--  On October 27, 2011, WesternZagros's operations celebrated having worked
    one full year without a recordable injury incident. To this date, over
    1.2 million hours of work have been performed safely. The dedication to
    safety demonstrated by all of the Company's employees and contractors
    has produced a work safety culture ranked as world class.
--  WesternZagros continues to integrate health, safety, environmental and
    security matters into its business decisions and remains committed to
    playing a leadership role in this regard. Positive safety results
    indicate that the Company is on the right track.
--  WesternZagros has achieved a total of 387 days without any Lost Time
    Incidents ("LTIs") to November 17, 2011.

--  On October 18, 2011, first oil production from the Sarqala-1 extended
    well test was achieved. Production started at approximately 2,000
    barrels of oil per day ("bopd") and is anticipated to increase towards
    5,000 bopd by 2011 year end. The Sarqala-1 well initially tested 40
    degree API crude oil at rates of over 9,000 bopd at a wellhead pressure
    of approximately 2,400 pounds per square inch. The well was not
    stimulated and is expected to continue to clean up and increase
    production capability during the extended well test.
--  On October 27, 2011, WesternZagros sold its first oil produced from
    Sarqala-1 into the domestic market. To date, for the sales into the
    domestic market, WesternZagros has executed two sales contracts for
    total delivery of approximately 66,500 barrels of oil priced in the
    range of $50 to $60 per barrel, and under the terms of these sales
    contracts WesternZagros received payments totaling $3.8 million in
    advance of delivery for these sales. Deliveries under these sales
    agreements to November 17, 2011 have totaled approximately 47,000
    barrels of oil.

--  Mil Qasim-1, the Company's third exploration well, commenced drilling
    operations on August 29, 2011, on the Garmian Block in the Kurdistan
    Region of Iraq. After successfully setting the 13-5/8"casing at 1,615
    metres in Mil Qasim-1, WesternZagros has drilled into the Upper Fars
    interval and has encountered over 88 metres of sands in the Upper Fars
    and had hydrocarbon shows, both oil and gas, while drilling.
    WesternZagros has completed logging these initial sands in the Upper
    Fars, set the 9-5/8" casing at 2,128 metres and is preparing to complete
    drilling to the estimated total depth of Mil Qasim-1 of 2,400 metres.
    Once total depth is reached, WesternZagros plans to conduct a testing
    program of the Upper Fars interval.
--  The Kurdamir-2 exploration well commenced drilling operations on October
    25, 2011, and is anticipated to be completed by June 2012. The well is
    being drilled on the flank of the Kurdamir structure approximately two
    kilometres from the Company's Kurdamir-1 discovery well and the well
    will target the Oligocene, Eocene and Cretaceous reservoirs. Talisman is
    the operator of the Kurdamir-2 well. To date Kurdamir-2 has been drilled
    to a depth of approximately 700 metres, where the first intermediate
    string of casing has been set. WesternZagros anticipates that the
    drilling and testing of the first reservoir, the Oligocene reservoir,
    will occur in the first quarter of 2012, with the deeper reservoirs, the
    Eocene and Cretaceous reservoirs, expected to be drilled and tested by
    the end of the second quarter of 2012.

--  In the third quarter of 2011, Sproule International Limited ("Sproule")
    completed an independent audit of the Company's contingent and
    prospective resource estimates for the Jeribe/Upper Dhiban reservoir
    interval at Sarqala-1. As at September 7, 2011, the Company estimates
    gross unrisked contingent oil resources for this interval of 9 MMbbl
    (low estimate), 21 MMbbl (best estimate), 44 MMbbl (high estimate) and
    24 MMbbl (mean estimate). Contingent resources were assigned over a 66
    metre gross pay zone from the top of the Sarqala reservoir down to 3,485
    metres as determined by wireline logs and production testing. This
    contingent resource number does not include the significant prospective
    resource potential on the flanks of the Sarqala structure deeper than
    the lowest known oil at 3,485 metres, nor the potential of an extension
    of this reservoir interval on the southwest flank of the structure. The
    gross unrisked prospective resources in the Sarqala structure deeper
    than the lowest know oil at 3,485 metres are 17 MMbbl (low estimate), 49
    MMbbl (best estimate), 125 MMbbl (high estimate) and 63 MMbbl (mean
    estimate). The gross unrisked prospective resources in the potential
    extension of the Jeribe reservoir on the southwest flank of structure
    are 14 MMbbl (low estimate), 87 MMbbl (best estimate), 304 MMbbl (high
    estimate) and 135 MMbbl (mean estimate). These estimated resources are
    in addition to the Company's prior audited estimates of prospective
    resources for the deeper reservoirs at Sarqala and the prior audited
    estimates of contingent resources and prospective resources for the
    Company's other prospects on the PSC Lands, including Mil Qasim and
    Kurdamir.
--  In the third quarter of 2011, Sproule completed a further independent
    audit of the Company's resource assessments on the PSC Lands. The audit
    included prospects identified on the Garmian Block with Jeribe, Mio-
    Oligocene, Shiranish and Eocene reservoirs (Tilako, Zardi, Segrdan,
    Chwar, Alyan) and two Upper Fars plays (Fault Trap Play, Bawanoor
    Saddle). As at July 19, 2011, the combined mean estimate of gross
    unrisked prospective resources for these prospects was 1,099 million
    barrels of oil or 1,798 million barrels of oil equivalent when gas and
    condensate prospective resources are included.
--  With the completion of these additional assessments, the combined mean
    estimate of prospective resources on the Company's two contract areas in
    Kurdistan is 2.3 billion barrels of oil, or 3.7 billion barrels of oil
    equivalent. Further details on these resource assessments can be found
    in the material change reports of the Company dated September 14, 2011
    and July 19, 2011.
--  WesternZagros continues to compile seismic data and information from
    wells adjacent to its PSC Lands to integrate with its existing large
    technical database and aid further in the definition and upgrade of its
    prospects and leads inventory. Talisman is expected to complete its
    Topkhana-1 well, which is located on the neighbouring Topkhana Block
    that is currently held by Talisman and the KRG, in the fourth quarter of
    2011 and has tested the Oligocene reservoir in the prospect, though
    details of the results are not known. The Topkhana well results will
    impact the interpretation of the Kurdamir-Topkhana megastructure trap
    and the attractiveness of drilling offsetting prospects on the Garmian
    Block, notably Qulijan.

--  As at September 30, 2011, WesternZagros had $20.4 million in working
    capital.
--  On October 25, 2011, WesternZagros closed a strategic investment with
    the Abu Dhabi National Energy Company PJSC ("TAQA") whereby TAQA
    purchased from WesternZagros, through a private placement, 74 million
    common shares of the Company at a price of Cdn$0.63 per share for gross
    proceeds of Cdn$46,620,000. TAQA now holds approximately 19.9 percent of
    the Company's issued and outstanding common shares. The proceeds from
    the private placement will be used towards WesternZagros's 2011/2012
    capital and operating program.
--  For the nine months ended September 30, 2011, WesternZagros's share of
    capital expenditures, associated with its Garmian and Kurdamir PSC
    activities and other capitalized costs was $58.5 million (net of
    disposals and prior to the impact of changes in non-cash investing
    capital). Year-to-date expenditures for 2011 included $42.3 million of
    drilling-related costs; $1.8 million for appraisal activities; $1.5
    million of geological and geosciences related work; $4.0 million of
    supervision and field office costs; $1.5 million of PSC-related
    expenditures; and $7.4 million for corporate related activities. These
    expenditures reflect the requirement that WesternZagros currently fund
    100 percent of the activities on the Garmian Block, with the Company to
    recover the third party participant's share of these costs when the KRG
    assigns the remaining interest in the Garmian Block.

--  WesternZagros has concluded its insurance claim for a total of $45
    million relating to the Kurdamir-1 well. The final proceeds of $4.4
    million were received during the third quarter of 2011. The Company and
    its insurers have also renewed the Company's insurance policy for the
    drilling of the Kurdamir-2 well. The terms of the policy include an
    increase in the net aggregate limit from $45 million to $75 million.

--  On October 27, 2011, David Cook, TAQA Executive Officer and Head of
    Oil and Gas, was appointed to the WesternZagros Board of Directors. Mr.
    Cook has in excess of 20 years of experience in the upstream oil and gas
    sector through a variety of global technical, commercial and managerial
    positions based from the United States, United Kingdom, and Russia, as
    well as board directorships.

--  Although the Iraq federal laws have yet to be enacted to address the
    future organization of Iraq's petroleum industry or the sharing of
    petroleum and other revenues within Iraq, in February 2011 an interim
    agreement was reached between the KRG and the federal government of Iraq
    with respect to the export and sale of crude oil from Kurdistan. The
    agreement is reported to provide 50 percent of the revenues from such
    sales to the KRG in order to reimburse the operators for costs
    associated with the producing fields. The KRG has confirmed receipt of
    two payments to date under this agreement, with the first payment
    received from the federal government equalling $243 million for
    production from February and March and distributed to the operators in
    June. The second payment to the KRG pursuant to this interim agreement
    occurred in the third quarter of 2011, with the KRG confirming it has
    received $207 million from the federal government for production from
    the second quarter of 2011. According to statements made by the KRG, a
    further approximate $1 billion is owing for the oil exported to date
    from Kurdistan.
--  The Parliament Oil and Energy Committee ("POEC") released a draft
    federal petroleum law in August 2011 that was based upon the 2007 draft
    federal petroleum law (the "2007 Draft Law") that was supported by the
    KRG and formed the basis for Kurdistan's Oil and Gas Law enacted in
    August 2007. The draft released by the POEC provided for greater
    involvement of the regions of Iraq in administering and issuing
    contracts related to oil and gas activities and was supported by both
    the KRG and the Kurdistan Alliance. The federal Council of Ministers, or
    Cabinet, subsequently released its draft of a federal petroleum law
    which centralized authority at the federal level and diminished the
    authority of the regions of Iraq. In October 2011, Iraqi Prime Minister
    Nuri Al-Maliki and Prime Minister Barham Salih, of the KRG, sidelined
    the two controversial oil and gas versions presented in August 2011 and
    agreed to, by the end of 2011, either amend the 2007 Draft Law, with
    agreement by all political factions, or adopt the 2007 Draft Law as is.

--  WesternZagros aspires to be an industry leader with respect to corporate
    social responsibility. The Company continues to focus on four key
    corporate social responsibility initiatives in the PSC Lands of
    Kurdistan, namely, local employment, water supply, education and health
    care. Activities in the third quarter of 2011 included:
    --  An ongoing Environmental Impact Assessment data collection
        process for the Garmian Block;
    --  Drilling and repairing water wells in several villages; digging 
        sumps, pits and irrigation channels in several rural communities
        that did not have any other reliable sources of drinking water;
        and completion of water projects in Qulijan Sarhad village and
        Shakal village;
    --  Commencement of a Community Health Awareness Program with doctors
        giving presentations on preventative measures in Hasira and Mil
        Qasim villages; and completion of major refurbishments to the
        medical clinic in Aziz Qadr village;
    --  Completion of approximately twenty earthworks projects in
        surrounding villages providing infrastructure for new-build
        housing, road/access improvement and sanitation upgrades;
        significant upgrading of roads to both Mil Qasim and Hasira
        villages;
    --  Refurbishment and upgrading of six primary schools in local
        villages; and ongoing purchasing and distribution of sports
        equipment throughout the Garmian region; and partnering with
        Heartland Alliance to facilitate 'mobile literary bus'
        educational visits to villages in Sarqala sub-district.

--  Local Garmian village personnel are being trained and promoted to
    positions within drilling crews and within the extended well testing
    operations;
--  Additional Garmian personnel trained and appointed as Health, Safety and
    Environment Technicians and Material & Logistics Supervisors; and
--  All Garmian local rig labourers and rig crew completed 'Rig Pass'
    training and certification.

----------------------------------------------------------------------------
                        Kurdamir PSC                Garmian PSC
----------------------------------------------------------------------------
First exploration
 sub-period
 (expires)              June 30, 2012               December 31, 2011
----------------------------------------------------------------------------
Exploration
 obligation                                         Mil Qasim-1 exploration
 (remaining)            Kurdamir-2                  well
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Second exploration
 sub-period             Additional two years        Additional two years
----------------------------------------------------------------------------
Exploration
 obligation             One appraisal well          One exploration well
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Other extensions        Six month extension         One year extension
----------------------------------------------------------------------------
Work commitments        One appraisal well          One exploration well
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Economic terms          Unchanged                   Unchanged
----------------------------------------------------------------------------
PSC payments            Additional Capacity
                        Building Support Payment    Additional Capacity
                        payable equal to 3% of      Building Support Payment
                        WesternZagros Profit        payable equal to 3% of
                        Oil. Continuation of        WesternZagros Profit
                        previous annual             Oil. Annual payments 50%
                        payments.                   of previous payments.
----------------------------------------------------------------------------
Operator                Talisman                    WesternZagros
----------------------------------------------------------------------------
Working interest        WesternZagros 40%           WesternZagros 40%
                        Talisman 40%                Unassigned TPPI 40%(ii)
                        KRG 20% (i)                 KRG 20% (i)
----------------------------------------------------------------------------
Contract area           340 km2                     1,780 km2
----------------------------------------------------------------------------

                                 For the Years Ending December 31,
                        2011      2012      2013      2014   2015+     Total
----------------------------------------------------------------------------
Exploration         $  1,437         -         -         -       -  $  1,437
Office              $    162  $    602  $    559  $    456       -  $  1,779
----------------------------------------------------------------------------
                    $  1,599  $    602  $    559  $    456       -  $  3,216
----------------------------------------------------------------------------
----------------------------------------------------------------------------

--  Continuation of the Sarqala-1 extended well test and sale of the related
    production;
--  The expected timing for exploration results from Mil Qasim-1 and
    Kurdamir-2;
--  The expected timing for appraisal activities at Sarqala and future
    exploration activities, including the 3D seismic program, the drilling
    of Sarqala-2 and the drilling of Hasira-1;
--  The ability to export oil and natural gas from the Kurdistan Region of
    Iraq in accordance with the economic terms under the PSCs likely
    following the promulgation of the new Federal Petroleum Law of Iraq; and
--  The current conditions in the financial markets, including the potential
    for further market instability.

----------------------------------------------------------------------------
(US$ thousands, unless otherwise
 specified)                                        Three Month Periods Ended
----------------------------------------------------------------------------
                                       Sept 30    Jun 30    Mar 31    Dec 31
                                          2011      2011      2011      2010
----------------------------------------------------------------------------
Total Revenue                               16        34        17        13
----------------------------------------------------------------------------
Net Loss                                 2,013     1,416     1,480     2,003
----------------------------------------------------------------------------
Net Loss Per Share (US$ Per Share)
(Basic and Fully Diluted)                0.007     0.005     0.006     0.010
----------------------------------------------------------------------------
Capital Expenditures, net of
 disposals                              24,649    18,420    15,494    17,283
----------------------------------------------------------------------------
Total Assets                           275,078   272,650   271,720   240,290
----------------------------------------------------------------------------
Total Non-Current Liabilities            1,417       864       816       649
----------------------------------------------------------------------------
Dividend (US$ per Share)                   Nil       Nil       Nil       Nil
----------------------------------------------------------------------------

----------------------------------------------------------------------------
                                                   Three Month Periods Ended
----------------------------------------------------------------------------
                                       Sept 30    Jun 30    Mar 31    Dec 31
                                          2010      2010      2010      2009
----------------------------------------------------------------------------
Total Revenue                               38        17        19        32
----------------------------------------------------------------------------
Net Loss                                   819     1,646     1,333     1,035
----------------------------------------------------------------------------
Net Loss Per Share (US$ Per Share)
(Basic and Fully Diluted)                0.004     0.008     0.006     0.005
----------------------------------------------------------------------------
Capital Expenditures                    20,455    15,962    13,153    11,250
----------------------------------------------------------------------------
Total Assets                           233,770   235,295   235,514   241,077
----------------------------------------------------------------------------
Total Non-Current Liabilities              665       624       573       175
----------------------------------------------------------------------------
Dividend (US$ per Share)                   Nil       Nil       Nil       Nil
----------------------------------------------------------------------------

--  Balance Sheets as at January 1, 2010, September 30, 2010 and December
    31, 2010;
--  Statements of Comprehensive Loss for the three and nine month ended
    September 30, 2010 as well as for the year ended December 31, 2010; and
--  Statements of Cash Flows for the three and nine months ended September
    30, 2010 as well as for the year ended December 31, 2010.

                                                      December      January
                                        September     31, 2010      1, 2010
                                 Note    30, 2011     (Note 24)    (Note 24)
----------------------------------------------------------------------------

Assets
Current assets
 Cash and cash equivalents          7  $   35,162   $   31,482   $   76,708
 Trade and other receivables        8         284        8,648        6,880
 Insurance recoveries
  receivable                                    -       17,597            -
 Deposits held in trust            11           -          420            -
 Prepaid expenses                             237           39          183
 Income tax recoverable            12       1,847          887        1,738
----------------------------------------------------------------------------
 Total current assets                      37,530       59,073       85,509

Non-current assets
 Deposits held in trust            11           -            -          420
 Property, plant and equipment     10         110          261          814
 Exploration and evaluation
  expenditures                      9     237,347      180,770      154,097
 Deferred tax assets               12          91          186          371
----------------------------------------------------------------------------
 Total non-current assets                 237,548      181,217      155,702
----------------------------------------------------------------------------
Total assets                           $  275,078   $  240,290   $  241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current liabilities
 Trade and other payables          13  $   17,176   $   21,525   $   18,297
----------------------------------------------------------------------------
 Total current liabilities                 17,176       21,525       18,297

Non-current liabilities
 Provision for decommissioning
  obligations                      14       1,250          509          432
 Deferred tax liabilities          12         167          140          134
----------------------------------------------------------------------------
 Total non-current liabilities              1,417          649          566
----------------------------------------------------------------------------
Total liabilities                          18,593       22,174       18,863
----------------------------------------------------------------------------

Equity
Share capital                      15     295,784      253,583      253,583
 Contributed surplus               16      12,300       11,223        9,654
 Deficit                                  (51,599)     (46,690)     (40,889)
----------------------------------------------------------------------------
 Total equity                             256,485      218,116      222,348
----------------------------------------------------------------------------
Total equity and liabilities           $  275,078   $  240,290   $  241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and contingencies (Note 22)
Subsequent events (Note 23)

                                   Three months ended     Nine months ended
                                         September 30,         September 30,
                            Note      2011       2010       2011       2010
----------------------------------------------------------------------------
Other Income
 Other Income

                                  $     16   $     38   $     67   $     74
Expenses
 General and
  administrative expenses 17, 18     1,958        929      5,601      4,175
 Depreciation                           50        132        151        443
 Accretion                    14         5          4         17         12
 Foreign exchange
  (gain)loss                           259       (140)       330        105
----------------------------------------------------------------------------
 Total expenses                      2,272        925      6,099      4,735
----------------------------------------------------------------------------

Loss before taxation                 2,256        887      6,032      4,661

Taxation
 Current                      12      (327)      (111)    (1,244)    (1,014)
 Deferred                     12        84         43        121        151
----------------------------------------------------------------------------
 Total taxation (recovery)            (243)       (68)    (1,123)      (863)
----------------------------------------------------------------------------

Total loss and
 comprehensive loss for
 the period attributable
 to the shareholders              $  2,013   $    819   $  4,909   $  3,798
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net loss per share
- basic and diluted           19  $  0.007   $  0.004   $  0.018   $  0.018
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                               Number of
                                   Note           shares      Share capital
----------------------------------------------------------------------------

Balance January 1, 2010              24      207,464,320      $     253,583
 Share based payments                                  -                  -
 Loss for the period                                   -                  -
----------------------------------------------------------------------------
Balance September 30, 2010           24      207,464,320            253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 Share based payments                                  -                  -
 Loss for the period                                   -                  -
----------------------------------------------------------------------------
Balance December 31, 2010            24      207,464,320            253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 Issuance of common shares                    89,665,352             44,227
 Options exercised                   16           79,800                 64
 Share issuance costs                                  -             (2,090)
 Share based payments            16, 17                -                  -
 Loss for the period                                   -                  -
----------------------------------------------------------------------------
Balance September 30, 2011                   297,209,472      $     295,784
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                  Contributed    Accumulated
                                      surplus        deficit   Total equity
----------------------------------------------------------------------------

Balance January 1, 2010           $     9,654    $   (40,889)   $   222,348
 Share based payments                     544              -            544
 Loss for the period                        -         (3,798)        (3,798)
----------------------------------------------------------------------------
Balance September 30, 2010             10,198        (44,687)       219,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 Share based payments                   1,025              -          1,025
 Loss for the period                        -         (2,003)        (2,003)
----------------------------------------------------------------------------
Balance December 31, 2010              11,223        (46,690)       218,116
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 Issuance of common shares                  -              -         44,227
 Options exercised                        (21)                           43
 Share issuance costs                       -              -         (2,090)
 Share based payments                   1,098              -          1,098
 Loss for the period                        -         (4,909)        (4,909)
----------------------------------------------------------------------------
Balance September 30, 2011        $    12,300        (51,599)   $   256,485
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                   Three months ended     Nine months ended
                                        September 30,         September 30,
                            Note      2011       2010       2011       2010
----------------------------------------------------------------------------

Cash flow from operating
 activities
Net loss before taxation          $ (2,256)  $   (887)  $ (6,032)  $ (4,661)
 Adjustments for
  Depreciation                          50        132        151        443
  Accretion                   14         5          4         17         12
  Share based payments    16, 17       197        106        635        593
 Income taxes recovered                283          -        283        598
 Change in non-cash
  operating working
  capital                     21     1,516        402       (182)       143
----------------------------------------------------------------------------
Net cash from (used in)
 operating activities                 (205)      (243)    (5,128)    (2,872)
----------------------------------------------------------------------------

Cash flow from investing
 activities
 Expenditures on
  exploration and
  evaluation                  21   (19,731)   (23,710)   (54,481)   (59,400)
 Disposals of assets                     2          -        463          -
 Insurance recoveries                4,446     10,284     20,646     15,664
----------------------------------------------------------------------------
Net cash from (used in)
 investing activities              (15,283)   (13,426)   (33,372)   (43,736)
----------------------------------------------------------------------------

Cash flow from financing
 activities
 Issuance of common
  shares, net of costs                 (56)         -     42,137          -
 Proceeds from options
  exercised                             38          -         43          -
----------------------------------------------------------------------------
Net cash from (used in)
 financing activities                  (18)         -     42,180          -
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Change in cash and cash
 equivalents                       (15,506)   (13,669)     3,680    (46,608)
----------------------------------------------------------------------------

Cash and cash equivalents,
 beginning of period                50,668     43,769     31,482     76,708

----------------------------------------------------------------------------
Cash and cash equivalents,
 end of period                    $ 35,162   $ 30,100   $ 35,162   $ 30,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Wholly-owned subsidiary                   Jurisdiction  Nature of operations
----------------------------------------------------------------------------

WesternZagros Resources Inc.                    Canada       Holding Company
Western Oil International Holdings Limited      Cyprus       Holding Company
WesternZagros (Garmian) Limited                 Cyprus       Holding Company
WesternZagros Limited                           Cyprus   Exploration Company

Furniture, fixtures and office equipment           20-33%
Computer hardware and software                     33-50%

As at                                 September 30, 2011   December 31, 2010
----------------------------------------------------------------------------
Cash and cash equivalents                     $   35,162          $   31,482
Trade and other receivables                          284               8,648
Insurance recoveries receivable                        -              17,597
Deposits held in trust                                 -                 420
----------------------------------------------------------------------------
Total                                         $   35,446          $   58,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------

i.  Ensure adequate levels of available cash and cash equivalents to meet
    the Company's commitments under the Garmian and Kurdamir PSCs (also
    refer to Note 22 "Commitments and contingencies"); and
ii. To prudently fund expenditures related to the acquisition of properties,
    and for exploration, appraisal and development of crude oil and natural
    gas properties.

                   September 30, 2011   December 31, 2010    January 1, 2010
----------------------------------------------------------------------------
Bank balances            $      3,064         $     3,613        $     6,609
Term deposits                  32,098              27,869             70,099
----------------------------------------------------------------------------
Cash and cash
 equivalents             $     35,162         $    31,482        $    76,708
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                 September 30,   December 31,     January 1,
Current                                   2011           2010           2010
----------------------------------------------------------------------------
Joint venture receivables          $         -    $     7,675     $    6,636
Other receivables                          284            973             53
Loan receivable from related
 party                                       -              -            191
----------------------------------------------------------------------------
Total trade and other
 receivables                       $       284    $     8,648     $    6,880
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                 September 30,    December 31,    January 1,
As at                                     2011            2010          2010
----------------------------------------------------------------------------
Costs                               $  237,347      $  180,770    $  154,097
Accumulated impairment                       -               -             -
----------------------------------------------------------------------------
Net book value                      $  237,347      $  180,770    $  154,097
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                     Nine months ended   Twelve months ended
                                    September 30, 2011     December 31, 2010
----------------------------------------------------------------------------
Opening net book value                 $       180,770       $       154,097
Additions, net of insurance
 recoveries                                     57,040                26,673
Disposals                                         (463)                    -
Impairment                                           -                     -
----------------------------------------------------------------------------
Closing net book value                 $       237,347       $       180,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                September 30,   December 31,     January 1,
As at                                    2011           2010           2010
----------------------------------------------------------------------------
Costs                             $     1,830    $     1,830    $     1,830
Accumulated impairment                      -              -              -
Accumulated depreciation               (1,720)        (1,569)        (1,016)
----------------------------------------------------------------------------
Net book value                    $       110    $       261    $       814
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                    Nine months ended   Twelve months ended
Period ended                       September 30, 2011     December 31, 2010
----------------------------------------------------------------------------
Opening net book value                     $      261            $      814
Additions                                           -                     -
Impairment                                          -                     -
Depreciation                                     (151)                 (553)
----------------------------------------------------------------------------
Closing net book value                     $      110            $      261
----------------------------------------------------------------------------
----------------------------------------------------------------------------

For the nine months ended September 30                    2011         2010
----------------------------------------------------------------------------
Current income tax recovery                        $    (1,244)  $   (1,014)
Future income tax expense (recovery)                       121          151
----------------------------------------------------------------------------
Income tax expense (recovery)                      $    (1,123)  $     (863)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                  September 30,   December 31,   January 1,
Deferred income tax asset as at            2011           2010         2010
----------------------------------------------------------------------------
 Share issue costs                    $      82      $     204    $     408
 Temporary differences on
  property, plant and equipment               9            (18)         (37)
----------------------------------------------------------------------------
 Total deferred income tax asset      $      91      $     186    $     371
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The deferred income tax liability is comprised of:

Deferred income tax liability as  September 30,   December 31,   January 1,
 at                                        2011           2010         2010
----------------------------------------------------------------------------
 Temporary differences on
  property, plant and equipment            $167           $140         $161
 Non-capital loss carryforwards               -              -          (27)
----------------------------------------------------------------------------
 Total deferred income tax
  liability                           $     167      $     140    $     134
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Current                            September 30,   December 31,   January 1,
                                            2011           2010         2010
----------------------------------------------------------------------------
Trade payables                         $     370      $   4,052    $   6,705
Accruals                                  16,806         17,473       11,592
----------------------------------------------------------------------------
Total trade and other payables         $  17,176      $  21,525    $  18,297
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                      Nine months ended  Twelve months ended
                                     September 30, 2011    December 31, 2010
----------------------------------------------------------------------------
Balance, beginning of period                        509                  432
Additional obligations incurred             $       662          $         -
Changes in estimates or timing of
 cash flows                                          62                   61
Accretion                                            17                   16
----------------------------------------------------------------------------
Balance, end of period                      $     1,250          $       509
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                                                   Weighted
For the year ended December 31, 2010                                average
                                                                   exercise
                                           Number of options    price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of year                    13,007,334    $      1.50
Granted                                            9,764,900           0.49
Exercised                                                  -              -
Forfeited and expired                             (2,417,334)          1.67
----------------------------------------------------------------------------
Outstanding, end of year                          20,354,900    $      1.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Exercisable at December 31, 2010                  12,143,965          $1.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                                                   Weighted
For the three months ended September 30,                            average
 2011                                                              exercise
                                           Number of Options    price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of period                  19,585,033    $      0.97
Granted                                              535,000           0.55
Exercised                                            (70,600)          0.51
Forfeited and expired                             (1,192,066)          0.85
----------------------------------------------------------------------------
Outstanding, end of period                        18,857,367    $      0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                                                   Weighted
For the nine months ended September 30,                             average
 2011                                                              exercise
                                           Number of Options    price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of period                  20,354,900    $      1.00
Granted                                              582,000           0.56
Exercised                                            (79,800)          0.51
Forfeited and expired                             (1,999,733)          1.17
----------------------------------------------------------------------------
Outstanding, end of period                        18,857,367    $      0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Exercisable at September 30, 2011                 10,727,898    $      1.31
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
                                    Nine months ended   Twelve months ended
                                   September 30, 2011     December 31, 2010
----------------------------------------------------------------------------
Weighted average fair value of
 stock options granted                 $         0.37       $          0.29
Average Risk Free Interest Rate        $         1.16%                 1.62%
Expected Life                                 3 years           2 - 3 years
Average Expected Volatility                       108%                  120%
Dividend Per Share                                Nil                   Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------

For the nine months ended September 30                   2011          2010
----------------------------------------------------------------------------
Staff expenses                                      $   4,379     $   3,492
Share-based payments                                      635           593
Travel expenses                                           725           337
Professional fees                                         924           924
Office costs                                              823           820
Regulatory and corporate project costs                    414           538
Other administrative expenses                             370           314
Less capitalized general and administrative costs
                                                       (2,669)       (2,843)
----------------------------------------------------------------------------

Total administrative expenses                       $   5,601     $   4,175
----------------------------------------------------------------------------
----------------------------------------------------------------------------

For the nine months ended September 30                       2011       2010
----------------------------------------------------------------------------
Salaries and employee benefits                           $  1,335   $    945
Share-based compensation expense                              636        505
----------------------------------------------------------------------------
Total                                                    $  1,971   $  1,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                Three months ended        Nine months ended
                                     September 30,             September 30,
                                 2011         2010         2011         2010
----------------------------------------------------------------------------
Loss for the period        $    2,013   $      819   $    4,909   $    3,798
Weighted-average common
 shares (000's)               297,191      207,464      274,816      207,464
----------------------------------------------------------------------------
Loss per share (basic and
 diluted)                  $    0.007   $    0.004   $    0.018   $    0.018
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                               For the three months     For the nine months
                                ended September 30,     ended September 30,
                                   2011        2010        2011        2010
----------------------------------------------------------------------------

Expenditures on exploration
 and evaluation assets       $  (24,651) $  (20,455) $  (59,026) $  (49,570)
Change in non-cash investing
 working capital                  4,920      (3,255)      4,545      (9,830)
----------------------------------------------------------------------------
                             $  (19,731) $  (23,710) $  (54,481) $  (59,400)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                               For the three months     For the nine months
                                ended September 30,     ended September 30,
                                    2011       2010        2011        2010
----------------------------------------------------------------------------

Related to operating
 activities
 Trade and other receivables   $   1,294  $     232   $      16   $     185
 Prepaid expenses                    222        170        (198)        (42)
 Trade and other payables              -          -           -           -
----------------------------------------------------------------------------
                               $   1,516  $     402   $    (182)  $     143
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Related to investing
 activities
 Trade and other receivables   $   1,377  $    (908)  $   8,768   $  (4,045)
 Trade and other payables          3,543     (2,347)     (4,223)     (5,785)
----------------------------------------------------------------------------
                               $   4,920  $  (3,255)  $   4,545   $  (9,830)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
                   Original PSC        Amended PSC         New PSC
                   (Kalar-Bawanoor)    (Kurdamir)          (Garmian)
----------------------------------------------------------------------------
First              December 31, 2010   June 30, 2012       December 31, 2011
 Exploration
 Sub-Period
 (expires)
----------------------------------------------------------------------------
Exploration        Third Exploration   Kurdamir-2          Mil Qasim-1
 Obligation        Well                                    Exploration Well
 (remaining)
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Second             Additional Two      Additional Two      Additional Two
 Exploration       Years               Years               Years
 Sub-Period
----------------------------------------------------------------------------
Exploration        Two Exploration     One Appraisal       One Exploration
 Obligation        Wells               Well                Well
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Other Extensions   Two One Year        Six Month           One Year
                   Extensions          Extension           Extension
----------------------------------------------------------------------------
Economic Terms     10% Royalty Oil,    Unchanged           Unchanged
                   remainder
                   available for
                   Cost Recovery and
                   Profit Oil
----------------------------------------------------------------------------
PSC Payments       $ 5 Million         Additional          Additional
                   Signature Bonus     Capacity Building   Capacity Building
                   $40 Million         Support Payment     Support Payment
                   Capacity Building   payable equal to    payable equal to
                   Support Payment     3% of               3% of
                   $ 1.1 Million       WesternZagros       WesternZagros
                   Annual Payments     Profit Oil.         Profit Oil.
                                       Continuation of     Annual payments
                                       previous annual     50% of previous
                                       payments.           payments.
----------------------------------------------------------------------------
Operator           WesternZagros       Talisman            WesternZagros
----------------------------------------------------------------------------
Ownership          WesternZagros 40%   WesternZagros 40%   WesternZagros 40%
                   Talisman 40%        Talisman 40%        Unassigned TPPI
                   KRG 20% (i)         KRG 20% (i)         40%(ii)
                                                           KRG 20% (i)
----------------------------------------------------------------------------
Contract Area      2,120 km2           340 km2             1,780 km2
----------------------------------------------------------------------------

                                 For the Years Ending December 31,
                       2011      2012      2013      2014    2015+     Total
----------------------------------------------------------------------------
Exploration        $  1,437         -         -         -        -  $  1,437
Office             $    162  $    602  $    559  $    456        -  $  1,779
----------------------------------------------------------------------------
                   $  1,599  $    602  $    559  $    456        -  $  3,216
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                                   Effect of
                                    Canadian   transition to
                         Notes          GAAP            IFRS           IFRS
----------------------------------------------------------------------------
Assets
Current assets
 Cash and cash
  equivalents                      $  76,708       $       -      $  76,708
 Trade and other
  receivables                          6,880               -          6,880
 Prepaid expenses                        183               -            183
 Income tax recoverable                1,738               -          1,738
 Future income tax
  assets                     a           231            (231)             -
----------------------------------------------------------------------------
 Total current assets                 85,740            (231)        85,509

Non-current assets
 Property, plant and
  equipment                  b       154,911        (154,097)           814
 Exploration and
  evaluation
  expenditures               b             -         154,097        154,097
 Deposits held in trust                  420               -            420
 Deferred tax assets         a             6             365            371
----------------------------------------------------------------------------
 Total non-current
  assets                             155,337             365        155,702
----------------------------------------------------------------------------
Total assets                       $ 241,077       $     134      $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current liabilities
 Accounts payable and
  accrued liabilities              $  18,297       $       -      $  18,297
----------------------------------------------------------------------------
 Total current
  liabilities                         18,297               -         18,297

Non-current liabilities
 Provision for
  decommissioning
  obligations                c           175             257            432
 Deferred tax
  liabilities                a             -             134            134
----------------------------------------------------------------------------
 Total non-current
  liabilities                            175             391            566
----------------------------------------------------------------------------
Total liabilities                     18,472             391         18,863
----------------------------------------------------------------------------

Equity
Share capital                        253,583               -        253,583
 Contributed surplus         d         8,749             905          9,654
 Deficit                     e       (39,727)         (1,162)       (40,889)
----------------------------------------------------------------------------
 Total equity                        222,605            (257)       222,348
----------------------------------------------------------------------------
Total equity and
 liabilities                       $ 241,077       $     134      $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                                     Effect of
                                         Canadian   transition
                                Notes        GAAP      to IFRS         IFRS
----------------------------------------------------------------------------
Assets
Current assets
 Cash and cash equivalents             $   30,100   $        -   $   30,100
 Trade and other receivables               10,739            -       10,739
 Insurance recoveries
  receivable                        a      21,270      (20,108)       1,162
 Prepaid expenses                             225            -          225
 Income tax recoverable                     2,155            -        2,155
 Future income tax assets           b         127         (127)           -
----------------------------------------------------------------------------
 Total current assets                      64,616      (20,235)      44,381

Non-current assets
 Property, plant and equipment      c     169,519     (169,148)         371
 Exploration and evaluation
  expenditures                      c           -      188,373      188,373
 Deposits held in trust                       420            -          420
 Deferred income tax assets         b           -          225          225
----------------------------------------------------------------------------
 Total non-current assets                 169,939       19,450      189,389
----------------------------------------------------------------------------
Total assets                           $  234,555   $     (785)  $  233,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current liabilities
 Accounts payable and accrued
  liabilities                          $   14,011   $        -   $   14,011
----------------------------------------------------------------------------
 Total current liabilities                 14,011            -       14,011

Non-current liabilities
 Provision for decommissioning
  obligations                       d         186          339          525
 Deferred tax liabilities           b          42           98          140
----------------------------------------------------------------------------
 Total non-current liabilities                228          437          665
----------------------------------------------------------------------------
Total liabilities                          14,239          437       14,676
----------------------------------------------------------------------------

Equity
 Share capital                            253,583            -      253,583
 Contributed surplus                e      10,284          (86)      10,198
 Deficit                            f     (43,551)      (1,136)     (44,687)
----------------------------------------------------------------------------
 Total equity                             220,316       (1,222)     219,094
----------------------------------------------------------------------------
Total equity and liabilities           $  234,555   $     (785)  $  233,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------

a.  Upon transition to IFRS, an adjustment was required for the timing of
    recognition related to the insurance recoveries receivable. Under IFRS,
    receivables could only be recognized to the extent that they were
    "virtually certain" to be realized. Virtual certainty was defined as the
    point in time the adjuster approved the interim claims, rather than
    Management's estimate of the receivable as calculated under previous
    GAAP. The resulting adjustment as at Sept 30, 2010 was a decrease in the
    insurance recoveries receivable of $20.1 million. Note that the total
    insurance recoveries for year ended December 31, 2010 were unchanged.


b.  Reclassification of the current portion of future income tax assets
    recognized under previous GAAP to non-current assets in accordance with
    IAS 12, Income Taxes. Net effect is a decrease in current future income
    tax assets of $0.1 million. In addition, the presentation of net
    deferred tax assets and liabilities are based on a separate legal entity
    basis which resulted in a net increase of $0.2 million in deferred tax
    assets and an increase of $0.1 million in deferred tax liabilities. The
    net overall change to deferred taxes was NIL.


c.  Adjustments to property, plant and equipment as well as E&E expenditures
    were as follows:


    i.  E&E expenditures previously classified as property, plant and
        equipment under GAAP were reclassified in accordance with IFRS 1,
        First Time Adoption of IFRS. The Company utilized the IFRS 1
        exemption allowing entities following a full-cost approach under
        previous GAAP to recognize exploration and evaluation assets on a
        deemed cost basis upon transition to IFRS. In addition, E&E
        expenditures incurred during the nine months ended September 30,
        2010 were also reclassified in accordance with IFRS 6, Exploration
        for and Evaluation of Mineral Resources. The net effect was a
        decrease in property, plant and equipment of $169.1 million with an
        associated increase in E&E expenditures.
    ii. Certain corporate projects that were previously capitalized within
        the full cost pool as allowed under previous Canadian GAAP, but
        which were unrelated to the Company's PSC contract areas, have been
        expensed as part of General and administrative costs for the nine
        months ended September 30, 2010 after conversion to IFRS. The net
        effect was a decrease in E&E expenditures of $0.3 million.
    iii.Share-based payment amounts associated with employees that directly
        contribute to exploration and evaluation activities are recognized
        as part of E&E expenditures. Upon adoption of IFRS 2, Share Based
        Payments, the expense relating to options granted to those employees
        is recognized over the vesting period for each individual vesting
        tranche, as opposed to previous GAAP which recognized the expense on
        a straight-line basis over the total vesting period of the entire
        grant. The net effect of the change in the timing of recognition of
        share-based payments associated with those employees that directly
        contributed to exploration and evaluation activities during the nine
        months ended September 30, 2010 resulted in a decrease in E&E
        expenditures of $0.7 million.
    iv. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
        Contingent Assets, the provision for decommissioning obligations
        (previously referred to as "asset retirement obligation") is
        prospectively adjusted each period for any changes in the estimated
        future decommissioning expenditures or the timing of estimated
        future decommissioning expenditures. Changes to estimates during the
        nine months ended September 30, 2010 resulted in an overall increase
        in the provision for decommissioning obligations of $0.1 million.
        Accordingly, this resulted in a $0.1 million corresponding increase
        in E&E expenditures.
    v.  The corresponding impact of item (a) above related to the change in
        timing for recognition of insurance recoveries credits resulted in
        an increase of $20.1 million for E&E expenditures.
    vi. The total net impact of items (i) through (v) was an increase in
        exploration and evaluation assets of $188.4 million, including other
        minor adjustments of $0.1 million.


d.  Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
    Contingent Assets, the provision for decommissioning obligations
    (previously referred to as "asset retirement obligation") increased due
    to a change in the discount rate utilized for the present value
    calculation of these obligations upon conversion to IFRS. Under previous
    GAAP a credit adjusted risk-free rate was utilized, but under IFRS a
    non-credit adjusted risk-free rate is utilized in the valuation of the
    discounted cash flows associated with estimated future abandonment
    costs. In addition, during the nine months ended September 30, 2010, the
    provision for decommissioning obligations was also adjusted
    prospectively each period for changes in the estimated future
    decommissioning expenditures or the timing of estimated future
    decommissioning expenditures. The total net effect of these changes was
    an increase in the provision for decommissioning obligations of $0.3
    million.


e.  Upon adoption of IFRS 2, Share Based Payments, the expense relating to
    options granted to employees is recognized over the vesting period for
    each individual vesting tranche, as opposed to previous GAAP which
    recognized the expense on a straight-line basis over the total vesting
    period of the entire grant. Upon transition to IFRS this resulted in an
    accelerated recognition of the expense associated with share-based
    payments, but was also impacted by a reduction in expense associated
    with estimated forfeitures associated with unvested options which were
    not estimated under previous GAAP. The net effect at September 30, 2010
    was a decrease in contributed surplus of $0.1 million.


f.  The cumulative change in the accumulated deficit is summarized as
    follows:


    i.  Impact of increased provision for decommissioning obligation at
        January 1, 2010 was an increase in accumulated deficit of $0.3
        million.
    ii. Impact of increased contributed surplus related to share based
        payments at January 1, 2010 was an increase in accumulated deficit
        of $0.9 million.
    iii.Impact of expensing certain Corporate projects that had been
        capitalized under previous GAAP during the nine months ended
        September 30, 2010 was an increase in the accumulated deficit of
        $0.3 million.
    iv. Due to the timing difference between IFRS and previous GAAP for
        recognition of the expense associated with share-based payments as
        well as the impact of estimated forfeitures under IFRS for the nine
        months ended September 30, 2010, there was a decrease in the
        accumulated deficit of $0.3 million.
    v.  The total impact of items (i) through (iv) was an increase in the
        accumulated deficit of $1.1 million as at September 30, 2010,
        including other minor adjustments of $(0.1) million.

                                                     Effect of
                                         Canadian   transition
                                Notes        GAAP      to IFRS         IFRS
----------------------------------------------------------------------------
Assets
Current assets
 Cash and cash equivalents             $   31,482   $        -   $   31,482
 Trade and other receivables                8,648            -        8,648
 Insurance recoveries
  receivable                               17,597            -       17,597
 Deposits held in trust                       420            -          420
 Prepaid expenses                              39            -           39
 Income tax recoverable                       887            -          887
 Future income tax assets           a         102         (102)           -
----------------------------------------------------------------------------
 Total current assets                      59,175         (102)      59,073

Non-current assets
 Property, plant and equipment      b     182,056     (181,795)         261
 Exploration and evaluation
  expenditures                      b           -      180,770      180,770
 Future income tax assets           a           -          186          186
----------------------------------------------------------------------------
 Total non-current assets                 182,056         (839)     181,217
----------------------------------------------------------------------------
Total assets                           $  241,231   $     (941)  $  240,290
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current liabilities
 Accounts payable and accrued
  liabilities                          $   21,525   $        -   $   21,525
----------------------------------------------------------------------------
 Total current liabilities                 21,525            -       21,525

Non-current liabilities
 Provision for decommissioning
  obligations                       c         189          320          509
 Deferred tax liabilities                      56           84          140
----------------------------------------------------------------------------
 Total non-current liabilities                245          404          649
----------------------------------------------------------------------------
Total liabilities                          21,770          404       22,174
----------------------------------------------------------------------------

Equity
 Share capital                            253,583            -      253,583
 Contributed surplus                d      11,353         (130)      11,223
 Deficit                            e     (45,475)      (1,215)     (46,690)
----------------------------------------------------------------------------
 Total equity                             219,461       (1,345)     218,116
----------------------------------------------------------------------------
Total equity and liabilities           $  241,231   $     (941)  $  240,290
----------------------------------------------------------------------------
----------------------------------------------------------------------------

a.  Reclassification of the current portion of future income tax assets
    recognized under previous GAAP to non-current assets in accordance with
    IAS 12, Income Taxes. Net effect is a decrease in current future income
    tax assets of $0.1 million. In addition, the presentation of net
    deferred tax assets and liabilities are based on a separate legal entity
    basis which resulted in a net increase of $0.2 million in deferred tax
    assets and an increase of $0.1 million in deferred tax liabilities. The
    net overall change to deferred taxes was NIL.


b.  Adjustments to property, plant, and equipment as well as E&E
    expenditures were as follows:


    i.  E&E expenditures previously classified as property, plant and
        equipment under GAAP were reclassified in accordance with IFRS 1,
        First Time Adoption of IFRS. The Company utilized the IFRS 1
        exemption allowing entities following a full-cost approach under
        previous GAAP to recognize exploration and evaluation assets on a
        deemed cost basis upon transition to IFRS. In addition, E&E
        expenditures incurred during the year ended December 31, 2010 were
        also reclassified in accordance with IFRS 6, Exploration for and
        Evaluation of Mineral Resources. The net effect was a decrease in
        property, plant and equipment of $181.8 million and an associated
        increase in E&E expenditures of $181.8 million.
    ii. Certain corporate projects that were previously capitalized within
        the full cost pool as allowed under previous Canadian GAAP, but
        which were unrelated to the Company's PSC contract areas, have been
        expensed as part of General and administrative costs for the year
        ended December 31, 2010. The net effect was a decrease in E&E
        expenditures of $0.3 million.
    iii.Share-based payment amounts associated with employees that directly
        contribute to exploration and evaluation activities are recognized
        as part of intangible E&E expenditures. Upon adoption of IFRS 2,
        Share Based Payments, the expense relating to options granted to
        those employees is recognized over the vesting period for each
        individual vesting tranche, as opposed to previous GAAP which
        recognized the expense on a straight-line basis over the total
        vesting period of the entire grant. The net effect of the change in
        the timing of recognition of share-based payments associated with
        those employees that directly contributed to exploration and
        evaluation activities during the year ended December 31, 2010
        resulted in a decrease in E&E expenditures of $0.8 million.
    iv. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
        Contingent Assets, the provision for decommissioning obligations
        (previously referred to as "asset retirement obligation") is
        prospectively adjusted each period for changes in the estimated
        future decommissioning expenditures or the timing of estimated
        future decommissioning expenditures. Changes to estimates during the
        year ended December 31, 2010 resulted in an overall increase in the
        provision for decommissioning obligations of $0.1 million. The net
        effect was a corresponding increase in E&E expenditures of $0.1
        million.
    v.  The total net impact of items (i) through (iv) was an increase in
        exploration and evaluation assets of $180.8 million.


c.  Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
    Contingent Assets, the provision for decommissioning obligations
    (previously referred to as "asset retirement obligation") increased due
    to a change in the discount rate utilized for the present value
    calculation of these obligations upon conversion to IFRS. Under previous
    GAAP a credit adjusted risk-free rate was utilized, but under IFRS a
    non-credit adjusted risk-free rate is utilized in the valuation of the
    discounted cash flows associated with estimated future abandonment
    costs. In addition, during the year ended December 31, 2010, the
    provision for decommissioning obligations was also adjusted
    prospectively each period for changes in the estimated future
    decommissioning expenditures or the timing of estimated future
    decommissioning expenditures. The total net effect of these changes was
    an increase in the provision for decommissioning obligations of $0.3
    million.


d.  Upon adoption of IFRS 2, Share Based Payments, the expense relating to
    options granted to employees is recognized over the vesting period for
    each individual vesting tranche, as opposed to previous GAAP which
    recognized the expense on a straight-line basis over the total vesting
    period of the entire grant. Upon transition to IFRS this resulted in an
    accelerated recognition of the expense associated with share-based
    payments in prior periods and resulted in less expense recognition
    during 2010. In addition, the expense associated with share based
    payments was slightly reduced due to estimated forfeitures associated
    with unvested options that had not been estimated under previous GAAP.
    The net effect at December 31, 2010 was a reduction in contributed
    surplus of $0.1 million.


e.  The cumulative change in the accumulated deficit is summarized as
    follows:


    i.  Impact of increased provision for decommissioning obligation at
        January 1, 2010 was an increase in accumulated deficit of $0.3
        million.
    ii. Impact of increased contributed surplus related to share based
        payments at January 1, 2010 was an increase in accumulated deficit
        of $0.9 million.
    iii.Impact from expensed portion of share based payments during the year
        ended December 31, 2010 was a decrease in accumulated deficit of
        $0.3 million.
    iv. Impact from increased accretion expense associated with
        decommissioning liabilities for the year ended December 31, 2010 was
        NIL.
    v.  Impact of expensing certain Corporate projects that had been
        capitalized under previous GAAP during the year ended December 31,
        2010 was an increase in the accumulated deficit of $0.3 million.
    vi. The total impact of all of items (i) through (v) was an increase in
        the accumulated deficit of $1.2 million.

                                                     Effect of
                                         Canadian   transition
                                 Note        GAAP      to IFRS         IFRS
----------------------------------------------------------------------------

Revenue
----------------------------------------------------------------------------
 Interest income                        $      38    $       -    $      38
----------------------------------------------------------------------------

Expenses
 General and administrative
  expenses                          a       1,208         (279)         929
 Depreciation                                 132            -          132
 Accretion on decommissioning
  liabilities                                   4            -            4
 Foreign exchange loss                       (140)           -         (140)
----------------------------------------------------------------------------
 Total expenses                             1,204         (279)         925
----------------------------------------------------------------------------

Loss before taxation                        1,166         (279)         887

Taxation
 Current                                     (111)           -         (111)
 Deferred                                      43            -           43
----------------------------------------------------------------------------
 Total taxation (recovery)                    (68)           -          (68)
----------------------------------------------------------------------------

Comprehensive loss for the
 period attributable to
 shareholders                           $   1,098   $     (279)   $     819
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                                      Effect of
                                           Canadian  transition
                                    Note       GAAP     to IFRS        IFRS
----------------------------------------------------------------------------

Revenue
----------------------------------------------------------------------------
 Interest income                           $     74    $      -    $     74
----------------------------------------------------------------------------

Expenses
 General and administrative
  expenses                             a      4,202         (27)      4,175
 Depreciation                                   443           -         443
 Accretion on decommissioning
  liabilities                                    11           1          12
 Foreign exchange loss                          105           -         105
----------------------------------------------------------------------------
 Total expenses                               4,761         (26)      4,735
----------------------------------------------------------------------------

Loss before taxation                          4,687         (26)      4,661

Taxation
 Current                                     (1,014)          -      (1,014)
 Deferred                                       151           -         151
----------------------------------------------------------------------------
 Total taxation (recovery)                     (863)          -        (863)
----------------------------------------------------------------------------

Comprehensive loss for the period
 attributable to shareholders              $  3,824    $    (26)   $  3,798
----------------------------------------------------------------------------
----------------------------------------------------------------------------

a.  Adjustments to general and administrative expenses were comprised of the
    following:


    i.  Certain corporate projects that were previously capitalized within
        the full cost pool as allowed under previous Canadian GAAP, but
        which were unrelated to the Company's PSC contract areas, have been
        expensed as part of general and administrative costs for the nine
        months ended September 30, 2010 after conversion to IFRS. The net
        effect was an increase in general and administrative costs of $0.3
        million.
    ii. Due to the timing difference between IFRS and previous GAAP for
        recognition of the expense associated with share-based payments as
        well as the impact of estimated forfeitures under IFRS for the nine
        months ended September 30, 2011, there was a decrease in the general
        and administrative costs of $0.3 million.
    iii.The total impact of items (i) and (ii) was negligible.

                                                        Effect of
                                            Canadian   transition
                                     Note       GAAP      to IFRS      IFRS
----------------------------------------------------------------------------

Revenue
----------------------------------------------------------------------------
 Interest income                            $     87     $      -  $     87
----------------------------------------------------------------------------

Expenses
 General and administrative expenses    a      6,362           51     6,413
 Depreciation                                    553            -       553
 Accretion on decommissioning
  liabilities                                     14            2        16
 Foreign exchange loss                            62            -        62
----------------------------------------------------------------------------
 Total expenses                         a      6,991           53     7,044
----------------------------------------------------------------------------

Loss before taxation                           6,904           53     6,957

Taxation
 Current                                      (1,347)           -    (1,347)
 Deferred                                        191            -       191
----------------------------------------------------------------------------
 Total taxation (recovery)                    (1,156)           -    (1,156)
----------------------------------------------------------------------------

Comprehensive loss for the period
 attributable to shareholders                 $5,748          $53    $5,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------

a.  Adjustments to general and administrative expenses were as follows:


    i.  Certain corporate projects that were previously capitalized within
        the full cost pool as allowed under previous Canadian GAAP, but
        which were unrelated to the Company's PSC contract areas, have been
        expensed as part of general and administrative costs for the year
        ended December 31, 2010 after conversion to IFRS. The net effect was
        an increase in general and administrative costs of $0.3 million.
    ii. Share-based payment amounts associated with employees that do not
        directly contribute to exploration and evaluation activities are
        recognized as part of general and administrative expenses. Upon
        adoption of IFRS 2, Share Based Payments, the expense relating to
        options granted to those employees is recognized over the vesting
        period for each individual vesting tranche, as opposed to previous
        GAAP which recognized the expense on a straight-line basis over the
        total vesting period of the entire grant. The net effect of the
        change in the timing of recognition of share-based payments
        associated with employee's activities during the year ended December
        31, 2010 resulted in a decrease in general and administrative
        expenses of $0.3 million.
    iii.The total net impact of items (i) and (ii) was an increased net loss
        of $0.1 million, including a $2k adjustment to accretion.

                                                      Effect of
                                           Canadian  transition
                                    Note       GAAP     to IFRS        IFRS
----------------------------------------------------------------------------

Cash flow from operating activities
Net loss prior to taxation             a   $ (1,098)   $    211    $   (887)
 Adjustments for
 Depreciation                                   132           -         132
 Accretion on decommissioning
  liabilities                                     4           -           4
 Share based payments                           385        (279)        106
 Future income tax expense             b         42         (42)          -
 Change in non-cash working capital    c        292         110         402
----------------------------------------------------------------------------
Net cash from (used in) operating
 activities                                    (243)          -        (243)
----------------------------------------------------------------------------

Cash flow from investing activities
 Expenditure on exploration and
  evaluation assets                    d          -     (23,710)    (23,710)
 Expenditure on property, plant,
  and equipment                        e    (20,455)     20,455           -
 Insurance recoveries                        10,284           -      10,284
 Change in non-cash working capital    d     (3,255)      3,255           -
----------------------------------------------------------------------------
Net cash from (used in) investing
 activities                                 (13,426)          -     (13,426)
----------------------------------------------------------------------------

Cash flow from financing activities
 None                                             -           -           -
----------------------------------------------------------------------------
Net cash from (used in) financing
 activities                                       -           -           -
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Change in cash and cash equivalents         (13,669)          -     (13,669)
----------------------------------------------------------------------------

Cash and cash equivalents,
 beginning of period                         43,769           -      43,769

----------------------------------------------------------------------------
Cash and cash equivalents, end of
 period                                    $ 30,100           -    $ 30,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------

a.  Adjustments to net loss, which total to $0.2 million, were as follows:


    i.  Presentation of net loss under IFRS is prior to taxation expense.
        The net effect was an increased net loss prior to total taxation
        expense (current and deferred) of $0.1 million.
    ii. Decreased general and administrative expense for timing difference
        between IFRS and previous GAAP for recognition of the expense
        associated with share-based payments as well as the impact of
        estimated forfeitures under IFRS resulted in a decreased net loss of
        $0.3 million
    iii.Total net effect of items (i) through (ii) is a decreased net loss
        of $0.2 million.


b.  Presentation of net loss under IFRS is prior to taxation, accordingly
    there is no adjustment for future income tax expense, net effect was a
    reduction of the adjusting item to zero.


c.  Adjustment to change in non-cash working capital was due to the
    presentation of net loss under IFRS prior to taxation, as a result the
    change in current income tax recovery is removed from the change in non-
    cash working capital which results in an increase in the change in non-
    cash working capital for operating activities of $0.1 million.


d.  The net change in E&E expenditures is as follows:


    i.  Reclassification of expenditures on property, plant and equipment of
        $20.5 million.
    ii. Combine changes in non-cash investing working capital with E&E
        expenditures for proper presentation under IFRS, which reduces the
        change in non-cash working capital to NIL.
    iii.The net effect of items (i) through (ii) results in an increase in
        E&E expenditures of $23.7 million, including other minor adjustments
        of $0.1 million.


e.  Expenditures for property, plant and equipment were reclassified as E&E
    expenditures, net effect was a decrease of $20.5 million.

                                                      Effect of
                                           Canadian  transition
                                    Note       GAAP     to IFRS        IFRS
----------------------------------------------------------------------------

Cash flow from operating activities
Net loss prior to taxation             a  $  (3,824)  $    (837)  $  (4,661)
 Adjustments for
  Depreciation                                  443           -         443
  Accretion on decommissioning
   liabilities                                   11           1          12
  Share based payments                          880        (287)        593
 Income tax recovered (paid)           b          -         598         598
 Future income tax expense             c        151        (151)          -
 Change in non-cash working capital    d       (273)        416         143
----------------------------------------------------------------------------
Net cash from (used in) operating
 activities                                  (2,612)       (260)     (2,872)
----------------------------------------------------------------------------

Cash flow from investing activities
 Expenditure on exploration and
  evaluation assets                    e          -     (59,400)    (59,400)
 Expenditure on property, plant,
  and equipment                        f    (49,830)     49,830           -
 Insurance recoveries                        15,664           -      15,664
 Change in non-cash working capital    e     (9,830)      9,830           -
----------------------------------------------------------------------------
Net cash from (used in) investing
 activities                                 (43,996)        260     (43,736)
----------------------------------------------------------------------------

Cash flow from financing activities
 None                                             -           -           -
----------------------------------------------------------------------------
Net cash from (used in) financing
 activities                                       -           -           -
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Change in cash and cash equivalents         (46,608)          -     (46,608)
----------------------------------------------------------------------------

Cash and cash equivalents,
 beginning of period                         76,708           -      76,708

----------------------------------------------------------------------------
Cash and cash equivalents, end of
 period                                   $  30,100           -   $  30,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------

a.  Adjustments to net loss, which total to $(0.8) million, were as follows:


    i.  Presentation of net loss under IFRS is prior to taxation expense.
        The net effect was an increased net loss prior to total taxation
        expense (current and deferred) of $0.9 million.
    ii. Increased general and administrative expense for corporate projects
        previously capitalized under IFRS, the net effect was an increased
        net loss of $0.3 million.
    iii.Decreased general and administrative expense for timing difference
        between IFRS and previous GAAP for recognition of the expense
        associated with share-based payments as well as the impact of
        estimated forfeitures under IFRS resulted in a decreased net loss of
        $0.3 million
    iv. Total net effect of items (i) through (iii) is an increased net loss
        of $0.8 million, including other minor adjustments that reduced the
        net loss by $0.1 million.


b.  Increased $0.6 million due to presentation of actual taxes recovered
    under IFRS.


c.  Presentation of net loss under IFRS is prior to taxation, accordingly
    there is no adjustment for future income tax expense, net effect was a
    reduction of the adjusting item to zero.


d.  Adjustments to change in non-cash working capital were as follows:


    i.  Presentation of net loss under IFRS is prior to taxation, as a
        result the change in current income tax recovery is removed from the
        change in non-cash working capital which results in an increase in
        the change in non-cash working capital for operating activities of
        $1.0 million.
    ii. In addition, actual taxes recovered are reflected separately, which
        results in a $0.6 million decrease to the change in non-cash working
        capital for operating activities.
    iii.The net effect of items (i) and (ii) resulted in an increase in the
        net change for non-cash working capital items of $0.4 million.


e.  The net change in E&E expenditures is as follows:


    i.  Reclassification of expenditures on property, plant and equipment of
        $49.8 million.
    ii. Decrease in expenditures of $0.3 million for corporate projects
        previously capitalized under GAAP that were expensed as general and
        administrative expenses under IFRS.
    iii.Combine changes in non-cash investing working capital with E&E
        expenditures for proper presentation under IFRS, which reduces the
        change in non-cash working capital to NIL.
    iv. The net effect of items (i) through (iii) results in an increase in
        E&E expenditures of $59.4 million, including other minor adjustments
        of $0.1 million.


f.  Expenditures for property, plant and equipment were reclassified as E&E
    expenditures, net effect was a decrease of $49.8 million.

                                                     Effect of
                                         Canadian   transition
                                 Note        GAAP      to IFRS         IFRS
----------------------------------------------------------------------------

Cash flow from operating
 activities
Net loss prior to taxation          a   $  (5,748)   $  (1,209)   $  (6,957)
 Adjustments for
  Depreciation                                553            -          553
  Accretion on decommissioning
   liabilities                                 14            2           16
  Share based payments              b       1,568         (258)       1,310
 Income tax recovered (paid)        c           -        2,198        2,198
 Future income tax expense          d         191         (191)           -
 Change in non-cash working
  capital                           e         728         (851)        (123)
----------------------------------------------------------------------------
Net cash from (used in)
 operating activities                      (2,694)        (309)      (3,003)
----------------------------------------------------------------------------

Cash flow from investing
 activities
 Expenditure on exploration and
  evaluation assets                 f           -      (66,626)     (66,626)
 Expenditure on property, plant,
  and equipment                     g     (67,162)      67,162            -
 Insurance recoveries                      24,403            -       24,403
 Change in non-cash working
  capital                           f         227         (227)           -
----------------------------------------------------------------------------
Net cash from (used in)
 investing activities                     (42,532)         309      (42,223)
----------------------------------------------------------------------------

Cash flow from financing
 activities
 None                                           -            -            -
----------------------------------------------------------------------------
Net cash from (used in)
 financing activities                           -            -            -
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Change in cash and cash
 equivalents                              (45,226)           -      (45,226)
----------------------------------------------------------------------------

Cash and cash equivalents,
 beginning of period                       76,708            -       76,708

----------------------------------------------------------------------------
Cash and cash equivalents, end
 of period                              $  31,482            -    $  31,482
----------------------------------------------------------------------------
----------------------------------------------------------------------------

a.  Adjustments to net loss, which total to $(1.2 million), were as follows:


    i.  Presentation of net loss under IFRS is prior to total taxation
        (current and deferred). The net effect was an increased net loss
        prior to taxation of $1.2 million.
    ii. Decreased expense associated with share-based payments, net effect
        was a decreased net loss of $0.3 million.
    iii.Increased general and administrative expense for corporate projects
        previously capitalized under IFRS, the net effect was an increased
        net loss of $0.3 million.
    iv. Total net effect of items (i) through (iii) is an increased net loss
        of $1.2 million.


b.  Decreased expense relating to timing of recognition of share based
    payment under IFRS 2, net effect a decrease of $0.3 million.


c.  For proper presentation under, actual taxes recovered of $2.2 million
    are reflected directly in the cash flow statement.


d.  Presentation of net loss under IFRS is prior to taxation, accordingly
    there is no adjustment for future income tax expense, net effect was a
    reduction of the adjusting item to zero.


e.  Adjustments to change in non-cash working capital were as follows:


    i.  Presentation of net loss under IFRS is prior to taxation, as a
        result the change in current income tax recovery is removed from the
        change in non-cash working capital which results in an increase in
        the change in non-cash working capital for operating activities of
        $1.3 million.
    ii. In addition, actual taxes recovered are reflected separately, which
        results in a $2.2 million decrease to the change in non-cash working
        capital for operating activities.
    iii.The net effect of items (i) and (ii) resulted in a decrease in the
        net change for non-cash working capital items of $0.9 million.


f.  The net change in E&E expenditures is as follows:


    i.  Reclassification of expenditures on property, plant and equipment of
        $67.2 million.
    ii. Decrease in expenditures of $0.3 million for corporate projects
        previously capitalized under GAAP that were expensed as general and
        administrative expenses under IFRS.
    iii.Combine changes in non-cash investing working capital with E&E
        expenditures for proper presentation under IFRS, which reduces the
        change in non-cash working capital to NIL.
    iv. The net effect of items (i) through (iii) results in an increase in
        E&E expenditures of $66.6 million.


g.  Expenditures for property, plant and equipment were reclassified as E&E
    expenditures, net effect was a decrease of $67.2 million.

Falcon Oil & Gas, Ltd. (TSXV: FO) (the "Company", "Falcon") announced today that the full testing program has been successfully carried out on the Shenandoah-1 well in the Beetaloo Basin, Australia, with gas being produced from each of the shale intervals tested. Both Velkerri intervals are now considered candidates for future testing, including horizontal drilling with multiple stimulation treatments to establish commerciality, with the other intervals subject to further evaluation.

Shenandoah-1 is within the 100,000 acre area that is under the sole ownership of Falcon Oil & Gas Australia Ltd. and is not part of the acreage included in the joint venture with Hess Australia (Beetaloo) Pty. Ltd. ("Hess"), as described in the July 13, 2011 press release. Under the terms of that arrangement however, Hess will be provided copies of data obtained from the testing and completion, for which the Company will receive $2 million.

Testing Results

Shenandoah-1 is a vertical well situated in the deepest part of the basin and natural gas was the expected hydrocarbon at the depths being tested. The well is the first to be tested in these unconventional targets, consequently the objectives of the tests were to determine whether the shale intervals could be fracture-stimulated and whether they could produce hydrocarbons, and to confirm rock, pressure and fluid properties. The operation has succeeded in these objectives and the well will now be plugged and abandoned to the highest environmental standards.

The Shenandoah-1 tests were not designed for long-term testing with full clean-up of fluids, but rather to test for hydrocarbon production to surface over a period of four to six days and to gather the maximum information possible before moving on to the next interval according to program. For this reason and because these are shale zones in a vertical well with single stimulation treatments, high flowrates were not expected as mentioned in the press release dated September 16, 2011.

Five intervals were tested in accordance with the program. The gathered information is still to be fully interpreted for planning future appraisal and exploration operations, however the following preliminary comments can be made at this time:

    --  Three of the five intervals flowed gas while still recovering
        significant amounts of frac fluid.
    --  The most positive results came from the Middle Velkerri shales
        where there was no indication of formation water being
        produced. The sustained gas rates ranged between 50 and 100
        mscfpd (thousand standard cubic feet per day), gas gravities
        ranged from 0.64 to 0.70 and the lower interval also yielded
        condensate with an API gravity of 43 degrees.  Importantly this
        showed that that these rocks can be stimulated and are over
        pressured.  Both Velkerri intervals will now be considered
        candidates for future testing, including horizontal drilling
        with multiple stimulation treatments to establish
        commerciality.
    --  The Lower Kyalla shale also produced gas to surface and will
        now be considered for further exploratory investigation.
    --  Two separate intervals were perforated in the Moroak
        sandstones. They were not stimulated but rather were
        conventional perforation tests, intended to find out if the
        rocks were gas-bearing and to provide technical information.
        Little to no commercial hydrocarbons were present. The test did
        however provide valuable rock property information as the
        Moroak is target of interest elsewhere in the Beetaloo Basin as
        a conventional play.
    --  The Upper Kyalla shale is oil-bearing in Shenandoah-1 but was
        not tested due to wellbore configuration.

Further evaluation of the extensive information gathered in this wellbore is now required before considering follow-up vertical and horizontal exploration wells. In order to locate future wells optimally it is likely that some additional seismic lines will need to be acquired in the Shenandoah area.

Falcon CEO Robert Macaulay commented, "I am very pleased with the results of the Shenandoah-1 well test. The Velkerri results support our belief in recoverable hydrocarbons in the deepest part of the Beetaloo Basin. They also prove that these particular shales can be fracture stimulated which is a crucial first step in the exploration and appraisal process. The Moroak sandstones continue to be a target of interest and the information gained from testing will help with prospecting for these targets elsewhere in the Basin. The Lower Kyalla result is likewise encouraging, we will be working through the data to understand it better before committing our plans to paper on the next steps. Finally, a very extensive sequence of operations was carried out safely and successfully - I am very happy with the performance of our staff and contractors in this regard."

Images from the operations can be found on the company's website at www.falconoilandgas.com or www.falconaustralia.com.au.

About Falcon Oil & Gas Ltd.