important lessons during our seven years at BlackRock.

First, commodity price cycles are a fact of life in the energy sector. Second, if you follow a well-chosen strategy, execute on a well-considered exploration program, and develop the assets with well-planned operations you will be successful. The key to that strategy is execution which will result in viable netbacks, modest operating costs, strong recycle ratios and reasonable finding and development costs. Our track record in heavy oil has proven this to be the case – and the fundamentals of heavy oil make it possible to hit these targets.

IMPLEMENT a SIMILaR STRaTEGy aT PEaRL

We plan to adopt a similar strategy that we used in the past at BlackRock, including:

1. Focus on heavy oil;

2. Focus on execution – in other words, maximize the value of the assets by fully developing their production and reserves potential;

3. Maintain a conservative balance sheet.

(5)

We are encouraged by Pearl’s excellent portfolio of properties. although we are currently in the early stages of evaluating all properties, we believe the assets are substantial building blocks for a large and successful heavy oil company. The portfolio includes short-term properties that already generate cash flow, medium-term properties that have development potential and a longer-term, large SaGD opportunity that could multiply our reserve and production potential. It is the magnitude of this potential that attracted us to Pearl.

at the time of writing this annual report, Pearl is producing approximately 6,000 boe per day, the majority of which is being generated by the Company’s core areas of Mooney and Onion Lake. although we are currently in a very challenging oil price environment, these properties will provide the short-term cash flow to fund the medium and longer-term projects.

SIGNIFICaNT MEDIuM-TERM PRODuCTION POTENTIaL

In the medium-term, both Onion Lake and Mooney offer significant potential through secondary and tertiary recovery methods.

Pearl initiated steps in this direction in 2008 with waterflood and polymer flood pilot projects at Mooney and a cyclic steam thermal pilot project at Onion Lake.

We anticipate that these pilot projects will be put on hold during the weak oil price environment. However, when prices improve and additional development is justified, we believe there is significant production potential in each area.

Blackrod is a large oil sands property with SaGD potential located in the athabasca oil sands region in northern alberta. Pearl has an 80% working interest in this project which has more than one billion barrels of oil-in-place. In the longer-term, Blackrod has the potential to be a 20,000 to 40,000 barrel per day development.

NET aCRES OF uNDEVELOPED LaND

CORE PROPERTIES

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Our immediate plans are to better understand all of Pearl’s assets, prioritize their development and create plans in anticipation of higher oil prices.

In early 2008, Pearl made an important strategic decision to focus on four core areas, including Mooney and Blackrod, alberta; Onion Lake, Saskatchewan; and San Miguel, Texas. as a result, the Company sold production of approximately 3,200 barrels of oil per day for $75 million. The sale was timely – at the height of oil prices.

The cash allowed Pearl to eliminate its debt, focus on its core areas and look at new opportunities.

The oil and natural gas sector saw incredible price volatility in 2008, with highs near uS$150 WTI per barrel and lows in the uS$30 per barrel range. This extreme fluctuation makes it difficult to plan development of large-scale projects.

We have no doubt that over the long-term the price of oil will strengthen. The world’s largest oil fields are continuing to decline and new sources of oil reserves are smaller and more expensive to find and produce.

In addition to the challenges of commodity prices, we are faced with a new royalty

JOHN FESTIVaL

President and Chief Executive Officer March 19, 2009

framework in alberta that took effect in January 2009. under the terms of the framework, the government will increase its take of production revenues. We hope the government will reconsider some of the framework’s provisions which render many new projects uneconomic and have caused reductions in drilling and land sales proceeds.

NEW NaME PROPOSED

In summary, we are moving from a resource company to a full-cycle operating company which will originate, develop and produce its own properties. In connection with this change in strategy and outlook for the Company, we will be asking our shareholders to approve a change in name to BlackPearl Resources Inc. at the upcoming annual meeting. We look forward to the support of our employees and shareholders and the guidance of our Board of Directors as we build Pearl into a successful heavy oil company.

On behalf of the Board of Directors,

BaRRELS PER Day OF PRODuCTION

MILLION BaRRELS OF PROVED PLuS PROBaBLE PLuS POSSIBLE RESERVES

(7)

– Why did your management team choose Pearl?

In North america, there are very few remaining attractive heavy oil opportunities. Some of the best ones are held by large oil and gas companies and, generally, these companies are reluctant to part with them. We recognized that Pearl had acquired a very promising group of undeveloped properties and we were excited to be given the mandate to help fulfill their potential within Pearl.

– What is the new strategy for Pearl?

It’s important to understand at the outset that Pearl’s previous strategy of adding value by converting resource to reserves got caught in the downdraft of oil prices and the financial crisis. Our strategy is longer-term to implement but will be more resilient to changing markets. It entails building a full-cycle heavy oil exploration and production company.

We are fortunate to have a great platform with which to start this process. Our near-term cash-flow properties will help fund our mid-term development projects such as Onion Lake and Mooney, which in turn will provide the financial foundation to fund a SaGD project

EXPLORING THE SHIFT AT PEARL

AN INTERVIEW WITH MANAGEMENT

Chris Hogue John Festival Don Cook Ed Sobel

(8)

– Will you continue to acquire companies to grow Pearl?

although we will continue to look for new opportunities, corporate acquisitions will not be our primary focus. Once oil prices are higher and more stable, we will be very busy with the properties that are currently in Pearl.

– Why are you changing the name?

The name change to BlackPearl Resources Inc. acknowledges both our prior success and the current people and properties in the Company. It will be a reminder of where we’ve been and where we’re going.

– What are your plans for Pearl’s non-core properties?

We have no immediate plans for our lower priority properties other than to review the cost structure and optimize the existing production. as we grow the Company, these properties may become relatively insignificant and we would consider selling them in a better price environment.

– What is your forecast for oil prices?

We typically don’t spend much time trying to forecast oil and natural gas prices; however, oil is a commodity that is getting harder and more expensive to find and produce. If you couple that reality with the growth in the world’s population, you can only draw one conclusion – oil prices must trend up. Of course, we can’t be sure of the exact path that oil prices will take and that is why we prefer to manage our company in a financially conservative way.

– When oil prices strengthen, won’t you face the same problems such as increased costs and shortage of skilled people?

We have operated successfully in heated environments in the past and the solution is good planning and good people. We have always been able to attract motivated and experienced people because they want to be part of a winning team.

(9)

– Many other companies talk about billions of

barrels of oil sands potential. How do I determine which company has real potential?

It comes down to track record. Our technical team has a 15 year history of discovering and developing heavy oil prospects. Whether it is the early adoption of a new technology or the discovery of a new play, we have consistently delivered on our plans. We have not promoted a new play until we have a solid basis for our projections.

– Why are you adverse to using debt to grow your company?

Heavy oil is a marginal barrel. In other words, it garners the lowest price and is the most costly to produce. We never know when we may experience low prices and we want to ensure we never lose control of our company because of our debt situation.

– Recently there has been little mention of the u.S. properties. What has changed?

after compiling the merits of each individual property, we were able to rank them in order of priority and more immediate potential. The u.S. properties ended up lower on the list.

We’re not suggesting they have no value; we’re saying we have better opportunities to pursue at this time.

– We have seen quite a few management changes already. as shareholders, how can we be sure that the new management team is committed to this company?

This new management team is directly aligned with the interests of all shareholders due to our significant share ownership. Currently, the officers own about 20 million shares.

– What is the upside to holding Pearl shares?

In Pearl you have an experienced heavy oil team and a great suite of assets. If you combine that with higher heavy oil prices, there is tremendous upside in the Company.

(10)

ONION LAKE BLACKROD

EAR LAKE/SALT LAKE DRUID

MOONEY

SOUTHERN ALBERTA GAS

ALBERTA

SASKATCHEWAN

OIL SANDS

UNITED STATES

OPERATIONS REVIEW

(11)

Pearl’s existing inventory of projects provides us with the building blocks to create a successful heavy oil company.

Mooney, Onion Lake, Salt Lake and Southern alberta Gas provide immediate cash flow from over 5,000 barrels per day of production. This cash flow can be used to advance our medium-term projects at Mooney and Onion Lake, which provide excellent potential to increase production and reserves from secondary and tertiary recovery (water and polymer floods, and steam injection). These projects in time will provide some of the cash flow to tackle a long-term project such as Blackrod, which is a potential 20,000-40,000 barrel per day SaGD project in the athabasca Oil Sands.

Mooney

Southern Alberta Gas Salt Lake

Onion Lake Blackrod

Other (includes properties sold in 2008)

2,108

372 521 2,274

2,397

2008 Production (boe/d) by Area

20.3 15.1

70

8.1

Proved + Probable + Possible Reserves (mmbbls) by Area

(at December 31, 2008)

24.8 28.1

22.8 3.2

5.9

2008 Net Operating Revenues ($mm) by Area

(12)

Mooney is a conventional heavy oil play located in north-central alberta. Pearl has a 98% working interest in 79 sections in the area. In 2008, Pearl’s production for the area averaged 1,674 barrels of oil per day and 2,605 mcf of natural gas per day.

The field contains more than 150 million barrels of oil-in-place. under primary production we anticipate recovery rates of 3-5% of the oil. Due to the reservoir characteristics and oil quality, we anticipate secondary or tertiary recovery methods may yield significantly higher recovery rates. Our modeling indicates that recovery rates with a waterflood could reach 15% and with a polymer flood recovery rates could be 20-30%. In 2006, Pearl started a pilot waterflood program and in late 2008 initiated a pilot polymer flood. Initial results appear positive and we will continue to monitor and evaluate

MOONEY, ALBERTA

Key Facts

Working interest (%) 98 Land

acres (net) 47,020

2P reserves (Mboe) 8,220

aPI (degrees) 16

2008 production

Oil (bbls/d) 1,674

Natural gas (mcf/d) 2,605

# producing horizontal wells 38

Depth (metres) 900

Formation Bluesky

2008 highlights

• Drilled 12 additional horizontal wells

• Initiated pilot polymer flood

• Installed amine facilities to remove CO2 from the gas stream 2009 plans

• Continue to evaluate water and polymer pilot floods

• Apply for EOR royalty treatment for oil production

results. Other industry participants in the general area are achieving positive results with water and polymer floods in reservoirs that have similar characteristics to Mooney. In addition to the potential from these EOR projects, there are an additional 25-50 conventional development locations to be drilled at Mooney, as well as additional resource to be delineated.

Because Mooney lies outside the designated Peace River Oil Sands region, it is not eligible for oil sands royalties. as a result of the new alberta royalty structure, Mooney’s relative high production rate per well will be subject to higher royalties under this new royalty structure. The Company will make an application with regulatory authorities for lower royalties as a result of our enhanced oil recovery activities.

T71

T70 T72 T73 R7W5 T74 R8

R9 R10

R11

Pearl land

2008 delineation well 2008 horizontal well

Existing horizontal well 6 miles

MOONEY

T71

T70 T72 T73 R7W5 T74

R8 R9

R10 R11

Pearl land

2008 delineation well 2008 horizontal well

Existing horizontal well 1 mile

Polymer pilot

(13)

ONION LAKE, ALBERTA

Onion Lake is a conventional heavy oil play, located on the Onion Lake First Nations lands along the alberta/Saskatchewan border near Lloydminster. Pearl holds an 87.5-100%

working interest in the lands. Our working interest partner is the Onion Lake First Nations development corporation. To date, Pearl has drilled a total of 44 wells on the property, with production averaging 2,217 barrels of oil per day in 2008, a 111% increase from 2007. Our technical team sees the potential for an additional 50-75 development wells at Onion Lake using primary recovery methods.

Internal estimates indicate the field contains more than 400 million barrels of oil. Production

under primary development is expected to yield a recovery rate of 3-8%. Our reservoir simulations indicated that the injection of steam in the reservoir could generate recovery rates of 20-30%. as a result, in 2008 Pearl commenced two Cyclic Steam Stimulation (CSS) thermal pilots consisting of one vertical well on each pilot. Each well has been through two steam injection and production cycles and peak production reached in excess of 200 barrels of oil per day per well. Due to the low pricing environment, Pearl has elected to discontinue the steam pilot until economic conditions improve. In the near term, Pearl will focus on primary development of the field.

Key Facts

Working interest (%) 87.5-100 Land

acres (net) 17,528

2P reserves (Mboe) 11,391 2008 production

Oil (boe/d) 2,274

Depth (metres) 400-600

Formation Dina, Cummings

2008 highlights

• Commenced 2 well CSS steam pilot

• Installed fuel gas system 2009 plans

• Monitor CSS pilot results

• Consider water and sand disposal facilities to lower operating costs

• Negotiate new joint operating agreement with the Onion Lake First Nation

Pearl land Producing wells Oil pool

CSS pilot site

6 miles

T55 T56

T54 R26W3 T57

R27 R1W4

ONION LAKE

(14)

Blackrod is a SaGD opportunity located in the athabasca Oil Sands region in northern alberta.

Pearl initially acquired a 35% interest in the lands at a Crown land sale in 2007. In 2008 and early 2009, we acquired additional interests from our partners and now have an 80% working interest.

We have also become operator of the project.

In 2008, Pearl also acquired a 100% interest in 31 sections (19,840 acres) of oil sands leases contiguous to the main Blackrod area.

The project area has more than one billion barrels of oil-in-place. To date, 18 wells have been drilled on the main project area that allow us to better understand the areal extent and homogeneous quality of the reservoir. The oil is

located in the Lower Grand Rapids Formation at a depth of approximately 300 metres.

Pearl is planning to drill 10 additional evaluation wells in the 2008-2009 winter season. We expect to initiate a single well pair SaGD pilot in 2010.

The pilot will provide a better understanding of reservoir performance expectations, refine operating and capital cost estimates and provide valuable information to plan full field development. Following a successful pilot test, we would begin commercial development at Blackrod.

We believe Blackrod has the potential to be a 20,000-40,000 barrels of oil per day commercial project.

BLACKROD, ALBERTA

Key Facts

Working interest (%) 80-100 Land

acres (net) 30,080

3P reserves (Mbbls) 69,920

aPI (degrees) 9

Oil saturation (%) 65-75 Pay thickness (metres) 18-26 Commercial potential (bbls/d) 20,000-40,000

Formation Lower

Grand Rapids

2008 highlights

• Increased working interest from 35-80%

• Agreed to operate the project

• Acquired an additional 19,840 acres of adjacent oil sands leases

2009 plans

• Drill 10 evaluation wells to better define the resource

• Seek regulatory approval to undertake a single well-pair SaGD pilot

Pearl land

Lower Grand Rapids Existing wells 2009 evaluation well

T76

6 miles

R17W4 R18

R19

T77

BLACKROD T78

(15)

The following tables summarize the Company’s oil and gas reserves as at December 31, 2008. The reserve report was prepared by DeGolyer and MacNaughton Canada Limited (“DeGolyer”). The 2008 reserves have decreased from 2007. In Canada, as a result of the slowdown in activities and the uncertainty of when these activities will recommence, reserves booked in the past for development activities and enhanced oil recovery programs (such as waterfloods) were removed from the reserve base. Reserves from these activities will be recognized as we undertake the development work in the future. The decrease in u.S. reserves was based on a review of technical results of 2008 activities, primarily at San Miguel and Fiddler Creek.

The complete list of schedules required under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities are included in Pearl’s annual Information Form filed on SEDaR at www.sedar.com or available on Pearl’s website at www.pearleandp.com.

summary oF oil and gas reserves – Forecasted prices and costs

Canada united States Total Natural Natural Natural Oil & NGL Gas Oil & NGL Gas Oil & NGL Gas

Company interest, before royalties Reserves Reserves Reserves Reserves Reserves Reserves (Mbbls) (MMcf) (Mbbls) (MMcf) (Mbbls) (MMcf)

Proved developed producing 4,078 7,887 4 49 4,082 7,936

Proved developed non-producing 1,299 1,771 1,299 1,771

Proved undeveloped 3,378 579 3,378 579

Total proved 8,755 10,237 4 49 8,759 10,286

Probable 14,055 10,757 3 29 14,058 10,786

Total proved plus probable 22,810 20,994 7 78 22.817 21,072

Possible 85,543 10,014 85,543 10,014

2008 total 108,353 31,008 7 78 108,360 31,086

OIL AND GAS RESERVES

(16)

net present value oF reserves – Forecasted prices and costs

Net Present Values of Before Tax Future Net Revenue Discounted at

$000s 0% 5% 10% 15% 20%

Proved

Developed producing 120,846 105,089 93,719 85,032 78,147

Developed non-producing 38,513 30,182 24,462 20,378 17,356

undeveloped 89,718 60,271 42,083 30,185 22,049

Total proved 249,077 195,542 160,264 135,595 117,552

Probable 490,288 305,957 207,200 149,012 112,091

Total proved plus probable 739,365 501,499 367,464 284,607 229,643

Possible 3,126,931 1,188,108 542,140 285,732 167,804

Total 3,866,296 1,689,607 909,604 570,339 397,447

Net Present Values of after Tax Future Net Revenue Discounted at

$000s 0% 5% 10% 15% 20%

Proved

Developed producing 120,846 105,089 93,719 85,032 78,147

Developed non-producing 38,513 30,182 24,462 20,378 17,356

undeveloped 89,718 60,271 42,083 30,185 22,049

Total proved 249,077 195,542 160,264 135,595 117,552

Probable 411,378 266,309 185,862 136,883 104,885

Total proved plus probable 660,455 461,851 346,126 272,478 222,437

Possible 2,314,443 864,793 385,635 197,779 112,838

Total 2,974,898 1,326,644 731,761 470,257 335,275

Columns may not add due to rounding

pricing assumptions – Forecast prices and costs

WTI Edmonton Hardisty alberta

Cushing Par Price Bow River aECO-C Inflation Exchange year 40° aPI 40° aPI 25° aPI Spot Rate Rate (uS$/bbl) (Cdn$/bbl) (Cdn$/bbl) (Cdn$/MMBtu) (%/yr) (uS$/Cdn$)

2009 57.00 69.10 51.83 7.31 0.0 0.82

2010 69.53 81.35 61.01 7.99 3.0 0.85

2011 76.38 84.39 63.29 8.09 3.0 0.90

2012 86.99 96.16 73.57 8.47 2.5 0.90

2013 94.74 104.76 81.19 8.67 2.5 0.90

Escalation rate of 2.5% thereafter

Notes:

(1) The pricing assumptions were provided by DeGolyer.

(2) None of the Company’s future production is subject to a fixed or contractually committed price.

(17)

reconciliation oF changes in reserves

The following table summarizes the changes in the Company’s share of oil and natural gas reserves (Company’s interest before deducting royalties) from December 31, 2007 to December 31, 2008.

Oil and NGL (Mbbls)

Proved Plus

Proved Plus Probable Proved Probable Probable Possible Plus Possible

Balance, Dec. 31, 2007 19,819 27,041 46,860 142,831 189,691

Production (2,257) (2,257) (2,257)

Discoveries

Extensions 381 82 463 463

Technical revisions (5,269) (2,223) (7,492) (31,395) (38,887)

Dispositions (2,472) (2,135) (4,607) (324) (4,931)

Economic factors (1443) (8,708) (10,151) (25,569) (35,720)

Balance, dec. 31, 2008 8,758 14,058 22,816 85,543 108,359

Natural Gas (MMcf)

Proved Plus

Proved Plus Probable Proved Probable Probable Possible Plus Possible

Balance, Dec. 31, 2007 16,537 10,280 26,817 4,528 31,345

Production (3,264) (3,264) (3,264)

Discoveries

Extensions 43 8 51 51

Technical revisions (770) 1,737 967 5,753 6,720

Dispositions (2,572) (1,353) (3,925) (333) (4,258)

Economic factors 312 114 426 66 492

Balance, dec. 31, 2008 10,286 10,786 21,072 10,014 31,086

(18)

The following is Management’s Discussion and Analysis (“MD&A”) of the operating and financial results of Pearl Exploration and Production Ltd. (“Pearl” or the “Company”) for the year ended December 31, 2008. These results are being compared with the 15 months ended December 31, 2007 (Pearl changed its year-end in 2007 from September 30 to December 31). The MD&A should be read in conjunction with the Company’s audited consolidated financial statements for the twelve months ended December 31, 2008, together with the accompanying notes.

All dollar amounts are referenced in thousands of Canadian dollars, except where otherwise noted. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).

Throughout this MD&A the calculation of barrels of oil equivalent (boe) uses a conversion rate of six thousand cubic feet (mcf) of natural gas for one barrel of oil and is based on an energy equivalence conversion method. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner tip and does not represent a value equivalence at the wellhead.

Included in this report are references to terms commonly used in the oil and gas industry, such as cash flow and funds from operations, which represent cash flow from operating activities expressed before changes in non-cash working capital and cash flow per share, and are used by the Company to analyze operating performance, leverage and liquidity.

These terms do not have standardized meanings prescribed by GAAP and therefore may not be comparable with the calculations of similar measures for other entities. Consequently, these are referred to as non-GAAP measures.

Management uses these non-GAAP measurements to evaluate the Company’s performance and to provide shareholders and investors with additional information to measure the Company’s performance and efficiency and its ability to fund a portion of its future activities.

Additional information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.

This MD&A contains forward-looking information and statements. At the end of this MD&A is an advisory on forward- looking information and statements.

The effective date of this MD&A is March 19, 2009.

OVERVIEW

Pearl is a Canadian-based oil and gas company whose common shares are traded on the TSX under the symbol “PXX”

and on the First North (OMX Nordic Exchange) under the symbol “PXXS”. Pearl’s main focus is heavy oil projects in western Canada and the U.S. The Company also holds interests in a number of natural gas properties.

Pearl’s core properties in 2008 included:

• Onion Lake, Saskatchewan – heavy oil;

• Mooney, Alberta – heavy oil;

• Blackrod, Alberta – heavy oil; and

• San Miguel, Texas – heavy oil

MANAGEMENT’S DISCUSSION AND ANALYSIS

(19)

2008 SIGNIFIC ANT EVENTS

• On January 1, 2008 the Company amalgamated Cipher and Watch with Pearl E & P Canada Ltd.

• On May 22, 2008 the Company sold assets in the Lloydminster, Celtic, Pike’s Peak and Thunderchild areas of Saskatchewan for approximately $75 million. These assets represented 10% of Pearl’s proved plus probable reserves and 30% of existing oil production. The sale resulted in the elimination of the Company’s outstanding debt.

• On August 20, 2008 the Company acquired an additional 30% interest in the Blackrod area to bring its total interest to 65%. Blackrod is a potential SAGD project located in the Athabasca Oil Sands.

• On December 17, 2008 the Company agreed to acquire 100% of the shares of BlackCore Resources Inc. (“BlackCore”).

The principle assets of BlackCore consist of a 100% working interest in the John Lake Field in Northern Alberta as well as $5.5 million in cash. This transaction closed on January 8, 2009.

• On December 17, 2008 in conjunction with the above transaction, the Company decided to hire a new senior management team. The new management group was formerly part of the management of BlackRock Ventures Inc. and are also principal shareholders of BlackCore.

• On December 30, 2008, the Company sold all of its interests in certain lands, wells, pipelines and other associated equipment located in the Palo Duro Basin area of Texas. In exchange, Pearl received 18,756,414 common shares of Tyner Resources Ltd. (“Tyner”). These shares were valued at a price of $0.03 per share. The share price was calculated by using the weighted average share price for the five days before and after the transaction date.

• During the fourth quarter of 2008 and continuing into 2009, the oil and gas industry has experienced a severe decrease in commodity prices due to a major global economic downturn, as well as significant disruptions in the financial credit markets. These events have resulted in considerable government intervention, particularly in the financial services sector.

• On October 1, 2008, the Company agreed to sell its investment in Serrano Energy Ltd. for an additional 15% working interest at Blackrod (increasing the Company’s working interest to 80%). In addition, Pearl will be carried for the next

$5 million of expenditures at Blackrod. This transaction closed in February 2009.

(20)

ANNUAL FINANCIAL INFORMATION

As at and for the Period Ended

12 Months 15 Months 12 Months

$000s, except per share amounts December 31, 2008 December 31, 2007 September 30, 2006

Total revenues 183,536 128,524 3,635

Earnings (loss) from continuing operations

and net earnings (loss) (78,862) (227,206) (8,953)

Per share – basic (0.42) (1.73) (0.23)

Per share – diluted (0.42) (1.73) (0.23)

Cash flow from operations (1) 72,120 21,646 (1,247)

Per share – basic 0.38 0.16 (0.03)

Per share – diluted 0.38 0.16 (0.03)

Capital expenditures 107,367 229,246 44,632

Total assets 472,143 575,865 129,067

Bank loan 4,976

Common shares outstanding 189,242 189,242 51,913

(1) Cash flow from operations before working capital changes and cash flow per share do not have standardized meanings prescribed by Canadian generally accepted accounting principles (“GAAP”) and therefore may not be comparable to similar measures used by other companies. Cash flow from operations before working capital changes includes all cash flow from operating activities and is calculated before changes in non-cash working capital.

Cash flow from operations before working capital changes is reconciled with net loss on the Consolidated Statements of Cash Flows. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the Company’s efficiency and its ability to fund a portion of its growth expenditures.

SEGMENTED INFORMATION

The Company presently has one reportable business segment, that being oil and gas exploration, development and production. The Company’s operations are carried on in the following geographic locations:

Year Ended December 31, 2008

$000s, except where noted Canada U.S. Consolidated

Total revenues, net of royalties 137,951 1,904 139,855

Net loss (20,921) (57,941) (78,862)

Segment assets 459,659 12,484 472,143

Capital additions 86,765 20,602 107,367

Fifteen Months Ended December 31, 2007

$000s, except where noted Canada U.S. Consolidated

Total revenues, net of royalties 99,307 1,843 101,150

Net income (loss) (227,932) 726 (227,206)

Segment assets 522,075 53,790 575,865

Capital additions 204,116 25,130 229,246

(21)

SELECTED QUARTERLY INFORMATION

31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar

$000s, except where noted 2008 2008 2008 2008 2007 2007 2007 2007

Production (boe/d) 6,198 5,776 8,246 10,503 9,507 9,093 7,910 6,966

Revenue per boe($) 36.28 85.02 79.74 60.50 40.30 39.17 41.40 38.98

Oil & gas revenue 20,687 45,180 59,839 57,830 35,250 32,786 29,801 24,464 Production costs 10,299 9,272 11,453 18,883 14,835 12,245 10,949 10,132 Net earnings (loss) (1) (83,686) 1,926 6,688 (3,790) (183,407) (13,683) (7,225) (17,628) Per share, basic and diluted (0.44) 0.01 0.04 (0.02) (1.04) (0.09) (0.05) (0.13) Cash flow from operations 3,623 21,021 28,023 19,452 9,609 6,268 973 5,039 Per share, basic and diluted 0.02 0.11 0.15 0.10 0.05 0.04 0.01 0.04 Total assets 472,143 554,956 543,123 584,237 575,865 654,543 620,792 586,276 Weighted average shares

outstanding (000s) 189,242 189,242 189,242 189,242 181,212 145,616 133,935 132,472

(1) The large loss in the fourth quarter of 2008 was the result of a write-down of the Company’s U.S. oil and gas properties. The loss in the fourth quarter of 2007 was due to the write-off of goodwill.

RESULTS OF OPERATIONS

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

Net loss (78,862) (227,206)

Per share ($) (0.42) (1.73)

The Company incurred a net loss of $78.9 million or $0.42 per share for the year ended December 31, 2008 compared to a loss of $227.2 million or $1.73 per share for the 15 months ended December 31, 2007. The net loss for the year is principally a result of the high depletion cost of $85.4 million and a write-down of the Company’s U.S. oil and gas assets of $57.4 million. The loss in 2007 is a result of the write-down of goodwill of $172.9 million.

COMMODITY PRICES

In Canada and the U.S., crude oil prices are generally based on WTI benchmark prices. In 2008, WTI prices were strong for most of the year with WTI oil averaging US$99.65/bbl compared with US$72.31/bbl in 2007. The increase is attributable to increased worldwide demand combined with tight supplies. Late in the year, as a result of the global recession and financial crisis, demand for oil dropped, resulting in a dramatic decrease in WTI prices. During the fourth quarter of 2008, WTI averaged US$58.73/bbl and has continued to drop during the first two months of 2009. The WTI futures price for the remainder of 2009 is approximately US$48 per barrel, suggesting continued reduced demand. Pearl predominately produces heavy oil, which sells for less than light oil, due to increased processing required for a heavy barrel. One of the benchmark prices for heavy oil in Canada is the Western Canadian Select (“WCS”) stream price.

Throughout 2008, the WTI/WCS differential was narrower than 2007. In 2008, the WCS reference price averaged 78%

of the WTI price, compared with 68% of the WTI price in 2007. The lower differentials were a result of more demand for heavy crudes and reduced supplies from countries such as Mexico and Venezuela.

(22)

Oil prices in Canada are also impacted by the Canada/U.S. dollar exchange rate, since oil is generally priced in U.S. dollars.

During the first three quarters of 2008, the Canadian dollar was relatively strong against the U.S. dollar with an exchange rate of $0.98. However, in the fourth quarter in conjunction with the drop in WTI prices, the exchange rate decreased to $0.82 which, in part, lessens the impact on a drop in WTI prices for Canadian producers.

In 2008, natural gas prices increased 23%, reflecting higher demand. The AECO-C gas price averaged $7.70 per GJ in 2008 compared to $6.26 per GJ in 2007. During the fourth quarter, similar to oil prices, natural gas prices decreased as a result of lower demand caused by slowing economies and warm weather which resulted in higher gas storage levels.

Lower natural gas prices have continued during the first two months of 2009.

Oil and Gas Production, Pricing and Revenue

Twelve Months Ended Fifteen Months Ended December 31, 2008 December 31, 2007

Daily production/sales volumes (1)

Oil (bbls/d) 6,182 5,310

Natural gas (mcf/d) 8,942 10,309

Combined (boe/d) 7,672 7,029

Product pricing ($)

Crude oil – per bbl 68.97 40.31

Natural gas – per mcf 8.11 6.39

Combined – per boe 65.36 40.01

Revenue ($000s)

Oil and gas revenue – gross 183,536 128,524

Royalties (45,192) (28,494)

Oil and gas revenue – net 138,344 100,030

(1) Gas production converted at 6:.1.

Oil and gas revenues increased 43% in 2008 to $183.5 million compared with $128.5 million in 2007. The increase is attributable to:

a) a 16% increase in oil production;

b) a 71% increase in the average oil price;

c) a 13% decrease in natural gas production; and d) a 27% increase in the average gas price.

Overall, production on a boe basis increased 9% to 7,672 boe in 2008 compared with 7,029 boe in 2007. The increase in production is attributable to the Mooney and Onion Lake areas, reflecting additional drilling activity in late 2007 and 2008.

(23)

Twelve Months Ended Fifteen Months Ended

December 31, 2008 December 31, 2007

Oil (bbls/d) Gas (mcf/d) Oil (bbls/d) Gas (mcf/d)

Long Coulee/McGregor/Pageant 19 2,233 16 2,616

Mooney 1,674 2,605 1,353 1,409

Salt Lake 389 794 209 1,565

Celtic – Pike’s Peak 552 182 1,447 637

Ear Lake 360 140 338 468

Onion Lake 2,217 340 933 856

Other 971 2,648 1,014 2,758

6,182 8,942 5,310 10,309

Production in 2008 was impacted by the sale of oil and gas properties during the second quarter. The properties that were sold were producing approximately 3,200 boe per day at the time of the sale. As a result of the property sale, production in the second half of the year was lower than the average for the year. Fourth quarter production averaged 6,198 boe per day.

The Company did not enter into any hedging arrangements in 2008 or 2007, and, at the present time, does not anticipate hedging any of its production in 2009.

Royalties

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

Royalties 45,192 28,494

As a percentage of revenue 25% 22%

Royalties increased significantly from $28.5 million in 2007 to $45.2 million in 2008. The increase is consistent with the higher revenues during 2008. Royalty rates are generally dependent on well productivity and commodity prices. The increased royalty rates in 2008 reflect the significantly higher oil prices during the first nine months of 2008.

Production Costs

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

Production costs 49,907 50,531

Per boe ($) 17.77 15.73

Production costs on a per boe basis averaged $17.77 for the current year which is an increase over the prior 15-month period average of $15.73. The increase in per unit operating costs for the period is principally due to an increase in fluid hauling, fuel and electricity costs. These costs are related to the WTI price which has increased significantly in 2008. Production costs were also impacted by inflationary pressure due to high demand for services, especially during the first nine months of the year.

(24)

Transportation Costs

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

Transportation costs 3,664 3,567

Per boe ($) 1.30 1.11

Transportation costs are incurred to move marketable crude oil and natural gas to their selling points. Average transportation costs in 2008 were $1.30 per boe, which is a $0.19 increase over 2007. The increase is a result of increased fuel costs in the current year, which is directly related to high oil prices.

Operating Netback

Twelve Months Ended Fifteen Months Ended December 31, 2008 December 31, 2007

Revenues 65.36 40.01

Royalties 16.11 8.87

Transportation costs 1.30 1.11

Operating costs 17.77 15.73

Netback per boe ($) 30.18 14.30

The 2008 netback of $30.18 per boe has increased significantly from the $14.30 per boe reported in 2007. This increase is consistent with the significant increase in oil revenue due to high market prices for oil in 2008.

Interest Income

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

Interest income 1,511 1,120

Interest income represents bank interest earned on excess cash which was held in short-term investments.

General and Administrative Expenses (“G&A”)

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

General and administrative expenses 15,000 19,142

Per boe ($) 5.34 5.96

General and administrative costs decreased from $19.1 million in 2007 to $15 million in 2008. The 2007 amount is based on a 15 month period and, if annualized, it is comparable to the 2008 amount.

(25)

In 2007, the Company was busy with numerous transactions and the associated costs increased G&A significantly.

Therefore, a decrease was anticipated for 2008. In 2008, the Company experienced higher salaries due to more staff and escalating costs in the labour market due to high demand for personnel, as well as management severance payments near the end of the year. In addition, the Company moved into new office premises at higher rental rates. These increases were offset by a reduction in bad debt expense. In 2007, the Company had to write off $3.2 million resulting from uncollectible receivables that were acquired in corporate acquisitions.

The Company is focused on decreasing general and administrative costs as efficiencies are realized. During 2008, the Company did not capitalize any of general and administrative expenses.

Depletion, Depreciation and Accretion (“DD&A”)

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

Depletion, depreciation and accretion 85,385 92,620

Per boe ($) 30.41 28.83

DD&A expense was $85.4 million or $30.41 per boe for the current year in comparison to $92.6 million or $28.83 per boe for the prior 15-month period. The higher rate in 2008 is a result of a reduction in proved reserves as detailed in the Company’s 2008 reserve report. Due to the reduction in reserves, the Company anticipates that the depletion rate per boe will increase further in 2009.

Stock-Based Compensation

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

Stock-based compensation 3,116 4,047

The Company uses the fair value method of accounting for stock options granted to directors, officers, employees and consultants whereby the fair value of all stock options granted is recorded as a charge to operations. The fair value of common share options granted is estimated on the date of grant using the Black-Scholes options pricing model. For the 2008 year, the Company issued 6.5 million options at prices ranging from $0.40 to $2.60.

Interest Expense

Twelve Months Ended Fifteen Months Ended

$000s, except where noted December 31, 2008 December 31, 2007

Interest expense 828 3,710

Per boe ($) 0.29 1.15

The reduction in interest expense is a result of the Company repaying its bank debt in full with funding provided from asset dispositions in the second quarter. The $0.8 million of interest expense relates entirely to the Company’s bank debt. The Company had an average debt level of $9.0 million and an effective interest rate of 3.64% for the year ended December 31, 2008.

References

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