OUR DISCUSSION AND ANALYSIS OF OUR OIL AND GAS ACTIVITIES WITH RESPECT TO OIL
AND GAS VOLUMES, RESERVES AND RELATED PERFORMANCE MEASURES IS PRESENTED ON OUR
WORKING INTEREST BASIS AFTER ROYALTIES. ALL TABULAR AMOUNTS ARE EXPRESSED IN
THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AND PRODUCTION DATA INCLUDING
REVENUES AND COSTS PER BOE.
As generally used in the oil and gas business and in this throughout the Form
10-Q, the following terms have the following meanings:

            Boe       = barrel of oil equivalent
            Bbl       = barrel
            MBbl      = thousand barrels
            MMBbl     = million barrels
            Mboe      = thousands of barrels of oil equivalent
            Bopd      = barrels of oil per day
            Bbls/d    = barrels per day
            Boe/d     = barrels of oil equivalent per day
            Mboe/d    = thousands of barrels of oil equivalent per day
            MBbls/d   = thousand barrels per day
            MMBls/d   = million barrels per day
            MMBtu     = million British thermal units
            Mcf       = thousand cubic feet
            MMcf      = million cubic feet
            Mcf/d     = thousand cubic feet per day
            MMcf/d    = million cubic feet per day

When we refer to oil in "equivalents", we are doing so to compare quantities of oil with quantities of gas or to express these different commodities in a common unit. In calculating Bbl equivalents, we use a generally recognized industry standard in which one Bbl is

equal to six Mcf. Boes may be misleading, particularly if used in isolation. The conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Electronic copies of our filings with the SEC and the CSA are available, free of charge, through our web site (www.ivanhoeenergy.com) or, upon request, by contacting our investor relations department at (604) 688-8323. Alternatively, the SEC and the CSA each maintains a website (www.sec.gov and www.sedar.com) that contains our periodic reports and other public filings with the SEC and the CSA.
Ivanhoe Energy's Business
Ivanhoe Energy is an independent international heavy oil development and production company focused on pursuing long-term growth in its reserve base and production using advanced technologies, including its proprietary, patented rapid thermal processing process ("RTPTM Process") for heavy oil upgrading ("HTLTM Technology" or "HTLTM"). The recently announced acquisition of two leases located in the heart of the Athabasca oilsands region in Alberta, Canada will provide the site for the first commercial application of the Company's HTL™ Technology in a major, integrated heavy oil project (see Implementation Strategy and the Talisman Lease Acquisition below).
In addition, the Company seeks to expand its reserve base and production through conventional exploration and production ("E&P") of oil and gas. Finally, the Company is exploring an opportunity to monetize stranded gas reserves through the application of the conversion of natural gas-to-liquids using a technology ("GTL Technology" or "GTL") licensed from Syntroleum Corporation. Our core operations are in Canada, the United States and China, with business development opportunities worldwide.
Corporate Strategy
Importance of the Heavy Oil Segment of the Oil and Gas Industry The global oil and gas industry is operating near capacity, driven by sharp increases in demand from developing economies and the declining availability of replacement low cost reserves. This has resulted in a significant increase in the relative price of oil and marked shifts in the demand and supply landscape. These shifts include demand moving toward China and India, while supply has shifted towards the need to develop higher cost/lower value resources, including heavy oil.
Heavy oil developments can be segregated into two types: conventional heavy oil that flows to the surface without steam enhancement and non-conventional heavy oil and bitumen. While we focus on the non-conventional heavy oil, both play an important role in Ivanhoe's corporate strategy.
Production of conventional heavy oil has been steadily increasing worldwide, led by Canada and Latin America but with significant contributions from most oil basins, including the Middle East and the Far East, as producers struggle to replace declines in light oil reserves. Even without the impact of the large non-conventional heavy oil projects in Canada and Venezuela, world oil production has been getting heavier. Refineries, on the other hand, have not been able to keep up with the need for deep conversion capacity, and heavy-light price differentials have widened significantly.
With regard to non-conventional heavy oil and bitumen, the dramatic increase in interest and activity has been fueled by higher prices, in addition to various key advances in technology, including improved remote sensing, horizontal drilling, and new thermal techniques. This has enabled producers to more effectively access the extensive, heavy oil resources around the world. These newer technologies, together with higher oil prices, have generated increased access to heavy oil resources, although for profitable exploitation, key challenges remain, with varied weightings, project by project: 1) the requirement for steam and electricity to help extract heavy oil, 2) the need for diluent to move the oil once it is at the surface, 3) the wide heavy-light price differentials that the producer is faced with when the product gets to market, and 4) conventional upgrading technologies limited to very large scale, high capital cost facilities. These challenges can lead to "distressed" assets, where economics are poor, or to "stranded" assets, where the resource cannot be economically produced and lies fallow.
Ivanhoe's Value Proposition
Ivanhoe's application of the HTLTM Technology seeks to address the four key heavy oil development challenges outlined above, and can do so at a relatively small minimum economic scale.
Ivanhoe's HTL™ upgrading is a partial upgrading process that is designed to operate in facilities as small as 10,000-30,000 barrels per day. This is substantially smaller than the minimum economic scale for conventional stand-alone upgraders such as delayed cokers, which typically operate at scales of well over 100,000 barrels per day. Ivanhoe's HTL™ Technology is based on carbon rejection, a tried and tested concept in heavy oil processing. The key advantage of HTL™ is that it is a very fast process - processing times are

typically under a few seconds. This results in smaller, less costly facilities and eliminates the need for hydrogen addition, an expensive, large minimum scale step typically required in conventional upgrading. Ivanhoe's HTL™ Technology has the added advantage of converting the byproducts from the upgrading process into onsite energy, rather than generating large volumes of low value coke. The HTL™ process offers significant advantages as a field-located upgrading alternative, integrated with the upstream heavy oil production operation. HTL™ provides four key benefits to the producer:
1. Virtual elimination of external energy requirements for steam generation and/or power for upstream operations.

2. Elimination of the need for diluent or blend oils for transport.

3. Capture of the majority of the heavy-light oil value differential.

4. Relatively small minimum economic scale of operations suited for field upgrading and for smaller field developments.

The business opportunities available to Ivanhoe correspond to the challenges each potential heavy oil project faces. In Canada, Ecuador, California, Iraq and Oman, all four of the HTLTMadvantages identified above come into play. In others, including certain identified opportunities in Colombia and Libya, the heavy oil naturally flows to the surface, but transport is the key problem. The economics of a project are effectively dictated by the advantages that HTLTM can bring to a particular opportunity. The more stranded the resource and the fewer monetization alternatives that the resource owner has, the greater the opportunity the Company will have to establish the Ivanhoe value proposition. Implementation Strategy and the Talisman Lease Acquisition In July, the Company announced the completion of the acquisition of Talisman Energy Canada's ("Talisman') 100% working interests in two leases (Leases 10 and
6) located in the heart of the Athabasca oilsands region in the Province of Alberta, Canada. Lease 10 is a 6,880-acre contiguous block located approximately 10 miles (16 km) northeast of Fort McMurray. Lease 6 is a small, undelineated, 680-acre block, 1 mile (1.6km) south of Lease 10. The acquisition of Lease 10 will provide the site for the first commercial application of Ivanhoe Energy's proprietary, HTL™ heavy-oil upgrading technology in a major, integrated heavy-oil project. Lease 10 has a relatively high level of delineation (four wells per section). It is believed to be a high-quality reservoir and an excellent candidate for thermal recovery production using the SAGD (steam-assisted gravity drainage) process. The high quality of the asset is expected to provide for favorable projected operating costs, including attractive steam-oil ratios (SOR) using SAGD development techniques. Ivanhoe's HTL plant on Lease 10 is projected ultimately to be capable of operating at production rates of at least 30,000 barrels per day for approximately 25 years. Ivanhoe intends to integrate established SAGD thermal recovery techniques with its patented HTL upgrading process, producing and marketing a light, synthetic sour crude. Ivanhoe has already commenced planning its Lease 10 winter 2008 delineation program in preparation for the submission of permits for an integrated HTL project. In general, thermal oilsands projects, including SAGD projects, require a period of initial development, including delineation, permitting and field development, which is followed by relatively stable operations for many years The Company's continuing strategy includes the following:
1. Build a portfolio of major HTLTM projects. We will continue to deploy our personnel and our financial resources in support of our goal to capture additional opportunities for development projects utilizing our HTLTM Technology.

2. Advance the technology. Additional development work will continue as we advance the technology through the first commercial application and beyond.

3. Enhance our financial position in anticipation of major projects. Implementation of large projects requires significant capital outlays. We are refining our financing plans and establishing the relationships required for the development activities that we see ahead.

4. Build internal capabilities. During recent months, the Company has made significant progress in building its execution teams in preparation for the Talisman acquisition. The upstream team consists of a number of Calgary-based, experienced heavy-oil engineers and geologists complemented by a core team of petroleum engineers and geologists located in Ivanhoe's offices in Bakersfield, California, a number of who are expected to move to Calgary. The Houston-based HTL technology team also has been strengthened. The Company expects to continue filling key positions in its execution mode.

5. Build the relationships that we will need for the future. Commercialization of our technologies demands close alignment with partners, suppliers, host governments and financiers.

Talisman retains back-in rights of up to 20% in the acquired leases for a period of three years. During this period, Talisman also will have the right of first offer to acquire any participation interests in heavy-oil projects in Alberta that Ivanhoe wishes to sell, excluding the acquired leases, on mutually agreeable terms. In addition, Ivanhoe and Talisman have signed an HTL Data Monitoring Agreement to allow Talisman to effectively monitor the commercial effectiveness of the Company's HTL technology.
The Company plans to establish a number of geographically focused entities. The parent company, Ivanhoe Energy Inc., will pursue HTL opportunities in the Athabasca oilsands of Western Canada and will hold and manage the core HTL technology. Two new subsidiaries have been established, one for Latin America and one for the Middle East & North Africa, complementing Sunwing Energy Ltd., the Company's existing, wholly-owned company for China. Ivanhoe Energy Inc. owns 100% of each of these subsidiaries, although the percentages are expected to decline as they develop their respective businesses and raise capital independently.
This structure will allow the development and financing of multiple HTL projects around the world, while minimizing dilution of the Company's existing shareholders. In addition, the alignment with principal energy-producing regions will facilitate financing from region-specific strategic investors, some of which already have been identified, and also will enhance flexibility in accessing global capital markets.
Executive Overview of 2008 Results
The following table sets forth certain selected consolidated data for the three-month and six-month periods ended June 30, 2008 and 2007:

                                                     Three-Month Periods Ended June 30,                Six-Month Periods Ended June 30,
                                                        2008                     2007                    2008                    2007
Oil and gas revenue                              $         17,979          $        9,789          $       33,022          $       19,385

Net loss                                         $        (21,731 )        $       (6,579 )        $      (30,275 )        $      (13,126 )
Net loss per share                               $          (0.09 )        $        (0.03 )        $        (0.12 )        $        (0.05 )

Average production (Boe/d)                                  1,891                   1,824                   1,899                   1,929

Net operating revenue per Boe                    $          66.05          $        33.53          $        60.80          $        32.87

Cash flow from operating activities              $          2,626          $          199          $        5,643          $        2,800

Capital investments                              $          2,593          $        8,123          $        7,916          $       13,457

Financial Results - Change in Net Loss
The following provides an analysis of our changes in net losses for the three-month and six-month periods ended June 30, 2008 when compared to the same periods for 2007:

                                                      Three-Month Periods Ended June 30,                          Six-Month Periods Ended June 30,
                                                                      Favorable                                               Favorable
                                                                    (Unfavorable)                                           (Unfavorable)
                                                  2008                Variances            2007             2008              Variances             2007
Summary of Net Loss by Significant
Components:
Oil and Gas Revenues:                         $     17,979                               $  9,789        $    33,022                              $  19,385
Production volumes                                                 $           336                                         $          (207 )
Oil and gas prices                                                           7,854                                                  13,844
Realized gain (loss) on derivative
instruments                                         (4,354 )                (4,324 )          (30 )           (6,302 )              (6,479 )            177
Operating costs                                     (6,614 )                (2,391 )       (4,223 )          (12,006 )              (4,098 )         (7,908 )

General and administrative, less stock
based compensation                                  (3,533 )                (1,010 )       (2,523 )           (6,291 )              (1,543 )         (4,748 )
Business and technology development,
less stock based compensation                       (1,672 )                   484         (2,156 )           (3,218 )                 945           (4,163 )
Net interest                                          (259 )                  (250 )           (9 )             (605 )                (577 )            (28 )

Unrealized loss on derivative
instruments                                        (16,433 )               (16,147 )         (286 )          (18,431 )             (17,479 )           (952 )
Depletion and depreciation                          (8,129 )                (2,105 )       (6,024 )          (16,495 )              (3,579 )        (12,916 )
Stock based compensation                              (793 )                   260         (1,053 )           (1,911 )                 (56 )         (1,855 )
Future income tax recovery                           2,286                   2,286              -              2,286                 2,286                -
Other                                                 (209 )                  (145 )          (64 )             (324 )                (206 )           (118 )


Net Loss                                      $    (21,731 )       $       (15,152 )     $ (6,579 )      $   (30,275 )     $       (17,149 )      $ (13,126 )

Our net loss for the three-month period ended June 30, 2008 was $21.7 million ($0.09 per share) compared to our net loss for the same period in 2007 of $6.6 million ($0.03 per share). The increase in our net loss from 2007 to 2008 of $15.2 million was mainly due to a $16.2 million increase in unrealized loss on derivative instruments, a $2.1 million increase for depletion and depreciation and an increase in operating costs of $2.4 million. These increases were partially offset by an increase of $3.9 million in combined oil and gas revenues and realized loss on derivative instruments, in addition to a future income tax recovery of $2.3 million, in connection with the Company's ability to utilize tax deductions associated with future income tax assets in China, a future income tax recovery of $2.3 million.
Our net loss for the six-month period ended June 30, 2008 was $30.3 million ($0.12 per share) compared to our net loss for the same period in 2007 of $13.1 million ($0.05 per share). The increase in our net loss from 2007 to 2008 of $19.4 million was mainly due to a $17.5 million increase in unrealized loss on derivative instruments, a $3.6 million increase for depletion and depreciation and an increase in operating costs of $4.1 million. These increases were partially offset by an increase of $7.2 million in combined oil and gas revenues and realized loss on derivative instruments, in addition to a future income tax recovery of $2.3 million, in connection with the Company's ability to utilize tax deductions associated with future income tax assets in China, a future income tax recovery of $2.3 million.
Significant variances are explained in the sections that follow. Revenues and Operating Costs
The following is a comparison of changes in production volumes for the three-month and six-month periods ended June 30, 2008 when compared to the same periods in 2007:

                                         Three-Month Periods Ended June 30,                            Six-Month Periods Ended June 30,
                                            Net Boe's                      Percentage                    Net Boe's                     Percentage
                                    2008                  2007               Change              2008                 2007               Change
China:
Dagang                              111,662               110,680                 1 %            231,490              231,356                 0 %
Daqing                                4,845                 5,257                -8 %              9,988               10,897                -8 %

                                    116,507               115,937                 0 %            241,478              242,253                 0 %

U.S.:
South Midway                         52,020                44,195                18 %             95,697               95,968                 0 %
Spraberry                             3,215                 5,345               -40 %              7,724               10,038               -23 %
Others                                  352                   474               -26 %                767                  853               -10 %

                                     55,587                50,014                11 %            104,188              106,859                -2 %


                                    172,094               165,951                 4 %            345,666              349,112                -1 %

Net production volumes for the three-month period ended June 30, 2008 increased 4% when compared to the same period in 2007 mainly due to an increase in production volumes in our U.S. properties of 11%, resulting in increased revenues of $0.3 million. Production volumes for the six-month period ended June 30, 2008 decreased 1% when compared to the same period in 2007 which resulted in decreased revenues of $0.2 million.
Oil and gas prices increased 77%, and 72%, per Boe for the three-month and six-month periods ended June 30, 2008 generating $7.9 million, and $13.8 million, in additional revenue as compared to the same periods in 2007. We realized an average of $100.82, and 93.74, per Boe from operations in China during these periods, which were increases of $40.53, and 36.47, per Boe from 2007 prices and accounted for $4.7 million, and $8.8 million, of our increase in revenues. From the U.S. operations, we realized an average of $112.12, and $99.69, per Boe during these periods, which were increases of $56.16, and $48.13, per Boe and accounted for $3.2 million, and $5.0 million, of our increased revenues. We expect crude oil prices and natural gas prices to remain volatile throughout 2008.
The increased revenues from oil and gas price increases during the three-month and six-month periods ended June 30, 2008 were offset by settlements from our costless collar derivative instruments. As benchmark prices rise above the ceiling price established in the contract the Company is required to settle monthly (see further details on these contracts below under "Unrealized Loss on Derivative Instruments"). The Company realized a net loss on these settlements during these periods of $4.4 million and $6.3 million, $2.2 million, and $3.4 million, of which were from the U.S. segment, with the balance from the China segment. This compares to a minimal loss, and a $0.2 million net realized gain, in the same periods in 2007 for our U.S. contracts.
For the three-month and six-month periods ended June 30, 2008, operating costs, including production taxes and engineering and support costs, increased 51%, and 53%, per Boe compared to the same periods in 2007. Of the total $2.4 million, . . .