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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 20-F

[   ]  REGISTRATION STATEMENT PURSUANT TO SECTION
12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended******December
31, 2011**

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[   ]  SHELL COMPANY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number**000-30087**

ADIRA ENERGY LTD.(Exact name of Registrant specified in its charter)

CANADA(Jurisdiction of incorporation
or organization)

120 Adelaide Street West, Suite 1204Toronto,
OntarioCanada M5H 1T1(Address of principal
executive offices)

Contact Person: Gadi LevinAddress: 120 Adelaide
Street West, Suite 1204Toronto, Ontario M5H 1T1Email:
glevin@adiraenergy.comTelephone: (416) 250-1955, Facsimile: (416)
250-6330(Name, Telephone, Email and/or Facsimile number and Address
of Company Contact Person)

Securities registered or to be registered pursuant to Section
12(b) of the Act:

|Title of Each Class | Name of each exchange on which registered
|------------------- | -----------------------------------------
|None                | Not applicable                           

Securities registered or to be registered pursuant to Section
12(g) of the Act:

COMMON SHARES(Title of Class)

Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None

i

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Number of outstanding shares of the Companys only class of
capital or common stock as at December 31, 2011 was 101,768,453 common
shares.

Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ 
 ]     No [X]

If this is an annual report or a transition report, indicate by
check mark if the Registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934. 
  Yes [   ]     No [X]

Indicate by check mark whether Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.Yes [X]     No
[   ]

Indicate by check mark whether Registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).Yes [   ]     No [   ]

Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (check one):

Large accelerated filer [ ]
    Accelerated filer [ ]
    Non-accelerated filer
[X]


Indicate by check mark which basis of accounting the Registrant
  has used to prepare the financial statements included in this filing:

|U.S.       | International Financial
      Reporting Standards as issued by the International Accounting Standards
      Board |            
|---------- | ----------------------------------------------------------------------------------------------------------------- | -----------
|GAAP [   ] | [X]                                                                                                               | Other [   ]

If other has been checked in response to the previous
question, indicate by check mark which financial statement item the Registrant
has elected to follow:Item 17 [   ]     
Item 18 [   ]

If this is an annual report, indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]     No [X]

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)

Indicate by checkmark whether the Registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. YES [ 
 ]     NO [   ]

ii

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TABLE OF CONTENTS

|GENERAL | - 1 -  
|------- | -------
|        |        
|PART I  | - 2 -  
|        |        
|        | ITEM 1 
|        | ITEM 2 
|        | ITEM 3 
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|        | ITEM 11

iii

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|             |          | A.                                                                                 | Transaction Risk and Currency Risk Management | - 70 -
|------------ | -------- | ---------------------------------------------------------------------------------- | --------------------------------------------- | ------
|             |          | B..                                                                                | Interest Rate Risk and Equity Price Risk      | - 70 -
|             |          | C.                                                                                 | Exchange Rate Sensitivity                     | - 70 -
|             |          | D.                                                                                 | Commodity Price Risk                          | - 70 -
|             | ITEM 12  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                             | - 70 -                                       
|             |          |                                                                                    |                                               |       
|**Part II**  |          | - 70 -                                                                            
|             |          |                                                                                    |                                               |       
|             | ITEM 13  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                    | - 70 -                                       
|             | ITEM 14  | MATERIAL MODIFICATIONS TO
      THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | - 70 -                                       
|             | ITEM 15  | CONTROLS AND PROCEDURES                                                            | - 70 -                                       
|             | ITEM 16A | AUDIT COMMITTEE FINANCIAL
      EXPERTS                                            | - 71 -                                       
|             | ITEM 16B | CODE OF ETHICS                                                                     | - 72 -                                       
|             | ITEM 16C | PRINCIPAL ACCOUNTANT FEES
      AND SERVICES                                       | - 72 -                                       
|             | ITEM 16D | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                         | - 72 -                                       
|             | ITEM 16E | PURCHASE OF EQUITY SECURITIES
      BY THE ISSUER AND AFFILIATED PURCHASERS        | - 72 -                                       
|             | ITEM 16F | CHANGES TO REGISTRANTS CERTIFYING ACCOUNTANT                                      | - 72 -                                       
|             | ITEM 16G | CORPORATE GOVERNANCE                                                               | - 73 -                                       
|             | ITEM 16H | MINE SAFETY DISCLOSURE                                                             | - 73 -                                       
|             |          |                                                                                    |                                               |       
|**PART III** |          | - 73 -                                                                            
|             |          |                                                                                    |                                               |       
|             | ITEM 17  | FINANCIAL STATEMENTS                                                               | - 73 -                                       
|             | ITEM 18  | FINANCIAL STATEMENTS                                                               | - 73 -                                       
|             | ITEM 19  | EXHIBITS                                                                           | - 73 -                                       

iv

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GENERAL

This Form 20-F is being filed as an annual report under the
Exchange Act.

In this Form 20-F, references to:

Adira means Adira Energy Ltd., a Canadian federal
corporation (formerly AMG Oil Ltd.);

Adira Group means Adira Energy Ltd. (formerly AMG Oil
Ltd.) together with: (a) its wholly-owned subsidiary, Adira Energy Holding
Corp.; (b) its wholly-owned indirect (through Adira Energy) subsidiaries, Adira
Energy Israel Ltd., Adira Energy Israel Services Ltd., Adira Oil Technologies
Ltd., Adira Energy CBM Ltd., and Adira Energy Holdings (Barbados) Ltd., which
wholly owns Adira Energy Investments (Barbados) Ltd.; and (c) Adiras 60%
indirect (through Adira Energy) subsidiary, Adira Geo Global Ltd.;

Adira Energy means Adira Energy Holding Corp., an
Ontario corporation (formerly Adira Energy Corp.);

Adira Israel means
  Adira Energy Israel Ltd., an Israeli corporation;

Adira Services means
  Adira Energy Israel Services Ltd., an Israeli corporation;

We,
  us, our, and the Company mean Adira Group; and

AMG refers to AMG Oil Ltd. which was the name of the
Company prior to its change of name to Adira Energy Ltd. on December 17, 2009.

Adira and Adira Energy have historically used U.S. dollar as
their reporting currency. All references in this document to dollars or $
are to United States dollars and all references to CDN$ are to Canadian
dollars, unless otherwise indicated.

Except as noted, the information set forth in this Form 20-F is
as of December 31, 2011 and all information included in this document should
only be considered correct as of such date.

- 1 -

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NOTE REGARDING FORWARD LOOKING STATEMENTS

Much of the information included in this Form 20-F includes or
is based upon estimates, projections or other forward looking statements. Such
forward looking statements include any projections or estimates made by us and
our management in connection with our business operations. These statements
relate to future events or our future financial performance. Generally, any
statements contained herein that are not statements of historical facts may be
forwardlooking statements. In some cases you can identify forward-looking
statements by terminology such as may, should, expects, plans,
anticipates, believes, estimates, predicts, potential or continue or
the negative of those terms or other comparable terminology. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein. Such estimates, projections or other forward looking
statements involve various risks and uncertainties and other factors, including
the risks in the section titled Risk Factors below, that may cause our actual
results, levels of activities, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. We
caution the reader that important factors in some cases have affected and, in
the future, could materially affect actual results and cause actual results to
differ materially from the results expressed in any such estimates, projections
or other forward looking statements. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Except as
required by applicable law, including the securities laws of the United States,
we do not intend to update any of the forward-looking statements to conform
those statements to actual results.

The statements contained in Item 4.B.  Business Overview,
Item 5  Operating and Financial Review and Prospects and Item 11 
Quantitative and Qualitative Disclosures About Market Risk are inherently
subject to a variety of risks and uncertainties that could cause actual results,
performance or achievements to differ significantly.

PART I

ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS

Not applicable.

ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3 - KEY INFORMATION

A.          
Selected Financial Data

Adira Energy

On August 31, 2009, Adira acquired Adira Energy by issuing
39,040,001 common shares of Adira to Adira Energys shareholders on a
one-for-one basis. As the shareholders of Adira Energy obtained control of
Adira, the share exchange is considered to be a reverse takeover transaction.
Accordingly, for accounting purposes, Adira Energy is the acquirer.

Adira Energys predecessor is Adira Israel, which was
incorporated in Israel on October 26, 2008. In order to facilitate tax planning,
all of the issued and outstanding shares of Adira Israel were registered in the
name of Adira Africa Corp. (Adira Africa), a privately-owned Canadian
corporation, as a trustee for and on behalf of a corporation to be incorporated
in Ontario  namely, Adira Energy, which was subsequently incorporated on April
8, 2009  pursuant to a Declaration of Trust dated November 16, 2008 (the
Declaration of Trust). In December 2008, upon application to Ministry
of Energy and Water Resources (formerly the Ministry of National
Infrastructures) of the State of Israel (the Ministry or MNI),
Adira Israel obtained Eitan License No. 356, covering 31,060 acres (125.7 square
kilometres) in the Hula Valley in Northern Israel (the Eitan License),
for no consideration other than the payment of a nominal stamp duty in the
amount of $3,544. Upon the incorporation of Adira Energy on April 8, 2009, Adira
Africa transferred the shares of Adira Israel to Adira Energy for no
consideration, as contemplated by the Declaration of Trust.

- 2 -

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The only activity undertaken in Adira Israel from December 2008
to April 8, 2009 was the application for, and the receipt of, the Eitan License,
and, pursuant to the Declaration of Trust, Adira Energy is in substance treated
as the owner of the Adira Israel shares since the inception of Adira Israel.
Further, the carrying amount of the single asset owned by Adira Israel, the
Eitan License (there were no material liabilities), was recorded in the accounts
of Adira Israel as of April 8, 2009 in its nominal amount of the stamp duty.
Therefore, under International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (the IASB), the
carrying amount of the Adira Israel shares transferred to Adira Energy on that
date was of the same nominal amount. Subsequent to April 7, 2009, all activities
of the Company are reflected in the consolidated financial statements of
Adira.

The selected historical information presented in the table
below for the years ended December 31, 2011 and 2010 are derived from the
audited consolidated financial statements of Adira for such period, and have
been prepared in accordance with IFRS as issued by the IASB. The selected
historical financial information presented in the table below for the 267-day
period ended December 31, 2009 comprises the operating data of Adira Energy and
its subsidiary companies from April 8, 2009 (date of incorporation of Adira
Energy) and that of Adira (formerly AMG Oil Ltd) from September 1, 2009, and
have also been prepared in accordance with IFRS as issued by the IASB. The
selected financial information presented below should be read in conjunction
with the audited consolidated financial statements and the notes thereto of
Adira Group, and with the information appearing under each of Item 4 
Information on the Company and Item 5  Operating and Financial Review and
Prospects of this Form 20-F. All financial data presented in this Form 20-F are
qualified in their entirety by reference to the consolidated financial
statements and their notes.

U.S. dollars in thousands, except share and per share data

|                           |  | Year Ended December 31, | 
|-------------------------- |  | ----------------------- | 
|                           |  | 2011                    | 
|                           |  |                         | 
|Balance Sheet Data         |  |                         | 
|Cash and cash equivalents  |  | 8,094                   | 
|Total Assets               |  | 10,247                  | 
|Total Liabilities          |  | 1,421                   | 
|Total Shareholders Equity |  | 8,826                   | 

-3 -

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|                                                                                                        |  | Year ended December 31 |   |  | 267-day period |  
|------------------------------------------------------------------------------------------------------- |  | ---------------------- | - |  | -------------- | -
|                                                                                                        |  |                        |   |  |                |  
|                                                                                                        |  |                        |   |  |                |  
|                                                                                                        |  | 2011                   |   |  | 2010           |  
|                                                                                                        |  | $                      |   |  | $              |  
|Operating Data                                                                                          |  |                        |   |  |                |  
|Revenues and other income                                                                               |  | 1,323                  |   |  | 1,707          |  
|                                                                                                        |  |                        |   |  |                |  
|Expenses:                                                                                               |  |                        |   |  |                |  
|Exploration expenses                                                                                    |  | 4,759                  |   |  | 1,485          |  
|General and administrative expenses                                                                     |  | 5,290                  |   |  | 3,206          |  
|Impairment charge                                                                                       |  | 1,226                  |   |  | -              |  
|                                                                                                        |  |                        |   |  |                |  
|Total expenses                                                                                          |  | 11,275                 |   |  | 4,691          |  
|                                                                                                        |  |                        |   |  |                |  
|Operating loss                                                                                          |  | (9,952                 | ) |  | (2,984         | )
|                                                                                                        |  |                        |   |  |                |  
|Financing income                                                                                        |  | 43                     |   |  | -              |  
|Financing expense                                                                                       |  | (109                   | ) |  | (5             | )
|Issuance expenses                                                                                       |  | -                      |   |  | -              |  
|                                                                                                        |  |                        |   |  |                |  
|Loss before income taxes                                                                                |  | (10,018                | ) |  | (2,989         | )
|                                                                                                        |  |                        |   |  |                |  
|Income taxes                                                                                            |  | (33                    | ) |  | (15            | )
|                                                                                                        |  |                        |   |  |                |  
|Net loss and comprehensive loss                                                                         |  | (10,051                | ) |  | (3,004         | )
|                                                                                                        |  |                        |   |  |                |  
|                                                                                                        |  |                        |   |  |                |  
|Basic and diluted net loss per share attributable
      to equity holders of the parent                 |  | (0.10                  | ) |  | (0.05          | )
|                                                                                                        |  |                        |   |  |                |  
|Weighted average number of Ordinary shares
      used in computing basic and diluted net loss per share |  | 99,813,334             |   |  | 65,653,700     |  

We previously prepared our financial statements in accordance
with Canadian generally accepted accounting principles (Canadian GAAP).
The consolidated financial statements included in our transition report on Form
20-F for the period from October 1, 2010 to December 31, 2010, as filed with the
SEC on February 27, 2012, were our Companys first annual financial statements
reported in accordance with IFRS. IFRS 1, First-time Adoption of International
Financial Reporting Standards, was applied to such consolidated financial
statements; the impact of the transition to reporting in accordance with IFRS on
our Company's financial statements was detailed in Note 19 to those financial
statements.

The selected balance sheet data presented in the table below
for Adira Israel as of April 7, 2009, and the related changes in equity for the
164-day period from its incorporation (October 26, 2008) to April 7, 2009, are
derived from the audited financial statements of Adira Israel for such period,
which are included in Amendment No. 1 to our annual report on Form 20-F for the
year ended September 30, 2010, as filed with the SEC on November 21, 2011. Adira
Israels financial statements do not include a statement of operations and
statement of cash flows for the 164-day period ended April 7, 2009, as there
were no revenues, expenses or cash transactions during this period. The selected
financial information presented below should be read in conjunction with the
audited financial statements and the notes thereto of Adira Israel.

-4 -

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Under Israeli GAAP (U.S. dollars in thousands)

|                                 |  | As at April 7 | 
|-------------------------------- |  | ------------- | 
|                                 |  | 2009          | 
|                                 |  | $             | 
|Balance Sheet Data               |  |               | 
|Exploration and evaluation asset |  | 3,544         | 
|Total Assets                     |  | 3,544         | 
|Total Liabilities                |  | 3,541         | 
|Total Shareholders Equity       |  | 3             | 

|Changes in Equity                                   |  | Share Capital |  |   | Total  | 
|--------------------------------------------------- |  | ------------- |  | - | ------ | 
|                                                    |  | Number        |  |   | Amount | 
|                                                    |  |               |  |   |        | 
|Balance at October 26, 2008 (date of incorporation) |  | -             |  | $ | -      | 
|                                                    |  |               |  |   |        | 
|Shares issued                                       |  | 1,000         |  |   | 3      | 
|                                                    |  |               |  |   |        | 
|Balance at April 7, 2009                            |  | 1,000         |  | $ | 3      | 

As noted in Note 4 to the audited financial statements of Adira
Israel, which are included in Amendment No. 1 to our annual report on Form 20-F
for the year ended September 30, 2010, as filed with the SEC on November 21,
2011, there are no differences between Israeli GAAP and US GAAP in respect of
the financial position and results of operations of Adira Israel for the period
presented.

We have never declared or paid any cash or other dividends.

B.          
Capitalization and Indebtedness

Not applicable.

C.          
Reasons for the Offer and Use of Proceeds

Not applicable.

D.          
Risk Factors

An investment in our securities is highly speculative and
involves a high degree of risk. Our Company may face a variety of risks that may
affect our operations or financial results and many of those risks are driven by
factors that we cannot control or predict. Before investing in our Companys
securities, investors should carefully consider the following risks. If any of
the following risks actually occurs, our Companys business, prospects,
financial condition and results of operations could be materially adversely
affected. In that case, investors may lose all or a part of their
investment.

Risks Associated with the Company

Our independent auditors have referred to circumstances
which might result in doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.

Adira incurred a net loss of $10 million for the year ended
December 31, 2011. At December 31, 2011, Adira had an accumulated deficit of
$19.2 million. These circumstances raise doubt about our ability to continue as
a going concern, as described in the Note 1 to our consolidated financial
statements for the period ended December 31, 2011, which are included herein.
Although our consolidated financial statements refer to circumstances which
might raise doubt about our ability to continue as a going concern, they do not
reflect any adjustments that might result if we are unable to continue our
business.

- 5 -

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We are an early-stage oil and gas exploration company
without significant revenues. Our ability to continue in business depends upon
our continued ability to obtain significant financing from external sources and
the success of our exploration efforts and any production efforts resulting
therefrom, none of which can be assured.

We are an early-stage oil and gas exploration company without
any significant revenues, and there can be no assurance of our ability to
develop and operate our projects profitably. We have historically depended
entirely upon capital infusion from the issuance of equity securities to provide
the cash needed to fund our operations, but we cannot assure you that we will be
able to continue to do so. Our ability to continue in business depends upon our
continued ability to obtain significant financing from external sources and the
success of our exploration efforts and any production efforts resulting
therefrom. Any reduction in our ability to raise equity capital in the future
would force us to reallocate funds from other planned uses and could have a
significant negative effect on our business plans and operations, including our
ability to continue our current exploration activities.

While we may in the future generate additional working
capital through the development, operation, sale or possible syndication of our
current property or any future properties, there is no assurance that our
Company will be successful in generating positive cash flow, or if successful,
that any such funds will be available for distribution to shareholders or to
fund further exploration and development programs.

We have had negative cash flows from operations, and there is
no assurance that our current resources will be sufficient to fund our
operations on an ongoing basis. Our business operations may fail if our actual
cash requirements exceed our estimates and we are not able to obtain further
financing.

We will require significant capital to complete our drill
test wells, and to build the necessary infrastructure to commence operations if
our exploration activities result in the discovery of sufficient oil and gas
reserves to justify their exploitation and development.

Since inception, we have not earned any significant revenues
from operations, and due to the length of time between the discovery of oil and
gas reserves and their exploitation and development, we do not anticipate
earning significant revenues from operation in the near future. We have incurred
and will continue to incur significant expenses. As at December 31, 2011, we had
cash and equivalents on hand of $8.1 million. We will have to seek additional
financing to fund the advanced exploration on our assets, if warranted. Further,
we cannot assure you that our actual cash requirements will not exceed our
estimates, and in any case we will require additional financing to bring our
interests into commercial operation, finance working capital, meet our
contractual minimum expenditures and pay for operating expenses and capital
requirements until we achieve a positive cash flow. Additional capital also may
be required in the event we incur any significant unanticipated expenses.

In light of our operating history, and under the current
capital and credit market conditions, we may not be able to obtain additional
equity or debt financing on acceptable terms if and when we need it. Even if
financing is available, it may not be available on terms that are favorable to
us or in sufficient amounts to satisfy our requirements.

If we require, but are unable to obtain, additional financing
in the future, we may be unable to implement our business plan and our growth
strategies, respond to changing business or economic conditions, withstand
adverse operating results, and compete effectively. More importantly, if we are
unable to raise further financing when required, our planned exploration
activities may have to be scaled down or even ceased, and our ability to
generate revenues in the future would be negatively affected.

As a holding company, our ability to make payments will
eventually depend on the cash flows of our subsidiaries.

We are a holding company and conduct substantially all of our
operations through our subsidiaries incorporated outside North America. We have
no direct operations and no significant assets other than the shares of our
subsidiaries and cash proceeds received from any financings, which cash is
subsequently provided to our subsidiaries. Assuming our holding company
structure remains, we will be dependent on the cash flows from our subsidiaries
to meet our obligations, including payment of principal and interest on any debt
we incur. The ability of certain of our subsidiaries to provide us with payments
may be constrained by the following factors:

- the cash flows generated by operations, investment activities and
  financing activities; and

- 6 -

---

- the level of taxation, particularly corporate profits and withholding
  taxes.

In addition, we cannot guarantee that the current fiscal regime
that allows for repatriation of funds in each of the countries where we do
business will remain in effect, nor can we guarantee that arbitrary changes in
exchange controls in each of the countries where we do business will not take
place, which may adversely impact on the ability of investors to recover their
investment.

If we are unable to receive sufficient cash from our subsidiaries,
  we may be required to refinance any indebtedness we incur, raise funds in a
  public or private equity or debt offering or sell some or all of our assets.
  We can provide no assurances that an offering of our debt or equity or a refinancing
  of our debt can or will be completed on satisfactory terms or that it would
  be sufficient to enable us to make payment with respect to our debt. The foregoing
  events could have an adverse impact on our future cash flows, earnings, results
  of operations and financial condition.

The majority of our assets are outside the United States,
with the result that it may be difficult for investors to enforce within the
United States any judgments obtained against us or some of our directors or
officers.

The majority of our assets are located outside the United
States. In addition, some of our directors and officers are nationals and/or
residents of countries other than the United States, and all or a substantial
portion of such persons assets are located outside the United States. As a
result, it may be difficult for investors to enforce within the United States
any judgments obtained against us or our officers or directors, including
judgments predicated upon the civil liability provisions of the securities laws
of the United States or any state thereof. Consequently, investors may be
effectively prevented from pursuing remedies under United States federal
securities laws against them.

We may be adversely affected by current global financial
conditions.

Current global financial conditions have been characterized by
increased volatility and several financial institutions have either gone into
bankruptcy or have had to be rescued by governmental authorities. Access to
public financing and bank credit has been negatively impacted by both the rapid
decline in value of sub-prime mortgages and the liquidity crisis affecting the
asset-backed commercial paper market. These and other factors may affect our
ability to obtain equity or debt financing in the future on favorable terms.
Additionally, these factors, as well as other related factors, may cause
decreases in our asset values that may be other than temporary, which may result
in impairment losses. If such increased levels of volatility and market turmoil
continue, or if more extensive disruptions of the global financial markets
occur, our operations could be adversely impacted and the market value of our
common shares may be adversely affected.

Currency fluctuations could have an adverse effect on our
business.

Our earnings and cash flow may also be affected by fluctuations
in the exchange rate between the U.S. dollar and other currencies, such as the
New Israeli Shekel (NIS), the Canadian dollar and to a limited extent,
the Euro. Our consolidated financial statements are expressed in U.S. dollars.
Our sales of oil and gas, if any, will be denominated in U.S. dollars, while
exploration costs and operating costs are, in part, denominated in Israel
Shekels, U.S. dollars and Canadian dollars.

Fluctuations in exchange rates between the U.S. dollar and
other currencies may give rise to foreign exchange currency exposures, both
favorable and unfavorable, which have impacted and in the future may materially
impact our future financial results. We do not utilize a hedging program to
limit the adverse effects of foreign exchange rate fluctuations.

Conditions in Israel may affect our
operations.

Our subsidiaries conduct their principal operations in Israel,
and therefore are directly affected by the political, economic, and military
conditions affecting Israel and the Middle East. Armed conflicts between Israel
and its neighboring countries and territories occur periodically and a
protracted state of hostility, varying in degree and intensity over time, has in
the past led to security and economic difficulties for Israel. These
hostilities, any escalation thereof or any future armed conflict or violence in
the region, could adversely affect our subsidiaries operations. In addition, we
could be adversely affected by other events or factors affecting Israel such as
the interruption or curtailment of trade between Israel and its
present trading partners, a significant downturn in the economic or financial
condition of Israel, a significant downgrading of Israels international credit
rating, labor disputes and strike actions and political instability.

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Our financial reporting may be subject to weaknesses in
internal controls.

Internal controls over financial reporting are procedures
designed to provide reasonable assurance that transactions are properly
authorized, assets are safeguarded against unauthorized or improper use, and
transactions are properly recorded and reported. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
with respect to the reliability of financial reporting and financial statement
preparation.

We cannot be certain that current expected expenditures
and completion/testing programs will be realized.

We believe that the costs used to prepare internal budgets are reasonable, however, there are assumptions, uncertainties, and risk that may cause our allocated funds on a per well basis to change as a result of having to alter certain activities from those originally proposed or programmed to reduce and mitigate uncertainties and risks.  These assumptions, uncertainties, and risks are inherent in the completion and testing of wells and can include but are not limited to: pipe failure, casing collapse, unusual or unexpected formation pressure, environmental hazards, and other operating or production risk intrinsic in oil and/or gas activities.  Any of the above may cause a delay in the Company’s completion program and its ability to determine reserve potential.

Our lack of diversification increases the risk of an
investment, and our financial condition and results of operations may
deteriorate if we fail to diversify.

Our business focus is on oil and gas exploration on three
properties in Israel within close proximity. As a result, we lack
diversification, in terms of both the nature and geographic scope of our
business. We will likely be impacted more acutely by factors affecting our
industry or the regions in which we operate than we would if our business were
more diversified. If we cannot diversify our operations, our financial condition
and results of operations could deteriorate.

We may not effectively manage the growth necessary to
execute our business plan.

Our business plan anticipates a significant increase in the number of our contractors, strategic partners and equipment suppliers.  Such growth, if any, will place significant strain on our current personnel, systems and resources.  We expect that we will be required to hire qualified consultants and employees to help manage our growth effectively.  We believe that we will also be required to improve our management, technical, information and accounting systems, controls and procedures.  We may not be able to maintain the quality of our operations, control our costs, continue complying with all applicable regulations and expand our internal management, technical information and accounting systems to support our desired growth.  If we fail to manage our anticipated growth effectively, our business could be adversely affected.

We have agreed to indemnify our directors against
liabilities incurred by them as directors.

We have agreed to indemnify our directors from and against all
costs, charges and expenses reasonably incurred by them in respect of any civil,
criminal or administrative action or proceeding to which they are made a party
or with which they are threatened by reason of being or having been a director
of Adira, provided that (a) they have acted honestly and in good faith with a
view to the best interests of Adira; and (b) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, they
had reasonable grounds for believing that their conduct was lawful. This
indemnity may reduce the likelihood of derivative litigation against our
directors and may discourage or deter our shareholders from suing the directors.

Risks Associated with Our Business

We have not discovered any oil and gas reserves, and we
cannot assure you that we or our venture ever will.

We are in the business of exploring for oil and natural gas,
and the development and exploitation of any significant reserves that are found.
Oil and gas exploration involves a high degree of risk that the exploration will
not yield positive results. These risks are more acute in the early
stages of exploration. We have not discovered any reserves, and we cannot
guarantee you that we ever will. Even if we succeed in discovering oil or gas
reserves, these reserves may not be in commercially viable quantities or
locations. Until we discover such reserves, we will not be able to generate any
revenues from their exploitation and development. If we are unable to generate
revenues from the development and exploitation of oil and gas reserves, we will
be forced to change our business or cease operations.

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Our business will suffer if we cannot obtain or maintain
necessary licenses.

Our operations require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities.  Specifically, the licenses awarded to us by the Government of Israel have terms of three years and must be renewed in order to extend the license beyond this initial term.  Although certain licenses have received one extension, there can be no assurance that we will be able to secure any additional extensions, if necessary.  Among other factors, our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to change in regulations and policies and to the discretion of the applicable governments.  Our inability to obtain, maintain or acquire extensions for these licenses or permits could hamper our ability to produce revenues from operations.  Other oil and gas companies may seek to acquire property leases and licenses that we will need to operate our business.  This competition has become increasingly intense as the price of oil on the commodities markets has risen in recent years.  This competition may prevent us from obtaining licenses we deem necessary for our business, or it may substantially increase the cost of obtaining these licenses.

We may be liable to pay operating expenditures respecting
our licenses exceeding our pro rata share of such expenditures.

We are a party to certain joint operation agreements respecting
our licenses pursuant to which we have agreed to pay our pro rata share of
operating expenditures in connection with the licenses. In accordance with the
terms and conditions of such joint operation agreements, if a party to such
joint operation agreement fails to pay its pro rata share of the expenditures,
we may be liable to cover such defaulting partys pro rata share of the
expenditures based on our interest in the license to ensure compliance with the
terms and expenditure requirements under the work plan. If we do not have
sufficient funds to cover the defaulting partys pro rata share of expenditures,
we may not be able to maintain our licenses in good standing, causing them to be
revoked, suspended or cancelled, which would have a material adverse effect on
us.

We might incur debt in order to fund our exploration and
development activities, which would continue to reduce our financial flexibility
and could have a material adverse effect on our business, financial condition or
results of operation.

It is possible that we might incur debt in order to fund our
exploration and development activities, which would continue to reduce our
financial flexibility and could have a material adverse effect on our business,
operations and results of operations and financial condition. General economic
conditions, oil and gas prices and financial, business and other factors affect
our operations and future performance. Many of these factors are beyond our
control. No assurances can be made that we will be able to generate sufficient
cash flow to pay the interest on its debt or that future working capital,
borrowings or equity financing will be available to pay or refinance such debt.
Factors that will affect its ability to raise cash through an offering of Common
Shares or other types of equity securities, or a refinancing of debt include
financial market conditions, the value of its assets and performance at the time
we need capital. No assurances can be made that we will have sufficient funds to
make such payments. If we do not have sufficient funds and are otherwise unable
to negotiate renewals of our borrowings or arrange new financing, we might be
required to sell significant assets. Any such sale could have a material adverse
effect on our business, financial condition and results of operations.

Our assets and operations are subject to government
regulation in Israel.

Our interests and operations in Israel may be affected in varying degrees by government regulations relating to the oil and gas industry.  Any changes in regulations or shifts in political conditions are beyond the control of the Company and may adversely affect our business.  Our operations may be affected in varying degrees by new government regulations and changes to existing regulations, including those with respect to restrictions on exploration and production, price controls, export controls, income taxes, employment, land use, water use, environmental legislation and safety regulations.  On April 10, 2011, the Petroleum Profits Taxation Law, 5771-2011 (the “Petroleum Taxation Law”) was published based largely on the conclusions and recommendations of the Sheshinski Committee, a government appointed committee in Israel which was tasked with examining the fiscal system prevailing in Israel in respect of petroleum and gas resources and proposing an updated fiscal policy. The Petroleum Taxation Law imposes a progressive levy (the “Levy”) on profits derived from petroleum reserve, in addition to the 12.5% royalty payable under the old tax regime which remains unchanged.  The Levy is designed to capitalize on the economic benefits from each individual reservoir and is imposed only after the investment in exploration, development and construction are fully returned, plus a yield that reflects, among other things, the developer’s risk and required financial expenses.  As a result of the Levy, the aggregate government take from oil and gas revenue is expected to increase from approximately 33% to about 52% to 62%.  The implementation of the Petroleum Taxation Law may have an adverse effect on our business, financial conditions and results as our business matures.

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Our future success depends upon our ability to find,
develop and acquire additional oil and natural gas reserves that are
economically recoverable.

In the event that we are able to find and develop oil and
natural gas reserves which are economically recoverable, the rate of production
from those reservoirs will decline as reserves are depleted. As a result, we
must locate and develop or acquire new oil and natural gas reserves to replace
those being depleted by production. We must do this even during periods of low
oil and natural gas prices when it is difficult to raise the capital necessary
to finance activities. Without successful exploration or acquisition activities,
our reserves and revenues will decline. We may not be able to find and develop
or acquire additional reserves at an acceptable cost or have necessary financing
for these activities.

Oil and natural gas drilling is a high-risk activity.

Our future success will depend on the success of our
exploration and drilling programs. In addition to the numerous operating risks
described in more detail below, these activities involve the risk that no
commercially productive oil or natural gas reservoirs will be discovered. In
addition, we are uncertain as to the future cost or timing of drilling,
completing and producing wells. Furthermore, our drilling operations may be
curtailed, delayed or cancelled as a result of a variety of factors, including,
but not limited to, the following: unexpected drilling conditions; pressure or
irregularities in formations; equipment failures or accidents; adverse weather
conditions; inability to comply with governmental requirements; and shortages or
delays in the availability of drilling rigs and the delivery of equipment. If we
experience any of these problems, our ability to conduct operations could be
adversely affected.

Our success depends on our ability to attract and retain
qualified personnel.

Recruiting and retaining qualified personnel is critical to our success.  The number of persons skilled in the acquisition, exploration and development of oil and gas properties is limited and competition for such persons is intense.  As our business activity grows, it will require additional key financial, administrative and qualified technical personnel as well as additional operations staff.  Although we believe that we will be successful in attracting, training and retaining qualified personnel, there can be no assurance of such success.  If we are not successful in attracting and training qualified personnel, the efficiency of our operations could be affected, which could have an adverse impact on our future cash flows, earnings, results of operations and financial condition. Our development now and in the future will also depend on the efforts of key management figures.  The loss of any of these key people could have a material adverse effect on our business.  We do not currently maintain key-man life insurance on any of our key employees.

We face strong competition from other energy companies
that may negatively affect our ability to carry on operations.

We operate in the highly competitive area of oil and natural
gas exploration, development and production. Factors which affect our ability to
successfully compete in the marketplace include, but are not limited to, the
following: the availability of funds and information relating to a property; the
standards established by us for the minimum projected return on investment; the
availability of alternate fuel sources; and the transportation of gas.

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Our competitors include major integrated oil companies,
substantial independent energy companies, affiliates of major pipeline
companies, and national and local natural gas gatherers. Many of these
competitors possess greater financial and other resources than we do.

We might not be able to determine reserve potential,
identify liabilities associated with the properties or obtain protection from
sellers against them, which could cause us to incur losses.

Although we believe we have reviewed and evaluated our
properties in Israel in a manner consistent with industry practices, such review
and evaluation might not necessarily reveal all existing or potential problems.
This is also true for any future acquisitions made by us. Inspections may not
always be performed on every well, and environmental problems, such as
groundwater contamination, are not necessarily observable even when an
inspection is undertaken. Even when problems are identified, a seller may be
unwilling or unable to provide effective contractual protection against all or
part of those problems, and we often assume environmental and other risks and
liabilities in connection with the acquired properties.

You should not place undue reliance on reserve
information because reserve information represents estimates.

There are numerous uncertainties inherent in estimating
quantities of proved reserves and cash flows from such reserves, including
factors beyond our control and the control of engineers. Reserve engineering is
a subjective process of estimating underground accumulations of oil and natural
gas that cannot be measured in an exact manner. The accuracy of an estimate of
quantities of reserves, or of cash flows attributable to these reserves, is a
function of many factors, including, but not limited to, the following:
available data; assumptions regarding future oil and natural gas prices;
estimates of future production rates; expenditures for future development and
exploitation activities; and engineering and geological interpretation and
judgment.

Reserves and future cash flows may also be subject to material
downward or upward revisions based upon production history, development and
exploitation activities and oil and natural gas prices. Actual future
production, revenue, taxes, development expenditures, operating expenses,
quantities of recoverable reserves and value of cash flows from those reserves
may vary significantly from the estimates. In addition, reserve engineers may
make different estimates of reserves and cash flows based on the same available
data.

The nature of oil and gas exploration makes the estimates
of costs uncertain, and our operations may be adversely affected if we
underestimate such costs.

It is difficult to project the costs of implementing an
exploratory drilling program. Complicating factors include the inherent
uncertainties of drilling in unknown formations, the costs associated with
encountering various drilling conditions, such as over-pressured zones and tools
lost in the hole, and changes in drilling plans and locations as a result of
prior exploratory wells or additional seismic data and interpretations thereof.
If we underestimate the costs of such programs, we may be required to seek
additional funding, shift resources from other operations or abandon such
programs.

Losses and liabilities arising from uninsured or
under-insured hazards could have a material adverse effect on our business.

If we develop and exploit oil and gas reserves, those
operations will be subject to the customary hazards of recovering, transporting
and processing hydrocarbons, such as fires, explosions, gaseous leaks, migration
of harmful substances, blowouts and oil spills. An accident or error arising
from these hazards might result in the loss of equipment or life, as well as
injury, property damage or other liability. We cannot assure you that we will
obtain insurance on reasonable terms or that any insurance we may obtain will be
sufficient to cover any such accident or error. Our operations could be
interrupted by natural disasters or other events beyond our control. Losses and
liabilities arising from uninsured or under-insured events could have a material
adverse effect on our business, financial condition and results of operations.

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Compliance with environmental and other government
regulations could be costly and could negatively impact production.

All phases of the oil and gas business present environmental
risks and hazards and are subject to environmental regulation pursuant to a
variety of laws and regulations. Our operations are subject to laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. The recent trend toward stricter
standards in environmental legislation and regulation is likely to continue. The
enactment of stricter legislation or the adoption of stricter regulation could
have a significant impact on our operating costs, as well as on the oil and
natural gas industry in general.

Our existing property, and any future properties that we
may acquire, may be subject to pre-existing environmental liabilities.

Pre-existing environmental liabilities may exist on the
property in which we currently hold an interest or on properties that may be
subsequently acquired by us which are unknown to the Company and which have been
caused by previous or existing owners or operators of the properties. In such
event, we may be required to remediate these properties and the costs of
remediation could be substantial. Further, in such circumstances, we may not be
able to claim indemnification or contribution from other parties. In the event
we were required to undertake and fund significant remediation work, such event
could have a material adverse effect upon the Company and the value of our
common shares.

Penalties we may incur could impair our business.

Failure to comply with government regulations could subject us
to civil and criminal penalties, could require us or our venture to forfeit
property rights or licenses, and may affect the value of our assets. We may also
be required to take corrective actions, such as installing additional equipment,
which could require substantial capital expenditures. We could also be required
to indemnify our employees in connection with any expenses or liabilities that
they may incur individually in connection with regulatory action against them.
As a result, our future business prospects could deteriorate due to regulatory
constraints, and our profitability could be impaired by our obligation to
provide such indemnification to our employees.

Strategic relationships upon which we may rely are
subject to change, which may diminish our ability to conduct our operations.

Our ability to successfully acquire additional licenses, to
discover reserves, to participate in drilling opportunities and to identify and
enter into commercial arrangements depends on developing and maintaining close
working relationships with industry participants and government officials and on
our ability to select and evaluate suitable properties and to consummate
transactions in a highly competitive environment. We may not be able to
establish these strategic relationships, or if established, we may not be able
to maintain them. In addition, the dynamics of our relationships with strategic
partners may require us to incur expenses or undertake activities we would not
otherwise be inclined to undertake in order to fulfill our obligations to these
partners or maintain our relationships. If our strategic relationships are not
established or maintained, our business prospects may be limited, which could
diminish our ability to conduct our operations.

Political instability or fundamental changes in the
leadership or in the structure of the governments in the jurisdictions in which
the Company operates could have a material negative impact on the Company.

Our interests may be affected by political and economic upheavals.  Although we currently operate in jurisdictions that welcome foreign investment and are generally stable, there is no assurance that the current economic and political situation in these jurisdictions will not change drastically in coming years. Local, regional and world events could cause the jurisdictions in which we operate to change the applicable resource laws, tax laws, foreign investment laws, or to revise their policies in a manner that renders our current and future projects non-economic.

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Even if we discover and then develop oil and gas
reserves, we may have difficulty distributing our production.

If our exploration activities result in the discovery of oil
and gas reserves, and if we are able to successfully develop and exploit such
reserves, we will have to make arrangements for storage and distribution of oil
and gas. We would have to rely on local infrastructure and the availability of
transportation for storage and shipment of oil and gas products, but any readily
available infrastructure and storage and transportation facilities may be
insufficient or not available at commercially acceptable terms. The
marketability of our production, if any, will depend in part upon the
availability, proximity, and capacity of oil and natural gas pipelines, crude
oil trucking, natural gas gathering systems and processing facilities. This
could be particularly problematic to the extent that operations are conducted in
remote areas that are difficult to access, such as areas that are distant from
shipping or pipeline facilities. Furthermore, weather conditions or natural
disasters, actions by companies doing business in one or more of the areas in
which we or our venture will operate, or labor disputes may impair the
distribution of oil and gas. In addition, Israel has little or no storage
capacity and the currently available distribution infrastructure is limited.
These factors may affect the ability to explore and develop properties and to
store and transport oil and gas and may increase our expenses to a degree that
has a material adverse effect on operations.

Our inability to obtain necessary facilities could hamper
our operations.

Oil and gas exploration activities depend on the availability
of equipment, transportation, power and technical support in the particular
areas where these activities will be conducted, and our access to these
facilities may be limited. Demand for such limited equipment and other
facilities or access restrictions may affect the availability of such equipment
to us and may delay exploration and development activities. The quality and
reliability of necessary facilities may also be unpredictable and we may be
required to make efforts to standardize our facilities, which may entail
unanticipated costs and delays. Shortages or the unavailability of necessary
equipment or other facilities will impair our activities, either by delaying our
activities, increasing our costs or otherwise.

Factors beyond our control affect our ability to market
oil and gas.

Our ability to market oil and natural gas from ourwells, in the event we discover and exploit oil and natural gas, depends
upon numerous factors beyond our control. These factors include, but are not
limited to, the following: the level of domestic production and imports of oil
and gas; the volatility of both oil and natural gas pricing; the proximity of
natural gas production to natural gas facilities, pipelines and other means of
transportation; the availability of pipeline capacity or other means of
transportation; the demand for oil and natural gas by utilities and other end
users; the availability of alternate fuel sources; the effect of inclement
weather; and government regulation of oil and natural gas marketing.

If these factors were to change dramatically, our ability to
market oil and natural gas or obtain favourable prices for our oil and natural
gas could be adversely affected.

Prices and markets for oil are unpredictable and tend to fluctuate significantly, which could reduce profitability, growth and the value of our business if we or our ventures ever begin exploitation of reserves.

Our future financial condition, results of operations and the
carrying value of our oil and natural gas properties depend primarily upon the
prices we receive for our oil and natural gas production, if any. Oil and
natural gas prices historically have been volatile and likely will continue to
be volatile in the future, especially given current world economic conditions.
Significant changes in long-term price outlooks for crude oil could by the time
that we start exploiting oil and gas reserves, if we ever discover and exploits
such reserves, have a material adverse effect on revenues as well as the value
of licenses or other assets.

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Future cash flow from operations, if any, will be highly
dependent on the prices that we receive for oil and natural gas. This price
volatility also affects the amount of our cash flow available for capital
expenditures and our ability to borrow money or raise additional capital. The
prices for oil and natural gas are subject to a variety of additional factors
that are beyond our control. These factors include: the level of consumer demand
for oil and natural gas; the domestic and foreign supply of oil and natural gas;
the ability of the members of the Organization of Petroleum Exporting Countries
to agree to and maintain oil price and production controls; the price of foreign
oil and natural gas; the price and availability of alternative fuel sources;
governmental regulations; weather conditions; market uncertainty; political
conditions in oil and natural gas producing regions, including Israel and the
Middle East; war, or the threat of war, in oil producing regions; and worldwide
economic conditions.

These factors and the volatility of the energy markets
generally make it extremely difficult to predict future oil and natural gas
price movements with any certainty. Also, oil and natural gas prices do not
necessarily move in tandem. Declines in oil and natural gas prices would not
only reduce revenue, but could reduce the amount of oil and natural gas that we
can produce economically and, as a result, could have a material adverse effect
upon our financial condition, cash flows, results of operations, oil and natural
gas reserves, the carrying values of our oil and natural gas properties and the
amounts we can borrow under any bank credit facilities we may obtain in the
future.

Operating hazards may adversely affect our ability to
conduct business.

Our future operations, if any, will be subject to risks
inherent in the oil and natural gas industry, including, but not limited to, the
following: blowouts; cratering; explosions; uncontrollable flows of oil, natural
gas or well fluids; fires; pollution; and other environmental risks.

These risks could result in substantial losses to us from
injury and loss of life, damage to and destruction of property and equipment,
pollution and other environmental damage and suspension of operations.
Governmental regulations may impose liability for pollution damage or result in
the interruption or termination of operations.

We may enter into hedging agreements but may not be able
to hedge against all such risks.

If we are able to discover commercially exploitable quantities
of oil or gas and is able to enter into commercial production, from time to time
we may enter into agreements to receive fixed or a range of prices on its oil
and natural gas production to offset the risk of revenue losses if commodity
prices decline; however, if commodity prices increase beyond the levels set in
such agreements, we will not benefit from such increases. Similarly, from time
to time we may enter into agreements to fix the exchange rate of certain
currencies to US dollars in order to offset the risk of revenue losses if the
other currencies increase in value compared to the US dollar; however, if other
currencies decline in value compared to the US dollar, we will not benefit from
the fluctuating exchange rate. In addition to the potential of experiencing an
opportunity cost, other potential costs or losses associated with hedging
include the risk that the other party to a hedge transaction does not perform
its obligations under a hedge agreement, the hedge is imperfect or our hedging
policies and procedures are not followed.

Our Company is organized under the laws of
Canada.

Our Company is a Canadian corporation governed by the Canada
Business Corporations Actand as such, its corporate structure, the rights
and obligations of shareholders and its corporate bodies may be different from
those of the home countries of international investors. Furthermore,
non-Canadian residents may find it more difficult and costly to exercise
shareholder rights. International investors may also find it costly and
difficult to effect service of process and enforce their civil liabilities
against the Company or some of its directors, controlling persons and
officers.

To the extent that we establish natural gas and oil
reserves, we will be required to replace, maintain or expand these natural gas
and oil reserves in order to prevent reserves and production from declining,
which could adversely affect cash flows and income.

In general, production from natural gas and oil properties
declines over time as reserves are depleted, with the rate of decline depending
on reservoir characteristics. If we establish reserves, of which there is no
assurance, and are not successful in its subsequent exploration and development
activities or in subsequently acquiring properties containing proved reserves,
our proved reserves will decline as reserves are produced. Our future natural
gas and oil production is highly dependent upon its ability to economically
find, develop or acquire reserves in commercial quantities.

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To the extent cash flow from operations, if any, is reduced,
either by a decrease in prevailing production volume prices for natural gas and
oil or an increase in finding and development costs, and external sources of
capital become limited or unavailable, our ability to make the necessary capital
investment to maintain or expand its asset base of natural gas and oil reserves
would be impaired. Even with sufficient available capital, our future
exploration and development activities may not result in additional proved
reserves, and we might not be able to drill productive wells at acceptable
costs.

We may be treated as a U.S. corporation and taxed by the
U.S. on our worldwide income.

We continued from Nevada to Canada in 2008. Such continuance is
for corporate purposes a migration of us from Nevada to Canada. Transactions
whereby a U.S. corporation migrates to a foreign jurisdiction are considered by
the U.S. Congress to be a potential abuse of the U.S. tax rules because
thereafter the foreign entity is not subject to U.S. tax on its worldwide
income. As a result, Section 7874(b) of the Internal Revenue Code of 1986, as
amended, was enacted to address this potential abuse. Section 7874(b) provides
generally that a corporation that migrates from the U.S. will nonetheless remain
subject to U.S. tax on its worldwide income unless the migrating entity has
substantial business activities in the foreign country in which it is migrating
when compared to its total business activities.

If Section 7874(b) were to apply to our migration from Nevada
to Canada, it would cause us to be subject to U.S. federal income taxation on
our worldwide income. Section 7874(b) of the Code will apply to our migration
unless we had substantial business activities in Canada when compared to our
total business activities at the time of our migration.

Based on the fact that substantially all of our activities were
  taking place in Canada and all of our assets were located in Canada at the time
  of our migration, we have taken the position that we had substantial business
  activity in Canada in relation to our worldwide activities at the time of the
  migration and that Section 7874(b) did not apply to cause us, after the migration,
  to be subject to U.S. federal income tax on our worldwide income. There is limited
  guidance as to what substantial business activity is when
  compared to our worldwide activities. Accordingly, the position adopted
  by us may be challenged by the U.S. tax authorities with the result that we
  may be subject to U.S. federal income taxes on our worldwide activities. In
  addition to U.S. federal income taxes, were Section 7874(b) to apply to us,
  we could be subject to penalties for failure to file U.S. federal income tax
  returns, late fees and interest on past due taxes. Furthermore, if Section 7874(b)
  were to apply to us, our non-U.S. shareholders may be subject to adverse U.S.
  federal income tax consequences such as the assessment of U.S. federal income
  withholding taxes on dividends paid by us. Each shareholder should consult its
  own tax advisor regarding the foregoing rules.

Risks Associated with our Common Shares

The market price of the common shares of our Corporation
may be volatile

The market price of our common shares may experience
significant volatility. Numerous factors, including many over which we have no
control, may have a significant impact on the market price of our common shares
including, among other things: regulatory developments in target markets
affecting us, our customers or our competitors; actual or anticipated
fluctuations in our quarterly operating results; changes in financial estimates
or other material comments by securities analysts relating to us, our
competitors or the industry in general; announcements by other companies in the
industry relating to their operations, strategic initiatives, financial
condition or financial performance or to the industry in general; announcements
of acquisitions or consolidations involving industry competitors or industry
suppliers; addition or departure of our executive officers; and sales or
perceived sales of additional common shares of Adira.

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In addition, the stock market in recent years has experienced
extreme price and trading volume fluctuations that often have been unrelated or
disproportionate to the operating performance of individual companies. These
broad market fluctuations may adversely affect the price of the common shares of
Adira regardless of our operating performance. There can be no assurance that an
active market for the Common Shares will be established or persist and the share
price may decline.

The value of securities issued by us might be affected by
matters not related to our operating performance.

The value of securities issued by us may be affected by matters
not related to our operating performance or underlying value for reasons that
include the following: general economic conditions in Canada, the US, Israel and
globally; industry conditions, including fluctuations in the price of oil and
natural gas; governmental regulation of the oil and gas industry, including
environmental regulation; fluctuation in foreign exchange or interest rates;
liabilities inherent in oil and natural gas operations; geological, technical,
drilling and processing problems; unanticipated operating events which can
reduce production or cause production to be shut-in or delayed; failure to
obtain industry partner and other third party consents and approvals, when
required; stock market volatility and market valuations; competition for, among
other things, capital, acquisition of reserves, undeveloped land and skilled
personnel; the need to obtain required approvals from regulatory authorities;
worldwide supplies and prices of and demand for natural gas and oil; political
conditions and developments in Israel, Canada, the US, and globally; political
conditions in natural gas and oil producing regions; revenue and operating
results failing to meet expectations in any particular period; investor
perception of the oil and gas industry; limited trading volume of our common
shares; change in environmental and other governmental regulations;
announcements relating to our business or the business of our competitors; our
liquidity; and our ability to raise additional funds.

In the past, companies that have experienced volatility in
their value have been the subject of securities class action litigation. We
might become involved in securities class action litigation in the future. Such
litigation often result in substantial costs and diversion of managements
attention and resources and could have a material adverse effect on our
business, financial condition and results of operation.

An investment in our Company will likely be
diluted.

We may issue a substantial number of our common shares without
investor approval to raise additional financing and we may consolidate the
current outstanding common shares. Any such issuance or consolidation of our
securities in the future could reduce an investors ownership percentage and
voting rights in the Company and further dilute the value of your investment.

If we are a passive foreign investment company at any
time that a U.S. shareholder holds our common shares, such U.S. shareholder may
be subject to adverse U.S. federal income tax consequences

Acquiring, holding or disposing of our common shares may have
tax consequences under the laws of Canada and the United States that are not
disclosed in this Form 20-F. In particular, potential investors that are U.S.
taxpayers should be aware that we may be considered a passive foreign
investment company under Section 1297(a) of the U.S. Internal Revenue Code (a
PFIC) with respect to U.S. shareholders. If the Company is or becomes a
PFIC during any time that a U.S. shareholder holds our common shares, any gain
recognized on the sale of our common shares and any excess distributions paid on
our common shares must be ratably allocated to each day in a U.S. taxpayers
holding period for our common shares and any excess distributions paid on our
common shares must be ratably allocated to each day in a U.S. taxpayers holding
period for our common shares. The amounts allocated to the taxable year of
disposition and to years before we became a PFIC would be taxed as ordinary
income. The amount allocated to each other taxable year would be subject to tax
at the highest rate applicable to ordinary income in effect for that taxable
year for individuals or corporations, as appropriate, and an interest charge
would be imposed on the tax attributable to the allocated amount, calculated as
if such tax liability had been due in each such prior year. This risk factor is
qualified in its entirety by the discussion set forth under the heading Certain
United States Federal Income Tax Considerations. Shareholders should consult
their own tax advisors as to the PFIC rules and the other tax consequences of
the acquisition, ownership, and disposition of our common shares.

- 16 -

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We do not expect to pay dividends for the foreseeable
future.

We do not intend to declare dividends for the foreseeable
future, as we anticipate that we will reinvest any future earnings in the
development and growth of our business. Therefore, investors will not receive
any funds unless they sell their Common Shares, and shareholders may be unable
to sell their shares on favorable terms or at all. We cannot assure you of a
positive return on investment or that you will not lose the entire amount of
your investment in our Common Shares. Prospective investors seeking or needing
dividend income or liquidity should not purchase our Common Shares.

ITEM
4           INFORMATION ON THE
COMPANY

We are a Canadian corporation existing under the Canada
Business Corporations Act (the CBCA) which conducts business as an
oil and gas exploration company with operations in the State of Israel. We have
been granted certain petroleum licenses from the State of Israel, as more
particularly described below in Item 4B  Business Overview.

The Company presently does not produce any oil or gas and does
not earn any significant revenues.

A.          
History and Development of the Company

Name

Our legal and commercial name is Adira Energy Ltd.

Principal Office

Our principal office is located at 120 Adelaide Street West,
Suite 1204S, Toronto, Ontario, Canada, M4V 3A1. Our telephone number is (416)
250-6500.

Incorporation and Continuation

We are a Canadian corporation existing under the CBCA.

We were incorporated on February 20, 1997 under the name Trans
New Zealand Oil Company by filing our Articles of Incorporation with the
Secretary of State of Nevada. We changed our name to AMG Oil Ltd. on July 27,
1998. On December 17, 2009, we changed our name to Adira Energy Ltd. Our
fiscal year end is December 31.

On November 25, 2008, our shareholders approved the change of
our jurisdiction of incorporation from the State of Nevada to the Canadian
federal jurisdiction under the CBCA by way of continuation. The Company
completed the filing of its Articles of Conversion with the Nevada Secretary of
State on November 25, 2008, and the Companys Articles of Continuance were
accepted for filing by Industry Canada effective November 27, 2008. The effect
of these filings was to transfer the jurisdiction of incorporation of the
Company from the State of Nevada to the Canadian federal jurisdiction under the
CBCA. Copies of the Articles of Conversion, Articles of Continuance, Certificate
of Continuance and By-Laws, are incorporated by reference into this Form 20-F as
exhibits.

The Companys common shares remain registered under Section
12(g) of the Exchange Act after completion of the continuation as a result of
the operation of Rule 12g-3 of the Exchange Act. The Companys current trading
symbol on the OTC Bulletin Board (the OTCBB) is ADENF. The Companys
current trading symbol on the TSX Venture Exchange (the TSXV) is ADL.

Acquisition of Adira Energy

We completed the acquisition of Adira Energy, a company
incorporated in the Province of Ontario, on August 31, 2009. As a result of the
completion of this acquisition, we are now the owner of all the issued and
outstanding shares of Adira Energy and we ceased to be a shell company, as
defined in Rule 12b-2 of the Exchange Act. The acquisition was completed
pursuant to a securities exchange agreement dated August 4, 2009 among Adira,
Adira Energy and Dennis Bennie, Ilan Diamond and Alan Friedman, as
principal shareholders, and concurrent securities exchange agreements among
Adira and each of the minority shareholders of Adira Energy. We issued an
aggregate of 39,040,001 common shares to the shareholders of Adira Energy as
consideration for the acquisition of Adira Energy.

- 17 -

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Immediately prior to the acquisition, Adira Energy completed a
private placement (Adira Energy Private Placement) of 7,600,000 units
(Units) at a price of $0.25 per Unit. Sandfire Securities Inc. acted as
lead agent to Adira Energy in connection with the Adira Energy Private
Placement. Each Unit was comprised of one common share of Adira Energy and
one-half of one share purchase warrant. The common shares and share purchase
warrants issued by Adira Energy were exchanged concurrently with the closing of
the Acquisition. Each resulting share purchase warrant entitled the holder to
purchase one additional common share of the Company at the exercise price of
$0.50 per share for a two year period following closing, which expired on August
31, 2011. In connection with the Adira Energy Private Placement, 500,770
compensation warrants were issued to agents which entitled the holders thereof
to purchase an equal amount of common shares of the Company at the exercise
price of $0.25 per common share for a two year period following closing, which
expired on August 31, 2011.

On September 23, 2009, Adira completed a private placement of
an additional 400,000 Units on a non-brokered basis (the September Private
Placement) at a price of $0.25 per Unit. After deducting commissions
payable in connection with the September Private Placement, we raised an
aggregate of $100,000 in the September Private Placement.

On November 22, 2010 we completed a financing for gross
proceeds of $11,000,000 (Adira Financing). Pursuant to the Adira
Financing, we issued 27,500,000 subscription receipts which upon fulfillment of
certain conditions were automatically exercised into 27,500,000 of our common
shares and 13,750,000 of our share purchase warrants. Each whole warrant will be
exercisable for a term of three years from the date of issuance at an exercise
price of $0.55. In addition, we issued 1,307,375 share purchase warrants to
certain parties in conjunction with the Adira Financing. Each such warrant is
exercisable into one common share for up to three years from the date of closing
of the Adira Financing at an exercise price of $0.40.

On December 2, 2010, our common shares commenced trading on the
TSXV following approval of its listing in November 2010.

On February 16, 2011, we completed a private placement of
10,483,871 of our common shares at a price of CDN$ 0.62 per share for gross
proceeds of CDN$ 6.5 million.

Prior Operations of Adira

We were previously engaged in the acquisition and, formerly,
exploration of resource properties.

We were inactive for approximately four years prior to our
acquisition of Adira Energy in 2009 and were considered a shell company within
the meaning assigned to that term in Rule 12b-2 of the Exchange Act because we
had no operations and our assets consisted solely of cash. Prior to this
four-year period, we had conducted oil and gas exploration activities in New
Zealand but withdrew from the permit and assigned our interest to other
participants in the permit during the 2003 fiscal year.

We do not receive any revenue from our discontinued oil and gas
operations in New Zealand, and had no significant assets, tangible or intangible
except for cash on hand. We have no history of earnings and there is no
assurance that our business will be profitable. We expect to continue incurring
operating losses and accumulating deficits in future periods.

Reporting Issuer Status under Canadian Securities Laws

On February 1, 2006, the British Columbia Securities Commission
granted our application to be designated as a reporting issuer under the
Securities Act (British Columbia). Accordingly, we and our insiders
became subject to the continuous disclosure requirements under the securities
laws of the Province of British Columbia, Canada. The Company received final
approval for listing on the TSXV on December 1, 2010, and on December 2, 2010,
our common shares commenced trading on the TSXV. The Company is
also a reporting issuer under the securities legislation of the provinces of
Alberta and Ontario.

-18 -

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Capital Expenditures and Divestitures

During the year ended December 31, 2011, the Company incurred
capital expenditures of approximately $954,000 which relates to costs incurred
to set up a drilling rig site on the Eitan License, and office and computer
equipment for our Tel-Aviv office. The Company did not make any capital
divestitures.

Takeover Offers

We are not aware of any indication of any public takeover
offers by third parties in respect of our common shares during our last and
current financial years.

B.          
Business Overview

We have been granted interests in the following offshore
petroleum licenses from the State of Israel: the Gabriella License No. 378 (the
Gabriella License), Yitzhak License No. 380 (the Yitzhak
License) and Samuel License No. 388 (the Samuel License). The
Gabriella License, the Yitzhak License and the Samuel License are collectively
referred to herein as the Offshore Licenses.

Below is a map showing the locations of the Offshore Licences,
each of which is more particularly discussed below. As also discussed below, we
relinquished our interests in two onshore licenses (collectively, the
Onshore Licences) during the year ended December 31, 2011.



Offshore Licences

Gabriella License

The Gabriella License covers 97,000 acres (392 square kilometers (“sq. km”)) and is approximately 10 kilometers (“km”) offshore Israel between Netanya and Ashdod. The Gabriella License was issued on July 15, 2009 to the Company (100%) for an initial three year period and may be renewed for a further four year period with a further renewal option of two years in the case of a reserve discovery. Thereafter, a lease (30-50 years) can be sought if a “discovery” (as defined in the Israeli Petroleum Law 5712 & 1952 and the regulations promulgated thereunder (“Israeli Petroleum Law”)) is made. On February 23, 2012, we received approval from the Petroleum Commissioner of Israel (the “Commissioner”) to extend the expiration of the Gabriella License to February 28, 2013.

- 19 -

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In January 2010, we, through our subsidiary Adira Energy Israel
Ltd. (Adira Israel), entered into an agreement with Modiin Energy
Limited Partnership (MELP) and Modiin Energy Management (1992) Ltd.
(MEGP) whereby we transferred 70% of the participation interests in the
Gabriella License to MELP. In addition, in January 2010, a subsidiary of
Brownstone Energy Inc. (formerly Brownstone Ventures Inc.) (Brownstone)
exercised its option to purchase 15% of the participation interests in the
Gabriella License, which interests we understand have not been registered in the
name of Brownstone with the Ministry. Pursuant to an agreement dated July 7,
2011 between Adira Israel and Brownstone, Adira Israel confirmed to Brownstone
that it is holding 15% of the participation interests in the Gabriella License
on Brownstones behalf. We are currently the operator of the Gabriella License.

In addition to its 15% of the remaining participation interests
in the Gabriella License, Adira Israel also has an option to acquire 15% of
MELPs participation interests in the Gabriella Licenseat any time until
the earlier of six months after a discovery or the end of the license period,
including all renewals, which 15% will be deducted out of the 70% participation
interest held by MELP. As at the date hereof, Adira Israels option has not been
registered with the Ministry.

Our pro rata share of exploration expenditures, being 15% of
the costs up to the first US$8 million of expenditures have been paid by MELP.
We previously received a monthly fee of $12,500 from MELP, which payments ended
on February 1, 2012. In addition, we are entitled to receive: (a) 4.25% of the
7.5% management fees payable by MELP to MEGP; and (b) a royalty in the aggregate
amount of 4.5% (2.25% from each of MELP and MEGP) from any resources extracted
from the Gabriella License until MELP recovers the pro rata exploration
expenditures incurred by it on behalf of the Company, after which time the
royalty increases to an aggregate of 10.5% (5.25% from each of MELP and
MEGP).

On the Gabriella License and Yitzhak License, Western Geco, a
business segment of Schlumberger Limited, has completed a dual azimuth 511 sq.
km and 129 sq. km 3D survey, respectively, which will help define the
anticipated oil targets on both licenses.

The following work program must be completed in order to maintain the Gabriella License:

| | 1. | filing a prospect to MNI for the first well which shall include a description of the geological background, the targets for drilling and the petroleum systems related thereto, as well as a geological forecast and engineering planning of the proposed drilling by June 1, 2012;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                    
| | 2. | signing a drilling agreement with a drilling contractor by July 1, 2012;                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                    
| | 3. | commencement of drilling by December 1, 2012;                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                    
| | 4. | preparation of a summary report to MNI of the drilling activity, and transfer of all of the findings, including tests, samples, pits (if taken), electrical logs and results of tests (if performed) within three months from completion of the drilling; and                      
| |    |                                                                                                                                                                                                                                                                                    
| | 5. | submission to MNI of a work plan for continuation of the work in the license within four months from completion of the drilling.                                                                                                                                                   

Yitzhak License

The Yitzhak License covers 31,555 acres (127.7 sq. km) and is located approximately 17 km offshore Israel between Hadera and Netanya, directly to the north of and contiguous to the Gabriella License.  The Yitzhak License was issued in October 2009 to Adira Energy (85% working interest) and Brownstone (15% working interest, which interest has been registered with the Ministry) for an initial three year period and may be renewed upon fulfillment of certain conditions for a further four year period with a further renewal option of two years in the case of a reserve discovery. Thereafter, a lease (30-50 years) can be sought if a “discovery” (as defined in the Israeli Petroleum Law) is made. On February 23, 2012, the Company received approval from the Commissioner to extend the expiration of the Yitzhak License to February 28, 2013.

On January 10, 2012, the Company announced that it received
approval from the Commissioner for the farm-out of an aggregate of 25% of its
interest in the Yitzhak License to two new partners, 5% to AGR Group ASA
(AGR) and 20% to Ellomay Oil and Gas 2011 LP, a limited partnership
(Ellomay) whose general partner is a wholly-owned subsidiary of Ellomay
Capital Ltd. (Ellomay Capital). Accordingly, as at the date hereof, the
Company continues to have a 60% interest in the Yitzhak License, Brownstone has
a 15% working interest in the license, AGR has a 5% working interest in the
license and Ellomay has a 20% working interest in the license. The Company and
AGR Petroleum Services Holdings AS are currently the co-operators of the Yitzhak
License. The Company, Brownstone, AGR and Ellomay are currently negotiating a
joint operating agreement to regulate their commercial relationship in respect
of the Yitzhak License.

The farm-out agreement between the Company and AGR dated
November 29, 2011 (the AGR Farm-Out Agreement) provides, among other
things, that: (a) AGRs 5% working interest is to be carried by the remaining
holders of the Yitzhak License through the exploration period; (b) AGR will pay
the Company a 3% overriding royalty interest (ORRI) on AGRs share of
revenues from sold petroleum, until repayment of AGR's expenditures in the work program and 4.5% ORRI from that date forward; (c)
AGR will be designated lead operator in accordance with Israeli regulations
defining Operator, with the continued involvement of the Company as
cooperator; and (d) AGR has been appointed as engineering services contractor on
the Yitzhak License with continued involvement of the Company as part of the
core professional team led by AGR.

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The farm-out agreement between the Company and Ellomay dated
November 29, 2011 (the Ellomay Farm-Out Agreement) provides, among
other things, that: (a) Ellomay will reimburse the Company for its proportionate
share of the costs incurred by the Company on the Yitzhak License, plus interest
at LIBOR plus 1%; and (b) Ellomay will also pay the Company a 3% ORRI on
Ellomays share of revenues from sold petroleum, until repayment of Ellomay's
expenditures in the work program and 4.5% ORRI from that date forward.

The following work program must be completed in order to maintain the Yitzhak License:

| | 1. | submission of a first drilling prospect to MNI which includes a description of the geological background, the drilling targets and the petroleum systems related thereto, as well as a geological forecast and engineering planning of the proposed drilling by June 1, 2012;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                              
| | 2. | signing of a drilling agreement with a drilling contractor by July 1, 2012;                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                              
| | 3. | commencement of drilling by December 1, 2012;                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                              
| | 4. | preparation of a summary report to MNI of the drilling activity, and transfer of all of the findings, including tests, samples, pits (if taken), electrical logs and results of tests (if performed) within three months from completion of the drilling; and                
| |    |                                                                                                                                                                                                                                                                              
| | 5. | submission to MNI of a work plan for continuation of the work in the license within four months from completion of the drilling.                                                                                                                                             

Exploration History

The Yitzhak (formally called Delta) structure is a carbonate
build-up on a structurally elevated block. This structure was tested by
Belpetco, in their Delta-1 well (total depth of 4423 meters) in 1970, in the
Upper Jurassic Delta Formation. Recent seismic reprocessing, seismic
interpretation and log analysis demonstrate a highly potential closure at the
Zohar limestone level encompassing approximately 20 square kilometres.

Most of the exploration efforts conducted to the date of this
Annual Report concentrated on large structural features with little attention
given to direct hydrocarbon indicators (DHI) and amplitude with offset
related imaging (AVO/AVAZ) to identify and quantify reservoir
zones. Based on recent advances in reprocessing and interpretation, it became
apparent that each of the Gabriella License and the Yitzhak License structures
show an abundance of minor faulting/fracturing which most likely play an
important role in fluid dynamics and transmissibility of the primary target
reservoir (Zohar).

In May 2011, the Company formally contracted Gustavson
Associates LLC as an independent contractor, to provide professional,
geophysical, petrophysical, geological and engineering services for resource
interpretation and evaluation on the first phase of processing (often termed
Fast Track) for each of the Gabriella License and the Yitzhak License. In
September 2011, the Company received two independent reports disclosing resource
estimates on the Gabriella License and the Yitzhak License. The reports were
prepared by Gustavson Associates LLC in accordance with National Instrument
51-101, Standards of Disclosure for Oil and Gas Activities (NI
51-101), as adopted by the Canadian Securities Administrators, and describe
a probabilistic distribution of each of the Gabriella Licenses and the Yitzhak
Licenses Contingent Resources in respect of oil on the Gabriella License and
Prospective Resources in respect of gas for both the Gabriella License and the
Yitzhak License and the oil on the Yitzhak License.

In March 2012, the Company received two further independent
reports from Netherland, Sewell & Associates, Inc. disclosing resource
estimates on each of the Gabriella License and the Yitzhak License. The reports
were prepared by Netherland, Sewell & Associates, Inc. in accordance with NI
51-101 and also describe a probabilistic distribution of each of the Gabriella
Licenses and the Yitzhak Licenses Contingent Resources in respect of oil on
the Gabriella License and Prospective Resources in respect of gas for both the
Gabriella License and the Yitzhak License and the oil on the Yitzhak License.
Copies of the reports are available on www.sedar.com.

Readers should note that Contingent Resources and
Prospective Resources are as defined by the Canadian Oil and Gas Evaluation
Handbook, and do not represent an estimate of reserves. Readers are cautioned
that in contrast to disclosure permitted by NI 51-101, under applicable SEC
rules, the disclosure of estimates of oil or gas resources other than reserves,
and any estimated values of such resources, is not permitted to be disclosed in
any document publicly filed with the SEC.

Samuel License

The Samuel License covers 88,708 acres (361 sq. km) and is located approximately 17 km offshore Israel adjacent to the shoreline between the City of Ashkelon in the South and the City of Palmachim. The Samuel License was issued on August 1, 2010 to Adira Geo Global Ltd. (“Adira GeoGlobal”) (30% interest), Geo Global Resources (India) Inc. (“GGRI”) (30% interest), Adira Oil Technologies Ltd. (“Adira Oil”) (23.25% interest), Pinetree Capital Ltd. (“Pinetree”) (10% interest) and Brownstone (6.75% interest) for an initial three year period and may be renewed for a further four year period and a further renewal option of two years in the case of a reserve discovery.  Thereafter, a lease (30-50 years) can be sought if a “discovery” (as defined in the Israeli Petroleum Law) is made.  The Company’s net interest in the Samuel License is 41.25%, of which 23.25% is held through its 100% owned Canadian subsidiary Adira Oil and 18% of which is held through its 60% held subsidiary Adira GeoGlobal.

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The exploration and extraction activity in the Samuel License is performed in the framework of a joint operating agreement (the “JOA”) between GGRI, Adira GeoGlobal, Adira Oil, Brownstone and Pinetree, pursuant to which Adira GeoGlobal has been designated as the operator of the Samuel License.  In accordance with the JOA, the Company is entitled to receive one-half of an aggregate operating fee equal to 7.5% of the cumulative direct costs incurred in connection with operating the Samuel License and one-half of 3% ORRI.

Pursuant to an option agreement between GGRI and the holders of
the Myra and Sara Licenses (as hereinafter defined), the holders of the Myra and
Sara Licenses are entitled to acquire up to a 20% interest in the Samuel
License, contingent on the Myra and Sara Option (as hereinafter defined).

In March 2011, a contract with ARIS Nefterazvedka LLC., a
Russian geophysical contractor specializing in Ocean Bottom Deployed Cables
(OBC), was signed for a system which provides high resolution recording
of targets with little impact with surface traffic. The OBC system provides an
excellent quality survey for shallow transient zones. The survey was completed
in July, 2011 and the Company has engaged GX Technology EAME Ltd. to commence
the processing of the 3D data, which the Company currently expects will be
completed during the second quarter of 2012.

On April 4, 2012, GGRI announced that Emanuelle Energy Ltd., a wholly-owned subsidiary of The Israel Land Development Company-Energy Ltd., had given notice that it elects to exercise its participating option interest of 7.128% in the Samuel License.  GGRI’s interest would therefore decrease to 22.872%.

Work Program

The following work program must be completed in order to maintain the Samuel License:

| | 1. | submission of a first drilling prospect to MNI which includes a description of the geological background, the drilling targets and the petroleum system/s related thereto, as well as a geological forecast and engineering planning  of the proposed drilling by June 1, 2012;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                
| | 2. | execution of a contract with a drilling contractor by July 1, 2012;                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                
| | 3. | commencement of performance of first drilling by October 1, 2012;                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                
| | 4. | preparation of a summary report to MNI of the drilling activity, and transfer of all of the findings, including tests, samples, pits (if taken), electrical logs and results of tests (if performed) within three months from completion of the drilling; and                  
| |    |                                                                                                                                                                                                                                                                                
| | 5. | submission of a work plan to MNI for continuation of the work on the license within four months from completion of the drilling.                                                                                                                                               

Myra and Sara Licenses

In August 2010, the Company signed a definitive co-operation
agreement with Geo Global Resources Inc., and its wholly-owned subsidiary, GGRI
(together, GGR) confirming the terms whereby GGR has agreed to assign
an option (the Myra and Sara Option) it has to acquire up to a 5%
participating interest in each of two deep water licenses offshore Israel known
as Petroleum License No's 347 Myra and 348 Sara (collectively, the Myra
and Sara Licenses) to the Company. The Myra and Sara Licenses are each
subject to a JOA among the holders of the participating interests in the
respective licenses (collectively, the M&S Operating Agreements),
which M&S Operating Agreements govern the operations with respect to the
exploration work on the Myra and Sara Licenses and the change of any interest
holders in the Myra and Sara Licenses.

On October 28, 2010, by notice to the other joint holders of
interests under the M&S Operating Agreements, namely MELP and ILDC Energy
Ltd. (the M&S Consortium), and with the consent of the Company, GGR
gave notice of its intent to exercise the Myra and Sara Option pursuant to the
terms of the M&S Operating Agreements but has to date not formally exercised
the Myra and Sara Option nor have funds been paid on behalf of any party for
such exercise.

GGR has agreed to hold the Myra and Sara Option in the Myra and
Sara Licenses (and all rights pursuant thereto) in trust for the Company (the
Beneficiary M&S Interest).

As a condition to the Company obtaining title to the
Beneficiary M&S Interest, the Company will (i) be required to become a
signatory to the M&S Operating Agreements; and (ii) obtain the approval of
the Commissioner. Upon obtaining the Company's interest and receipt of the
approvals, the Company will be required to pay $1,200,000  in one lump sum payment to
certain parties of the M&S Operating Agreements. Additionally, GGR granted
to the partners in the Myra and Sara Licenses an option to purchase up to 12.5%
of the participation rights in the Samuel License not later than the sending of
a processed three-dimensional seismic survey including analysis of the
information relating to the Samuel License (the First Option). Subject
to the exercise of the First Option, GGR granted to the partners in the Myra and
Sara Licenses an additional option to purchase an additional 7.5% until
commencement of the first drilling in the area of the Samuel License (the
Second Option and together with the First Option, the
Options)).

In addition, under the terms of a cooperation agreement in
respect of the Sara, Myra, Michal and Samuel Licenses between GGR, GGRI and
Adira (the Cooperation Agreement), the parties agreed, among other
things, that upon receipt of the approval of the partners in the Myra and Sara
Licenses to transfer the Myra and Sara Option to the Company, and following
registration of the Company as the owner of the rights under the Myra and Sara
Option with the Ministry, the following provisions will apply in relation to the
Samuel License: (a) in the event the partners in the Myra and Sara Licenses
exercise either or both of the Options, the rate of the holdings of the Company
and GGR in the Samuel License would be diluted proportionately to
their holdings, (b) GGR and the Company would act to increase the level of the
participation rights of GGR in the Samuel License by 3%, with appropriate
dilution of the level of participation rights of Adira Oil Technologies Ltd.,
such that the rate of the holdings in the Samuel License would be: GGR - 45%;
Adira - 38.25%; Brownstone - 6.75%; Pinetree - 10%.

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Additionally, the Company will be expected to pay its pro rata
share of expenditures, pursuant to the M&S Operating Agreements. The
Beneficiary M&S Interest is dependent upon a number of circumstances beyond
the control of the Company and there is no assurance that the Company will be
able to take title of this asset.

On December 6, 2011, two of the partners in the Myra and Sara Licenses announced that GGR did not transfer the funds required and therefore the option had expired.  On December 8, 2011, GGR reported that the Myra and Sara Option expired due to failure of the Company to meet the conditions of the Myra and Sara Option.  On December 8, 2011, the Company notified GGR that it believes the Myra and Sara Option is valid and exercisable. Accordingly, there is no assurance that the Company will be able to exercise the Myra and Sara Option.

The Company does not currently consider the Myra and Sara
Option material to its operations.

Former Onshore Licences

On December 15, 2011, following the Companys findings from the
drilling of the Eitan#1 well and further analysis by the Companys geoscientists
in consultation with outside consultants, the Company determined that the
continuation of exploration activities on the Companys Eitan License No. 356,
covering 31,060 acres (125.7 sq. km.) in the Hula Valley in Northern Israel (the
Eitan License) would not lead to an economically viable project for the
Company. Accordingly, the Company announced that it has relinquished the Eitan
License and has commenced the process of surrendering the Eitan License in
accordance with Israeli Petroleum Law.

The Company had a right to farm into 70% of the Notera License
which is approximately 19,000 acres and contiguous and directly to the south of
the Eitan License (the Notera License). In July 2011, the Company
waived its right to farm into the Notera License. The Company has therefore
terminated all agreements with Coalbed Gas Hachula Ltd, an Israel-based coalbed
methane development company relating to the Notera License.

Drilling Activity

As of the date of this Form 20-F, no drilling activity is being
carried out. During the past three fiscal years, we have had no productive wells
and have had only one dry exploratory well - namely, the Eitan #1 well which was
drilled on lands in the Hula Valley in Northern Israel covered by the Eitan
License. As defined in Item 1205(b)(1) of Regulation S-K, a dry well is an
exploratory, development, or extension well that proves to be incapable of
producing either oil or gas in sufficient quantities to justify completion as an
oil or gas well.

C.          
Organizational Structure

As December 31, 2011, we operate in Canada through our wholly
owned subsidiary Adira Energy, an Ontario corporation incorporated on April 8,
2009; and in Israel, through Adira Energys subsidiaries. The following sets out
the current organizational structure of the Company and its subsidiaries:

- 23 -

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Notes:

|(1) | The other 40% of the shares of Adira Geo Global are held
      by GGRI, a corporation that is not related to the Company, the Companys
      partner in the development of the Samuel License.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Adira Energy Ltd. (Canada) is a holding corporation and
      is the registered and beneficial owner of 100% of Adira Energy Holding
      Corp. (Ontario).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(3) | Adira Energy Holding Corp. (Ontario) is a holding corporation and is the registered and beneficial owner of foreign subsidiaries: (i) 60% of Adira GeoGlobal Ltd., a holding corporation created to hold certain licenses that Adira may acquire.  It currently holds a 30% interest in the Samuel License; (ii) 100% of Adira Energy CBM Ltd. (Israel), an inactive corporation; (iii) 100% of Adira Oil Technologies Ltd. (Israel), a holding corporation created to hold licenses.  It currently holds a 23.25% interest in the Samuel License; (iv) 100% of Adira Energy Israel Ltd. (Israel), a holding corporation created to hold certain licenses that Adira may acquire.  It currently holds the Gabriella License and Yitzhak License; (v) 100% of Adira Energy Israel Services Ltd. (Israel), a corporation created to provide services to the Company’s other Israeli subsidiaries; (vi) 100% of Adira Energy Holdings (Barbados) Ltd. (Barbados), a holding corporation created to hold certain licenses that the Company may acquire, which wholly owns Adira Energy Investments (Barbados) Ltd. (Barbados) (“AEIB”); and (vii) AEIB, a holding corporation created to hold certain licenses that the Company may acquire.  It currently holds the Myra and Sara Option.

D.          
Property, Plant and Equipment

(a)          
Corporate Offices

Our executive offices are comprised of approximately 784 square
  feet at 120 Adelaide Street West, Suite 120, Toronto, Ontario, Canada, M4V 3A1
  for which the lease cost is CDN$1,372 per month and 424 square meters at Aba
  Hillel Silver 12, Ramat Gan, Israel, for which the lease cost is $12,917 per
  month.

(b)          
Special Skill and Knowledge

Our ability to complete drilling and exploration is dependent
on the availability of well-trained, experienced crews to operate our field
equipment and qualified management. We believe that our strategic arrangement
with certain oil and gas exploration companies provides us with access to the
special skills and knowledge required to assist us in the evaluation of our
exploration properties.

- 24 -

---

(c)          
Foreign Operations

During the fiscal years ended December 31, 2011 and 2010, all
of our oil and gas exploration activities were in the State of Israel.

(d)          
Competitive Conditions

The oil and gas industry in the State of Israel is, and will
continue to be, competitive. Most contracts are awarded on the basis of
competitive bids. We believe that our early entry into oil and gas exploration
in Israel will provide us with a competitive advantage in the exploration and
evaluation of our licenses. Our joint venture with Brownstone is anticipated to
allow us to access to new projects while limiting our financial exposure. We
also expect to benefit from Brownstones operational knowledge and experience,
given its established oil and gas exploration and development operations.

(e)          
Dependence on Customers and Suppliers

We are not dependent upon a concentration of customers or
suppliers for revenues, or our operations.

(f)          
Environmental Protection and Policies

We are subject to various state and district environmental laws
and regulations enacted in Israel, which primarily govern the manufacture,
processing, importation, transportation, handlings and disposal of certain
materials used in operations, as well as limits on emissions into the air and
discharges into surface and sub-surface waters. We adhere to all such laws and
regulations. We may be required to increase operating expenses or capital
expenditures in order to comply with any new restrictions or regulations.

We do not expect that environmental protection requirements
will have a significant financial or operational effect on our capital
expenditures, earnings or competitive position. Environmental requirements have
not had a significant effect on such matters in fiscal year 2011 nor are they
currently anticipated in the future.

To date, all of our operations have been in compliance in all
material respects with applicable corporate standards and environmental
regulations and there were no material notices of violations, fines or
convictions relating to environmental matters at any of our operations.

We believe that we are in substantial compliance with all
material current government controls and regulations for each of our licenses.

See also Item 3D - Risk Factors.

ITEM
5           OPERATING AND
FINANCIAL REVIEW AND PROSPECTS

The following is a discussion and analysis of the activities,
consolidated results of operations and financial condition of the Company for
the year ended December 31, 2011. Our managements discussion and analysis of
financial conditions and results of operations for the year ended December 31,
2011 should be read in conjunction with our audited consolidated financial
statements and related notes for the year ended December 31, 2011. Our financial
statements have been prepared in accordance with IFRS as issued by the IASB.

A.          
Operating Results

Summary

We are an oil and gas exploration company. Through our
wholly-owned subsidiary, Adira Energy, and its wholly owned subsidiary, Adira
Israel, we have been granted three offshore petroleum licenses - namely, the
Gabriella License held by Adira Israel, the Yitzhak License, held by Adira
Israel and the Samuel License - which we own through our other wholly owned
subsidiary, Adira Oil Technologies Limited, and our partially owned 60%
subsidiary, Adira Geo Global Ltd. (Adira Geo Global). Our business plan
is to undertake evaluation work on each of the offshore licenses to establish
whether exploration is justified. We also previously held one onshore petroleum license in Israel, the Eitan License, which we
relinquished in December 2011 after we determined that exploration work was not
warranted.

- 25 -

---

In addition, the Company has an option (referred to elsewhere
in this annual report as the Myra and Sara Option), subject to the fulfillment
of certain conditions, to acquire a 5% participating interest in each of two
deep water licenses offshore Israel called the Myra and Sara Licenses. On
December 6, 2011, two of the Partners in Myra and Sara announced that the Myra
and Sara Option had expired. Adira was not party to the relevant contract upon
which the two Partners in Myra and Sara have based their position, and therefore
believes that the Myra and Sara Option remains validly exercisable. However,
there is no assurance that the Company will be able to exercise the Myra and
Sara Option. We do not currently consider the Myra and Sara Option material to
our operations.

We presently do not produce any oil or gas and do not earn any
significant revenues.

Our activities on each of the Offshore Licenses are conducted
jointly with others. Our financial statements reflect our proportionate interest
in these activities.

Results of Operations

Consolidated results of operations for the year ended
December 31, 2011 compared to the year ended December 31, 2010.

Revenues and Other Income

Year endedDecember 31,2011
      
      
      2010U.S. dollars in
        thousandsConsulting
      $
      771
      
      $
      810Operator fees
      
      312
      
      
      455Income from farm-out
      
      240
      
      
      330Other income
      
      -
      
      
      112$
      1,323
      
      $
      1,707


Consulting fees relates to consulting services in respect of
the Offshore Licenses on a time and materials basis.

Operator fees relate to
  fees we received as the operator on our three Offshore Licenses, at a fixed rate
  of the total exploration costs incurred by the respective Unincorporated Joint
  Ventures (UJVs).

Income from farm-out relates mainly to fees received from MELP
and MEGP, in respect of our agreement with them relating to the farm out of 70%
of the Companys interest in the Gabriella License.

For the year ended December 31, 2011 the Company earned revenues of $1,323,000, as compared to $1,707,000 for the year ended December 31, 2010.  Revenues in 2011 relate to operator, and consulting fees, which are a function of the level of exploration activity in 2011 and income from our farm out agreement with MELP and MEGP. The higher revenues in 2010 relate to higher management and operator fees received, mainly due to higher exploration expenses in 2010 following the execution of the 3D seismic program in the Gabriela License, which took place in 2010.  As the Company’s portion of these expenses was carried by MELP, no exploration expenses were recorded.

Expenses

Share-based compensation

Stock based compensation during the years ended December 31,
2011 and 2010 was attributable to stock options granted to our directors,
officers, employees and other service providers during these periods.

The Company has sixteen categories of stock options that have
different vesting periods:

| | (i) | Type A stock options vest over 2 years, with 12.5%
      vesting each quarter with the initial amount vesting on the date three months after the grant
  date.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

- 26 -

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| | (ii)   | Type B stock options vest 8.5% at the end of each quarter
      for the first two years and 8% at the end of each quarter thereafter. The
      initial amount will vest three months after the grant date.                                                                                                       
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                                                                                                                                                                                   
| | (iii)  | Type C stock options vest over 4 years, with 6.25%
      vesting at the end of each quarter with the initial amount vesting on the
      date three months after the grant date.                                                                                                                                  
| |        |                                                                                                                                                                                                                                                                                                                   
| | (iv)   | Type D stock options vest at 12.5% each quarter and the
      initial amount vests on the business day immediately on which each of the
      optionees is elected or appointed as a director of the Company. In the
      event they are not elected as a director, all options granted expire
      immediately.
| |        |                                                                                                                                                                                                                                                                                                                   
| | (v)    | Type E stock options vest over 2 years, with 12.5%
      vesting at the end of each quarter with the initial amount vesting on the
      date three months after the grant date.                                                                                                                                  
| |        |                                                                                                                                                                                                                                                                                                                   
| | (vi)   | Type F stock options vest over 4 years, with 6.25%
      vesting at the end of each quarter with the initial amount vesting on the
      date three months after the grant date.                                                                                                                                  
| |        |                                                                                                                                                                                                                                                                                                                   
| | (vii)  | Type G stock options vest 8.5% at the end of each quarter
      over two years and 8.0% at the end of each quarter thereafter with the
      initial amount vesting on the date three months after the grant
    date.                                                                                            
| |        |                                                                                                                                                                                                                                                                                                                   
| | (viii) | Type H stock options vest 12.5% each quarter over two
      years with the initial amount vesting on the grant date.                                                                                                                                                                                              
| |        |                                                                                                                                                                                                                                                                                                                   
| | (ix)   | Type I stock options vest 12.5% every six months over
      four years with the initial amount vesting on the date three months after
      the grant date;                                                                                                                                                       
| |        |                                                                                                                                                                                                                                                                                                                   
| | (x)    | Type J stock options vest 12.5% every six months over
      four years with the initial amount vested on September 18, 2011;                                                                                                                                                                                      
| |        |                                                                                                                                                                                                                                                                                                                   
| | (xi)   | Type K stock options vest over six months and were fully vested six months after the date of grant;                                                                                                                                                                                                               
| |        |                                                                                                                                                                                                                                                                                                                   
| | (xii)  | Type L stock options vest 12.5% every six months over
      four years with the initial amount vested on September 3, 2011;                                                                                                                                                                                       
| |        |                                                                                                                                                                                                                                                                                                                   
| | (xiii) | Type M stock options vest 12.5% every six months over
      four years with the initial amount vested on December 1, 2011;                                                                                                                                                                                        
| |        |                                                                                                                                                                                                                                                                                                                   
| | (xiv)  | Type N stock options vest 12.5% every six months over
      four years with the initial amount vested on December 27, 2011;                                                                                                                                                                                       
| |        |                                                                                                                                                                                                                                                                                                                   
| | (xv)   | Type O stock options vest 12.5% every six months over
      four years with the initial amount vested on February 1, 2012;
  and                                                                                                                                                                                  
| |        |                                                                                                                                                                                                                                                                                                                   
| | (xvi)  | Type P stock options vest 12.5% every six months over
      four years with the initial amount vesting on May 1,
  2012.                                                                                                                                                                                          

We have a stock option plan whereby options may be granted to
eligible directors, officers and employees, provided that the number of shares
issued under the plan does not exceed 10% of issued and outstanding common
shares of the Company. Stock options may be issued at a term and exercise price
to be determined by the Companys Board of Directors (the Board or the
Board of Directors) provided that the exercise price is no less than
the market price at the date of the grant.

Exploration Expenses

For the year ended December 31, 2011, exploration expenses
amounted to $4,759,000 as compared to $1,485,000 for year ended December 31,
2010. The increase in exploration expenses in 2011 is a result of the Companys
continued exploration work on the Offshore Licenses, specifically, the execution
of the 3D seismic program on each of the Yitzhak License and the Samuel License,
compared with less exploration activities in 2010.

Impairment Charge

For the year ended December 31, 2011, the write off amounted to
$1,226,000 in respect of the Companys Eitan #1 well as well as consumables and
equipment related to the Eitan License relinquished in 2011, as compared to $0
for the year ended December 31, 2010.

- 27 -

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General and Administrative Expenses

For the year ended December 31, 2011, general and
administration expenses amounted to $5,290,000 as compared to $3,206,000 for
year ended December 31, 2010. The increase in operating expenses results
primarily from increased activity in Israel since late 2010, including the
hiring of additional staff and the opening of the Company's new office in Israel
as well as increased legal, accounting, travel and marketing expenses.

Part of the expenses relates to share based compensation of
$1,023,000 as compared to $1,277,000 in 2010. The decrease of $254,000 is mainly
due to employee stock options that were forfeited during 2011.

Financing Income/Expense

For the year ended December 31, 2011, financial income amounted
to $43,000 as compared to a financial income of $0 for the year ended December
31, 2010. Financing income represents interest earned on short-term deposits,
primarily held in Canadian dollars and US dollars.

For the year ended December 31, 2011, financial expenses
amounted to $109,000 as compared to a financial expense of $5,000 for the year
ended December 31, 2010. The amounts in 2011 and in 2010 are a result of
fluctuations in NIS and Canadian dollar rates against the US dollar.

Net Loss

The Company reported a net loss and comprehensive loss for the
year ended December 31, 2011 of $10.0 million as compared to a net loss and
comprehensive loss of $3 million for year ended December 31, 2010. The reason
for the increase in the loss is as a result of an increase in exploration and
operating activities, offset by revenues generated from management, operator and
consulting fees.

Inflation

During the years ended December 31, 2011 and 2010, inflation
has not had a material impact on our operations.

Government Regulation

The Offshore Licenses held by us have been granted to us by the
State of Israel under the Israeli Petroleum Law, and our evaluation and
exploration activities in the areas covered by the Offshore Licenses must be
undertaken in compliance with work plans approved by the Commissioner.

Consolidated results of operations for the year ended
December 31, 2010 compared to the 267 day period ended December 31, 2009.

Revenues and Other Income

For the year ended December 31, 2010 we earned revenues and
other income of $1.7 million as compared to $0 for the 267 day period ended
December 31, 2009. The breakdown of revenues for the year ended December 31,
2010 is as follows:

Year endedDecember 31, 2010
    
    
    % of TotalRevenue Categories
    
    (in thousands)
    
    
    IncomeConsulting
    $
    810
    
    
    47Operator
      fees
    
    455
    
    
    27Other
      income
    
    442
    
    
    26Total Revenues and other
      income
    $
    1,707
    
    
    100%


Consulting fees relates to consulting services in respect of
the Offshore Licenses on a time and materials basis.

- 28 -

---

Operator fees relate to fees we received as the operator on our
three Offshore Licenses, on a fixed rate (i.e. 7.5%) of the total exploration
costs incurred by the respective UJVs.

Other income relates mainly to management fees received from
MELP and MEGP, in respect of our agreement with them relating to the farm-out of
70% of the Company interest in the Gabriella License.

Expenses Exploration Expenses

For the year ended December 31, 2010, exploration expenses
amounted to $1,485,000 as compared to $195,000 for the 267 day period ended
December 31, 2009. The increase in exploration expenses is a result of the
Company having commenced its offshore exploration program in 2010 compared with
minimal exploration activities in 2009.

General and Administrative Expenses

For the year ended December 31, 2010, general and
administrative expenses amounted to $3,206,000 as compared to $1,639,000 for the
267 day period ended December 31, 2009. The increase in general and
administrative expenses results primarily from increased activity in Israel,
including the hiring of additional staff and the opening of the Company's new
office in Israel, as well as increased legal, accounting travel and marketing
expenses. In addition, share-based compensation increased by $340,000.

Financing expense (income)

During the year ended December 31, 2010, the Company recorded
net exchange rate loss of $5,000 as compared to a gain of $15,000 for the 267
day period ended December 31, 2009.

Income Taxes

For the year ended December 31, 2010, we incurred Israeli taxes
  on income on one of our Israeli subsidiaries, Adira Services in an amount of
  $15,000 as compared to $1,000 for the 267 day period ended December 31, 2009.

Net Loss

The Company reported a net loss and comprehensive loss for the
year ended December 31, 2010 of $3,004,000 as compared to a net loss and
comprehensive loss of $6,722,000 for the 267 day period ended December 31, 2009.
The reason for the decrease in the loss despite higher exploration and operating
activities in 2010 is a result of (i) increased revenues in 2010, and (ii) the
one-time charge in 2009 in respect of issuance expenses related to the reverse
takeover consummated in August 2009.

B.          
Liquidity and Capital Resources

Liquidity

Liquidity is a measure of a companys ability to meet potential
cash requirements. The Company has historically met its capital requirements
through the issuance of common shares.

The Company has an accumulated deficit of $19.2 million as of December 31, 2011, and the Company had negative cash flows from operations of $6.4 million for the year ended December 31, 2011 ($3 million for the year ended December 31, 2010). The ability of the Company to continue as a going concern depends upon the discovery of economically recoverable reserves, the ability of the Company to obtain financing to complete development, and upon future profitable operations from the properties or proceeds from their disposition. The Company is an exploration stage company and has not earned any revenues from its oil and gas properties to date.

There can be no assurance that the Company will be able to
continue to raise funds in which case the Company may be unable to meet its
obligations. The Company is considering various alternatives with respect to
raising additional capital to remedy any future shortfall in capital, but to
date has made no specific plans or arrangements. Because of the early stage of
the Company's operations and the Company's absence of any material oil and
natural gas reserves, there can be no assurance this capital will be available and if
it is not, the Company may be forced to substantially curtail or cease
exploration, appraisal and development expenditures.

- 29 -

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Year ended December 31, 2011 compared to year ended
December 31, 2010

During the year ended December 31, 2011, the Company's overall
position of cash and cash equivalents decreased by $592,000. This decrease in
cash can be attributed to the following activities:

The Company's net cash used in operating activities during the
year ended December 31, 2011 was $6,414,000 as compared to $3,010,000 for the
year ended December 31, 2010. This increase is attributable to and consistent
with the increase in the Company's exploration and operating activities for the
current year, compared to the prior year.

Cash used in investing activities during the year ended
December 31, 2011 was $657,000 as compared to cash used in investing activities
of $1,087,000 during the year ended December 31, 2010. The investment in 2011
relates primarily to the capitalization of drilling costs in respect of the
Eitan #1 well as well as purchase of furniture, computers and office equipment
for the Israeli office, offset by the release of restricted cash. The amount
invested in 2010 relates primarily to investment in restricted cash and to the
purchase of the drilling rig and related equipment for the Eitan License.

Cash provided by financing activities for the year ended
December 31, 2011 was $6,617,000 as compared to $10,754,000 during the year
ended December 31, 2010. The cash provided in 2011 a result of the completion of
a private placement for net proceeds of $6,152,000 (gross proceeds: CAN$6.5
million), and the exercise of warrants and employee stock options during the
period. The cash provided in 2010 is a primarily as a result of the completion
of a private placement for net proceeds of $10,077,000 (gross proceeds: US$11
million) in November 2010.

There are no legal restrictions on transferring funds between
Canada and Israel.

Year ended December 31, 2010 compared to the 267-day
period ended December 31, 2009

During the year ended December 31, 2010, the Company's overall
position of cash and cash equivalents increased by $6,642,000. This increase in
cash can be attributed to the following activities:

The Company's net cash used in operating activities during the year ended December 31, 2010 was $3,010,000 as compared to $683,000 for the 267 day period ended December 31, 2009. This increase is attributable to and consistent with the increase in the Company's exploration and operating activities for the current period, compared to the prior period.

Cash used in investing activities during the year ended
December 31, 2010 was $1,087,000 as compared to net cash used of $365,000 during
the 267 day period ended December 31, 2009. The investment in 2010 relates
primarily to restricted cash held by the bank in respect of a letter of credit
and the purchase of computers and equipment for the Israeli office. The amount
in 2009 relates primarily to a deposit made on the purchase of drilling
equipment for the Eitan License.

Cash provided by financing activities for the year ended
December 31, 2010 was $10,754,000 as compared to $3,093,000 during the 267 day
period ended December 31, 2009. The increase is a result of the completion of an
$11 million private placement in November 2010, as compared to a $2.4 million
financing from two offerings in 2009 and off-set by $897,000 in cash and cash
equivalents acquired as part of the Companys RTO in August 2009.

Capital Resources

At December 31, 2011, the Company's cash and cash equivalents
were $8.1 million (December 31, 2010 - $8.7 million), The majority of this
balance is being held in US Dollars. The Company's working capital at December
31, 2011 was $8 million as compared to $10.7 million at December 31, 2010.

- 30 -

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Commitments

The Company has commitments to the Ministry to complete the
  work programs on all of the Companys licenses as set out above under Item 4B 
  Offshore Licences.

In order to maintain the current licenses, the Company will be
required to expend amounts in respect of exploration expenditure. The Company
intends to meet all of its drilling and related expenditures as they become due
to maintain the Companys interests in its oil and gas properties. These oil and
gas expenditure obligations are not fixed and cannot be pre-determined with
certainty. Failure to meet the obligations may result in the loss of the
Companys ownership interests.

The Company's share of the funding commitment for 2012 for the
above-mentioned licenses amounts to approximately $6.0 million.

Critical Accounting Policies and Estimates

Our results of operation and financial condition are based on
our consolidated financial statements, which are presented in accordance with
IFRS. Certain accounting principles require us to make certain estimates,
judgments and assumptions. We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon information available
to us at that time. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the financial statements, as well as
the reported amounts of revenues and expenses during the periods presented. To
the extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected. The
significant accounting policies that we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:

- Share-based payment transactions;
- Joint oil and gas ventures;
- Farm out arrangements in the exploration and evaluation phase;
- Exploration and evaluation assets; and
- Revenue recognition.

Share-based payment transactions

The Company's employees and other service providers are
entitled to remuneration in the form of equity-settled share-based payment
transactions.

The cost of equity-settled transactions with employees is
measured at the fair value of the equity instruments granted at grant date. The
fair value is determined using the Black Scholes pricing model. As for other
service providers, the cost of the transactions is measured at the fair value of
the goods or services received as consideration for equity instruments. In cases
where the fair value of the goods or services received as consideration of
equity instruments cannot be measured, they are measured by reference to the
fair value of the equity instruments granted.

The cost of equity-settled transactions is recognized in profit
or loss, together with a corresponding increase in equity, during the period
which the performance and service conditions are to be satisfied, ending on the
date on which the relevant employees become fully entitled to the award (the
vesting period). The cumulative expense recognized for equity-settled
transactions at the end of each reporting period until the vesting date reflects
the extent to which the vesting period has expired and the Company's best
estimate of the number of equity instruments that will ultimately vest. The
expense or income recognized in profit or loss represents the movement in the
cumulative expense recognized at the end of the reporting period.

If the Company modifies the conditions on which
equity-instruments were granted, an additional expense is recognized for any
modification that increases the total fair value of the share-based payment
arrangement or is otherwise beneficial to the employee/other service provider at
the modification date. If a grant of an equity instrument is cancelled, it is
accounted for as if it had vested on the cancellation date, and any expense not
yet recognized for the grant is recognized immediately. However, if a new grant
replaces the cancelled grant and is identified as a replacement grant on the
grant date, the cancelled and new grants are accounted for as a modification of
the original grant, as described above.

- 31 -

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Joint oil and gas ventures

The Company conducts petroleum and natural gas exploration
activities jointly with other partners who each have direct ownership in the
assets and each are directly obligated for the liabilities of the ventures.
Consequently, these financial statements reflect only the Company's
proportionate interest in such activities.

The Company accounts for its share of the joint venture's
assets, liabilities it has incurred, income from the sale or use of its share of
the joint venture's output, together with its share of the expenses incurred by
the joint venture and any expenses it incurs in relation to its interest in the
joint venture.

Farm-out arrangements in the exploration and evaluation
phase

A farm out is the transfer of part of oil and gas interest in
consideration for an agreement by the transferee (the farmee) to meet,
absolutely, certain expenditures which would otherwise have to be undertaken by
the owner (the farmor). Farm-out transactions generally occur in the
exploration or development phase and are characterized by the transferor (i.e.
farmor) giving up future economic benefits, in the form of reserves, in exchange
for a reduction in future funding obligations.

Accordingly, the farmee recognizes its expenditure under the
arrangement in respect of its interest and that retained by the farmor, as and
when the costs are incurred.

The Company, as the farmor, accounts for the farm-out
arrangement as follows:

- the Company does not record any expenditure made by the farmee on its
  behalf;
- the Company does not recognize a gain or loss on the farm out arrangement,
  but rather redesignates any costs capitalized in relation to the whole
  interest as relating to the partial interest retained; and
- any cash consideration received is credited against costs previously
  capitalized in relation to the whole interest with any excess accounted for by
  the farmor as a gain on disposal.

Exploration and evaluation assets

Prelicense costs

Pre-license costs are expensed in the period in which they are
incurred.

Exploration and evaluation costs

Oil and natural gas exploration and development expenditure is
accounted for using the successful efforts method of accounting.

During the geological and geophysical exploration phase, costs
are charged against income as incurred. Costs directly associated with an
exploration well in its drilling phase, for which it has not yet been determined
whether there are proved reserves or it is not commercially viable, are
capitalized as exploration and evaluation intangible assets until the drilling
of the well is complete and the results have been evaluated. These costs include
employee remuneration, materials and fuel used, rig costs and payments made to
contractors. If no reserves are found, the exploration asset is tested for
impairment. If extractable hydrocarbons are found and, subject to further
appraisal activity (e.g., by drilling further wells), are likely to be developed
commercially, the costs continue to be carried as an intangible assets while
sufficient and continued progress is made in assessing the commerciality of the
hydrocarbons. All such costs are subject to technical, commercial and management
review as well as review for impairment at least once a year to confirm the
continued intent to develop or otherwise extract value from the discovery. When
this is no longer the case, the costs are written off. When proved reserves of
oil are determined and development sanctioned, the relevant expenditure is
transferred to oil and gas properties after impairment is assessed and any
resulting impairment loss is recognized.

As of December 31, 2011, substantially all exploration costs
have been expensed.

- 32 -

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Revenue recognition

Revenues are recognized in the statement of comprehensive loss
  when the revenues can be measured reliably, it is probable that the economic
  benefits associated with the transaction will flow to the Company and the costs
  incurred or to be incurred in respect of the transaction can be measured
  reliably.

The Companys revenues are derived from:

1. Operator fees - The Company
acts as the operator or joint operator on the Offshore Licenses and is entitled
to operator fees at a fixed rate of 7.5% of the total exploration costs incurred
by the respective UJVs. Revenues from operator fees are recognized in
accordance with the terms of the JOAs, as exploration expenses are incurred in
the UJVs.

2. Consulting fees  The Company
provides consulting services in respect of the Offshore Licenses on a time and
materials basis. Consulting fees are recognized as revenues as the services are
rendered to the respective UJVs.

C.          
Research and Development, Patents and Licences

Not applicable.

D.          
Trend Information

We are not aware of any trends that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.

E.          
Off-Balance Sheet Arrangements

Except for the Myra and Sara Option, we do not have any
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.

F.          
Tabular Disclosure of Contractual Obligations

The following sets forth our contractual obligations as of
December 31, 2011:

Payments due by period (U.S.
        dollars in thousands)Contractual Obligations
      Total
      Less than 1 year
      1-3 years
      3-5 years
      More than 5 yearsOperating Lease Obligations
      339
      171
      168
      0
      0Approved funding commitment regarding our licenses
      6,004
      6,004
      0
      0
      0Total
      6,343
      6,175
      168
      0
      0


G.          
Safe Harbor

Not applicable.

ITEM
6           DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES

A.          
Directors and Senior Management

The size of Adiras Board of Directors is currently set at 6.
All of our directors are elected annually by the shareholders and hold office
until our next annual general meeting or until their successors are duly elected
and qualified, unless their office is earlier vacated in accordance with the
CBCA and our articles of incorporation. Pursuant to an agreement with BRM Group
Ltd. (BRM), for as long as BRM exercises control over 10% or more of
our issued and outstanding common shares, we will nominate, at each annual
shareholders meeting of the Company, two nominees of BRM to Adiras Board of
Directors, and one nominee in the event that BRM exercises control over common shares in an amount less than 10% but equal
to or greater than 7% of our issued and outstanding common shares. Further this
to arrangement, Eli Barkat and Yael Reznik Cramer were appointed as directors to
the Board of Directors as of January 11, 2011.

- 33 -

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The following table sets forth information relating to the
directors and senior management of Adira as at the date of this Form 20-F:

Name(1)
    PositionDennis Bennie (2)(3)
    Director (Chairman)Sheldon Inwentash (2)(3)
    DirectorEli Barkat (3)
    DirectorYael Reznik-Cramer (2)(3)
    DirectorColin Kinley
    DirectorAlan Friedman
    Director and
      Executive Vice-President, Corporate DevelopmentHezi Kugler (4)
    Chief Executive
      Officer from June 1, 2011 to February 24, 2012 Strategic Consultant
      from February 27, 2012Gadi Levin (5)
    Chief
      Financial Officer from January 11, 2011 Secretary from August 23, 2010
      Acting Principal Executive Officer from February 24 to February 27,
      2012Jeffrey E. Walter(6)
    Chief Executive
      Officer from February 27, 2012Alon Polishuk
    Vice-President,
      Contracts Administration and Regulations, from August 15, 2012Mosh Politi
    Chief Geologist


|(1) | Neither age nor date of birth of directors or senior
      managers is required to be reported in the Companys home country (Canada)
      nor otherwise publicly disclosed.                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Member of Audit Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | Independent for purposes of National Instrument
      52-110.                                                                                                                                                                                                                                                                                                                                                                                                               
|(4) | Mr. Kuglers employment as the Chief Executive Officer of
      the Company was terminated effective February 24, 2012 in accordance with
      the terms of the Kugler Service Agreement, as defined and more
      particularly discussed under Item 6B of this Form 20-F. Mr. Kugler
      continues to assist the Company as a strategic consultant effective
      February 27, 2012.                                                                                    
|(5) | Mr. Levin was appointed the Chief Financial Officer of
      the Company effective January 11, 2011 and served as the Acting Principal
      Executive Officer of the Company during the interim period from the
      effective date of the termination of Mr. Kugler as the Chief Executive
      Officer of the Company (February 24, 2012) to the effective date of Mr.
      Walters employment as the Chief Executive Officer of the Company
      (February 27, 2012).
|(6) | Mr. Walter was appointed the Chief Executive Officer of
      the Company effective February 27, 2012 following the termination of Mr.
      Kuglers employment as the Chief Executive
Officer.                                                                                                                                                                                                                                                                              

Directors and Senior Management of the Subsidiaries

The following table sets out the directors and senior
management of Adiras subsidiaries as of the date of this Form 20-F, provides
the persons name, location of residence, position(s) held with the entity,
principal occupation during the last five years and if a director, the date on
which the person became a director. None of the directors and senior management
listed below beneficially own, control or direct, directly or indirectly, any
common shares of any subsidiary listed below.

- 34 -

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|Adira Energy Holding Corp. (Ontario)        |                                   |                  
|------------------------------------------- | --------------------------------- | -----------------
|                                            |                                   | Date First       
|Name
      and Residence                    | Position                          | Elected          
|                                            |                                   |                  
|Jeffrey E. Walter 
      Annaopolis MD, USA | Chief Executive Officer           | February 27, 2012
|                                            |                                   |                  
|Gadi Levin 
      Lev Hasharon, Israel      | Chief Financial Officer           | January 11, 2011 
|                                            |                                   |                  
|Alan Friedman 
      Toronto, Canada        | President, Secretary and Director | April 4, 2008    
|                                            |                                   |                  
|Dennis Bennie 
      Toronto, Canada        | Director                          | April 4, 2008    

|Adira Energy CBM Ltd. (Israel)              |                                      |                  
|------------------------------------------- | ------------------------------------ | -----------------
|                                            |                                      | Date First       
|Name
      and Residence                    | Position                             | Elected          
|                                            |                                      |                  
|Jeffrey E. Walter 
      Annaopolis MD, USA | Chief Executive Officer              | February 27, 2012
|                                            |                                      |                  
|Gadi Levin 
      Lev Hasharon, Israel      | Chief Financial Officer and Director | February 17, 2011
|                                            |                                      |                  
|Yael Reznik-Cramer 
      Lapid, Israel     | Director                             | February 17, 2011

|Adira Oil Technologies Ltd. (Israel)        |                         |                  
|------------------------------------------- | ----------------------- | -----------------
|                                            |                         | Date First       
|Name
      and Residence                    | Position                | Elected          
|                                            |                         |                  
|Jeffrey E. Walter 
      Annaopolis MD, USA | Chief Executive Officer | February 27, 2012

- 35 -

---

|                                 |                                            | Date First    | Principal Occupation During Last                                                                                                                                                                                                          
|-------------------------------- | ------------------------------------------ | ------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and
      Residence         | Position                                   | Elected       | 5
      Years                                                                                                                                                                                                                             
|                                 |                                            |               | for Noble Energy Inc.                                                                                                                                                                                                                     
|                                 |                                            |               |                                                                                                                                                                                                                                           
|Gadi Levin Lev Hasharon, Israel  | Chief Financial Officer and
      Director | March 1, 2011 | VP and Chief Financial Officer for two Israeli investment
      houses in the fields of private equity, hedge funds and real estate. Prior
      to that, financial consultant to the Prime Ministers Office of the State
      of Israel
|                                 |                                            |               |                                                                                                                                                                                                                                           
|Yael Reznik-Cramer Lapid, Israel | Director                                   | March 1, 2011 | VP Business Development with BRM Group. Prior to BRM
      Group, Chief Financial Officer of STAR Ventures, Israel                                                                                                                        

|Adira Energy Israel Ltd. (Israel)           |                                      |                  
|------------------------------------------- | ------------------------------------ | -----------------
|                                            |                                      | Date First       
|Name and Residence                          | Position                             | Elected          
|                                            |                                      |                  
|Jeffrey E. Walter 
      Annaopolis MD, USA | Chief Executive Officer              | February 27, 2012
|                                            |                                      |                  
|Gadi Levin 
      Lev Hasharon, Israel      | Chief Financial Officer and Director | January 11, 2011 
|                                            |                                      |                  
|Yael Reznik-Cramer 
      Lapid, Israel     | Director                             | January 11, 2011 

|Adira Energy Israel Services Ltd. (Israel)  |                         |                  
|------------------------------------------- | ----------------------- | -----------------
|                                            |                         | Date First       
|Name and Residence                          | Position                | Elected          
|                                            |                         |                  
|Jeffrey E. Walter 
      Annaopolis MD, USA | Chief Executive Officer | February 27, 2012

- 36 -

---

|                                 |                                            | Date First    | Principal Occupation During Last                                                                                                                                                                                                          
|-------------------------------- | ------------------------------------------ | ------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and
      Residence         | Position                                   | Elected       | 5
      Years                                                                                                                                                                                                                             
|Gadi Levin Lev Hasharon, Israel  | Chief Financial Officer and
      Director | April 4, 2011 | VP and Chief Financial Officer for two Israeli investment
      houses in the fields of private equity, hedge funds and real estate. Prior
      to that, financial consultant to the Prime Ministers Office of the State
      of Israel
|                                 |                                            |               |                                                                                                                                                                                                                                           
|Yael Reznik-Cramer Lapid, Israel | Director                                   | April 4, 2011 | VP Business Development with BRM Group. Prior to BRM
      Group, Chief Financial Officer of STAR Ventures, Israel                                                                                                                        

|Adira Geo Global Ltd. (Israel)              |                         |                  
|------------------------------------------- | ----------------------- | -----------------
|                                            |                         | Date First       
|Name and Residence                          | Position                | Elected          
|                                            |                         |                  
|Jeffrey E. Walter 
      Annaopolis MD, USA | Chief Executive Officer | February 27, 2012
|                                            |                         |                  
|Gadi Levin 
      Lev Hasharon, Israel      | Chief Financial Officer | April 4, 2011    
|                                            |                         |                  
|Yael Reznik-Cramer 
      Lapid, Israel     | Director                | April 4, 2011    
|                                            |                         |                  
|Paul Miller 
      Calgary, AB, Canada      | Director                | December 17, 2010

|Adira Energy Holdings (Barbados) Ltd. (Barbados)                           |                                |              
|-------------------------------------------------------------------------- | ------------------------------ | -------------
|                                                                           |                                | Date First   
|Name and
      Residence                                                   | Position                       | Elected      
|                                                                           |                                |              
|Dr. J. Gordon Murphy 
      Lascelles, St. James, 
      Barbados Barbados | President and
        Director | June 30, 2011

- 37 -

---

|                                |          | Date First      | Principal Occupation During Last                                                                                                                                                                                                          
|------------------------------- | -------- | --------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and
      Residence        | Position | Elected         | 5
      Years                                                                                                                                                                                                                             
|                                |          |                 |                                                                                                                                                                                                                                           
|Gadi Levin Lev Hasharon, Israel | Director | June 30, 2011   | VP and Chief Financial Officer for two Israeli investment
      houses in the fields of private equity, hedge funds and real estate. Prior
      to that, financial consultant to the Prime Ministers Office of the State
      of Israel
|                                |          |                 |                                                                                                                                                                                                                                           
|Joseph William Ward             | Director | August 11, 2011 | Chartered Accountant and
      partner,                                                                                                                                                                                                   
|Falmouth House, Belair,         |          |                 | BDO Barbados (formerly Ward,                                                                                                                                                                                                              
|St. Philip, Barbados            |          |                 | Patel & Co.). Director of
      Barbados                                                                                                                                                                                                  
|                                |          |                 | Insurance Managers Limited                                                                                                                                                                                                                

|Adira Energy Investments (Barbados) Ltd.
      (Barbados)                      |                                |                
|------------------------------------------------------------------------------ | ------------------------------ | ---------------
|                                                                               |                                | Date First     
|Name and Residence                                                             | Position                       | Elected        
|                                                                               |                                |                
|Dr. J. Gordon Murphy 
      Lascelles, St. James, 
      Barbados Barbados     | President and
        Director | June 30, 2011  
|                                                                               |                                |                
|Gadi Levin 
      Lev Hasharon, Israel                                         | Director                       | June 30, 2011  
|                                                                               |                                |                
|Joseph William Ward 
      Falmouth House, Belair, 
      St. Philip, Barbados | Director                       | August 11, 2011

The following is biographical information on each of the
persons listed above:

Mr. Dennis Bennie. Mr. Bennie became Chairman and a director of Adira on August 31, 2009. Prior to that, Mr. Bennie was a founding member of Adira Holding Co., now a wholly-owned subsidiary of the Company and its Chairman since inception in April 2009. Over the past 25 years, Mr. Bennie has founded and managed several successful companies. In 1997, he founded the XDL Venture Capital Fund. One of its most noteworthy investments was a 1997 start-up, Delano Technology Corporation (NASD:DTEC). XDL Intervest, a $150 million fund was started in 1999 and is now fully invested. From 1988 to 1996, Mr. Bennie was Chairman and Chief Executive Officer of Delrina Corporation, which was listed on both the Toronto Stock Exchange and NASDAQ. Mr. Bennie serves on several boards and also regularly serves on various charitable boards.

- 38 -

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Sheldon Inwentash. Mr. Inwentash has been a director of Adira since April 14, 2011. He has been the Chief Executive Officer and Chairman of Pinetree, a company he founded, since February 1992. Mr. Inwentash also serves as the Chairman and Chief Executive Officer of Brownstone, an energy-focused company with direct interests in oil and gas properties around the world. He serves as an Advisor of PowerOne Capital Markets Limited and has been the Chief Executive Officer of Mega Uranium Ltd. since May 30, 2000, also serving as its Chairman. He has over 25 years of experience in the investment industry and a deep understanding of progressive investment and financial management strategies. Mr. Inwentash served as the President of Mega Precious Metals Inc. (formerly, Mega Silver Inc. and Treat Systems Inc. Bc). He was a Partner at KBL Capital Partners Inc. and has been the Chairman of Titan Uranium Inc. since January 25, 2011. He has been a Director of X-Terra Resources Corporation since March 2009, U3O8 Corp. since April 2010, and of Brownstone, since 1988. In addition, he serves as a director of Alpha North General Partner Inc., the General Partner of AlphaNorth 2010 Flow-Through Limited Partnership. He has been a Director of Mega Uranium Ltd. since 1996 and a Director of Terreno Resources Corp. since November 2010. He has also been a Director of U308 Corp. since August 2010 and is a current Director of NSI Communications Inc. He has served as a Director of Pinetree Capital Corp. since February 1992, Unigold Inc. from October 9, 2003 to April 11, 2005, Brainhunter Inc. (formerly, Treklogic Technologies Inc.) since August 27, 2003, Aurelian Resources Inc. since June 2003, Enghouse Systems Ltd. since May 23, 1996, Visible Genetics Inc. since April 1994 and Akela Pharma Inc. (formerly, Lab International Inc.) since May 1, 2002. Mr. Inwentash served as a Director of Mega Precious Metals Inc. from October 31, 2001 to January 2008. He served as an Independent Director of Southern Star Resources Inc. since April 22, 2003, served as a Director of Manitex Capital, Inc. since June 1995 and served as a Director of Octagon Industries Inc. until May 2001. Mr. Inwentash is a Chartered Accountant and holds a Bachelor of Commerce from the University of Toronto.

Mr. Eli Barkat.Mr. Barkat became a
director of Adira on January 11, 2011. He is the CEO, chairman and co-founder of
BRM. In 1988, Mr. Barkat co-founded BRM, an anti-virus software start-up sold to
Symantec. Under Mr. Barkat's leadership, BRM has been involved, either directly
or via venture capital funds under its control, in some of the prominent exits
including Checkpoint (NASDAQ: CHKP); Backweb (NASDAQ: BWEB); Passave (sold to
PMC-Sierra); Oplus Technologies (sold to Intel); Whale Communications (sold to
Microsoft) and Fraud Sciences (sold to eBay). Mr. Barkat is also the Chairman of
DS-APEX and he currently sits on the board of Mediamind, GigaSpaces,
SupportSpace and Pando Networks Together with his wife, Alona, he founded the
BRM Institute of Technology and Society at Tel Aviv University, and serves on
the Tel Aviv Universitys Board of Governors. He holds a B.Sc in Computer
Science and Mathematics from the Hebrew University of Jerusalem.

Ms. Yael Reznik-Cramer.Ms. Reznik-Cramer became a director of Adira on January 11, 2011. She is responsible for BRM’s new business opportunities and BRM Capital’s financial operations, financial reporting, taxation, information systems and administration. Prior to joining BRM, Ms. Reznik-Cramer was Chief Financial Officer of STAR Ventures in Israel for over nine years. Before joining STAR, Ms. Reznik-Cramer was Controller at Lannet Data Communications Ltd. (NASDAQ: LANTF) and an Audit Team Manager at Bavli Milner, one of Israel’s leading accounting firms.  She currently sits on the boards of directors of each of Backweb Ltd. and Schema Ltd. Ms. Reznik-Cramer is a Certified Public Accountant in Israel and holds a B.A degree in Accounting and Economics from the Hebrew University in Jerusalem and an MBA from Tel-Aviv University.

Mr. Colin Kinley. Mr. Kinley became a director of
Adira on August 31, 2009 and was a Senior Advisor of the Company from August 23,
2010 to December 15, 2011. He also served as President and Chief Operating
Officer of the Company from July 22, 2010 to June 27, 2011. Mr. Kinley is Chief
Executive Officer of Kinley Exploration LLC, a specialized exploration company
providing integrated program exploration and development management for both new
and established oil and gas plays. Mr. Kinley has over 30 years of international
experience in the exploration of frontier resource plays, 26 years as a senior
executive for Layne Christensen and its predecessor companies. During his tenure
at Layne he had executive oversight of multiple service companies and
exploration and production operations, both domestically and internationally.
More recently, Mr. Kinley was President of a Toronto based Botswana
unconventional gas project, exploring and drilling numerous wells from a base he
established in the Kalahari Desert. He is experienced and practiced in both
public and private company disciplines.

- 39 -

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Mr. Alan Friedman. Mr. Friedman became Executive
Vice-President and a director of Adira on August 31, 2009. Prior to joining the
Company, Mr. Friedman was a founding member of Adira Holding Co. and had been
its President since its inception in April 2009. Mr. Friedman is a South African
attorney and a director of the Canada-South Africa Chamber of Business. He is
the founder, President and Chief Executive Officer of Rivonia Capital Inc., a
firm that identifies opportunities in emerging markets, and enhances value
through combining quality assets, management and financial and marketing support
for early stage companies in the resource sector. He was formerly the Executive
Vice-President for a Canadian finance firm, through which he facilitated
significant capital raising for a number of public companies.

Mr. Hezi Kugler.Mr. Kuglerserved
as the Chief Executive Officer and director of Adira from June 2, 2011 to
February 24, 2012 and continues to assist the Company as a Strategic Consultant
effective February 27, 2012. Mr. Kugler replaced Ilan Diamond who served as the
Companys Chief Executive Officer from September 1, 2009 until March 1, 2011.
Mr. Kugler has extensive experience in the energy infrastructure field in
general and in Israels hydrocarbons market in particular. Prior to his position
as Director General of MNI from 2006  2009, he was a leading project finance
lawyer on major projects in the energy and water sectors in Israel. During his
tenure as Director General of MNI, he was responsible for overseeing Israels
power sector and oil and gas exploration and development on behalf of the
government. Mr. Kugler led Israels negotiations with BG on development of the
Gaza Marine natural gas reservoir off shore from Israel / the Palestinian
Authority; he initiated Israels first LNG project and served as co-chairman of
the government tender committee; he supervised closely development of Israels
natural gas transmission system; and was responsible for development of Israels
oil and LPG imports networks carried out through government-owned companies
under his supervision. He holds a BA in Political Science from Bar-Ilan
University and an LLB from Tel-Aviv University.

Mr. Gadi Levin. Mr. Levin became Chief Financial
Officer of Adiras Israeli subsidiaries in July 2010, Secretary of Adira in
August 2010 and was appointed as Adiras Chief Financial Officer in January
2011. He served as the Acting Principal Executive Officer of Adira during the
interim period from the effective date of the termination of Mr. Kugler as the
Chief Executive Officer of Adira (February 24, 2012) to the effective date of
Mr. Walters employment as the Chief Executive Officer of Adira (February 27,
2012). Mr. Levin previously served as the Vice President of Finance and Chief
Financial Officer for two Israeli investment houses in the fields of private
equity, hedge funds and real estate (July 2008 to December 2009 and January 2010
to June 2010, respectively). For the five years prior to that he worked as a
financial consultant to the Prime Ministers Office of the State of Israel. Mr.
Levin began his career at the accounting firm, Arthur Andersen, where he worked
in the Cape Town, London and Tel Aviv offices for nine years. He has a Bachelor
of Commerce degree in Accounting and Information Systems from the University of
the Cape Town, South Africa, and a post graduate diploma in Accounting from the
University of South Africa. He received his Chartered Accountant designation in
South Africa and has an MBA from Bar Ilan University in Israel.

Mr. Paul Miller. Mr. Miller became director of
Adira GeoGlobal Ltd. (Israel) on December 17, 2010. As of March 1, 2010, he
joined GGRI as an Executive Officer and effective August 17, 2010, he became its
President and Chief Executive Officer. Mr. Miller is a professional engineer
licensed in Ontario and Alberta. He has a depth of experience working in the oil
and gas industry all over the world. Originally from the east coast of Canada,
Mr. Miller has lived and worked throughout Canada having started his career in
Alberta in 1997 working for Talisman Energy from 1997 to 2000 before moving on
to Matrikon Inc., a global engineering consulting company, where he was employed
in various management capacities from 2000 to 2010. During his ten year tenure
with Matrikon, he headed up business units in Australia, Eastern North America,
and the Middle East prior to returning to Alberta. Mr. Miller holds a Bachelor
of Science degree in Chemical Engineering from the University of Alberta and in
2009 graduated from the Kellogg-Schulich Executive MBA program.

Mr. J. Gordon Murphy. Dr. Murphy became President
and Director of Adira Energy Holdings (Barbados) Ltd. and Adira Energy
Investments (Barbados) Ltd. on June 30, 2011. Educated in Canada, Dr. Murphy has
a B.Sc. in Physics, an M.Sc. in Engineering Physics and a Ph.D. in Mining and
Metallurgical Engineering. He was employed as a scientist and laboratory manager
from 1977-1984 before accepting an appointment as a Professor at the Technical
University of Nova Scotia. In 1989 he re-entered the private sector as cofounder
of a Massachusetts based aerospace manufacturing firm specializing in advanced
materials. In 1994 he sold that firm and moved from Canada to Barbados where he
has since operated as a business and technology consultant. He has served as
President and Director of Adiras business partners Brownstone Ventures
(Barbados) Inc. and Pinetree (Barbados) Inc. since 2007 and 2000 respectively.

- 40 -

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Mr. Jeffrey Walter.Mr.
Walter became Chief Executive Officer of Adira and was appointed to the
applicable positions with Adiras subsidiaries on February 27, 2012. Immediately
prior to joining the Company, Mr. Walter was the Chief Executive Officer of
White Birch Energy, a start up oil and gas company focussed on energy
exploration in the Eastern Mediterranean (April 2010 to February 2012). Prior to
his role at White Birch Energy, from April 2009 to February 2012, Mr. Walter was
a principal at Energy Consultant International where he acted as a consultant
for various oil and gas clients. From 2006 to 2009, Mr. Walter was Vice
President Europe and Mediterranean for Noble Energy Inc. where he lead the Noble
Energy Inc. team response for the Tamar field offshore Israel discovery and
increased Noble Energy Inc.s Eastern Mediterranean portfolio, including the
discovery of the Leviathan Basin and Block 12 in Cyprus. Mr. Walter has a BS in
Geology from The University of New Mexico.

Mr. Alon Polishuk. Mr. Polishuk became the Vice
President, Contracts and Administration and Regulations of Adira on August 15,
2011. He has over five years of experience in Government Services of Israel,
managing and co-coordinating mission critical programs and projects. He has
experience in project management, business development and expertise in legal
analysis and critical examination. Mr. Polishuk specializes in Law and was
admitted to the Israel Bar in 2001. He holds a BA, Business (Finance) from the
Arison School of Business, as well as LLE, Radzyner School of Law,
Interdisciplinary Center, Herzliya.

Mr. Moshe Politi. Mr. Politi became the Chief
Geologist of the Company on March 9, 2010. He has 39 years of experience,
specializing in the integration of multi-disciplinary aspects and methodologies
of geology and geophysics into viable prospects in various environments:
onshore, offshore, shallow and deep prospects, structurally complex (overthrust)
and stratigraphic plays. Mr. Politi received his Bachelor and Master Degrees in
Geology from the Hebrew University in Jerusalem and is currently engaged in his
PhD studies in Jerusalem. Mr. Politi has taught Petroleum geology and
geophysical methods courses for graduate and post graduate students at the
Hebrew University in Jerusalem.

Mr. Joseph W. Ward.Mr. Ward
became a director of Adira Energy Holdings (Barbados) Ltd. and of Adira Energy
Investments (Barbados) Ltd. on August 11, 2011. He has practised as a CPA in the
United Kingdom and Barbados since 1978. He is a Member of the Institute of
Chartered Accountants of England and Wales and of the Institute of Chartered
Accountants of Barbados. In 1994 he founded a sole practitioner accounting
practice in Barbados which provided audit, accounting, taxation and corporate
secretarial services to Barbadian and international clients. That firm became
Ward, Patel & Co. in January 2002 and BDO Barbados on April 1, 2012. Mr.
Ward is joint managing partner of BDO Barbados which provides accounting and
management services to Adiras Barbados subsidiaries.

Alan Friedman's wife is the niece of Dennis Bennie. Other than
that relationship, no director or any member of senior management has any family
relationships with any other director or manager.

Except for the nominee agreement with BRM noted above, there is
no arrangement with any major shareholder, customer, supplier or other party
pursuant to which any person was selected as a director or member of senior
management.

- 41 -

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Cease trade orders, bankruptcies, penalties or
sanctions

For the purposes of this section, “order” means a cease trade order; an order similar to a cease trade order; or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than 30 consecutive days.

Other than as disclosed below, no director or executive officer of the Company is, as at the date hereof, or has been, within the 10 years before the date hereof, a director, chief executive officer or chief financial officer of any corporation (including the Company) that:

| | (a) | was subject to an order that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or                                                                                                                                          
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                         
| | (b) | was subject to an order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.

No director or executive officer of the Company or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company:

| | (a) | is, as at the date hereof, or has been within the 10 years before the date hereof, a director or executive officer of any corporation (including the Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (b) | as, within the 10 years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any  proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or  trustee appointed to hold the assets of the director, executive officer or shareholder.                                                                                                                                                                              

No director or executive officer of the Company, or a shareholder holding a sufficient number of the Company’s securities to affect materially the control of the Company, has been subject to:

| | (a) | any penalties or sanctions imposed by a court relating to securities legislation or by a securities  regulatory authority or has entered into a settlement agreement with a securities regulatory  authority; or
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                 
| | (b) | any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.                                     

In October 2002, trading in the shares of Treat Systems Inc. (“Treat”) was halted by the TSXV for failure to meet the exchange’s tier maintenance requirements under TSXV Policy 2.5 – Tier Maintenance Requirements and Inter-Tier Movement and for having been designated as an inactive issuer for a period in excess of 18 months.  In August 2003, Treat’s shares were listed for trading on the NEX board of the TSXV.  In January 2008, Treat completed a “change of business” pursuant to the policies of the TSXV.  The corporation’s name was changed to Mega Silver Inc.  (now known as Mega Precious Metals Inc.) and its shares commenced trading on the Exchange on January 31, 2008.  Mr. Inwentash was a director of  the corporation from October 2001 until his resignation in January 2008 concurrently with the completion of Treat’s change of business.

Conflicts of Interest

Certain officers and directors of the Company are directors or officers of other oil and gas exploration companies. Consequently, potential conflicts of interest may arise in the event that these companies compete in respect of the sale or option of oil and gas properties in which the Company is or may be interested.

The directors and officers of the Company are aware of the existence of laws governing accountability of directors and officers for corporate opportunity and requiring disclosures by directors of conflicts of interest and the Company will rely upon such laws in respect of any directors and officers conflicts of interest or in respect of any breaches of duty by any of its directors or officers. All such conflicts will be disclosed by such directors or officers in accordance with the CBCA and they will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.

Promoters

Alan Friedman, Ilan Diamond, former Chief Executive Officer and Director of the Company, and Dennis Bennie took the initiative in organizing the Company and may be considered to have been promoters of the Company. See Item 6E - Share Ownership for details of the shareholdings of such individuals.

B.          
Compensation

During the year ended December 31, 2011, we paid aggregate
remuneration to our directors and officers as a group who served in the capacity
of director or executive officer during such year of approximately $1,967,000,
of which $911,000 relates to salaries to executive officers and $1,056,000
relates to share based compensation to executive officer and directors.

Executive Compensation

Compensation Discussion and Analysis

In assessing the compensation of our Companys executive
officers, we do not have in place any formal objectives, criteria or analysis;
instead, we rely mainly on Board discussion. Currently, any material
commitments, inclusive of remuneration, are required to be pre-approved by the
Board.

Our executive compensation program has three principal
components: base salary, incentive bonus plan and stock options. Base salaries
for all our employees are established for each position through comparative
salary surveys of similar type and size companies. Both individual and corporate
performances are also taken into account. Incentive bonuses, in the form of cash
payments, are designed to add a variable component of compensation based on corporate and individual performances for executive officers
and employees. No bonuses were paid to executive officers or employees during
the most recently completed financial year.

- 42 -

---

We have no other forms of compensation, although payments may
be made from time to time to individuals or companies they control for the
provision of consulting services. Such consulting services are paid for by the
Company at competitive industry rates for work of a similar nature by reputable
arms length services providers.

We have no compensatory plan, contract or arrangement where an
executive officer is entitled to receive more than $100,000 to compensate such
executive officers in the event of resignation, retirement or other termination,
a change of control of the Company or a change in responsibilities following a
change in control, other than as described in this Form 20-F.

Summary Compensation Table

The following table provides a summary of compensation paid to the senior management employed by our Company as of December 31, 2011 during the fiscal year then ended (in thousands of US Dollars):

Names and Principal Position
      Salary ($)
      Share- Based Awards ($)
      Option- Based Awards ($)
      **Non-Equity Incentive**
        **Plan Compensation** **($)**
      Pension Value
        ($)
      All Other Compensation
        ($)
      Total Compensation
        ($)Annual incentive plans
      Long- term
        incentive plansHezi Kugler, 
        Chief 
        Executive 
        Officer (1)
      182
      314
      -
      -
      -
      -
      -
      496Gadi Levin, 
        Chief Financial 
        Officer (2)
      177
      76
      -
      -
      -
      -
      -
      253Alan Friedman, 
        Executive Vice 
        President, 
        Corporate 
        Development
      152
      104
      -
      -
      -
      -
      -
      256Colin Kinley 
        Former Senior 
        Advisor, 
        President and 
        Chief 
        Operating 
        Officer (3)
      102
      358
      -
      -
      -
      -
      -
      460


- 43 -

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Alon Polishuk, Vice President,
      Contracts Administration and Regulations (4)
    68
    28
    -
    -
    -
    -
    -
    96Moshe Politi Chief Geologist
    160
    49
    -
    -
    -
    -
    -
    209


|(1) | Mr. Kugler served as the Chief Executive Officer and
      Director of the Company from June 2, 2011 to February 24, 2012 and
      continues to assist the Company as a Strategic Consultant effective
      February 27, 2012. Mr. Walter was appointed the Chief Executive Officer of
      the Company effective February 27, 2012.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Levin was appointed the Chief Financial Officer of
      the Company effective January 11, 2011, replacing Alan
  Rootenberg.                                                                                                                                                                                                      
|(3) | Mr. Kinley was a Senior Advisor of the Company from August 23, 2010 to December 15, 2011 and President and Chief Operating Officer of the Company from July 22, 2010 to June 27, 2011.  He continues to serve as a Director of the Company.                                                                                            
|(4) | Mr. Polishuk was appointed the Vice President, Contracts
      and Administration and Regulations of the Company on August 15,
    2011.                                                                                                                                                                                               

Option Based Awards

Stock options are granted to provide an incentive to the
directors, officers, employees and consultants of the Company to achieve the
longer-term objectives of the Company; to give suitable recognition to the
ability and industry of such persons who contribute materially to the success of
the Company; and to attract and retain persons of experience and ability, by
providing them with the opportunity to acquire an increased proprietary interest
in the Company. The Company awards stock options to its executive officers based
upon the recommendation of the Board, which recommendation is based upon the
Compensation Committees review of a proposal from the President and CEO.
Previous grants of incentive stock options are taken into account when
considering new grants.

The Company has a stock option plan for the granting of
incentive stock options to the officers, employees, consultants and directors.
See Item 6E - Share Ownership  Equity Compensation Plans for more
information.

Director Compensation

The Company has no arrangements, standard or otherwise,
pursuant to which Directors are compensated by the Company for their services in
their capacity as Directors, or for committee participation, involvement in
special assignments or for services as consultant or expert during the most
recently completed financial year or subsequently, up to and including the date
of this Form 20-F, except for the consulting fees described in Item 7.B 
Related Party Transactions of this Form 20-F.

- 44 -

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Long-Term Incentive Plan Awards

The Company did not make any long-term incentive plan awards
during the years ended December 31, 2011 and 2010.

Pension, Retirement or Similar Benefits

We have amounts set aside to provide for pension, retirement or similar benefits.

Employment Agreements

We have entered into employment agreements with certain of our
senior officers. The agreements contain, among other things, confidentiality,
non-solicitation and non-competition covenants that will apply during the term
of each officers employment and for a specific period of time after termination
of their employment.

Each employment agreement provides for certain compensation
arrangements upon termination on the occurrence of specified circumstances as
described below. Generally, on a termination without cause or resignation for
good reason, the officer will be entitled to a severance payment based on past
salary and bonus levels, and outstanding and unvested incentives and other
equity entitlements will accelerate to immediately vest and become exercisable.
Good reason generally means (i) a material and adverse change in the officers
status or position or a material reduction in his duties and responsibilities;
(ii) a reduction in the officers base compensation; (iii) a relocation of the
officers place of employment; (iv) the failure to pay material compensation
when due; or (v) a change of control of the Company as defined below.

The employment agreements also provide for certain benefits in
the event of a change of control of the Company. Generally, a change of
control is defined in the employment agreements as (i) a tender or take-over
offer (or series of related offers) completed for 50% or more of the Companys
outstanding voting securities; (ii) the amalgamation, merger or consolidation of
the Company or the entry into an arrangement, as a result of which less than 50%
of the outstanding voting securities of the surviving or resulting entity are
owned by the former securityholders of the Company or its subsidiaries and
affiliates; (iii) the sale or disposition by the Company of all or substantially
all of its assets to another entity that is not wholly owned by the Company; or
(iv) the acquisition by a person of 50% or more of the outstanding voting
securities of the Company (whether directly, indirectly, beneficially or of
record).

As of the date of this Annual Report, we have employment
agreements with the following senior officers of the Company:

Mr. Hezi Kugler  Chief Executive Officer from June 1,
2011 to February 24, 2012

Effective June 1, 2011, we entered into an employment agreement
with Kugler Development and Investments Ltd. (the Kugler Service
Company), a company wholly owned by Mr. Kugler, pursuant to which Mr.
Kugler agreed to provide his services to us in the capacity of Chief Executive
Officer for a term to continue until terminated (the Kugler Service
Agreement). Mr. Kuglers employment as the Chief Executive Officer of the
Company was terminated effective February 24, 2012 in accordance with the terms
and conditions of the Kuguler Service Agreement.

- 45 -

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Pursuant to the Kugler Service Agreement, Mr. Kugler reported to the Board of Directors. Under the Kugler Service Agreement, Mr. Kugler was paid a monthly fee of 94,000 Israeli shekel (“NIS”) ($25,701*), excluding value added tax (“VAT”), and was entitled to, among other things, a vehicle allowance.  In addition, in accordance with the terms and conditions of the Kugler Service Agreement, the Board of Directors were to determine, on an annual basis, Mr. Kugler’s entitlement to a bonus.

The Kugler Service Agreement contained certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Kugler Service Agreement and for a period of six months thereafter.

Pursuant to the Kugler Service Agreement, each party thereto
was entitled to terminate the Kugler Service Agreement at any time during the
first year following the effective date of the Service Agreement, by one months
written notice, and during each year thereafter, by three months written
notice. In addition, the Company was entitled to terminate the Kugler Service
Agreement immediately without notice and/or payment in lieu thereof if the
Kugler Service Company or Mr. Kugler materially breached the Kugler Service
Agreement and such breach was not cured within 30 days from the date on which
the Company informs the party of such breach. If the Kugler Service Agreement
was terminated on or after June 2, 2012 due to a change of control in the
Company (as defined in the Kugler Service Agreement), the Kugler Service Company
was entitled to a payment equal to six months salary.

Mr. Hezi Kugler  Strategic Consultant effective February
27, 2012

Effective February 27, 2012, we entered into an employment
agreement with Kugler Service Company pursuant to which Mr. Kugler agreed to
provide his services to us in the capacity of Strategic Consultant on a
part-time basis of 93 hours per month as directed by the Companys CEO for a
term to continue until terminated (the Kugler Consulting Agreement).

Pursuant to the Kugler Consulting Agreement, Mr. Kugler is paid
a monthly fee of $8,000, excluding VAT, and $1,000 for each additional day (9
hours a day) should the Company request Mr. Kuglers services for additional
hours.

The Kugler Consulting Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Kugler Consulting Agreement.

Pursuant to the Kugler Consulting Agreement, each party thereto
is entitled to terminate the Kugler Consulting Agreement at any time by one
months written notice. In addition, the Company may terminate the Kugler
Consulting Agreement immediately without notice and/or payment in lieu thereof
if, among other things, the Kugler Service Company or Mr. Kugler materially
breach the Kugler Consulting Agreement and such breach is not cured within 30
days from the date on which the Company informs the party of such breach.

Notwithstanding the foregoing, those options which vested on
behalf of the Kugler Service Company as of the date of the Kugler Consulting
Agreement, and those options which will vest on behalf of the Kugler Service
Company on May 31, 2012, November 30, 2012 and May 31, 2013 (collectively, the
Committed Vested Options), will belong to the Kugler Service Company in
any event of termination of the Kugler Consulting Agreement prior to the last of
the dates mentioned above and will be exercisable by the Kugler Service Company.
In any event of termination of the Kugler Consulting Agreement prior to said
last dates, the Kugler Service Company will be entitled to exercise the Committed Vested Options within 30 (thirty) days of the
last date mentioned above, unless Kugler Consulting Agreement is terminated for
cause (as defined therein) in which case the Committed Vested Options will be
exercisable within 30 (thirty) days of said date of termination.

____________________________________________
*
Based on the exchange rate provided by the International Monetary Fund as at
February 17, 2012.

- 46 -

---

Pursuant to the Kugler Consulting Agreement, all other options
(that is: except for the Committed Vested Options) that were exercisable by the
Kugler Service Company by February 27, 2012, being 1,138,109 options, were
cancelled as of that date.

Mr. Alan Friedman  Executive Vice President, Corporate
Development

Effective May 1, 2011, we entered into an employment agreement
with Rivonia Capital Inc (the Friedman Service Company), a
company wholly owned by Mr. Friedman, pursuant to which Mr. Friedman agreed to
provide his services to us in the capacity of Chief Business Development Officer
for a term to continue until terminated (the Friedman Service
Agreement). Mr. Friedman reports to the Companys CEO.

Under the Friedman Service Agreement, Mr. Friedman is paid a
monthly salary of CDN$12,000 (excluding HST).

The Friedman Service Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Friedman Service Agreement and for a period of six months thereafter.

Pursuant to the Friedman Service Agreement, each party thereto
is entitled to terminate the Friedman Service Agreement at any time during the
first year following the date of the Friedman Service Agreement, by one months
written notice, and during each year thereafter, by three months written
notice. In addition, the Company is entitled to terminate the Friedman Service
Agreement immediately without notice and/or payment in lieu thereof if the
Friedman Service Company or Mr. Friedman materially breach the Friedman Service
Agreement and such breach is not cured within 30 days from the date on which the
Company informs the party of such breach. If the Friedman Service Agreement is
terminated due to a change of control in the Company (as defined in the Friedman
Service Agreement), the Friedman Service Company is entitled to a payment equal
to six months salary and a pro rata portion of Mr. Friedmans annual bonus
entitlement, if any.

Furthermore, in accordance with the terms and conditions of the
Friedman Service Agreement, on Mr. Friedmans termination without cause or
resignation for good reason, the Friedman Service Company is entitled to a
severance payment equal to six months salary.

Mr. Jeffery Walter  Chief Executive Officer from
February 27, 2012

Effective February 27, 2012, we entered into an employment
agreement with Mr. Walter pursuant to which Mr. Walter agreed to provide his
services to us in the capacity of Chief Executive Officer for a term to continue
until terminated (the Walter Employment Agreement). Mr. Walter will
report to the Companys board of directors.

Under the Walter Employment Agreement, Mr. Walter is paid a
monthly salary of CDN$28,000, excluding VAT and is entitled to, among other
things, remuneration for his transportation and accommodation expenses while
physically present in the State of Israel.

- 47 -

---

The Walter Employment Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Walter Employment Agreement and for a period of six months thereafter.

Pursuant to the Walter Employment Agreement, each party thereto
will be entitled to terminate the Walter Employment Agreement at any time by one
months written notice, and during each year thereafter, by three months
written notice. In addition, the Company is entitled to terminate the Walter
Employment Agreement immediately without notice and/or payment in lieu thereof
if Mr. Walter has materially breached the Walter Employment Agreement. If the
Walter Employment Agreement is terminated due to a change of control in the
Company (as defined in the Walter Employment Agreement), Mr. Walter is entitled
to a payment equal to up to twelve months salary and a pro rata portion of Mr.
Walters annual bonus entitlement, if any. In addition, subject to the approval
of the Board and subject to the Companys stock option plan, upon the occurrence
of a change of control, 50% of each portion of unvested options which have been
granted to Mr. Walter will be accelerated and be vested upon such change of
control, and the remaining 50% of each portion of unvested option will vest on
the earlier of the first anniversary of the change of control or upon the
termination of the Walter Employment Agreement by the Company without cause
during the 12-month period following the change of control.

Furthermore, in accordance with the terms and conditions of the
Walter Employment Agreement, on Mr. Walters termination without cause or
resignation for good reason, Mr. Walter will be entitled to a severance payment
equal to twelve months salary.

Mr. Gadi Levin  Chief Financial Officer

Effective July 21, 2010, we entered into an employment
agreement with Mr. Levin pursuant to which Mr. Levin agreed to provide his
services to us in the capacity of Chief Financial Officer for a term to continue
until terminated (the  Levin Employment Agreement). Mr. Levin reports
to the Companys CEO.

Under the Levin Employment Agreement, Mr. Levin is paid a monthly salary of NIS 40,000 ($10,701*) and is entitled to, among other things, a vehicle allowance.

The Levin Employment Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Levin Employment Agreement and for a period of six months thereafter.

Pursuant to the Levin Employment Agreement, each party thereto
is entitled to terminate the Levin Employment Agreement at any time by two
months written notice. In addition, the Company is entitled to terminate the
Levin Employment Agreement immediately without notice and/or payment in lieu
thereof if Mr. Levin has materially breached the Levin Employment Agreement and
such breach is not cured within 30 days from the date on which the Company
informs Mr. Levin of such breach. If the Levin Employment Agreement is
terminated due to a change of control in the Company (as defined in the Levin
Employment Agreement), Mr. Levin is entitled to a payment equal to six months
salary and a pro rata portion of Mr. Levins annual bonus entitlement, if any.
Also, in case the Levin Employment Agreement is terminated due to change of
control (as such term is defined in the Levin Employment Agreement) the vesting
period of the options granted to Mr. Levin shall be accelerated according to the
provisions of the Levin Employment Agreement.

Furthermore, in accordance with the terms and conditions of the
Levin Employment Agreement, on Mr. Levins termination without cause or
resignation for good reason, Mr. Levin is entitled to a severance payment equal
to six months salary.

____________________________________________
*
Based on the exchange rate provided by the International Monetary Fund as at
February 27, 2012.

- 48 -

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Mr. Alon Polishuk  Vice President Contracts and
Regulation

Effective August 1, 2011, we entered into an employment
agreement with Mr. Polishuk pursuant to which Mr. Polishuk agreed to provide his
services to us in the capacity of Vice President Contracts and Regulation for a
term to continue until terminated (the Polishuk Employment Agreement).
Mr. Polishuk reports to the Companys CEO.

Under the Polishuk Employment Agreement, Mr. Polishuk is paid a monthly salary of NIS 35,000 ($9,363*), excluding VAT, and is entitled to, among other things, a vehicle allowance.

The Polishuk Employment Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Polishuk Employment Agreement and for a period of six months thereafter.

Pursuant to the Polishuk Employment Agreement, each party
thereto is entitled to terminate the Polishuk Employment Agreement at any time
during the first year following the date of the Polishuk Employment Agreement,
by one months written notice, and during each year thereafter, by three months
written notice. In addition, the Company is entitled to terminate the Polishuk
Employment Agreement immediately without notice and/or payment in lieu thereof
if Mr. Polishuk materially breaches the Polishuk Employment Agreement and such
breach is not cured within 30 days from the date on which the Company informs
Mr. Polishuk of such breach. If the Polishuk Employment Agreement is terminated
due to a change of control in the Company (as defined in the Polishuk Employment
Agreement), Mr. Polishuk is entitled to a payment equal to six months salary and
a pro rata portion of Mr. Polishuks annual bonus entitlement, if any.

Furthermore, in accordance with the terms and conditions of the
  Polishuk Employment Agreement, on Mr. Polishuks termination without cause
  or resignation for good reason, Mr. Polishuk is entitled to a severance payment
  equal to six months salary.

Mr. Moshe Politi  Chief Geologist

Effective August 1, 2011, we entered into a revised employment
agreement with Mr. Politi pursuant to which Mr. Politi agreed to provide his
services to us in the capacity of Chief Geologist for a term to continue until
terminated (the Politi Employment Agreement). Mr. Politi reports to the
Companys CEO.

Under the Politi Employment Agreement, Mr. Politi is paid a monthly salary of NIS 33,000 ($8,828*), excluding VAT, and is entitled to, among other things, a vehicle allowance.

The Politi Employment Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality and non-competition and non-solicitation clauses effective during the term of the Politi Employment Agreement and for a period of six months thereafter.

Pursuant to the Politi Employment Agreement, each party thereto
is entitled to terminate the Politi Employment Agreement at any time during the
first year following the date of the Politi Employment Agreement, by one months
written notice, and during each year thereafter, by three months written
notice. In addition, the Company is entitled to terminate the Politi Employment
Agreement immediately without notice and/or payment in lieu thereof if Mr.
Politi materially breaches the Politi Employment Agreement and such breach is
not cured within 30 days from the date on which the Company informs them of such
breach. If the Politi Employment Agreement is terminated due to a change of control in the Company (as defined in the Politi
Employment Agreement), Mr. Politi is entitled to a payment equal to six months
salary and a pro rata portion of Mr. Politis annual bonus entitlement, if any.

______________________________
* Based on the exchange rate provided by the International Monetary Fund as at February 17, 2012.

- 49 -

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Furthermore, in accordance with the terms and conditions of the Politi Employment Agreement, on Mr. Politi’s termination without cause or resignation for good reason, Mr. Politi is entitled to a severance payment equal to six months salary.

C.          
Board Practices

Our Directors have served in their respective capacities since
their election or appointment and will serve until our next annual general
meeting or until a successor is duly elected and qualified, unless their office
is earlier vacated in accordance with the CBCA and our articles of
incorporation. Our officers serve at the discretion of the board.

The Board is responsible for, among other things, identifying
suitable candidates to be recommended for election to the Board by shareholders
or appointment by the Directors, subject to the limits in the Companys articles
and the CBCA. One of the objectives of the Board with respect to the nomination
is to maintain the composition of the Directors in a way that provides the best
mix of skills and experience to guide our long-term strategy and ongoing
business operations.

The Board conducts an annual review and assessment of the
performance of the Chairman and Chief Executive Officer and the other senior
executive officers of the Company.

The Board also reviews and monitors our executive development
programs and the long-range plans and personnel policies for recruiting,
developing and motivating our executives. The Board has reviewed and approved
the qualifications of each of the Board nominees standing for election.

The Board is responsible for conducting an annual review of the
performance of the Company and the Chief Executive Officer as measured against
objectives established in the prior year by the Board and the CEO and approved
by the Board. The evaluation is to be used by the Board in its deliberations
concerning the CEOs annual compensation. The evaluation of performance against
objectives forms part of the determination of the entire compensation of senior
employees. The Board is also responsible for reviewing the compensation of the
Directors on an annual basis, taking into account such matters as time
commitment, responsibility and compensation provided by comparable
organizations. The compensation committee will make an annual review of such
matters and make a recommendation to the Board.

The Board is responsible for making an annual assessment of the
overall performance of the Directors as a group and to reporting its findings to
the full Board. The assessment examines the effectiveness of the Directors as a
whole and specifically reviews areas that the Directors and/or management
believe could be improved to ensure the continued effectiveness of the Directors
in the execution of their responsibilities

Term of Office

All directors have a term of office expiring at our next annual
general meeting, unless a directors office is earlier vacated in accordance
with our Articles or the provisions of the CBCA. All officers serve at the
discretion of the Board.

- 50 -

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Audit and Compensation Committees

We have an audit committee and audit committee charter. A copy
  of our audit committee charter was filed as an exhibit to our Form 10-KSB filed
  for the Companys 2003 fiscal year. The function of the audit committee is to
  monitor the veracity of the financial and regulatory reports produced by the
  Company, and the controls that are in place to ensure the opportunities for
  fraud or material error in our financial statements are minimized. The current
  audit committee is comprised of Dennis Bennie, Sheldon Inwentash and Yael
  Reznik-Cramer.

The Board has determined that all members of the Audit
Committee meet the SECs definition of an audit committee financial expert, as
defined in Item 16 of Form 20-F. The Board has also determined that all members
of the Audit Committee meet the definition of an independent director, as
defined in Rule 121A of the American Stock Exchange Company Guide.

We have a compensation committee comprised of Dennis Bennie,
Yael Reznik-Cramer and Sheldon Inwentash. Currently, any material commitments,
inclusive of remuneration, are required to be pre-approved by the Board,
following recommendation of the compensation committee

We have a disclosure committee and a disclosure committee
charter. Our disclosure committee is comprised of all of our officers and
directors. The purpose of the committee is to provide assistance to the Chief
Executive Officer and the Chief Financial Officer in fulfilling their
responsibilities regarding the identification and disclosure of material
information about us, and the accuracy, completeness and timeliness of our
financial reports.

D.          
Employees

As of December 31, 2011, we and our subsidiaries together
employed a total of 14 full-time employees, out of which 9 are employed in
Israel and 5 in North America, as well as engaged the services of 7 consultants
who performed management and professional functions.

None of the Companys employees are part of a collective
bargaining unit. Management believes that its relations with its employees and
consultants are good.

Israeli Employment Law and Practices

The Company's employees are located in Israel. Certain
provisions of Israeli employment laws and of extension orders based upon
provisions of the collective bargaining agreements between the Histadrut (i.e.,
the General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations (including the Industrialists Associations) are
applicable to employees in Israel by order of the Israeli Ministry of Labor.
These provisions concern principally the length of the work day, minimum daily
wages for professional workers, insurance for work-related accidents, procedures
for dismissing employees, determination of severance pay and other conditions of
employment.

Israeli law generally requires severance pay, which may be
funded by Managers Insurance described below in this section upon the
retirement or death of an employee or termination of employment without cause
(as defined in the law). The payments thereto amount to approximately 8.33% of
wages. Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which is similar to the
United States Social Security Administration. Such amounts also include payments
for national health insurance. The payments to the National Insurance Institute
are equal to approximately 16.3% of the wages, of which the employee contributes
approximately 66% and the employer contributes approximately 34%. In addition,
Israeli law requires employers to make mandatory pension payments on behalf of
their employees.

A general practice followed, although not legally required, is
the contribution of additional funds on behalf of employees to a fund known as
Managers Insurance. This fund provides a combination of savings plan, insurance
and severance pay benefits to the employee, giving the employee a lump sum
payment upon retirement and securing the severance pay, if legally entitled,
upon termination of employment. The employer decides which employees are
entitled to participate in the plan, and each employee who agrees to
participate, contributes an amount equal to 5% of his or her salary, and the
employer contributes between 13.3% and 15.8% of the employee's salary which also
includes the mandatory pension payments required by applicable law.

- 51 -

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E.          
Share Ownership

Shares

The shareholdings of our officers and directors are set forth
below as of the date hereof.

Holder name
      No. of Sharesheld
      Percentage of holding
      Percentage of holding infull
        dilution(1)% incapital
      % in voting
      % incapital
      % in votingDennis Bennie(2)
      6,261,068
      6.15%
      6.15%
      4.96%
      4.96%Alan Friedman(3)
      5,988,267
      5.88%
      5.88%
      4.74%
      4.74%Colin Kinley(4)
      50,000
      0.05%
      0.05%
      0.04%
      0.04%Sheldon Inwentash(5)
      4,956,267
      4.87%
      4.87%
      3.93%
      3.93%Eli Barkat(6)
      10,000,000
      9.83%
      9.83%
      7.92%
      7.92%


|(1) | In full dilution means with the exercise of non
      negotiable warrants and options which were allotted to the Companys
      employees and officers and to private investors.                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Dennis Bennie is an interested party in the Company
      by virtue of his share holdings and by virtue of him serving as the
      chairman of the Board. Mr. Bennie indirectly holds all of the shares
      through companies controlled by himself and through his spouse.                                                                              
|(3) | Mr. Allan Friedman is an interested party in the Company
      by virtue of his share holdings and by virtue of him serving as a director
      and as the Companys chief business development officer. Mr. Friedman
      holds directly 4,953,600 shares and 150,000 options, and indirectly,
      through his spouse, 1,034,667 shares and 75,000 warrants.
|(4) | Mr. Colin Kinley is an interested party in the Company by
      virtue of his share holdings and by virtue of him serving as a director in
      the Company.                                                                                                                                                                                                   
|(5) | Mr. Sheldon Inwentash is an interested party in the
      Company by virtue of his holdings and by virtue of serving as a director
      in the Company. Mr. Sheldon Inwentash holds directly 1,528,000 shares of
      the Company and indirectly 2,000,000 through companies held thereby and
      1,428,267 through his spouse.                             
|(6) | Mr. Eli Barkat beneficially owns his shares through BRM,
      a private investment company controlled by him.                                                                                                                                                                                                                                                  

Options

The stock options, exercisable into common shares of the Company,
  held by our officers and directors are set forth below as of the date hereof.

Name
      Position
      Allotmentdate
      Expirationdate
      Exerciseprice
      (USDollar) (1)
      Vestingdate(2)
      TotalDennis Bennie
    Chairman of the board
    Aug. 20, 2009
    Aug. 19, 2014
    $0.25
    A
    396,000Jan. 28, 2010
    Jan. 28, 2015
    $0.60
    E
    250,000Jan 11, 2011
    Jan. 11, 2016
    $0.81
    I
    100,000


- 52 -

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Name
      Position
      Allotmentdate
      Expirationdate
      Exerciseprice
      (USDollar)(1)
      Vesting**date**(2)
      TotalSheldon Inwentash
    Director
    June 27, 2011
    June 24, 2016
    $0.51
    N
    100,000Alan Friedman
    Executive Vice
      President, Corporate Development and Director
    Aug. 20, 2009
    Aug. 19, 2014
    $0.25
    A
    396,000Aug. 20, 2009
    Aug. 19, 2014
    $0.25
    C
    250,000Jan. 28, 2010
    Jan. 28, 2015
    $0.60
    E
    250,000Jan 11, 2011
    Jan 11, 2016
    $0.81
    I
    150,000Colin Kinley
    President, Chief
      Operating Officer and Director
    Aug. 20, 2009
    Aug. 19, 2014
    $0.25
    B
    400,000Sep. 23, 2009
    Sep. 23, 2014
    $0.25
    D
    250,000Jan. 28, 2010
    Jan. 28, 2015
    $0.60
    E
    250,000Jan 11, 2011
    Jan. 11, 2016
    $0.81
    I
    800,000Mar. 17, 2011
    Sep. 17, 2017
    $0.73
    J
    100,000Gadi Levin
    Chief Financial
      Officer
    July 22, 2010
    July 22, 2015
    $0.60
    H
    250,000May 3, 2011
    May 2, 2016
    $0.61
    L
    250,000Yael Reznik Cramer
    Director, Former
      Interim Chief Executive Officer
    Jan. 11, 2011
    Jan. 11, 2016
    $0.81
    I
    100,000Mar. 17, 2011
    Mar. 17, 2016
    $0.73
    K
    200,000Eli Barkat
    Director
    Jan. 11, 2011
    Jan. 10, 2016
    $0.81
    I
    100,000Jeffery Walter
    Chief Executive
      Officer
    Mar. 14, 2012
    Mar. 13, 2017
    $0.25
    Q
    2,000,000


|(1) | The exercise price of employee stock options in 2010 were
      set in US Dollars and in 2011 in Canadian Dollars. The tables shows all
      amounts in US Dollars.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | For specification of the vesting dates in accordance with
      the option class refer to Item 5A of this Annual
Report.                                            

Each option may be exercised to purchase one of our common
shares at the exercise price.

Warrants

The share purchase warrants held by our officers and directors
are set forth below as of the date hereof.

Name
      Position
      Allotment date
      Expiration date
      Exerciseprice
      TotalDennis Bennie
    Chairman of the Board
    Dec. 3, 2010
    Dec. 3, 2013
    $0.55
    157,000Alan Friedman
    Executive Vice President,
      Corporate Development and Director
    Dec. 3, 2010
    Dec. 3, 2013
    $0.55
    75,000Colin Kinley
    President, Chief Operating
      Officer, and Director
    Dec. 3, 2010
    Dec. 3, 2013
    $0.55
    25,000Sheldon Inwentash
    Director
    Dec. 3, 2010
    Dec. 3, 2013
    $0.55
    500,000Eli Barkat(1)
    Director
    Dec. 3, 2010
    Dec. 3, 2013
    $0.55
    5,000,000


|(1) | Mr. Barkat beneficially owns his share purchase warrants
      through BRM.
|--- | ---------------------------------------------------------------------------

- 53 -

---

Each warrant may be exercised to purchase one of our common
shares at the exercise price.

Equity Compensation Plans

The following table summarizes our compensation plans under
which equity securities are authorized for issuance as at December 31, 2011.

Plan Category
    Number of securities to
      be issued upon exercise of outstanding options,
      warrants and rights
    Weighted-average
      exercise price of outstanding options,
      warrants and rights
    Number of securities remaining
      available for future issuance under equity
      compensation plans(1)(excluding
      securities reflected in the second column)Equity compensation plans approved by securityholders
    9,384,218
    0.52
    792,627Equity compensation plans not approved by securityholders
    NIL
    N/A
    N/ATotal:
    9,384,218
    0.52
    792,627


|(1) | The number of securities remaining available for future
      issuance under our 10% rolling stock option plan as at the end of our most
      recently completed financial year is calculated on the basis of 10% of the
      Companys issued and outstanding shares as at such date (being 10% of
      101,768,453 - 9,384,218 = 792,627).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On August 31, 2009, our board of directors adopted a new 10%
rolling stock option plan (the New Stock Option Plan) to replace the
existing plan. The New Stock Option plan was ratified by the shareholders of the
Company on December 17, 2009.

The purpose of the New Stock Option Plan continues to be to
allow the Company to grant options to directors, officers, employees and
consultants, as additional compensation, and as an opportunity to participate in
the success of the Company. The granting of such options is intended to align
the interests of such persons with that of the shareholders. Options will be
exercisable over periods of up to ten years as determined by the Board and are
required to have an exercise price no less than the fair market value of the
Companys common shares, as determined in accordance with the New Stock Option
Plan. Pursuant to the New Stock Option Plan, the Board may from time to time
authorize the issue of options to directors, officers, employees and consultants
of the Company and its subsidiaries or employees of companies providing
management or consulting services to the Company or its subsidiaries.

The maximum number of common shares which may be issued
pursuant to options previously granted and those granted under the New Stock
Option Plan will be a maximum of 10% of the issued and outstanding common shares
at the time of the grant. In addition, the number of shares which may be
reserved for issuance to any one individual may not exceed 5% of the issued
shares on a yearly basis or 2% if the optionee is engaged in investor relations
activities or is a consultant. The New Stock Option Plan contains no vesting
requirements, but permits the Board to specify a vesting schedule in its
discretion.

As of the date of this Form 20-F, 14,435,218 options had been granted under the New Stock Option Plan as follows (527,811 options have been exercised and 3,936,298 options have been cancelled):

| | 1. | On August 31, 2009, 3,334,000 options were granted to the
      former holders of Adira Energy stock options, in exchange for previously
      outstanding Adira Energy options. The exercise price per common share of
      these options is $0.25. These options will expire on August 19, 2014 and
      are subject to various vesting terms.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 54 -

---

| | 2.  | On September 23, 2009, 650,000 options were granted to
      certain directors and officers of the Company. The exercise price per
      common share of these options is $0.25. These options will expire on
      September 23, 2014 and are subject to various vesting terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 3.  | On January 27, 2010, 1,820,000 options were granted to
      certain directors and officers of the Company. The exercise price per
      common share of these options is $0.60. These options will expire on
      January 26, 2015 and are subject to various vesting terms                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 4.  | In March 2010, 270,000 options with an exercise price of
      $0.25 were cancelled and in June 2010, 250,000 Options with an exercise
      price of $0.25 and 550,000 options with an exercise price of $0.60 were
      cancelled.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 5.  | On July 22, 2010, 925,000 options were granted to certain
      directors and officers of the Company. The exercise price per common share
      of these options is $0.60. These options will expire on July 22, 2015 and
      are subject to various vesting terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 6.  | On January 11, 2011, 1,650,000 options were granted to
      certain directors and officers of the Company. The exercise price per
      common share of these options is CDN$0.80. These options will expire on
      January 11, 2016 and are subject to various vesting terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 7.  | On March 17, 2011, 300,000 options were granted to two
      officers of the Company. Terms of the options include an exercise price of
      CDN$0.72 per common share. 100,000 of the options vest as follows: 12.5%
      of the options granted every six months with the initial amount vested on
      September 17, 2011, resulting in the options being fully vested on
      September 17, 2015. These options expire on March 17, 2016. 200,000 of the
      options were fully vested on September 17, 2011 and expire on March 17,
      2016.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 8.  | On May 3, 2011, 505,000 options were granted to a certain
      officer and a number of employees of the Company. The exercise price per
      common share of these options is CDN$0.60. Terms of these options include
      an exercise price of CDN$0.60 per common share, a vesting schedule
      allowing for 12.5% of the options to vest by November 2, 2011with an
      additional 12.5% vesting each subsequent 6 month period until the options
      are fully vested on December 2, 2015. The options expire on May 2,
      2016.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 9.  | On June 1, 2011, 2,276,218 options were granted to Mr.
      Hezi Kugler concurrent with his appointment as Chief Executive Officer of
      the Company. Terms of these options include an exercise price of CDN$0.50
      per common share, a vesting schedule allowing for the vesting of 12.5% of
      the options granted every six months with the initial amount vested on
      December 1, 2011. Pursuant to the Kugler Consulting Agreement, all options
      other than the Committed Vested Options that were granted to Mr. Kugler
      (through the Kugler Service Company), being 1,422,636 options, were
      cancelled as of February 27, 2012. The Committed Vested Options, being
      853,582 options, are beneficially held by Mr. Kugler (through the Kugler
      Service Company). In accordance with the terms and conditions of the
      Kugler Consulting Agreement, in the event of termination of the Kugler
      Consulting Agreement prior to November 30, 2012, the Kugler Service
      Company will be entitled to exercise the Committed Vested Options by
      December 30, 2012, unless the Kugler Consulting Agreement is terminated
      for cause (as defined in the Kugler Consulting Agreement), in which case
      the Committed Vested Options will be exercisable within 30 (thirty) days
      of the date of such termination.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10. | On June 27, 2011, 100,000 options were granted to a certain director of the Company.  Terms of these options include an exercise price of CDN$0.50 per common share, a vesting schedule allowing for the vesting of 12.5% of the options granted every six months with the initial amount vested on December 24, 2011, resulting in the options being fully vested on December 24, 2015. The options expire on June 24, 2016.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 11. | On September 8, 2011, 250,000 options were granted to a certain employee of the Company. Terms of these options include an exercise price of CDN$0.49 per common share, and a vesting schedule allowing for the vesting of 12.5% of the options granted every six months with the initial amount vesting on February 1, 2012, resulting in the options being fully vested on August 1, 2015. The options expire on August 31, 2016.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

- 55 -

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| | 12. | On December 1, 2011, 625,000 options were granted to
      certain employees of the Company. Terms of the options include an exercise
      price of CDN$0.50 per common share, a vesting schedule allowing for the
      vesting of 12.5% of the options granted every six months with the initial
      amount vesting on June 1, 2012, resulting in the options being fully
      vested on December 1, 2015. The options expire on December 1,
  2016.                
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 13. | On March 14, 2012, 2,000,000 options were granted to the
      Chief Executive Officer of the Company. Terms of the options include an
      exercise price of CDN$0.25 per common share, a vesting schedule allowing
      for the vesting of 12.5% of the options granted every six months with the
      initial amount vesting on September 14, 2012, resulting in the options
      being fully vested on March 14, 2016. The options expire on March 14,
      2017.

On January 11, 2011, the Board of Directors adopted an annex to the New Stock Option Plan applicable to optionees who are residents of the State of Israel at the date of grant or those who are deemed to be residents of the state of Israel for the payment of tax at the date of grant. The provisions specified therein form an integral part of the New Stock Option Plan and is to be read as a continuation of the New Stock Option Plan and only modifies options granted to Israeli optionees so that they comply with the requirements set by the Israeli law in general, and in particular with the provisions of Section 102 of the Israeli Income Tax Ordinance, as may be amended or replaced from time to time. In connection with options granted to Israeli optionees under the New Stock Option Plan, the Board of Directors selected the capital gains tax track pursuant to the Israeli tax legislation which came into effect on January 1, 2003.

ITEM 7 MAJOR SHAREHOLDER AND RELATED PARTY TRANSACTIONS

A. Major Shareholders Major Shareholders

We are a publicly-held corporation, with our shares held by
residents of the United States, Canada and other countries. To the best of our
knowledge, no person, corporation or other entity beneficially owns, directly or
indirectly, or controls more than 5% of our common shares, except as follows:

Name
      Number of Common Shares Owned(1)
      Percentage(2)Dennis Bennie
    6,261,068(3)
    6.15%Alan Friedman
    5,988,267(5)
    5.88%BRM Group Ltd.(6)
    10,000,000
    9.83%Lapidoth Israel Oil Prospectors Corp. Ltd.(7)
    6,250,000
    6.14%Quantum Fund L.P.(8)
    10,438,871
    10.26%


|(1) | Based on beneficial share ownership data as of the date
      hereof. For these purposes, beneficial ownership means the sole or
      shared power to vote or direct the voting or to dispose or direct the
      disposition of any security. Unless otherwise indicated, each shareholder
      listed has sole voting or dispositive power with respect to such common
      shares.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Based on 101,768,453 of our common shares issued and outstanding as of the date of this filing.                                                                                                                                                                                                                                                                                           
|(3) | Includes 100,000 shares held by spouse.                                                                                                                                                                                                                                                                                                                                                   
|(4) | Includes 140,000 shares held by spouse.                                                                                                                                                                                                                                                                                                                                                   
|(5) | Includes 884,667 held by spouse.                                                                                                                                                                                                                                                                                                                                                          
|(6) | BRM is a private investment company beneficially owned by
      Mr. Eli Barkat, Mr. Nir Barkat and Mr. Yuval Rakav.                                                                                                                                                                                                                                                                       
|(7) | Lapidoth Israel Oil Prospectors Corp. Ltd. is
      beneficially owned by Mr. Yaakov Luxembourg.                                                                                                                                                                                                                                                                                          
|(8) | Quantum Fund LP is a foreign investment fund managed by
      Soros Fund Management LLC.                                                                                                                                                                                                                                                                                                  

Each of our common shares entitles the holder thereof to one
vote.

- 56 -

---

Geographic Breakdown of Shareholders

As of December 31, 2011, our shareholder register indicates
  that our common shares are held as follows:

Location
      Number of Shares
      Percentage of Total Shares
      Number of Registered Shareholders of RecordUnited States
    466,490
    0.46
    52Canada
    83,109,067
    81.66
    46Other
    18,192,896
    17.88
    15Total
    101,768,453
    100
    113


Shares registered in intermediaries were assumed to be held by
residents of the same country in which the clearing house was located.

Transfer Agent

Our securities are recorded in registered form on the books of
our transfer agent, Computershare Trust Company of Canada, located at 3rd Floor,
510 Burrard Street, Vancouver, BC V6C 3B9. However, the majority of such shares
are registered in the name of intermediaries such as brokerage houses and
clearing houses (on behalf of their respective brokerage clients). We do not
have knowledge or access to the identities of the beneficial owners of such
shares registered through intermediaries.

Control

To the best of our knowledge, we are not directly or indirectly
owned or controlled by any other corporation, by any foreign government or by
any other natural or legal person, severally or jointly.

Insider Reports under the British Columbia Securities Act

Under the Canadian Securities laws, insiders (generally
officers, directors and holders of 10% or more of our shares) are required to
file insider reports of changes in their ownership in the first 5 days following
a trade in our securities. Copies of such reports are available publically at
www.sedi.ca.

B.          
Related Party Transactions

No director or senior officer of the Company, and no associate
or affiliate of the foregoing persons, and no insider has or has had any
material interest, direct or indirect, in any transactions, or in any proposed
transaction, which in either such case has materially affected or will
materially affect us or our predecessors during the years ended December 31,
2011 and 2010 except as follows:

| | (a) | During the year ended December 31, 2011, the Company
      incurred $906,000 in consulting fees and operating expenses to private
      companies which are controlled by directors or officers of the Company
      (year ended December 31, 2010 - $574,000).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                
| |     | These transactions are in the normal course of operations
      and are measured at the exchange amount, which is the amount of
      consideration established and agreed to by the related parties.                                                          
| |     |                                                                                                                                                                                                                                                                
| | (b) | Compensation of key management personnel:                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                
| |     | For the purpose of related party disclosure in accordance
      with IASB 24, directors, the CEO, CFO, COO and executive vice president
      are considered key management personnel.                                                                         

- 57 -

---

| |                              |   |                           |  |   |              |  |   | 267-day | 
| | ---------------------------- | - | ------------------------- |  | - | ------------ |  | - | ------- | 
| |                              |   | Year ended                |  |   | period ended | 
| |                              |   | December 31,              |  |   | December 31, | 
| |                              |   | 2011                      |  |   | 2010         |  |   | 2009    | 
| |                              |   | U.S. dollars in thousands | 
| |                              |   |                           |  |   |              |  |   |         | 
| | Short-term employee benefits | $ | 911                       |  | $ | 481          |  | $ | 61      | 
| | Share based compensation     |   | 850                       |  |   | 595          |  |   | 250     | 
| |                              |   |                           |  |   |              |  |   |         | 
| |                              | $ | 1,761                     |  | $ | 1,076        |  | $ | 311     | 

Benefits in respect of key management
  persons (including directors) who are not employed by the Company:

| |                          |   |                           |  |   |              |  |   | 267-day | 
| | ------------------------ | - | ------------------------- |  | - | ------------ |  | - | ------- | 
| |                          |   | Year ended                |  |   | period ended | 
| |                          |   | December 31,              |  |   | December 31, | 
| |                          |   | 2011                      |  |   | 2010         |  |   | 2009    | 
| |                          |   | U.S. dollars in thousands | 
| |                          |   |                           |  |   |              |  |   |         | 
| | Share based compensation | $ | 206                       |  | $ | 243          |  | $ | 55      | 

C.          
  Interests of Experts and Counsel

Not applicable.

ITEM
8           FINANCIAL
INFORMATION

A.          
Consolidated Statements and Other Financial Information

Financial Statements

The financial statements required as part of this Annual Report
on Form 20-F are filed under Item 18 of this Annual Report.

Legal Proceedings

We are not a party to any legal or arbitration proceedings nor,
to our knowledge, are any such proceedings contemplated.

Dividends

We have not paid any dividends on our common shares since
incorporation. Our management anticipates that we will retain all future
earnings and other cash resources for the future operation and development of
our business. We do not intend to declare or pay any cash dividends in the
foreseeable future. Payment of any future dividends will be at our board of
directors discretion, subject to applicable law, after taking into account many
factors including our operating results, financial condition and current and
anticipated cash needs.

B.          
Significant Changes

We have not experienced any significant changes since the date
of the financial statements included with this Form 20-F except as disclosed in
this Form 20-F.

ITEM
9           THE OFFER AND
LISTING

Common Shares

Our authorized capital consists of an unlimited number of
common shares without par value, of which 101,768,453 common shares are issued
and outstanding as of December 31, 2011 and 90,140,001 as of December 31, 2010.
All shares are initially issued in registered form. Except for the escrowed
shares (see below) there are no restrictions on the transferability of our
common shares imposed by our constituting documents.

The common shares entitle their holders to: (i) vote at all
meetings of our shareholders except meetings at which only holders of specified
classes of shares are entitled to vote, having one vote per common share, (ii)
receive dividends at the discretion of our board of directors; and (iii) receive
our remaining property on liquidation, dissolution or winding up.

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A.          
Offer and Listing Details  Price History

Trading Markets

The Companys current trading symbol on the TSXV is ADL. The
  Company also trades on the OTCBB with the trading symbol ADENF and on the
  Frankfurt Stock Exchange with the trading symbol AORLB8.

The following table shows the progression in the high and low
closing trading prices of our common shares on the OCTBB for the periods
listed.

|                     | High ($) | Low ($)
|-------------------- | -------- | -------
|Annual (fiscal year) |          |        
|2011                 | 0.90     | 0.21   
|2010                 | 0.90     | 0.25   
|2009                 | 0.54     | 0.05   
|2008                 | 0.50     | 0.03   
|2007                 | 0.90     | 0.27   
|                     |          |        
|Quarterly            |          |        
|Fiscal 2011          |          |        
|Fourth Quarter       | 0.46     | 0.21   
|Third Quarter        | 0.62     | 0.29   
|Second Quarter       | 0.79     | 0.46   
|First Quarter        | 0.90     | 0.55   
|                     |          |        
|Fiscal 2010          |          |        
|Fourth Quarter       | 0.90     | 0.33   
|Third Quarter        | 0.50     | 0.25   
|Second Quarter       | 0.60     | 0.31   
|First Quarter        | 0.74     | 0.39   
|                     |          |        
|Monthly              |          |        
|December 2011        | 0.31     | 0.21   
|November 2011        | 0.36     | 0.29   
|October 2011         | 0.46     | 0.23   
|September 2011       | 0.56     | 0.29   
|August 2011          | 0.62     | 0.30   

The following table shows the progression in the high and low
closing trading prices of our common shares on the TSXV for the periods
listed.

|                     | High ($) | Low ($)
|-------------------- | -------- | -------
|Annual (fiscal year) |          |        
|2011                 | 0.90     | 0.20   
|2010(1)              | 0.90     | 0.55   
|2009(1)              | N/A      | N/A    
|2008(1)              | N/A      | N/A    
|2007(1)              |          |        

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|                   | High ($) | Low ($)
|------------------ | -------- | -------
|Quarterly          |          |        
|Fiscal 2011        |          |        
|Fourth Quarter     | 0.435    | 0.20   
|Third Quarter      | 0.58     | 0.30   
|Second Quarter     | 0.71     | 0.43   
|First Quarter      | 0.90     | 0.60   
|                   |          |        
|Fiscal 2010        |          |        
|Fourth Quarter (1) | 0.90     | 0.55   
|Third Quarter (1)  | N/A      | N/A    
|Second Quarter(1)  | N/A      | N/A    
|First Quarter (1)  | N/A      | N/A    
|                   |          |        
|Monthly            |          |        
|March 2012         | 0.355    | 0.140  
|February 2012      | 0.300    | 0.155  
|January 2012       | 0.340    | 0.245  
|December 2011      | 0.310    | 0.200  
|November 2011      | 0.360    | 0.295  
|October 2011       | 0.435    | 0.260  

(1) We commenced trading on the TSXV on December 2, 2010.
Therefore, information may not be available for all periods listed.

Escrowed Securities

Pursuant to our listing on the TSXV in December 2011, a number
of our common shares are subject to escrow pursuant to the policies of the TSXV.
As of December 31, 2011, the following securities were subject to escrow:

Designation of Class
    Number of Securities held in
      escrow or that are subject to a contractual restriction
      on transfer
    % of
      Class(1)Common Shares
    21,959,165
    21.6%Options
    2,166,110
    23.0%Warrants
    94,560
    0.6%


(1) Based on 101,768,453 Common Shares, 9,384,218 Options and
15,057,375 Warrants issued and outstanding as at December 31, 2011.

B.          
Plan of Distribution

Not applicable.

C.          
Markets

Our common shares are traded on the TSXV under the symbol
ADL, in the United States on the OTC Bulletin Board under the symbol ADENF
and on the Frankfurt Stock Exchange under the symbol AORLB8.

D.          
Selling Shareholders

Not applicable.

E.          
Dilution

Not applicable.

F.          
Expenses of the Issue

Not applicable.

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ITEM
10           ADDITIONAL
INFORMATION

A.          
Share Capital

Not applicable.

B.          
Memorandum and Articles of Incorporation

We were incorporated on February 20, 1997 as Trans New Zealand
Oil Company under the laws of the State of Nevada, U.S.A. We changed our name
to AMG Oil Ltd. on July 27, 1998.

On November 27, 2008, we changed our jurisdiction of
incorporation from Nevada to the Canadian federal jurisdiction under the
Canada Business Corporation Act (the CBCA) through a process
known as a conversion under Nevada corporate law, and known as a continuation
under Canadian corporate law. A continuance or continuation is a process by
which a corporation which is not incorporated under the laws of Canada may
change its jurisdiction of incorporation to Canada. Under the CBCA, if the laws
of its home jurisdiction allow for it, a company may be continued as a
Canadian corporation by filing Articles of Continuance with the Director under
the CBCA. In order to give effect to the continuation, our board of directors
adopted a plan of conversion under Chapter 92A of the Nevada Revised Statutes
which was subsequently approved and adopted by our shareholders. After the
completion of the continuation, we became a Canadian corporation governed by the
CBCA.

With effect from our continuation under the CBCA, our corporate
constituting documents are comprised of our Articles of Continuance
(Articles) and our By-Laws (By-Laws). Information regarding
our Articles and Bylaws is incorporated by reference from Amendment No. 3 to our
registration statement on Form S-4, which was filed with the SEC on October 10,
2010. The forms of our Articles and By-Laws were included as Appendices C and D,
respectively, to the proxy statement/prospectus included in the registration
statement, and the proxy statement/prospectus contained a summary, under the
heading Comparative Rights of Stockholders, of the more significant
differences between the Nevada Revised Statutes and the CBCA which resulted in
various changes in the rights of our shareholders as a result of our
continuance.

We changed our name to Adira Energy Ltd. pursuant to Articles
of Amendment dated December 17, 2009, and filed with the Director under the
CBCA. Such amendment to our Articles was certified by a Certificate of Amendment
dated December 17, 2009. The Certificate and Articles of Amendment were filed as
Exhibit 1.4 to our annual report on Form 20-F for the year ended September 30,
2009, filed with the SEC on January 1, 2010.

C.          
Material Contracts

The material contracts to which we are a party which were
entered into not in the ordinary course of business during the last two years
are as follows:

- Agency Agreement between Adira Energy and DS Apex and Mergers Ltd. dated
  November 22, 2010 in connection with the part of the Adira Financing placed by
  DS Apex Mergers & Acquisitions Ltd. in certain jurisdictions, excluding
  Canada and the United States of America. , as described in Item 4.A of this
  Form 20-F. A copy of this Agency agreement is attached hereto as Exhibit 4.4.
- Nominee agreement with BRM relating to the appointment of directors on
  behalf of BRM. A copy of the Nominee agreement is attached hereto as Exhibit
  4.5.

The Company is also party to executive employment agreements
with certain of its officers, which are disclosed under Item 6.B  Directors,
Senior Management and Employees- Compensation.

D.          
Exchange Controls

There is no limitation imposed by Canadian law or by the
charter or other constituent documents of the Company on the right of a
non-resident to hold or vote common shares of the Company. However, the
Investment Canada Act (Canada) (the Investment Act) has rules regarding
certain acquisitions of shares by non-residents, along with other requirements
under that legislation.

The following discussion summarizes the principal features of
the Investment Act for a non-resident who proposes to acquire common shares of
the Company. The discussion is general only; it is not a substitute for
independent legal advice from an investors own advisor; and it does not
anticipate statutory or regulatory amendments.

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The Investment Act is a federal statute of broad application
regulating the establishment and acquisition of Canadian businesses by
non-Canadians, including individuals, governments or agencies thereof,
corporations, partnerships, trusts or joint ventures (each an entity).
Investments by non-Canadians to acquire control over existing Canadian
businesses or to establish new ones are either reviewable or notifiable under
the Investment Act. If an investment by a non-Canadian to acquire control over
an existing Canadian business is reviewable under the Investment Act, the
Investment Act generally prohibits implementation of the investment unless,
after review, the Minister of Industry, is satisfied that the investment is
likely to be of net benefit to Canada.

A non-Canadian would acquire control of the Company for the
purposes of the Investment Act through the acquisition of common shares if the
non-Canadian acquired a majority of the common shares of the Company.

Further, the acquisition of less than a majority but one-third
or more of the common shares of the Company would be presumed to be an
acquisition of control of the Company unless it could be established that, on
the acquisition, the Company was not controlled in fact by the acquirer through
the ownership of common shares.

For a direct acquisition that would result in an acquisition of
control of the Company, subject to the exception for WTO-investors that are
controlled by persons who are resident in World Trade Organization
(WTO) member nations (there are currently 153 WTO members), a proposed
investment would be reviewable where the value of the acquired assets is CAD $5
million or more, or if an order for review was made by the federal cabinet on
the grounds that the investment related to Canadas cultural heritage or
national identity, where the value of the acquired assets is less than CAD $5
million.

For a proposed indirect acquisition that is not a so-called WTO
transaction and that would result in an acquisition of control of the Company
through the acquisition of a non-Canadian parent entity, the investment would be
reviewable where (a) the value of the Canadian assets acquired in the
transaction is CAD $50 million or more, or (b) the value of the Canadian assets
is greater than 50% of the value of all of the assets acquired in the
transaction and the value of the Canadian assets is CAD $5 million or more.

In the case of a direct acquisition by or from a WTO
investor, the threshold is significantly higher, and is adjusted for inflation
each year. The 2012 threshold is CAD$330 million. Other than the exception noted
below, an indirect acquisition involving a WTO investor is not reviewable under
the Investment Act.

The higher WTO threshold for direct investments and the
exemption for indirect investments do not apply where the relevant Canadian
business is carrying on a cultural business. The acquisition of a Canadian
business that is a cultural business is subject to lower review thresholds
under the Investment Act because of the perceived sensitivity of the cultural
sector.

In 2009, amendments were enacted to the Investment Act
concerning investments that may be considered injurious to national security. If
the Industry Minister has reasonable grounds to believe that an investment by a
non-Canadian could be injurious to national security, the Industry Minister
may send the non-Canadian a notice indicating that an order for review of the
investment may be made. The review of an investment on the grounds of national
security may occur whether or not an investment is otherwise subject to review
on the basis of net benefit to Canada or otherwise subject to notification under
the Investment Canada Act. To date, there is neither legislation nor guidelines
published, or anticipated to be published, on the meaning of injurious to
national security. Discussions with government officials suggest that very few
investment proposals will cause a review under these new sections.

Certain transactions, except those to which the national
security provisions of the Investment Act may apply, relating to common shares
of the Company are exempt from the Investment Act, including

| | (a) | acquisition of common shares of the Company by a person
      in the ordinary course of that persons business as a trader or dealer in
      securities,                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                   
| | (b) | acquisition of control of the Company in connection with
      the realization of security granted for a loan or other financial
      assistance and not for a purpose related to the provisions on the
      Investment Act, and

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| | (c) | acquisition of control of the Company by reason of an
      amalgamation, merger, consolidation or corporate reorganization following
      which the ultimate direct or indirect control in fact of the Company,
      through the ownership of common shares, remained
  unchanged.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E.          
Taxation

Material Canadian Federal Income Tax Consequences for United
States Residents

The following summarizes the material Canadian federal income
tax consequences generally applicable to the holding and disposition of our
shares by a holder (in this summary, a U.S. Holder) who, (a) for the
purposes of the Income Tax Act(Canada) (the Tax Act) and at all
relevant times, is not resident in Canada, deals at arms length with us, holds
our shares as capital property and does not use or hold our shares in the course
of carrying on, or otherwise in connection with, a business in Canada, and (b)
for the purposes of the Canada-United States Income Tax Convention, 1980 (the
Treaty) and at all relevant times, is a resident solely of the United
States, has never been a resident of Canada, is a qualifying person and has
not held or used (and does not hold or use) our shares in connection with a
permanent establishment or fixed base in Canada. This summary does not apply to
traders or dealers in securities, limited liability companies, tax-exempt
entities, insurers, financial institutions (including those to which the
mark-to-market provisions of the Tax Act apply), or any other holder in special
circumstances.

This summary is based on the current provisions of the Tax Act,
all regulations thereunder, the Treaty, all proposed amendments to the Tax Act,
the regulations and the Treaty publicly announced by the Government of Canada
prior to the date hereof, and our understanding of the current administrative
practices of the Canada Revenue Agency. It has been assumed that all currently
proposed amendments will be enacted as proposed and that there will be no other
relevant change in any governing law or administrative practice, although no
assurances can be given in this respect.

The summary does not take into account Canadian provincial,
U.S. federal (which follows further below), state or other foreign income tax
law or practice. The tax consequences to any particular U.S. Holder will vary
according to the status of that holder as an individual, trust, corporation,
partnership or other entity, the jurisdictions in which that holder is subject
to taxation, and generally according to that holders particular circumstances.
Accordingly, this summary is not, and is not to be construed as, Canadian tax
advice to any particular U.S. Holder. All U.S. Holders are advised to consult
with their own tax advisors regarding their particular circumstances. The
discussion below is qualified accordingly.

Dividends

Dividends paid or credited or deemed to be paid or credited to
a U.S. Holder by us will be subject to Canadian withholding tax. The Tax Act
requires a 25% withholding unless reduced under a tax treaty. Under the Treaty,
provided that a holder can demonstrate that it is a qualifying U.S. Holder, the
rate of withholding tax on dividends paid to a U.S. Holder is generally limited
to 15% of the gross amount of the dividend (or 5% if the U.S. Holder is a
corporation and beneficially owns at least 10% of our voting shares). We will be
required to withhold the applicable withholding tax from any dividend and remit
it to the Canadian government for the U.S. Holders account.

Disposition

For purposes of the following discussion, we have assumed that
our shares will remain listed on the TSXV. A U.S. Holder is not subject to tax
under the Tax Act in respect of a capital gain realized on the disposition of
our shares in the open market unless the shares are taxable Canadian property
to the holder thereof and the U.S. Holder is not entitled to relief under the
Treaty. Our shares will be taxable Canadian property to a U.S. Holder (a) if, at
any time during the 60-month period preceding the disposition: (i) the U.S.
Holder, alone or together with persons with whom the U.S. Holder did not deal at
arms length, owned 25% or more of our issued shares of any class or series, and
(ii) more than 50% of the fair market value of the shares was derived, directly
or indirectly, from one or any combination of real property situated in Canada,
timber resource properties, Canadian resource properties, or an option in
respect of, or an interest in, or for civil law a right in, any of the
foregoing, or (b) in other specific circumstances, including where shares were
acquired for other securities in a tax-deferred transaction for Canadian tax
purposes. If our shares constitute taxable Canadian property to the holder, the
holder will (unless relieved under the Treaty) be subject to Canadian income tax
on any gain. The taxpayers capital gain or loss from a disposition of the share is the amount, if any, by which the proceeds of
disposition exceed (or are exceeded by) the aggregate of the adjusted cost base
of the share and reasonable expenses of disposition. One-half of a capital gain
(taxable capital gain) from the disposition of taxable Canadian
property (other than treaty protected properties) is included in computing the
income of a U.S. Holder and one-half of a capital loss (allowable capital
loss) is deductible from taxable capital gains from dispositions of taxable
Canadian property realized in the same year. Unused allowable capital losses
from previous taxation years generally may be carried back three taxation years
or forward indefinitely and applied to reduce net taxable capital gains realized
in those years by a U.S. Holder from the disposition of a taxable Canadian
property.

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A U.S. Holder whose shares constitute taxable Canadian property
should consult with the holders own tax advisors regarding any possible relief
(if any) from Canadian tax under the Treaty based on applicable circumstances at
the relevant time.

Israeli Tax Consequences

The following is a summary of the material provisions of the
current tax law applicable to companies in Israel and does not discuss all the
aspects of Israeli tax law. To the extent that the discussion is based on tax
legislation that has not been subject to judicial or administrative
interpretation, we cannot assure you that the views expressed in the discussion
will be accepted by the tax authorities in question. The discussion is not
intended, and should not be construed, as legal or professional tax advice and
is not exhaustive of all possible tax considerations.

General Corporate Tax Structure

In December 2011, the Knesset passed the Law for Adjustment of
the Tax Burden (Amended Legislation)  2011, which amends the Law for Economic
Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and
2010)  2009 which prescribed, among other provisions, a gradual reduction in
the rates of the Israeli corporate tax and real capital gains tax starting in
2011. Following the amendment, corporate tax rates and capital gains rates are:
2011  24%, 2012  and thereafter  25%. The cancellation of the gradual
reduction in the corporate tax rate, will decrease the Levy per the Petroleum
Taxation Law from 2016 and thereafter to a maximum rate of 45.52% from the
Company's oil and gas revenues.

Israeli Transfer Pricing Regulations

On November 29, 2006, Income Tax Regulations (Determination of
Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came
into force (the TP Regs). Section 85A of the Tax Ordinance and the TP
Regs generally require that all cross-border transactions carried out between
related parties will be conducted on an arms length principle basis and will be
reported and taxed accordingly.

United States Tax Consequences

United States Federal Income Tax Consequences

The following is a general summary of certain material U.S.
federal income tax considerations applicable to a U.S. Holder (as defined below)
arising from and relating to the acquisition, ownership, and disposition of our
common shares.

This summary is for general information purposes only and does
not purport to be a complete analysis or listing of all potential U.S. federal
income tax considerations that may apply to a U.S. Holder arising from and
relating to the acquisition, ownership, and disposition of our common shares. In
addition, this summary does not take into account the individual facts and
circumstances of any particular U.S. Holder that may affect the U.S. federal
income tax consequences to such U.S. Holder, including without limitation
specific tax consequences to a U.S. Holder under an applicable tax treaty.
Accordingly, this summary is not intended to be, and should not be construed as,
legal or U.S. federal income tax advice with respect to any U.S. Holder. This
summary does not address the U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state
and local, and foreign tax consequences to U.S. Holders of the acquisition,
ownership, and disposition of our common shares. Each U.S. Holder should consult
its own tax advisor regarding the U.S. federal, U.S. federal alternative
minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax
consequences relating to the acquisition, ownership, and disposition of our
common shares.

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No legal opinion from U.S. legal counsel or ruling from the
Internal Revenue Service (the IRS) has been requested, or will be obtained,
regarding the U.S. federal income tax consequences of the acquisition,
ownership, and disposition of our common shares. This summary is not binding on
the IRS, and the IRS is not precluded from taking a position that is different
from, and contrary to, the positions taken in this summary. In addition, because
the authorities on which this summary is based are subject to various
interpretations, the IRS and the U.S. courts could disagree with one or more of
the conclusions described in this summary.

Scope of this Summary

Authorities

This summary is based on the Internal Revenue Code of 1986, as
amended (the Code), Treasury Regulations (whether final, temporary, or
proposed), published rulings of the IRS, published administrative positions of
the IRS, the Convention Between Canada and the United States of America with
Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended
(the Canada-U.S. Tax Convention), and U.S. court decisions that are applicable
and, in each case, as in effect and available, as of the date of this document.
Any of the authorities on which this summary is based could be changed in a
material and adverse manner at any time, and any such change could be applied on
a retroactive or prospective basis which could affect the U.S. federal income
tax considerations described in this summary. This summary does not discuss the
potential effects, whether adverse or beneficial, of any proposed legislation
that, if enacted, could be applied on a retroactive or prospective basis.

U.S. Holders

For purposes of this summary, the term "U.S. Holder" means a
beneficial owner of our common shares that is for U.S. federal income tax
purposes:

- an individual who is a citizen or resident of the U.S.;
- a corporation (or other entity taxable as a corporation for U.S. federal
  income tax purposes) organized under the laws of the U.S., any state thereof
  or the District of Columbia;
- an estate whose income is subject to U.S. federal income taxation
  regardless of its source; or
- a trust that (1) is subject to the primary supervision of a court within
  the U.S. and the control of one or more U.S. persons for all substantial
  decisions or (2) has a valid election in effect under applicable Treasury
  Regulations to be treated as a U.S. person.

Non-U.S. Holders

For purposes of this summary, a non-U.S. Holder is a
beneficial owner of our common shares that is not a U.S. Holder. This summary
does not address the U.S. federal income tax consequences to non-U.S. Holders
arising from and relating to the acquisition, ownership, and disposition of our
common shares. Accordingly, a non-U.S. Holder should consult its own tax advisor
regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal
estate and gift, U.S. state and local, and foreign tax consequences (including
the potential application of and operation of any income tax treaties) relating
to the acquisition, ownership, and disposition of our common shares.

U.S. Holders Subject to Special U.S. Federal Income Tax
Rules Not Addressed

This summary does not address the U.S. federal income tax
considerations applicable to U.S. Holders that are subject to special provisions
under the Code, including, but not limited to, the following: (a) U.S. Holders
that are tax-exempt organizations, qualified retirement plans,
individual retirement accounts, or other tax-deferred accounts; (b) U.S. Holders
that are financial institutions, underwriters, insurance companies, real estate
investment trusts, or regulated investment companies; (c) U.S. Holders that are
broker-dealers, dealers, or traders in securities or currencies that elect to
apply a mark-to-market accounting method; (d) U.S. Holders that have a
functional currency other than the U.S. dollar; (e) U.S. Holders that own our
common shares as part of a straddle, hedging transaction, conversion
transaction, constructive sale, or other arrangement involving more than one
position; (f) U.S. Holders that acquired our common shares in connection with
the exercise of employee stock options or otherwise as compensation for
services; (g) U.S. Holders that hold our common shares other than as a capital
asset within the meaning of Section 1221 of the Code (generally, property held
for investment purposes); or (h) U.S. Holders that own or have owned (directly,
indirectly, or by attribution) 10% or more of the total combined voting power of
the outstanding shares of we. This summary also does not address the U.S.
federal income tax considerations applicable to U.S. Holders who are: (a) U.S.
expatriates or former long-term residents of the U.S.; (b) persons that have
been, are, or will be a resident or deemed to be a resident in Canada for
purposes of the Tax Act; (c) persons that use or hold, will use or hold, or that
are or will be deemed to use or hold our common shares in connection with
carrying on a business in Canada; (d) persons whose our common shares constitute
taxable Canadian property under the Tax Act; or (e) persons that have a
permanent establishment in Canada for the purposes of the Canada-U.S. Tax
Convention. U.S. Holders that are subject to special provisions under the Code,
including, but not limited to, U.S. Holders described immediately above, should
consult their own tax advisor regarding the U.S. federal, U.S. federal
alternative minimum, U.S. federal estate and gift, U.S. state and local, and
foreign tax consequences relating to the acquisition, ownership and disposition
of our common shares.

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If an entity or arrangement that is classified as a partnership
(or other pass-through entity) for U.S. federal income tax purposes holds our
common shares, the U.S. federal income tax consequences to such entity and the
partners (or other owners) of such entity generally will depend on the
activities of the entity and the status of such partners (or owners). This
summary does not address the tax consequences to any such owner. Partners (or
other owners) of entities or arrangements that are classified as partnerships or
as pass-through entities for U.S. federal income tax purposes should consult
their own tax advisors regarding the U.S. federal income tax consequences
arising from and relating to the acquisition, ownership, and disposition of our
common shares.

Ownership and Disposition of our common shares

The following discussion is subject to the rules described
below under the heading Passive Foreign Investment Company Rules.

Taxation of Distributions

A U.S. Holder that receives a distribution, including a
constructive distribution, with respect to a our common share will be required
to include the amount of such distribution in gross income as a dividend
(without reduction for any foreign income tax withheld from such distribution)
to the extent of the current or accumulated earnings and profits of we, as
computed for U.S. federal income tax purposes. To the extent that a distribution
exceeds the current and accumulated earnings and profits of we, such
distribution will be treated first as a tax-free return of capital to the extent
of a U.S. Holder's tax basis in the our common shares and thereafter as gain
from the sale or exchange of such our common shares (see Sale or Other Taxable
Disposition of Common Shares below). However, we may not maintain the
calculations of earnings and profits in accordance with U.S. federal income tax
principles, and each U.S. Holder should therefore assume that any distribution
by us with respect to the our common shares will constitute ordinary dividend
income. Dividends received on our common shares generally will not constitute
qualified dividend income eligible for the dividends received deduction.

For tax years beginning before January 1, 2013, a dividend paid
by us to a U.S. Holder who is an individual, estate or trust generally will be
taxed at the preferential tax rates applicable to long-term capital gains if we
are a qualified foreign corporation (QFC) and certain holding period
requirements for the our common shares are met. We generally will be a QFC as
defined under Section 1(h)(11) of the Code if we are eligible for the benefits
of the Canada - U.S. Tax Convention or its shares are readily tradable on an
established securities market in the U.S. However, even if we satisfy one or
more of these requirements, we will not be treated as a QFC if we are a passive
foreign investment company (or PFIC, as defined below) for the tax year
during which we pay a dividend or for the preceding tax year. See the section
below under the heading Passive Foreign Investment Company Rules below.

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If a U.S. Holder is not eligible for the preferential tax rates
discussed above, a dividend paid by us to a U.S. Holder generally will be taxed
at ordinary income tax rates (and not at the preferential tax rates applicable
to long-term capital gains). The dividend rules are complex, and each U.S.
Holder should consult its own tax advisor regarding the application of such
rules.

Sale or Other Taxable Disposition of Common Shares

A U.S. Holder will recognize gain or loss on the sale or other
taxable disposition of our common shares in an amount equal to the difference,
if any, between (a) the amount of cash plus the fair market value of any
property received and (b) such U.S. Holders tax basis in such our common shares
sold or otherwise disposed of. Any such gain or loss generally will be capital
gain or loss, which will be long-term capital gain or loss if, at the time of
the sale or other disposition, such our common shares are held for more than one
year.

Preferential tax rates apply to long-term capital gains of a
U.S. Holder that is an individual, estate, or trust. There are currently no
preferential tax rates for long-term capital gains of a U.S. Holder that is a
corporation. Deductions for capital losses are subject to significant
limitations under the Code.

Passive Foreign Investment Company Rules

If we were to constitute a PFIC for any year during a U.S.
Holders holding period, then certain potentially adverse rules would affect the
U.S. federal income tax consequences to a U.S. Holder resulting from the
acquisition, ownership and disposition of our common shares. We do not believe
that we were a PFIC during our tax years ended September 30, 2010 and December
31, 2010 and 2011. However, we believe we were a PFIC in prior tax years. PFIC
classification is fundamentally factual in nature, generally cannot be
determined until the close of the tax year in question, and is determined
annually. Additionally, the analysis depends, in part, on the application of
complex U.S. federal income tax rules, which are subject to differing
interpretations. Consequently, there can be no assurances regarding our PFIC
status for any tax year during which U.S. Holders hold our common shares.

In addition, in any year in which we are classified as a PFIC,
such holder would be required to file an annual report with the IRS containing
such information as Treasury Regulations and/or other IRS guidance may require.
U.S. Holders should consult their own tax advisors regarding the requirements of
filing such information returns under these rules, including the requirement to
file a revised IRS Form 8621.

We generally will be a PFIC under Section 1297 of the Code if,
for a tax year, (a) 75% or more of our gross income for such tax year is passive
income (the income test) or (b) 50% or more of the value of our assets either
produce passive income or are held for the production of passive income (the
asset test), based on the quarterly average of the fair market value of such
assets. Gross income generally includes all sales revenues less the cost of
goods sold, plus income from investments and from incidental or outside
operations or sources, and passive income generally includes, for example,
dividends, interest, certain rents and royalties, certain gains from the sale of
stock and securities, and certain gains from commodities transactions. Active
business gains arising from the sale of commodities generally are excluded from
passive income if substantially all (85% or more) of a foreign corporations
commodities are stock in trade or inventory, depreciable property used in a
trade or business or supplies regularly used or consumed in a trade or business
and certain other requirements are satisfied.

In addition, for purposes of the PFIC income test and asset
test described above, if we own, directly or indirectly, 25% or more of the
total value of the outstanding shares of another corporation, we will be treated
as if we (a) held a proportionate share of the assets of such other corporation
and (b) received directly a proportionate share of the income of such other
corporation. In addition, for purposes of the PFIC income test and asset test
described above, passive income does not include any interest, dividends,
rents, or royalties that are received or accrued by us from a related person
(as defined in Section 954(d)(3) of the Code), to the extent such items are
properly allocable to the income of such related person that is not passive
income.

Under certain attribution rules, if we are a PFIC, U.S. Holders
will be deemed to own their proportionate share of any subsidiary of ours which
is also a PFIC (a Subsidiary PFIC), and will be subject to U.S. federal
income tax on (i) a distribution on the shares of a Subsidiary PFIC or (ii) a
disposition of shares of a Subsidiary PFIC, both as if the holder directly held
the shares of such Subsidiary PFIC.

- 67 -

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If we are a PFIC in any tax year in which a U.S. Holder held
our common shares, such holder generally would be subject to special rules with
respect to excess distributions made by us on the our common shares and with
respect to gain from the disposition of our common shares. An excess
distribution generally is defined as the excess of distributions with respect
to the our common shares received by a U.S Holder in any tax year over 125% of
the average annual distributions such U.S. Holder has received from us during
the shorter of the three preceding tax years, or such U.S. Holders holding
period for the our common shares. Generally, a U.S. Holder would be required to
allocate any excess distribution or gain from the disposition of our common
shares ratably over its holding period for the our common shares. Such amounts
allocated to the year of the disposition or excess distribution would be taxed
as ordinary income, and amounts allocated to prior tax years would be taxed as
ordinary income at the highest tax rate in effect for each such year and an
interest charge at a rate applicable to underpayments of tax would apply.

While there are U.S. federal income tax elections that
sometimes can be made to mitigate these adverse tax consequences (including,
without limitation, the QEF Election under Section 1295 of the Code and the
Mark-to-Market Election under Section 1296 of the Code), such elections are
available in limited circumstances and must be made in a timely manner.

U.S. Holders should be aware that, for each tax year, if any,
that we are a PFIC, we can provide no assurances that we will satisfy the record
keeping requirements of a PFIC, or that we will make available to U.S. Holders
the information such U.S. Holders require to make a QEF Election with respect to
us or any Subsidiary PFIC. U.S. Holders are urged to consult their own tax
advisors regarding the potential application of the PFIC rules to the ownership
and disposition of our common shares, and the availability of certain U.S. tax
elections under the PFIC rules.

Additional Considerations

Additional Tax on Passive Income

For tax years beginning after December 31, 2012, certain
individuals, estates and trusts whose income exceeds certain thresholds will be
required to pay a 3.8% Medicare surtax on net investment income including,
among other things, dividends and net gain from disposition of property (other
than property held in a trade or business). U.S. Holders should consult with
their own tax advisors regarding the effect, if any, of this tax on their
ownership and disposition of our common shares.

Receipt of Foreign Currency

The amount of any distribution paid to a U.S. Holder in foreign
currency, or on the sale, exchange or other taxable disposition of our common
shares, generally will be equal to the U.S. dollar value of such foreign
currency based on the exchange rate applicable on the date of receipt
(regardless of whether such foreign currency is converted into U.S. dollars at
that time). A U.S. Holder will have a basis in the foreign currency equal to its
U.S. dollar value on the date of receipt. Any U.S. Holder who converts or
otherwise disposes of the foreign currency after the date of receipt may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss, and generally will be U.S. source income or loss for foreign tax credit
purposes. Each U.S. Holder should consult its own U.S. tax advisor regarding the
U.S. federal income tax consequences of receiving, owning, and disposing of
foreign currency.

Foreign Tax Credit

Subject to the PFIC rules discussed above, a U.S. Holder that
pays (whether directly or through withholding) Canadian income tax with respect
to dividends paid on our common shares generally will be entitled, at the
election of such U.S. Holder, to receive either a deduction or a credit for such
Canadian income tax. Generally, a credit will reduce a U.S. Holders U.S.
federal income tax liability on a dollar-for-dollar basis, whereas a deduction
will reduce a U.S. Holders income subject to U.S. federal income tax. This
election is made on a year-by-year basis and applies to all foreign taxes paid
(whether directly or through withholding) by a U.S. Holder during a year.

Complex limitations apply to the foreign tax credit, including
the general limitation that the credit cannot exceed the proportionate share of
a U.S. Holders U.S. federal income tax liability that such U.S. Holders
foreign source taxable income bears to such U.S. Holders worldwide taxable
income. In applying this limitation, a U.S. Holders various items of income and deduction must be classified, under
complex rules, as either foreign source or U.S. source. Generally, dividends
paid by a foreign corporation should be treated as foreign source for this
purpose, and gains recognized on the sale of stock of a foreign corporation by a
U.S. Holder should be treated as U.S. source for this purpose, except as
otherwise provided in an applicable income tax treaty, and if an election is
properly made under the Code. However, the amount of a distribution with respect
to the our common shares that is treated as a dividend may be lower for U.S.
federal income tax purposes than it is for Canadian federal income tax purposes,
resulting in a reduced foreign tax credit allowance to a U.S. Holder. In
addition, this limitation is calculated separately with respect to specific
categories of income. The foreign tax credit rules are complex, and each U.S.
Holder should consult its own U.S. tax advisor regarding the foreign tax credit
rules.

- 68 -

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Backup Withholding and Information Reporting

Under U.S. federal income tax law and Treasury Regulations,
certain categories of U.S. Holders must file information returns with respect to
their investment in, or involvement in, a foreign corporation. For example, U.S.
return disclosure obligations (and related penalties) are imposed on individuals
who are U.S. Holders that hold certain specified foreign financial assets in
excess of $50,000. The definition of specified foreign financial assets includes
not only financial accounts maintained in foreign financial institutions, but
also, unless held in accounts maintained by a financial institution, any stock
or security issued by a non-U.S. person, any financial instrument or contract
held for investment that has an issuer or counterparty other than a U.S. person
and any interest in a foreign entity. U. S. Holders may be subject to these
reporting requirements unless our common shares are held in an account at a
domestic financial institution. Penalties for failure to file certain of these
information returns are substantial. U.S. Holders should consult with their own
tax advisors regarding the requirements of filing information returns under
these rules, including the requirement to file an IRS Form 8938.

Payments made within the U.S. or by a U.S. payor or U.S.
middleman, of dividends on, and proceeds arising from the sale or other taxable
disposition of, our common shares will generally be subject to information
reporting and backup withholding tax, at the rate of 28% (increasing to 31% for
payments made after December 31, 2012), if a U.S. Holder (a) fails to furnish
such U.S. Holders correct U.S. taxpayer identification number (generally on
Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c)
is notified by the IRS that such U.S. Holder has previously failed to properly
report items subject to backup withholding tax, or (d) fails to certify, under
penalty of perjury, that such U.S. Holder has furnished its correct U.S.
taxpayer identification number and that the IRS has not notified such U.S.
Holder that it is subject to backup withholding tax. However, certain exempt
persons generally are excluded from these information reporting and backup
withholding rules. Backup withholding is not an additional tax. Any amounts
withheld under the U.S. backup withholding tax rules will be allowed as a credit
against a U.S. Holders U.S. federal income tax liability, if any, or will be
refunded, if such U.S. Holder furnishes required information to the IRS in a
timely manner. Each U.S. Holder should consult its own tax advisor regarding the
information reporting and backup withholding rules.

F.          
Dividends and Paying Agents

Not applicable.

G.          
Statement by Experts

Not applicable.

H.          
Documents on Display

Exhibits attached to this Form 20-F are also available for viewing at our offices, 120 Adelaide Street West, Suite 1204, Toronto, Ontario, Canada, M5H 1T1; or you may request them by calling our office at (416) 250-6500. Copies of our financial statements and other continuous disclosure documents required under securities rules are available for viewing on the internet at www.sedar.com.

I.          
Subsidiary Information

See Item 4.C of this Annual Report on Form 20-F.

- 69 -

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ITEM
11           QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are not subject to any material market risks.

A.          
Transaction Risk and Currency Risk Management

Our operations do not employ complex financial instruments or
derivatives, and given that we keep our excess funds in high-grade short-term
instruments, we do not have significant or unusual financial market risks. In
the event we experience substantial growth in the future, our business and
results of operations may be materially affected by changes in interest rates on
new debt financings, the granting of credit options to our customers, and
certain other credit risks associated with our operations.

B.          
Interest Rate Risk and Equity Price Risk

We are equity financed and do not have any debt which could be
subject to significant interest rate change risks. We have raised equity funding
through the sale of securities denominated in Canadian dollars, and will likely
raise additional equity funding denominated in Canadian dollars in the future.

C.          
Exchange Rate Sensitivity

The Company is exposed to financial risk related to the fluctuation of foreign exchange rates. The Company operates in Israel. Most of the Company’s monetary assets are held in US dollars and most of the Company’s expenditures are made in US dollars. However, the Company also has expenditures in NIS and Canadian dollars. A significant change in the currency rates between the NIS and the Canadian dollars relative to the US dollar could have an effect on the Company’s future results of operations, financial position or cash flows depending on the Company’s currency management techniques. The Company has not hedged its exposure to currency fluctuations. An increase or decrease of 5% of the NIS relative to the U.S dollar would not have a significant effect on the Company. An increase or decrease of 5% on the Canadian dollar relative to the US dollar could have an effect on the Company as follows:

|                                    |  | December 31                         |  
|----------------------------------- |  | ----------------------------------- | -
|                                    |  | **2011**                            |  
|                                    |  | **U.S. dollars in
      thousands** |  
|Profit (loss) from change:          |  |                                     |  
|                                    |  |                                     |  
|5% increase in exchange rate US/CAN |  | 67                                  |  
|                                    |  |                                     |  
|5% decrease in exchange rate US/CAN |  | (67                                 | )

D.          
Commodity Price Risk

While the value of our exploration properties can always be
said to relate to the price of the commodity and the outlook for same, we do not
have any operating mines nor economic ore and therefore do not have any hedging
arrangements.

ITEM
12           DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM
13           DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM
14           MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM
15           CONTROLS AND
PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act) to mean controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SECs rules and forms and includes, without limitation, controls and procedures designed
to ensure that such information is accumulated and communicated to the issuers
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.

- 70 -

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As required under the Exchange Act, we have carried out an
evaluation of the effectiveness of the design and operation of our companys
disclosure controls and procedures as of the end of the period covered by this
annual report on Form 20-F, being December 31, 2011. This evaluation was carried
out by our Chief Executive Officer (being our principal executive officer) and
Chief Financial Officer (being our principal financial officer). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were effective as at
December 31, 2011.

Managements Annual Report on Internal Control Over
Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. The Exchange Act in Rule
13a-15(f ) and 15d-15(f ) defines this as a process designed by, or under the
supervision of, the companys principal executive and principal financial
officers and effected by the Board of Directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:

| | - | pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      the assets of the company;                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles, and that
      receipts and expenditures of the company are being made only in accordance
      with authorizations of management and directors of the company; and
| | - | provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use or disposition of the
      companys assets that may have a material effect on the financial
      statements.                                                                                                                                       

Under the supervision and with the participation of our chief
executive officer and chief financial officer, our management assessed the
effectiveness of the Companys internal control over financial reporting as at
December 31, 2011. In making this assessment, the Companys management used the
criteria, established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
upon this assessment, our management concluded that the Companys internal
control over financial reporting was effective as of December 31, 2011.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness of internal control over financial reporting
to future periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

This Annual Report does not include an attestation report of
the Companys registered public accounting firm regarding internal control over
financial reporting, as the Company is a smaller reporting company.

Changes in Internal Control over Financial Reporting

During the period ended December 31, 2011, there were no
changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 16A        
AUDIT COMMITTEE FINANCIAL EXPERTS

The Board has determined that all members of the Audit
Committee meet the SECs definition of an audit committee financial expert, as
defined in Item 16 of Form 20-F. The Board has also determined that all members
of the Audit Committee meet the definition of an independent director, as
defined in Rule 121A of the American Stock Exchange Company Guide.

- 71 -

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ITEM
16B         CODE OF ETHICS

We have adopted a code of ethics that applies to all of our
employees and officers, including our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions. A copy of our code of ethics will be provided to
any person without charge, upon request. All requests for a copy of our code of
ethics should be directed in writing to the attention of Gadi Levin, c/o Adira
Energy Ltd., 120 Adelaide Street West, Suite 1204, Toronto, Ontario, Canada M5H
1T1, or by email at: glevin@adiraenergy.com.

ITEM
16C         PRINCIPAL ACCOUNTANT
FEES AND SERVICES

The following table sets forth information regarding the amount
billed to us by our principal independent auditors, Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global, for our fiscal years ended
December 31, 2011 and 2010:

Period Ended December 312011
      2010Audit Fees:
      $110,000
      $55,000Audit Related Fees:
      $18,000
      $18,000Tax Fees:
      $64,000
      $41,000Total:
      $174,000
      $114,000


Audit Related Fees

This category includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by the independent auditors that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under "Audit Fees," and generally consist of fees for other engagements under professional auditing standards, accounting and reporting consultations, internal control-related matters, and audits of employee benefit plans.

Tax Fees

This category includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by the independent auditors for tax compliance, tax planning and tax advice.

Policy on Pre-Approval by Audit Committee of Services
Performed by Independent Auditors

The policy of our Audit Committee is to pre-approve all audit
and permissible non-audit services to be performed by our independent auditors
during the fiscal year.

ITEM
16D         EXEMPTIONS FROM THE
LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM
16E         PURCHASE OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM
16F         CHANGES TO REGISTRANTS
CERTIFYING ACCOUNTANT

On August 23, 2010, we replaced Smythe Ratcliffe LLP with MSCM
LLP as our independent auditors. The change in auditors was approved by our
Audit Committee and the Board of Directors. Smythe Ratcliffe LLPs reports on
our financial statements for our past two fiscal years did not contain an
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles, except to indicate doubt
as to the Companys ability to continue as a going concern. During our past two
fiscal years and until the replacement of Smythe Ratcliffe LLP, there were no
disagreements between our Company and Smythe Ratcliffe LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. On March 16, 2011, we appointed Kost Forer Gabbay and
Kasierer, a member firm of Ernst & Young Global, as our new auditors.

- 72 -

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ITEM
16G         CORPORATE
GOVERNANCE

Not applicable.

ITEM
16H         MINE SAFETY
DISCLOSURE

Not applicable.

PART III

ITEM
17           FINANCIAL
STATEMENTS

Not applicable.

ITEM
18           FINANCIAL
STATEMENTS

Financial Statements Filed as Part of this Annual Report:

- Report of Independent Registered Public Accounting Firm dated April 26,
  2012;
- Consolidated statement of financial position for the fiscal years ended
  December 31, 2011 and 2010;
- Consolidated statements of comprehensive income for the fiscal years ended
  December 31, 2011 and 2010;
- Consolidated statements of changes in shareholders equity for the fiscal
  years ended December 31, 2011 and 2010;
- Consolidated statements of cash flows for the fiscal years ended December
  31, 2011 and 2010; and
- Notes to consolidated financial statements

- 73 -

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ADIRA ENERGY LTD.



CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011

U.S. DOLLARS IN THOUSANDS





INDEX

|                                                        | Page  
|------------------------------------------------------- | ------
|                                                        |       
|Report of Independent Registered Public Accounting Firm | 75    
|                                                        |       
|Consolidated Balance Sheets                             | 76    
|                                                        |       
|Consolidated Statements of Comprehensive Loss           | 77    
|                                                        |       
|Consolidated Statements of Changes in Equity            | 78    
|                                                        |       
|Consolidated Statements of Cash Flows                   | 79    
|                                                        |       
|Notes to Consolidated Financial Statements              | 80-125

- - - - - - - - - - - - - - - - - -

- 74 -

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

ADIRA ENERGY LTD.

We
have audited the accompanying consolidated balance sheets of Adira Energy Ltd.
("the Company") and its subsidiaries as of December 31, 2011 and 2010, and the
related consolidated statements of comprehensive loss, changes in equity and
cash flows for the two years then ended and for the 267-day period from
incorporation (April 8, 2009) to December 31, 2009. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2011 and 2010 and the
consolidated results of their operations and their cash flows for the two years
then ended and for the 267-day period from incorporation (April 8, 2009) to
December 31, 2009, in conformity with International Financial Reporting
Standards as issued by the International Accounting Standards Board.

As
described in Note 1b to the financial statements, as of December 31, 2011 the
Company has an accumulated deficit of $ 19.2 million and a negative cash flow
from operations of $ 6.4 million for the year ended December 31, 2011. The
Company is an early exploration stage company and its existing funds and
operating revenues are currently insufficient to finance its future operating
expenses and exploration funding commitments. These matters and other matters
discussed in Note 1b, raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.

|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|---------------- | --------------------------------
|April 26, 2012   | A Member of Ernst & Young Global

- 75 -

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|ADIRA ENERGY LTD.                
|---------------------------------
|                                 
|CONSOLIDATED
      BALANCE SHEETS
|U.S. dollars in thousands        

|                                                     |      |  |   | December 31, |  
|---------------------------------------------------- | ---- |  | - | ------------ | -
|                                                     | Note |  |   | 2011         |  
|                                                     |      |  |   |              |  
|ASSETS                                               |      |  |   |              |  
|CURRENT ASSETS:                                      |      |  |   |              |  
|                                                     |      |  |   |              |  
|Cash and cash equivalents                            | 4    |  | $ | 8,094        |  
|Restricted deposits                                  | 5    |  |   | 100          |  
|Accounts receivable                                  | 6    |  |   | 682          |  
|Other receivables and prepaid expenses               | 7    |  |   | 426          |  
|Consumables                                          |      |  |   | 105          |  
|                                                     |      |  |   |              |  
|Total current assets                                 |      |  |   | 9,407        |  
|                                                     |      |  |   |              |  
|NON-CURRENT ASSETS:                                  |      |  |   |              |  
|Restricted deposits                                  | 5    |  |   | 343          |  
|Property and equipment, net                          | 8    |  |   | 459          |  
|Exploration and evaluation assets                    |      |  |   | 38           |  
|                                                     |      |  |   |              |  
|Total non-current assets                             |      |  |   | 840          |  
|                                                     |      |  |   |              |  
|Total assets                                         |      |  | $ | 10,247       |  
|                                                     |      |  |   |              |  
|LIABILITIES AND EQUITY                               |      |  |   |              |  
|CURRENT LIABILITIES:                                 |      |  |   |              |  
|Trade payables                                       |      |  | $ | 482          |  
|Other accounts payable and accrued
      liabilities | 11   |  |   | 939          |  
|                                                     |      |  |   |              |  
|Total current liabilities                            |      |  |   | 1,421        |  
|                                                     |      |  |   |              |  
|EQUITY:                                              | 14   |  |   |              |  
|Share capital                                        |      |  |   | -            |  
|Additional paid-in capital                           |      |  |   | 27,775       |  
|Accumulated deficit                                  |      |  |   | (19,169      | )
|                                                     |      |  |   |              |  
|Equity attributable to equity holders of the parent  |      |  |   | 8,606        |  
|Non-controlling interests                            |      |  |   | 220          |  
|                                                     |      |  |   |              |  
|Total equity                                         |      |  |   | 8,826        |  
|                                                     |      |  |   |              |  
|Total liabilities and equity                         |      |  | $ | 10,247       |  

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

Approved on Behalf of the Board:

|April 26, 2012          |  |                                    |  |                  
|----------------------- |  | ---------------------------------- |  | -----------------
|Date of approval of the |  | /s/ Dennis Bennie                  |  | /s/ Alan Friedman
|financial statements    |  | Chairman of the Board of Directors |  | Director         

- 76 -

---

|ADIRA ENERGY LTD.                                               
|----------------------------------------------------------------
|                                                                
|CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE LOSS             
|U.S. dollars in thousands, except share and per share
      data

|                                                                                                            |      |  |   |              |   |   |              |   |   | 267-day    |  
|----------------------------------------------------------------------------------------------------------- | ---- |  | - | ------------ | - | - | ------------ | - | - | ---------- | -
|                                                                                                            |      |  |   | Year ended   |   |   | period ended |  
|                                                                                                            |      |  |   | December 31, |   |   | December 31, |  
|                                                                                                            | Note |  |   | 2011         |   |   | 2010         |   |   | 2009       |  
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Revenues and other income                                                                                   | 17   |  | $ | 1,323        |   | $ | 1,707        |   | $ | -          |  
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Expenses:                                                                                                   |      |  |   |              |   |   |              |   |   |            |  
|Exploration expenses                                                                                        | 9    |  |   | 4,759        |   |   | 1,485        |   |   | 195        |  
|General and administrative expenses                                                                         | 18   |  |   | 5,290        |   |   | 3,206        |   |   | 1,639      |  
|Impairment charge                                                                                           | 9a   |  |   | 1,226        |   |   | -            |   |   | -          |  
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Total expenses                                                                                              |      |  |   | 11,275       |   |   | 4,691        |   |   | 1,834      |  
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Operating loss                                                                                              |      |  |   | (9,952       | ) |   | (2,984       | ) |   | (1,834     | )
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Financing income                                                                                            |      |  |   | 43           |   |   | -            |   |   | 15         |  
|Financing expense                                                                                           |      |  |   | (109         | ) |   | (5           | ) |   | -          |  
|Issuance expenses                                                                                           | 1c   |  |   | -            |   |   | -            |   |   | (4,902     | )
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Loss before income taxes                                                                                    |      |  |   | (10,018      | ) |   | (2,989       | ) |   | (6,721     | )
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Income taxes                                                                                                | 13   |  |   | 33           |   |   | 15           |   |   | 1          |  
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Net loss and comprehensive loss                                                                             |      |  | $ | (10,051      | ) | $ | (3,004       | ) | $ | (6,722     | )
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Net loss and comprehensive loss attributed to:                                                              |      |  |   |              |   |   |              |   |   |            |  
|Equity holders of the parent                                                                                |      |  | $ | (9,489       | ) | $ | (2,958       | ) | $ | (6,722     | )
|Non-controlling interests                                                                                   |      |  |   | (562         | ) |   | (46          | ) |   | -          |  
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|                                                                                                            |      |  | $ | (10,051      | ) | $ | (3,004       | ) | $ | (6,722     | )
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Basic and diluted net loss per share attributable to    
      equity holders of the parent                 |      |  | $ | (0.10        | ) | $ | (0.05        | ) | $ | (0.14      | )
|                                                                                                            |      |  |   |              |   |   |              |   |   |            |  
|Weighted average number of Ordinary shares used    
      in computing basic and diluted net loss per share |      |  |   | 99,813,334   |   |   | 65,653,700   |   |   | 49,184,720 |  

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

- 77 -

---

|ADIRA ENERGY LTD.                                 
|--------------------------------------------------
|CONSOLIDATED
      STATEMENTS OF CHANGES IN EQUITY
|U.S. dollars in thousands, except share data      

Attributable to equity holdersof the parentAdditional
      
      
      
      
      
      
      
      
      Non-Number of
      
      
      Share
      
      
      paid in
      
      
      Accumulated
      
      
      
      
      
      controlling
      
      
      Totalshares
      
      
      capital
      
      
      capital
      
      
      deficit
      
      
      Total
      
      
      interests
      
      
      equityApril 8, 2009 (date of incorporation)
      
      -
      
      $
      -
      
      $
      -
      
      $
      -
      
      $
      -
      
      $
      -
      
      $
      -Shares issued for services rendered (Note 14b(i))
      
      16,640,000
      
      
      -
      
      
      486
      
      
      -
      
      
      486
      
      
      -
      
      
      486Shares issued in private placement (Note
        14b(ii))
      
      14,560,000
      
      
      -
      
      
      425
      
      
      -
      
      
      425
      
      
      -
      
      
      425Shares issued as part of the reverse acquisition, net (Note
        1c)
      
      23,200,000
      
      
      -
      
      
      5,799
      
      
      -
      
      
      5,799
      
      
      -
      
      
      5,799Shares and warrants issued in private placements
        (Note 14b(iv))
      
      8,240,001
      
      
      -
      
      
      *)1,771
      
      
      -
      
      
      1,771
      
      
      -
      
      
      1,771Share-based compensation
      
      -
      
      
      -
      
      
      451
      
      
      -
      
      
      451
      
      
      -
      
      
      451Net loss
      
      -
      
      
      -
      
      
      -
      
      
      (6,722
      )
      
      (6,722
      )
      
      -
      
      
      (6,722
      )Balance as of December 31, 2009
      
      62,640,001
      
      
      -
      
      
      8,932
      
      
      (6,722
      )
      
      2,210
      
      
      -
      
      
      2,210Shares and warrants issued in private placement,
        net (Note 14b(v))
      
      27,500,000
      
      
      -
      
      
      **)10,077
      
      
      -
      
      
      10,077
      
      
      -
      
      
      10,077Investment in equity of subsidiary by non-controlling
        interests
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      677
      
      
      677Share-based compensation
      
      -
      
      
      -
      
      
      1,277
      
      
      -
      
      
      1,277
      
      
      -
      
      
      1,277Net loss
      
      -
      
      
      -
      
      
      -
      
      
      (2,958
      )
      
      (2,958
      )
      
      (46
      )
      
      (3,004
      )Balance as of December 31, 2010
      
      90,140,001
      
      
      -
      
      
      20,286
      
      
      (9,680
      )
      
      10,606
      
      
      631
      
      
      11,237Shares issued in private placement, net
        (Note 14b(vi))
      
      10,483,871
      
      
      -
      
      
      ***)6,152
      
      
      -
      
      
      6,152
      
      
      -
      
      
      6,152Exercise of warrants and options
      
      1,144,581
      
      
      -
      
      
      314
      
      
      -
      
      
      314
      
      
      -
      
      
      314Investment in equity of subsidiary by non-controlling
        interests
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      151
      
      
      151Share-based compensation
      
      -
      
      
      -
      
      
      1,023
      
      
      -
      
      
      1,023
      
      
      -
      
      
      1,023Net loss
      
      -
      
      
      -
      
      
      -
      
      
      (9,489
      )
      
      (9,489
      )
      
      (562
      )
      
      (10,051
      )Balance as of December 31, 2011
      
      101,768,453
      
      $
      -
      
      $
      27,775
      
      $
      (19,169
      )
      $
      8,606
      
      $
      220
      
      $
      8,826


*)        Net of issuance
expenses of $ 229. **)      Net of issuance
expenses of $ 923. 
  ***)   Net of issuance expenses of $ 472.

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

- 78 -

---

|ADIRA ENERGY LTD.                          
|-------------------------------------------
|                                           
|CONSOLIDATED
      STATEMENTS OF CASH FLOWS
|U.S. dollars in thousands                  

|                                                                                  |   |              |   |   |              |   |   | 267-day |  
|--------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------- | -
|                                                                                  |   | Year ended   |   |   | period ended |  
|                                                                                  |   | December 31, |   |   | December 31, |  
|                                                                                  |   | 2011         |   |   | 2010         |   |   | 2009    |  
|Cash flows from operating activities:                                             |   |              |   |   |              |   |   |         |  
|Net loss                                                                          | $ | (10,051      | ) | $ | (3,004       | ) | $ | (6,722  | )
|                                                                                  |   |              |   |   |              |   |   |         |  
|Adjustments to reconcile net loss to net cash used in operating
      activities: |   |              |   |   |              |   |   |         |  
|Adjustments to the profit or loss
      items:                                    |   |              |   |   |              |   |   |         |  
|Exchange rate differences for cash and cash equivalents                           |   | 138          |   |   | 15           |   |   | 1       |  
|Share issuance expenses                                                           |   | -            |   |   | -            |   |   | 4,902   |  
|Depreciation                                                                      |   | 80           |   |   | 12           |   |   | -       |  
|Impairment charge                                                                 |   | 1,226        |   |   | -            |   |   | -       |  
|Share-based compensation                                                          |   | 1,023        |   |   | 1,277        |   |   | 937     |  
|                                                                                  |   |              |   |   |              |   |   |         |  
|                                                                                  |   | 2,467        |   |   | 1,304        |   |   | 5,840   |  
|                                                                                  |   |              |   |   |              |   |   |         |  
|Changes in operating asset and liability items:                                   |   |              |   |   |              |   |   |         |  
|Decrease (increase) in accounts receivable                                        |   | 1,098        |   |   | (1,780       | ) |   | -       |  
|Decrease (increase) in other receivables and prepaid expenses                     |   | 5,771        |   |   | (6,169       | ) |   | (28     | )
|Decrease (increase) in consumables                                                |   | 253          |   |   | (507         | ) |   | -       |  
|Increase (decrease) in trade payables                                             |   | (6,611       | ) |   | 7,014        |   |   | 79      |  
|Increase in other accounts payable and accrued
      liabilities                  |   | 659          |   |   | 132          |   |   | 148     |  
|                                                                                  |   |              |   |   |              |   |   |         |  
|                                                                                  |   | 1,170        |   |   | (1,310       | ) |   | 199     |  
|                                                                                  |   |              |   |   |              |   |   |         |  
|Net cash used in operating activities                                             |   | (6,414       | ) |   | (3,010       | ) |   | (683    | )
|                                                                                  |   |              |   |   |              |   |   |         |  
|Cash flows from investing activities:                                             |   |              |   |   |              |   |   |         |  
|Expenditure on exploration and evaluation assets                                  |   | (923         | ) |   | (7           | ) |   | (12     | )
|Purchase of property and equipment                                                |   | (297         | ) |   | (74          | ) |   | (353    | )
|Decrease (increase) in restricted cash                                            |   | 563          |   |   | (1,006       | ) |   | -       |  
|                                                                                  |   |              |   |   |              |   |   |         |  
|Net cash used in investing activities                                             |   | (657         | ) |   | (1,087       | ) |   | (365    | )
|                                                                                  |   |              |   |   |              |   |   |         |  
|Cash flows from financing activities:                                             |   |              |   |   |              |   |   |         |  
|Proceeds from issue of shares, net of issuance
      expenses                     |   | 6,152        |   |   | 10,077       |   |   | 2,196   |  
|Investment in equity of subsidiary by non-controlling interests                   |   | 151          |   |   | 677          |   |   | -       |  
|Proceeds from exercise of warrants and options                                    |   | 314          |   |   | -            |   |   | -       |  
|Cash acquired upon reverse recapitalization                                       |   | -            |   |   | -            |   |   | 897     |  
|                                                                                  |   |              |   |   |              |   |   |         |  
|Net cash provided by financing activities                                         |   | 6,617        |   |   | 10,754       |   |   | 3,093   |  
|                                                                                  |   |              |   |   |              |   |   |         |  
|Exchange rate differences for cash and cash equivalents                           |   | (138         | ) |   | (15          | ) |   | (1      | )
|                                                                                  |   |              |   |   |              |   |   |         |  
|Increase (decrease) in cash and cash equivalents                                  |   | (592         | ) |   | 6,642        |   |   | 2,044   |  
|Cash and cash equivalents at the beginning
      of the period                    |   | 8,686        |   |   | 2,044        |   |   | -       |  
|                                                                                  |   |              |   |   |              |   |   |         |  
|Cash and cash equivalents at the end of the
      period                          | $ | 8,094        |   | $ | 8,686        |   | $ | 2,044   |  

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

- 79 -

---

|ADIRA ENERGY LTD.                                               
|----------------------------------------------------------------
|                                                                
|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS                
|U.S. dollars in thousands, except share and per share
      data

|NOTE 1:- | GENERAL
|-------- | -------

| | a. | Nature of operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Adira Energy Ltd. and its subsidiaries ("Adira" or "the
      Company"), is an oil and gas early-stage exploration company. Adira is a
      limited company, incorporated on April 8, 2009, and domiciled in Toronto,
      Ontario, Canada. The Company's shares are currently traded on the OTC
      market in the U.S. and the TSX Venture Exchange in Canada. The
      consolidated financial statements of the Company for the year ended
      December 31, 2011 were authorized for issue in accordance with a
      resolution of the directors on April 26, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company has been granted three offshore petroleum
      licenses in Israel. The Company's wholly-owned Canadian subsidiary, Adira
      Energy Holding Corp. owns four wholly owned Israeli subsidiaries as
      follows: (i) Adira Energy Israel Limited, which holds two offshore
      petroleum licenses being the "Gabriella License No. 378" ("Gabriella") of
      which it owns a 15% interest and the "Yitzhak License No. 380" ("Yitzhak")
      of which it owns 85% interest (see also Notes 9 and 19); (ii) Adira Oil
      Technologies Limited ("AOT") has been granted a 23.25% interest in one
      offshore petroleum license, the "Samuel License No. 388" ("Samuel"),
      (Gabriella, Yitzhak and Samuel - collectively the "Offshore Licenses")
      (iii) Adira Energy Israel Services Ltd. provides services in respect of
      the entities described above and (iv) Adira Energy CBM Ltd., which is an
      inactive company. Adira Energy Holding Corp. also owns 60% of Adira Geo
      Global Limited ("AGG"), which owns a 30% interest in Samuel. In addition,
      Adira Energy Holding Corp. wholly owns Adira Energy Holdings (Barbados)
      Ltd., a private company incorporated in Barbados, which wholly owns Adira
      Energy Investments (Barbados) Ltd., which was incorporated in Barbados, as
      well, and holds a beneficial right to an option to purchase 5% of the
      rights in the Sarah and Myra licenses, as specified in Note 16d
    below.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Adira Energy Israel Limited also held for three years a
      100% interest in one onshore petroleum license, the "Eitan License No.
      356" ("Eitan"), which the Company relinquished in December 2011 (see Note
      9a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Adira Energy Israel Limited is the operator of Gabriella
      and Yitzhak and AGG is the operator of Samuel. As the operator, the
      Company has established Unincorporated Joint Ventures ("UJV's") to manage
      the exploration activities of each of the offshore licenses. The Company
      receives consulting and operator fees in accordance with the terms of
      Joint Operating Agreements signed between the Company and each of its
      consortium partners in the UJV's.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 80 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------

| | b. | Financial position:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | As reflected in the consolidated financial statements, as
      of December 31, 2011, the Company has an accumulated deficit of $ 19,169
      and, in 2011, the Company had negative cash flows from operations of $
      6,414. The Company is an early-exploration stage company and its existing
      funds and operating revenues are currently insufficient to finance its
      future operating expenses and exploration funding commitments.                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The ability of the Company to continue as a going concern
      depends upon the discovery of economically recoverable reserves, the
      ability of the Company to obtain financing to complete development, and
      upon future profitable operations from the properties or proceeds from
      their disposition.                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | There can be no assurance that the Company will be able
      to continue to raise funds from the aforementioned sources in which case
      the Company may be unable to meet its obligations. These matters raise
      substantial doubt about the Company's ability to continue as a going
      concern. The consolidated financial statements do not include any
      adjustments relating to the recoverability and classification of recorded
      asset amounts and classification of liabilities that might be necessary
      should the Company be unable to continue as a going concern.                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | c. | Share exchange agreement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | AMG Oil Ltd. ("AMG") was incorporated on February 20,
      1997 under the name Trans New Zealand Oil Company in the State of Nevada,
      United States of America. It changed its name to AMG Oil Ltd. on July 27,
      1998 and to Adira Energy Ltd. on December 17, 2009. On November 25, 2008,
      AMG's shareholders approved the change of its jurisdiction of
      incorporation from the State of Nevada to the Canadian federal
      jurisdiction.                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | On April 29, 2009, AMG entered into a letter of intent to
      purchase all of the issued and outstanding shares of Adira Energy Corp
      ("AEC"), in exchange for shares of AMG and AEC subsequently changed its
      name to Adira Energy Holding Corp. On September 1, 2009, AMG completed the
      share exchange with AEC which resulted in a reverse takeover by AEC of
      AMG. The share exchange ratio was one common share of AMG for each issued
      and outstanding common share of AEC. Accordingly, AMG issued 39,040,001
      common shares to AEC's shareholders. The share exchange was completed
      together with a private placement by AEC of $2,000 through the issuance of
      8,000,000 units (Note 14(b)).

- 81 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------

As a result, the original shareholders
of AMG owned 37% of the shares of the Company and the former shareholders of AEC
owned 63% of the Company as follows:

| |                          |  | Issued and            |  |  |            | 
| | ------------------------ |  | --------------------- |  |  | ---------- | 
| |                          |  | outstanding number    |  |  |            | 
| |                          |  | of shares after share |  |  |            | 
| |                          |  | exchange              |  |  | Percentage | 
| | Shareholders of:         |  |                       |  |  |            | 
| |                          |  |                       |  |  |            | 
| | AMG                      |  | 23,200,000            |  |  | 37%        | 
| | AEC                      |  | 39,040,001            |  |  | 63%        | 
| |                          |  |                       |  |  |            | 
| | Total outstanding shares |  | 62,240,001            |  |  | 100%       | 

As the shareholders of AEC obtained
control of the Company, the share exchange should reflect the substance of the
transaction, which is a capital transaction, rather than a business combination.
That is, the transaction is a reverse recapitalization, equivalent to the
issuance of shares by the private company (AEC) for the net monetary assets of
the public shell company (AMG), accompanied by a recapitalization. The
accounting is similar to that resulting from a reverse acquisition, except that
no goodwill or other intangible assets are recorded. The assets and liabilities
of AEC are included at their carrying value and the assets and liabilities of
AMG are included at fair value. Equity represents the authorized and issued
number of shares of AMG (the legal parent) and the share capital, additional
paid-in capital and accumulated deficit of AEC (the legal subsidiary), In
addition, the comparative data presented in these financial statements are those
of AEC.

As the transaction is not a business
combination under IFRS 3, since AMG was a non-operating shell company, the
transaction is accounted for as a share-based payment transaction under IFRS 2,
whereby Adira is deemed to have issued shares in exchange for the $ 897 of cash
and receivables held by AMG together with the listing status of AMG. As the
listing status does not qualify for recognition as an intangible asset, an
expense of $ 4,902 representing the excess of the fair value of the deemed
shares issued to the original shareholders of AMG over the fair value of the net
assets of AMG was recorded in the statement of comprehensive loss in 2009 as
issuance expenses.

- 82 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 2:- | BASIS OF PREPARATION
|-------- | --------------------

| | a. | Basis of preparation of the financial
  statements:                                                                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                             
| |    | These financial statements have been prepared in
      accordance with International Financial Reporting Standards ("IFRS") as
      issued by the International Accounting Standards Board. These Standards
      comprise:

| | 1. | International Financial Reporting Standards
  (IFRS).
| | -- | -----------------------------------------------------
| | 2. | International Accounting Standards (IAS).            
| | 3. | Interpretations issued by the IFRIC and by the
  SIC.

| |    | Furthermore, the financial statements have been prepared
      in conformity with the provisions of the Israeli Securities Regulations
      (Annual Financial Statements), 2010.                                                                                                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | b. | The consolidated financial statements have been prepared
      on a historical cost basis, and are presented in U.S. dollars and all
      values are rounded to the nearest thousand ($ 000), except when otherwise
      indicated.                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | c. | The financial statements for the 267 day period ended
      December 31, 2009 are from Adira's date of incorporation on April 8,
      2009.                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | d. | Changes in accounting policies in view of the adoption of
      new standards:                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | IAS 24 - Related Party Disclosures:                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The amendment to IAS 24 ("the Amendment") clarifies the
      definition of a related party to simplify the identification of such
      relationships and to eliminate inconsistencies in its application. The
      revised Standard introduces a partial exemption of disclosure requirements
      for government-related entities. The Amendment has been applied
      retrospectively from January 1, 2011.                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | IAS 32 - Financial Instruments: Presentation -
      Classification of Rights Issues:                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The amendment to IAS 32 ("the Amendment") provides that
      rights, options or warrants to acquire a fixed number of the Company's
      equity instruments for a fixed amount of any currency are classified as
      equity instruments if the Company offers the rights, options or warrants
      pro rata to all of its existing owners of the same class of its
      non-derivative equity instruments. The Amendment has been applied
      retrospectively from January 1, 2011.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The retrospective application of the Amendment did not
      have a material effect on the Company's financial
  statements.                                                                                                                                                                                                                                                                                                                                                               

- 83 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES                                                                                                                                                         
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                               
|        | The following are the significant accounting policies
      applied by the Company in preparing its consolidated financial statements
      for all periods presented unless otherwise stated.

| | a. | Significant judgments, estimates and assumptions used in
      the preparation of the financial statements:                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The preparation of the financial statements requires
      management to make judgments, estimates and assumptions that have an
      effect on the application of the accounting policies and on the reported
      amounts of assets, liabilities, revenues and expenses. These estimates and
      underlying assumptions are reviewed regularly. Changes in accounting
      estimates are reported in the period of the change in estimate.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | In the process of applying the significant accounting
      policies, the Company has made the following judgments which have a
      significant effect on the amounts recognized in the financial
      statements:                                                                                                                                                                                                                           

-        Determining the fair
value of share-based payment transactions:

The fair value of share-based payment
transactions is determined using an acceptable option-pricing model. The
assumptions made by management and used in the model include expected
volatility, expected life and expected dividend. Changes in assumptions could
affect the estimates of fair values.

| | b. | Consolidated financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Effective from January 1, 2010, the date of adoption of
      IFRS 3 (Revised) and IAS 27 (2008), the Company applies the accounting
      policy required by these Standards for business combinations and
      transactions with non-controlling interests.                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The consolidated financial statements comprise the
      financial statements of companies that are controlled by the Company
      (subsidiaries). Control exists when the Company has the power, directly or
      indirectly, to govern the financial and operating policies of an entity.
      The effect of potential voting rights that are exercisable at the end of
      the reporting period is considered when assessing whether an entity has
      control. The consolidation of the financial statements commences on the
      date on which control is obtained and ends when such control
  ceases.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | All intercompany balances and transactions and gains or
      losses resulting from intercompany transactions are eliminated in full in
      the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The financial statements of the Company and of the
      subsidiaries are prepared as of the same dates and periods. The
      consolidated financial statements are prepared using uniform accounting
      policies by all companies in the Company.                                                                                                                                                                                                                                                                                                                                                               

- 84 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

Non-controlling interests of subsidiaries
  represent the non-controlling shareholders' share of the total comprehensive
  income (loss) of the subsidiaries and fair value of the net assets upon the
  acquisition of the subsidiaries. The non-controlling interests are presented
  in equity separately from the equity attributable to the equity holders of the
  Company.

The acquisition of non-controlling interests
  by the Company is recorded as a decrease/ an increase in equity (capital reserve
  from transactions with non-controlling interests) and calculated as the difference
  between the consideration paid by the Company and the proportionate amount of
  non-controlling interests acquired and derecognized at the date of acquisition
  (when non-controlling interests also include a share of other comprehensive
  income, the Company reattributes the cumulative amounts recognized in other
  comprehensive income between the equity holders of the Company and the non-controlling
  interests).

Upon the disposal of a subsidiary that
  does not result in a loss of control, an increase / a decrease in equity (capital
  reserve from transactions with non-controlling interests) is recognized for
  the amount of the difference between the consideration received by the Company
  and the carrying amount of the non-controlling interests in the subsidiary which
  has been added to the Company's equity, taking into account also the disposal
  of a portion of any goodwill in the subsidiary and any translation differences
  from foreign operations which have been recognized in other comprehensive income,
  based on the relative decrease in the interests in the subsidiary.

Transaction costs in respect of transactions
  with non-controlling interests are also recorded in equity. Cash flows from
  transactions with non-controlling interests (without change in status) are classified
  in the statement of cash flows as cash flows from financing activities.

Losses are attributed to non-controlling
  interests even if they result in a negative balance of non-controlling interests
  in equity.

Upon the disposal of a subsidiary
resulting in loss of control, the Company:

| | - | derecognizes the subsidiary's
      assets (including goodwill) and liabilities.                                                                                                                                                                                                                                       
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | derecognizes the carrying amount
      of non-controlling interests.                                                                                                                                                                                                                                                   
| | - | recognizes the fair value of the
      consideration received.                                                                                                                                                                                                                                                         
| | - | recognizes any remaining equity
      interest at fair value.                                                                                                                                                                                                                                                          
| | - | recognizes any resulting
      difference (surplus or deficit) as gain or loss.                                                                                                                                                                                                                                        
| | - | reclassifies the components recognized in other
      comprehensive income on the same basis as would be required if the
      subsidiary had directly disposed of the related assets or liabilities.
      Accordingly, cumulative exchange differences are reclassified to profit or
      loss upon loss of control.

- 85 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | c. | Joint oil and gas ventures:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Company conducts petroleum and natural gas
      exploration activities jointly with other partners who each have direct
      ownership in the assets and each are directly obligated for the
      liabilities of the ventures. Consequently, these financial statements
      reflect only the Company's proportionate interest in such
    activities.                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Company accounts for its share of the joint venture's
      assets, liabilities it has incurred, income from the sale or use of its
      share of the joint venture's output, together with its share of the
      expenses incurred by the joint venture and any expenses it incurs in
      relation to its interest in the joint venture.                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | d. | Farm-out arrangements in the exploration and evaluation
      phase:                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | A farm-out is the transfer of part of an oil and gas
      interest in consideration for an agreement by the transferee ("farmee") to
      meet, absolutely, certain expenditures which would otherwise have to be
      undertaken by the owner ("farmor"). Farm-out transactions generally occur
      in the exploration or development phase and are characterized by the
      transferor (i.e. farmor) giving up future economic benefits, in the form
      of reserves, in exchange for a reduction in future funding
    obligations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Accordingly, the farmee recognizes its expenditure under
      the arrangement in respect of its interest and that retained by the
      farmor, as and when the costs are incurred.                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Company (farmor) accounts for the farm-out
      arrangement as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| | - | The farmor does not record any expenditure made by the
      farmee on its behalf;                                                                                                                                                      
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                         
| | - | The farmor does not recognize a gain or loss on the
      farm-out arrangement, but rather redesignates any costs previously
      capitalized in relation to the whole interest as relating to the partial
      interest retained; and
| |   |                                                                                                                                                                                                                                         
| | - | any cash consideration received is credited against costs
      previously capitalized in relation to the whole interest with any excess
      accounted for by the farmor as a gain on disposal.                                       

- 86 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | e. | Functional currency and foreign
  currency:
| | -- | -------------------------------------------

| | 1. | Functional currency and presentation currency:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The functional currency, which is the currency that best
      reflects the economic environment in which the Company operates and
      conducts its transactions, is separately determined for the Company and
      each of its subsidiaries, and is used to measure the financial position
      and operating results. The functional currency of the Company and its
      subsidiaries is the U.S. dollar.                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The presentation currency of the financial statements is
      the U.S. dollar.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 2. | Transactions, assets and liabilities in foreign
      currency:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Transactions denominated in foreign currency (other than
      the functional currency) are recorded on initial recognition at the
      exchange rate at the date of the transaction. After initial recognition,
      monetary assets and liabilities denominated in foreign currency are
      translated at the end of each reporting period into the functional
      currency at the exchange rate at that date. Exchange differences, are
      recognized in profit or loss. Non-monetary assets and liabilities measured
      at cost are translated at the exchange rate at the date of the
      transaction.

| | f. | Cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Cash equivalents are considered as highly liquid
      investments, including unrestricted short-term bank deposits with an
      original maturity of three months or less from the date of acquisition or
      with a maturity of more than three months, but which are redeemable on
      demand without penalty and which form part of the Company's cash
      management.                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | g. | Allowance for doubtful accounts:                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The allowance for doubtful accounts is determined in
      respect of specific debts whose collection, in the opinion of the
      Company's management, is doubtful. No allowance for doubtful account
      exists as of December 31, 2011 and 2010.                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | h. | Consumables:                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Consumables (not allocated to specific wells) are stated
      at cost and are comprised of disposable supplies used by the Company in
      its drilling activities. In 2011, the Company recognized a $ 149 write-off
      with respect to consumables in the statement of comprehensive loss, since
      their net realizable value was lower than their cost. The Company did not
      recognize any write-offs in 2010 and 2009.

- 87 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | i. | Financial instruments:
| | -- | ----------------------

| | 1. | Financial assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Financial assets within the scope of IAS 39 are initially
      recognized at fair value plus directly attributable transaction
    costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The Company has receivables that are financial assets
      (non-derivative) with fixed or determinable payments that are not quoted
      in an active market. Short-term receivables (such as trade and other
      receivables) are measured based on their terms, normally at face value.
      Gains and losses are recognized in profit or loss when the loans and
      receivables are derecognized or impaired, as well as through the
      systematic amortization process. As for recognition of interest income,
      see q. below.                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 2. | Financial liabilities measured at amortized
  cost:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Interest-bearing loans and borrowings are initially
      recognized at fair value less directly attributable transaction costs
      (such as loan raising costs). After initial recognition, loans, including
      debentures, are measured based on their terms at amortized cost using the
      effective interest method taking into account directly attributable
      transaction costs. Short-term credit (such as trade and other payables)
      are measured based on their terms, normally at face value. Gains and
      losses are recognized in profit or loss when the financial liability is
      derecognized as well as through the systematic amortization
  process.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 3. | Derecognition of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

- 88 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | ---------------------------------------

| |    | If the Company transfers its rights to receive cash flows
      from an asset and neither transfers nor retains substantially all the
      risks and rewards of the asset nor transfers control of the asset, a new
      asset is recognized to the extent of the Company's continuing involvement
      in the asset. When continuing involvement takes the form of guaranteeing
      the transferred asset, the extent of the continuing involvement is the
      lower of the original carrying amount of the asset and the maximum amount
      of consideration received that the Company could be required to
    repay.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | b) | Financial liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | A financial liability is derecognized when it is
      extinguished, that is when the obligation is discharged or cancelled or
      expires. A financial liability is extinguished when the
  debtor:                                                                                                                                                                                                                                                                                                                                                                                                                           

| |  | discharges the liability by paying in cash, other
      financial assets, goods or services; or
| | - | -----------------------------------------------------------------------------------------------
| |  | is legally released from the liability.                                                        

| | 4. | Impairment of financial assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Company assesses at the end of each reporting period
      whether there is any objective evidence of impairment of a financial asset
      or group of financial assets carried at amortized cost as
  follows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | There is objective evidence of impairment of debt
      instruments and receivables as a result of one or more events that has
      occurred after the initial recognition of the asset and that loss event
      has an impact on the estimated future cash flows. Evidence of impairment
      may include indications that the debtor is experiencing financial
      difficulties, including liquidity difficulty and default in interest or
      principal payments. The amount of the loss recorded in profit or loss is
      measured as the difference between the asset's carrying amount and the
      present value of estimated future cash flows (excluding future credit
      losses that have not yet been incurred) discounted at the financial
      asset's original effective interest rate (the effective interest rate
      computed at initial recognition). If the financial asset has a variable
      interest rate, the discount rate is the current effective interest rate.
      The carrying amount of the asset is reduced through the use of an
      allowance account (see allowance for doubtful accounts above). In a
      subsequent period, the amount of the impairment loss is reversed if the
      recovery of the asset can be related objectively to an event occurring
      after the impairment was recognized. The amount of the reversal, up to the
      amount of any previous impairment, is recorded in profit or
  loss.

- 89 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | 5. | Classification of rights issues:                                                                                                                                                                                                                                                                                                                  
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                   
| |    | Rights, options or warrants to acquire a fixed number of
      the Company's equity instruments for a fixed amount of any currency are
      classified as equity instruments if the Company offers the rights, options
      or warrants pro rata to all of its existing owners of the same class of
      its non-derivative equity instruments.

| | j. | Property and equipment:                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                             
| |    | Property and equipment are measured at cost, including
      directly attributable costs, less accumulated depreciation. Cost includes
      spare parts and auxiliary equipment that can be used only in connection
      with the machinery and equipment.
| |    |                                                                                                                                                                                                                                                             
| |    | Depreciation is calculated on a straight-line basis over
      the useful life of the assets at annual rates as
follows:                                                                                                                                    

%Drilling rig and related equipment
      10Office furniture and equipment
      10Computers and peripheral equipment
      33


| |    | The useful life, depreciation method and residual value
      of an asset are reviewed at least each year-end and any changes are
      accounted for prospectively as a change in accounting estimate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | k. | Impairment of non-financial assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The Company evaluates the need to record an impairment of
      the carrying amount of non- financial assets whenever events or changes in
      circumstances indicate that the carrying amount is not recoverable. If the
      carrying amount of non-financial assets exceeds their recoverable amount,
      the assets are reduced to their recoverable amount. The recoverable amount
      is the higher of fair value less costs of sale and value in use. In
      measuring value in use, the expected future cash flows are discounted
      using a pre-tax discount rate that reflects the risks specific to the
      asset. The recoverable amount of an asset that does not generate
      independent cash flows is determined for the cash-generating unit to which
      the asset belongs. Impairment losses are recognized in profit or
    loss.

- 90 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | l. | Exploration and evaluation assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Pre-license costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Pre-license costs are expensed in the period in which
      they are incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Exploration and evaluation costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Oil and natural gas exploration and development
      expenditure is accounted for using the successful efforts method of
      accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | During the geological and geophysical exploration phase,
      costs are charged against income as incurred. Costs directly associated
      with an exploration well in its drilling phase, for which it has not yet
      been determined whether there are proved reserves or it is not
      commercially viable, are capitalized as exploration and evaluation
      intangible assets until the drilling of the well is complete and the
      results have been evaluated. These costs include employee remuneration,
      materials and fuel used, rig costs and payments made to contractors. If no
      reserves are found, the exploration asset is tested for impairment. If
      extractable hydrocarbons are found and, subject to further appraisal
      activity (e.g., by drilling further wells), are likely to be developed
      commercially, the costs continue to be carried as an intangible assets
      while sufficient and continued progress is made in assessing the
      commerciality of the hydrocarbons. All such costs are subject to
      technical, commercial and management review as well as review for
      impairment at least once a year to confirm the continued intent to develop
      or otherwise extract value from the discovery. When this is no longer the
      case, the costs are written off. When proved reserves of oil are
      determined and development sanctioned, the relevant expenditure is
      transferred to oil and gas properties after impairment is assessed and any
      resulting impairment loss is recognized.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | m. | Taxes on income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Taxes on income in the consolidated statement of
      comprehensive loss comprise current and deferred taxes. Current or
      deferred taxes are recognized in profit or loss, except to the extent that
      the tax arises from items which are recognized directly in other
      comprehensive income or in equity. In such cases, the tax effect is also
      recognized in the relevant item.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- 91 -

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|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | 2. | Deferred taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Deferred taxes are computed in respect of temporary
      differences between the carrying amounts in the financial statements and
      the amounts attributed for tax purposes. Deferred taxes are recognized
      directly in other comprehensive income or in equity if the tax relates to
      those items.                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Deferred taxes are measured at the tax rates that are
      expected to apply to the period when the taxes are reversed in profit or
      loss, comprehensive income or equity, based on tax laws that have been
      enacted or substantively enacted by the end of the reporting
  period.                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Deferred tax assets are reviewed at the end of each
      reporting period and reduced to the extent that it is not probable that
      they will be utilized. Also, temporary differences (such as carry-forward
      losses) for which deferred tax assets have not been recognized are
      reassessed and deferred tax assets are recognized to the extent that their
      recoverability has become probable. Any resulting reduction or reversal is
      recognized in the line item, "taxes on
income".

| | n. | Share-based payment transactions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The Company's employees and other service providers are
      entitled to remuneration in the form of equity-settled share-based payment
      transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The cost of equity-settled transactions with employees is
      measured at the fair value of the equity instruments granted at grant
      date. The fair value is determined using the Black Scholes pricing model,
      additional details are given in Note 14. As for other service providers,
      the cost of the transactions is measured at the fair value of the goods or
      services received as consideration for equity instruments. In cases where
      the fair value of the goods or services received as consideration of
      equity instruments cannot be measured, they are measured by reference to
      the fair value of the equity instruments granted.                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The cost of equity-settled transactions is recognized in
      profit or loss, together with a corresponding increase in equity, during
      the period which the performance and service conditions are to be
      satisfied, ending on the date on which the relevant employees become fully
      entitled to the award ("the vesting period"). The cumulative expense
      recognized for equity-settled transactions at the end of each reporting
      period until the vesting date reflects the extent to which the vesting
      period has expired and the Company's best estimate of the number of equity
      instruments that will ultimately vest. The expense or income recognized in
      profit or loss represents the movement in the cumulative expense
      recognized at the end of the reporting period. No expense is recognized
      for awards that do not ultimately vest.

- 92 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| |    | If the Company modifies the conditions on which
      equity-instruments were granted, an additional expense is recognized for
      any modification that increases the total fair value of the share-based
      payment arrangement or is otherwise beneficial to the employee/other
      service provider at the modification date.                                                                                                                       
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | If a grant of an equity instrument is cancelled, it is
      accounted for as if it had vested on the cancellation date, and any
      expense not yet recognized for the grant is recognized immediately.
      However, if a new grant replaces the cancelled grant and is identified as
      a replacement grant on the grant date, the cancelled and new grants are
      accounted for as a modification of the original grant, as described
      above.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | o. | Employee benefit liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Company has several employee benefit
  plans:                                                                                                                                                                                                                                                                                                                                                                                                              

| | 1. | Short-term employee benefits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Short-term employee benefits include salaries, paid
      annual leave, paid sick leave, recreation and social security
      contributions and are recognized as expenses as the services are rendered.
      A liability in respect of a cash bonus is recognized when the Company has
      a legal or constructive obligation to make such payment as a result of
      past service rendered by an employee and a reliable estimate of the amount
      can be made.                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 2. | Post-employment benefits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Company's plan in Israel is financed by contributions
      to insurance companies and is classified as a defined contribution plan,
      pursuant to Section 14 of the Severance Pay Law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Company pays fixed contributions and has no legal or
      constructive obligation to pay further contributions if the insurance
      company does not hold sufficient amounts to pay all employee benefits
      relating to employee service in the current and prior periods; therefore,
      upon release of the policy to the employee, no additional liability exists
      between the parties regarding the matter of severance pay and no
      additional payments shall be made by the Company to the employee.
      Accordingly, severance liability and deposits on behalf of such liability
      are not presented on the balance sheet, as the Company has no further
      obligation to these employees once the deposits have been
  paid.

- 93 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | p. | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Revenues are recognized in the statement of comprehensive
      loss when the revenues can be measured reliably, it is probable that the
      economic benefits associated with the transaction will flow to the Company
      and the costs incurred or to be incurred in respect of the transaction can
      be measured reliably.                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company's revenues are derived from:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Operator fees- the Company acts as the operator
      on the Offshore Licenses and is entitled to operator fees at a fixed rate
      of 7.5% of the total exploration costs incurred by the respective UJV's.
      Revenues from operator fees are recognized in accordance with the terms of
      the Joint Operating Agreements, as exploration expenses are incurred in
      the UJV's.                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Consulting fees- The Company provides consulting
      services in respect of the Offshore Licenses on a "time and materials"
      basis. Consulting fees are recognized as revenues as the services are
      rendered to the respective UJV's.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | q. | Finance income and expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Finance income comprises interest income on cash, cash
      equivalents and restricted cash and exchange rate gains and
  losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Gains and losses on exchange rate differences are
      reported on a net basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | r. | Loss per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Loss per share is calculated by dividing the net loss
      attributable to equity holders of the Company by the weighted number of
      Ordinary shares outstanding during the period. Basic loss per share only
      include shares that were actually outstanding during the period. Potential
      Ordinary shares (warrants and employee options) are only included in the
      computation of diluted loss per share when their conversion decreases
      earnings per share or increases loss per share from continuing operations.
      Further, potential Ordinary shares that are converted during the period
      are included in diluted earnings per share only until the conversion date
      and from that date in basic earnings per share.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | All share options and warrants outstanding during the
      years ended December 31, 2011 and 2010 and the 267-day period ended
      December 31, 2009 (see Note 14) have not been included in the calculation
      of diluted loss per share, as they are
antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 94 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | s. | Decommissioning liability:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Decommissioning liability is recognized when the Company
      has a present legal or constructive obligation as a result of past events,
      and it is probable that an outflow of resources will be required to settle
      the obligation, and a reliable estimate of the amount of obligation can be
      made. A corresponding amount equivalent to the provision is also
      recognized as part of the cost of the relegated property and equipment.
      The amount recognized is the estimated cost of decommissioning, discounted
      to its present value. Changes in the estimated timing of decommissioning
      or decommissioning cost estimates are dealt with prospectively by
      recording an adjustment to the provision, and a corresponding adjustment
      to property and equipment. The unwinding of the discount on the
      decommissioning provision is included as a finance cost.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | t. | Presentation of statement of comprehensive
loss:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Company has elected to present a single statement of
      comprehensive loss which includes both the items of the statement of
      operation and the items of other comprehensive loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | u. | Disclosure of new IFRSs in the period prior to their
      adoption:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | IFRS 7 - Financial Instruments:
  Disclosure:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The amendments to IFRS 7 deal with the following
      issues:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | 1. | Clarification of the Standard's disclosure requirements.
      In this context, emphasis is placed on the interaction between the
      quantitative disclosures and the qualitative disclosures about the nature
      and extent of risks arising from financial instruments. The Standard also
      reduces the disclosure requirements for collateral held by the Company and
      revises the disclosure requirements for credit risk. The amendment should
      be applied retrospectively commencing from the financial statements for
      periods beginning on January 1, 2011. Earlier application is
    permitted.                                                                                                                                                                 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2. | New disclosure requirements about transferred financial
      assets including disclosures regarding unusual transfer activity near the
      end of a reporting period. The objective of the amendment is to assist
      users of financial statements to assess the risks to which the Company may
      remain exposed from transfers of financial assets and the effect of these
      risks on the Company's financial position. The amendment is designed to
      enhance the reporting transparency of transactions involving asset
      transfers, specifically securitization of financial assets. The amendment
      should be applied prospectively commencing from the financial statements
      for periods beginning on January 1, 2012. Earlier application is
      permitted.

- 95 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

The relevant disclosures will be
included in the Company's financial statements.

IFRS 9 - Financial Instruments:

| | 1. | In November 2009, the IASB issued IFRS 9, "Financial
      Instruments", the first part of Phase 1 of a project to replace IAS 39,
      "Financial Instruments: Recognition and Measurement". IFRS 9 focuses
      mainly on the classification and measurement of financial assets and it
      applies to all financial assets within the scope of IAS 39.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                              
| |    | According to IFRS 9, all financial assets (including
      hybrid contracts with financial asset hosts) should be measured at fair
      value upon initial recognition. In subsequent periods, debt instruments
      should be measured at amortized cost if both of the following conditions
      are met:                                               

| | - | the asset is held within a business model whose objective
      is to hold assets in order to collect the contractual cash flows.                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                            
| | - | the contractual terms of the financial asset give rise on
      specified dates to cash flows that are solely payments of principal and
      interest on the principal amount outstanding.

Notwithstanding the aforesaid, upon
initial recognition, the Company may designate a debt instrument that meets both
of the abovementioned conditions as measured at fair value through profit or
loss if this designation eliminates or significantly reduces a measurement or
recognition inconsistency ("accounting mismatch") that would have otherwise
arisen.

Subsequent measurement of all other
debt instruments and financial assets should be at fair value.

Financial assets that are equity
instruments should be measured in subsequent periods at fair value and the
changes recognized in profit or loss or in other comprehensive income, in
accordance with the election by the Company on an instrument-by-instrument basis
(amounts recognized in other comprehensive income cannot be subsequently
transferred to profit or loss). Nevertheless, if equity instruments are held for
trading, they should be measured at fair value through profit or loss. This
election is final and irrevocable. When an entity changes its business model for
managing financial assets it shall reclassify all affected financial assets. In
all other circumstances, reclassification of financial instruments is not
permitted.

The Standard is effective commencing
from January 1, 2013. Earlier application is permitted. Upon initial
application, the Standard should be applied retrospectively, except as specified
in the Standard.

- 96 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

| | 2. | In October 2010, the IASB issued certain amendments to
      IFRS 9 regarding de- recognition and financial liabilities. According to
      those amendments, the provisions of IAS 39 will continue to apply to
      de-recognition and to financial liabilities for which the fair value
      option has not been elected (designated as measured at fair value through
      profit or loss); that is, the classification and measurement provisions of
      IAS 39 will continue to apply to financial liabilities held for trading
      and financial liabilities measured at amortized
cost.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The changes arising from these
amendments affect the measurement of a liability for which the fair value option
has been chosen. Pursuant to the amendments, the amount of the adjustment to the
liability's fair value that is attributable to changes in credit risk should be
presented in other comprehensive income. All other fair value adjustments should
be presented in profit or loss. If presenting the fair value adjustment of the
liability arising from changes in credit risk in other comprehensive income
creates an accounting mismatch in profit or loss, then that adjustment should
also be presented in profit or loss rather than in other comprehensive income.

Furthermore, according to the
amendments, derivative liabilities in respect of certain unquoted equity
instruments can no longer be measured at cost but rather only at fair value.

The amendments are effective
commencing from January 1, 2013. Earlier application is permitted provided that
the Company also adopts the provisions of IFRS 9 regarding the classification
and measurement of financial assets (the first part of Phase 1). Upon initial
application, the amendments should be applied retrospectively, except as
specified in the amendments.

The Company believes that the
amendments are not expected to have a material effect on the financial
statements.

IFRS 10, IFRS 11, IFRS 12, IFRS 13 -
  Consolidated Financial Statements, Joint Arrangements, Disclosure of Interests
  in Other Entities, Fair Value Measurement:

In May 2011, the IASB issued four new
Standards: IFRS 10, "Consolidated Financial Statements", IFRS 11,
"Joint Arrangements", IFRS 12, "Disclosure of Interests in Other
Entities" ("the new Standards") and IFRS 13, "Fair Value
Measurement", and amended two existing Standards, IAS 27R (Revised 2011),
"Separate Financial Statements", and IAS 28R (Revised 2011),
"Investments in Associates and Joint Ventures".

The new Standards are to be applied
  retrospectively in financial statements for annual periods commencing on January
  1, 2013 or thereafter. Earlier application is permitted. However, if the Company
  chooses earlier application, it must adopt all the new Standards as a package
  (excluding the disclosure requirements of IFRS 12 which may be adopted separately).
  The Standards prescribe transition provisions with certain modifications upon
  initial adoption.

- 97 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

The main provisions of the Standards
and their expected effects on the Company are as follows:

IFRS 10 - Consolidated Financial
Statements:

IFRS 10 supersedes IAS 27 regarding
the accounting treatment of consolidated financial statements and includes the
accounting treatment for the consolidation of structured entities previously
accounted for under SIC 12, "Consolidation - Special Purpose Entities".

IFRS 10 does not prescribe changes to
the consolidation procedures but rather modifies the definition of control for
the purpose of consolidation and introduces a single consolidation model.
According to IFRS 10, in order for an investor to control an investee, the
investor must have power over the investee and exposure, or rights, to variable
returns from the investee. Power is defined as the ability to influence and
direct the investee's activities that significantly affect the investor's
return.

According to IFRS 10, when assessing
the existence of control, potential voting rights should be considered only if
they are substantive, as opposed to the provisions of IAS 27 prior to its
amendment which required consideration of potential voting rights only if they
could be exercised immediately while disregarding management's intentions and
financial ability to exercise such rights.

IFRS 10 also prescribes that an
investor may have control even if it holds less than a majority of the
investee's voting rights (de facto control), as opposed to the provisions of the
existing IAS 27 which permits a choice between two consolidation models - the de
facto control model and the legal control model.

IFRS 10 is to be applied retrospectively
  in financial statements for annual periods commencing on January 1, 2013, or
  thereafter.

The Company believes that the adoption
of IFRS 10 is not expected to have a material effect on the financial
statements.

IAS 27R - Separate Financial
Statements:

IAS 27R supersedes IAS 27 and only
addresses separate financial statements. The existing guidanceforseparate financial statements has remained unchanged in IAS 27R.

IFRS 11 - Joint Arrangements:

IFRS 11 supersedes IAS 31 regarding
the accounting treatment of interests in joint ventures and SIC 13 regarding the
interpretation of the accounting treatment of non-monetary contributions by
venturers.

- 98 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

IFRS 11 defines joint arrangements as
contractual arrangements over which two or more parties have joint control.

IFRS 11 distinguishes between two
types of joint arrangements:

| | - | Joint ventures in which the parties that have joint
      control of the arrangement have rights to the net assets of the
      arrangement. IFRS 11 requires joint ventures to be accounted for solely by
      using the equity method, as opposed to the provisions of IAS 31 which
      allowed the Company to make an accounting policy choice whether to apply
      proportionate consolidation or the equity method for entities under joint
      control.                                             
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | Joint operations in which the parties that have joint
      control of the arrangement have rights to the assets, and obligations for
      the liabilities, relating to the arrangement. IFRS 11 requires the joint
      operator to recognize a joint operation's assets, liabilities, revenues
      and expenses in proportion to its relative share of the joint operation as
      determined in the joint arrangement, similar to the current accounting
      treatment for proportionate consolidation.

IFRS 11 is to be applied
retrospectively in financial statements for annual periods commencing on January
1, 2013, or thereafter.

The Company believes that the adoption
of IFRS 11 is not expected to have a material effect on the financial
statements.

IAS 28R - Investments in Associates
and Joint Ventures:

IAS 28R supersedes IAS 28. The
principal changes in IAS 28R compared to IAS 28 relate to the application of the
equity method of accounting for investments in joint ventures, as a result of
the issuance of IFRS 11, and the guidance for transition from proportionate
consolidation to the equity method of accounting for these investments. IAS 28R
also prescribes that in the event of disposal of an investment in an associate
or joint venture, including a portion thereof, the portion that meets the
criteria to be classified as held for sale is accounted for in accordance with
IFRS 5. Any remaining portion is accounted for using the equity method until the
time of actual disposal. In addition, an investment in an associate that becomes
an investment in a joint venture, or vice versa, will continue to be accounted
for at equity and the remaining investment will not be remeasured.

IAS 28R is to be applied retrospectively
  in financial statements for annual periods commencing on January 1, 2013, or
  thereafter. Earlier application is permitted; however, if the Company elects
  earlier application of IAS 28R, it must also apply IFRS 10, IFRS 11, IFRS 12
  and IFRS 27R (Revised 2011) collectively.

- 99 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

The Company estimates that IAS 28R is
not expected to have a material impact on its financial statements.

IFRS 12 - Disclosure of Interests
in Other Entities:

IFRS 12 prescribes disclosure
requirements for the Company's investees, including subsidiaries, joint
arrangements, associates and structured entities. IFRS 12 expands the disclosure
requirements to include the judgments and assumptions used by management in
determining the existence of control, joint control or significant influence
over investees, and in determining the type of joint arrangement. IFRS 12 also
provides disclosure requirements for material investees.

The required disclosures will be included
  in the Company's financial statements upon initial adoption of IFRS 12.

IFRS 13 - Fair Value
Measurement:

IFRS 13 establishes guidance for the
measurement of fair value, to the extent that such measurement is required
according to IFRS. IFRS 13 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. IFRS 13 also
specifies the characteristics of market participants and determines that fair
value is based on the assumptions that would have been used by market
participants. According to IFRS 13, fair value measurement is based on the
assumption that the transaction will take place in the asset's or the
liability's principal market, or in the absence of a principal market, in the
most advantageous market.

IFRS 13 requires an entity to maximize
  the use of relevant observable inputs and minimize the use of unobservable inputs.
  IFRS 13 also includes a fair value hierarchy based on the inputs used to determine
  fair value as follows:

Level 1 -
      quoted prices (unadjusted) in active markets for identical
          assets or liabilities.Level 2 -
      inputs other than quoted market prices included within
      Level 1 that are observable for the asset or liability, either directly or
      indirectly.Level 3 -
      unobservable inputs (valuation techniques that do not
      make use of observable inputs).


IFRS 13 also prescribes certain
specific disclosure requirements.

The new disclosures, and the
measurement of assets and liabilities pursuant to IFRS 13, are to be applied
prospectively for periods commencing after the Standard's effective date, in
financial statements for annual periods commencing on January 1, 2013 or
thereafter. Earlier application is permitted. The new disclosures will not be
required for comparative data.

- 100 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: | SIGNIFICANT ACCOUNTING
      POLICIES (Cont.)
|------- | ---------------------------------------------

The appropriate disclosures will be
included in the Company's financial statements upon initial adoption of IFRS
13.

As for the effect on the financial
statements, the Company believes that IFRS 13 is not expected to have a material
impact on its financial statements.

IAS 32 - Financial Instruments:
Presentation and IFRS 7 - Financial Instruments: Disclosure:

In December 2011, the IASB issued
amendments to IAS 32 ("the amendments to IAS 32") regarding the offsetting of
financial assets and liabilities. The amendments to IAS 32 clarify, among
others, the meaning of "currently has a legally enforceable right of set-off"
("the right of set-off"). Among others, the amendments to IAS 32 prescribe that
the right of set-off must be legally enforceable not only during the ordinary
course of business of the parties to the contract but also in the event of
bankruptcy or insolvency of one of the parties. The amendments to IAS 32 also
state that in order for the right of set-off to be currently available, it must
not be contingent on a future event, there may not be periods during which the
right is not available, or there may not be any events that will cause the right
to expire.

Simultaneously in December 2011, the
IASB issued amendments to IFRS 7 ("the amendments to IFRS 7") regarding the
offsetting of financial assets and liabilities. According to the amendments to
IFRS 7, the Company is required, among others, to provide disclosure of rights
of set-off and related arrangements (such as collateral agreements), the
composition of amounts that are set off, and amounts subject to enforceable
master netting arrangements that do not meet the offsetting criteria of IAS 32.

The amendments to IAS 32 are to be
applied retrospectively commencing from the financial statements for periods
beginning on January 1, 2014, or thereafter. Earlier application is permitted,
but disclosure of early adoption is required as well as the disclosures required
by the amendments to IFRS 7 as described above. The amendments to IFRS 7 are to
be applied retrospectively commencing from the financial statements for periods
beginning on January 1, 2013, or thereafter.

The Company estimates that the
amendments to IAS 32 are not expected to have a material impact on its financial
statements. The required disclosures pursuant to the amendments to IFRS 7 will
be included in the Company's financial statements.

- 101 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 4:- | CASH AND CASH EQUIVALENTS
|-------- | -------------------------

| |                     |   | December 31,              | 
| | ------------------- | - | ------------------------- | 
| |                     |   | 2011                      | 
| |                     |   | U.S. dollars in thousands | 
| |                     |   |                           | 
| | In US Dollars       | $ | 6,633                     | 
| | In Canadian Dollars |   | 1,324                     | 
| | In NIS              |   | 137                       | 
| |                     |   |                           | 
| |                     | $ | 8,094                     | 

|NOTE 5:- | RESTRICTED CASH                                                                                                                                                                                                                                                              
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                              
|         | Short-term restricted cash in 2010 relates to the
      Company's proportionate share of cash held by a financial institution as a
      guarantee to secure a letter of credit issued to a third party supplier in
      respect of exploration services of the Yitzhak UJV.
|         |                                                                                                                                                                                                                                                                              
|         | Short-term restricted cash of $ 100 as of December 31,
      2011 relates to deposits held by a financial institution as security in
      connection with a guarantee against the Company's credit facility and was
      released subsequent to balance sheet date.        
|         |                                                                                                                                                                                                                                                                              
|         | Long-term restricted cash of $ 65 as of December 31, 2010
      and 2011 relates to cash held by a financial institution as a guarantee
      for the Company's Israeli office and the land lease on the Eitan license.                                                      
|         |                                                                                                                                                                                                                                                                              
|         | Long-term restricted cash of $ 278 as of December 31,
      2011 relates to deposits held by a financial institution as security in
      connection with the Company's credit card and a guarantee in favor of
      customs.                                               
|         |                                                                                                                                                                                                                                                                              
|NOTE 6:- | ACCOUNTS RECEIVABLE                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                              
|         | Accounts receivable are non-interest bearing and are
      generally on 30-90 days terms. The Company has no past due or impaired
      trade receivables as of December 31, 2011 and 2010.                                                                                  

- 102 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 7:- | OTHER RECEIVABLES AND PREPAID EXPENSES
|-------- | --------------------------------------

| |                        |   | December 31,              | 
| | ---------------------- | - | ------------------------- | 
| |                        |   | 2011                      | 
| |                        |   | U.S. dollars in thousands | 
| |                        |   |                           | 
| | Receivable from UJVs   | $ | -                         | 
| | Government authorities |   | 220                       | 
| | Prepaid expenses       |   | 195                       | 
| | Other receivables      |   | 11                        | 
| |                        |   |                           | 
| |                        | $ | 426                       | 

|NOTE 8:- | PROPERTY AND EQUIPMENT, NET
|-------- | ---------------------------
|         |                            
|         | Composition and movement:  
|         |                            
|         | 2011                       

| |                                       |   |                           |  |   | Office        |  |   | Computer      |  |   |       | 
| | ------------------------------------- | - | ------------------------- |  | - | ------------- |  | - | ------------- |  | - | ----- | 
| |                                       |   | Drilling rig              |  |   | furniture     |  |   | and           |  |   |       | 
| |                                       |   | and related               |  |   | and           |  |   | peripheral    |  |   |       | 
| |                                       |   | equipment                 |  |   | **equipment** |  |   | **equipment** |  |   | Total | 
| |                                       |   | U.S. dollars in thousands | 
| | Cost:                                 |   |                           |  |   |               |  |   |               |  |   |       | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at January 1, 2011            | $ | 389                       |  | $ | 6             |  | $ | 32            |  | $ | 427   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Purchases during the year             |   | 37                        |  |   | 77            |  |   | 183           |  |   | 297   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at December 31, 2011          |   | 426                       |  |   | 83            |  |   | 215           |  |   | 724   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Accumulated depreciation:             |   |                           |  |   |               |  |   |               |  |   |       | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at January 1, 2011            |   | 9                         |  |   | -             |  |   | 3             |  |   | 12    | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Additions during the year:            |   |                           |  |   |               |  |   |               |  |   |       | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Depreciation for the year *)          |   | 40                        |  |   | 14            |  |   | 57            |  |   | 111   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Provision for impairment **)          |   | 142                       |  |   | -             |  |   | -             |  |   | 142   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at December 31, 2011          |   | 191                       |  |   | 14            |  |   | 60            |  |   | 265   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Depreciated cost at December 31, 2011 | $ | 235                       |  | $ | 69            |  | $ | 155           |  | $ | 459   | 

| | *)  | Including depreciation of drilling rig and drilling
      equipment of $31 that was capitalized to exploration and evaluation
      assets.                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | **) | Following the Eitan license relinquishment in 2011 (See
      Note 9a), an impairment loss of $ 142 thousand was recognized in the
      Statement of Comprehensive Loss for 2011.

- 103 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 8:- | PROPERTY AND EQUIPMENT, NET
      (Cont.)
|-------- | -----------------------------------------
|         |                                          
|         | 2010                                     

| |                                       |   |                           |  |   | Office        |  |   | Computer      |  |   |       | 
| | ------------------------------------- | - | ------------------------- |  | - | ------------- |  | - | ------------- |  | - | ----- | 
| |                                       |   | Drilling rig              |  |   | furniture     |  |   | and           |  |   |       | 
| |                                       |   | and related               |  |   | and           |  |   | peripheral    |  |   |       | 
| |                                       |   | equipment                 |  |   | **equipment** |  |   | **equipment** |  |   | Total | 
| |                                       |   | U.S. dollars in thousands | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Cost:                                 |   |                           |  |   |               |  |   |               |  |   |       | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at January 1, 2010            | $ | -                         |  | $ | -             |  | $ | -             |  | $ | -     | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Purchases during the year             |   | 389                       |  |   | 6             |  |   | 32            |  |   | 427   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at December 31, 2010          |   | 389                       |  |   | 6             |  |   | 32            |  |   | 427   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Accumulated depreciation:             |   |                           |  |   |               |  |   |               |  |   |       | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at January 1, 2010            |   | -                         |  |   | -             |  |   | -             |  |   | -     | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Additions during the year:            |   |                           |  |   |               |  |   |               |  |   |       | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Depreciation for the year             |   | 9                         |  |   | -             |  |   | 3             |  |   | 12    | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at December 31, 2010          |   | 9                         |  |   | -             |  |   | 3             |  |   | 12    | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Depreciated cost at December 31, 2010 | $ | 380                       |  | $ | 6             |  | $ | 29            |  | $ | 415   | 

|NOTE 9: | EXPLORATION AND EVALUATION
      ASSETS                                                 
|------- | ----------------------------------------------------------------------------------------
|        |                                                                                         
|        | The following is a description of
      activities in respect of the Company's licenses:

| | a. | Eitan:                                                                                                                                                                                                                                                                                         
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                
| |    | The Eitan License comprises an area of approximately
      31,060 acres in the Hula Valley in Northern Israel. The Eitan License was
      awarded in December 2008 for a term of three years which expired in
      December 2011. The Company had a 100% working interest in the
    license.
| |    |                                                                                                                                                                                                                                                                                                
| |    | The Company commenced drilling its first new well ("Eitan
      1") in January 2011. In accordance with the Company's accounting policy,
      the Company capitalized $ 935 to Exploration and Evaluation Assets during
      2011.                                                           

- 104 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 9: | EXPLORATION AND EVALUATION
      ASSETS (Cont.)
|------- | -----------------------------------------------

Following a review and further
analysis by the Company's geoscientists, in consultation with outside
consultants, management concluded in November 2011 that commercial quantities of
hydrocarbons were not present in the Eitan 1 well. In December 2011, the Company
notified the Ministry of Energy and Water Resources of the State of Israel ("the
Ministry") that it is relinquishing the license.

As a result of the above, the Company
recorded a $ 1,226 non-cash impairment charge arising from the write-off of
exploration and evaluation assets as well as inventory and equipment related to
onshore drilling in the statement of comprehensive loss. In 2012, the Company
decided to sell the remaining inventory and equipment.

The exploration expenses relating to
the Eitan license that were not initially capitalized are as follows:

| |                      |   |                           |  |   |              |  |   | 267-day | 
| | -------------------- | - | ------------------------- |  | - | ------------ |  | - | ------- | 
| |                      |   | Year ended                |  |   | period ended | 
| |                      |   | December 31,              |  |   | December 31, | 
| |                      |   | 2011                      |  |   | 2010         |  |   | 2009    | 
| |                      |   | U.S. dollars in thousands | 
| |                      |   |                           |  |   |              |  |   |         | 
| | Exploration expenses | $ | 784                       |  | $ | 568          |  | $ | 195     | 

| | b. | Off-shore licenses:
| | -- | -------------------
| |    |                    
| |    | (1)                
| |    |                    
| |    |                    
| |    |                    
| |    |                    

- 105 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 9: | EXPLORATION AND EVALUATION
      ASSETS (Cont.)
|------- | -----------------------------------------------

In January 2010, Adira Energy Israel
Ltd., signed an agreement with Modiin Energy Limited Partnership ("MELP") and
Modiin Energy General Partners ("MEGP") (collectively "Modiin") to facilitate
the full initial funding of the Gabriella License. Under the terms of the
agreement, Modiin farmed in 70% of the rights of participation in the Gabriella
License (the "Gabriella Project"). Brownstone Ventures Inc ("Brownstone") has a
15% participating interest in the Gabriella License. Brownstone's working
interest is registered in the Company's name. Transfer of the beneficial
ownership is subject to the approval of the Ministry. Until such time, these
participating interests are held in trust by the Company. Modiin has agreed to
fund its 70% share, as well as the Company's 15% share of the work program up to
a total of $ 8,000 (i.e. $ 1,200).

In addition, Modiin will pay Adira: 1)
a monthly management fee of $ 12.5 for a period of two years commencing February
1, 2010, 2) one half of the management fees MEGP receives from MELP (3.75% of
7.5% management fees) in respect to this license, for a period of 24 months,
commencing February 1, 2010, after which the amount increases to 4.25%; and 3) a
royalty of 2.25% from both MELP and MEGP each from any resources extracted until
Modiin recovers its costs incurred, after which the royalty increases to 5.25% .
Due to the uncertainty of receipt of these fees and royalties in the event of
the termination of the exploration program, these fees and royalties are
recorded as income upon receipt.

The Company has an option to purchase
15% of the Gabriella License from Modiin (or 21.43% of MELP's 70% interest) any
time until the earlier of six months after a discovery or seven years from July
2009. The exercise price for this option is the actual costs incurred by Modiin
on the 15% interest up until the exercise date.

Exploration activities of Gabriella
since inception and during the year ended December 31, 2011 amounted to $ 8,089.
The Company's 15% interest in the first $8 million of exploration expense has
been carried by Modiin and is not included in the Company's accounts for the
years ended December 31, 2011 and 2010.

The Company's proportionate share of
the Gabriella license is as follows:

| |                           |   | December 31,                    |  
| | ------------------------- | - | ------------------------------- | -
| |                           |   | 2011                            |  
| |                           |   | U.S. dollars in
      thousands |  
| |                           |   |                                 |  
| | Cash and cash equivalents | $ | 35                              |  
| | Trade payables            |   | (32                             | )
| |                           |   |                                 |  
| |                           | $ | 3                               |  

- 106 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 9: | EXPLORATION AND EVALUATION ASSETS
      (Cont.)
|------- | -----------------------------------------------

| |                      |   |                                 |  |   |              |  |   | 267-day | 
| | -------------------- | - | ------------------------------- |  | - | ------------ |  | - | ------- | 
| |                      |   | Year ended                      |  |   | period ended | 
| |                      |   | December 31,                    |  |   | December 31, | 
| |                      |   | 2011                            |  |   | 2010         |  |   | 2009    | 
| |                      |   | U.S. dollars in
      thousands | 
| |                      |   |                                 |  |   |              |  |   |         | 
| | Exploration expenses | $ | 13                              |  | $ | -            |  | $ | -       | 

| | (2) | Yitzhak:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The Yitzhak license was awarded to the Company in October
      2009 and covers 31,555 acres (127.7 sq.km) and is located approximately 17
      km offshore Israel between Hadera and Netanya, directly to the North of
      and contiguous to Gabriella. The license was issued for an initial three
      year period and may be renewed upon fulfillment of certain conditions for
      a further four year period with a further renewal option of two years in
      case of a reserve discovery. In 2011, the Company had 85% working interest
      in this license. Brownstone has a 15% participating interest in the
      Yitzhak license. Brownstone's working interest is registered in the
      Company's name. Transfer of the Brownstone's working interest is subject
      to the approval of the Ministry (see Note 19). Until such time, these
      participating interests are held in trust by the Company. In addition, the
      Company is the operator of the Yitzhak License and is entitled to receive
      a 7.5% operating fee on all its expenditures.                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | In November 2011, an agreement was signed between Adira
      Israel and Ellomay LP ("Ellomay") for the transfer of rights in the
      Yitzhak license (the "Agreement") according to which Ellomay would receive
      20% (out of 100%) non-specific participation rights in the Yitzhak License
      (the "Transferred Rights"), in consideration for reimbursement of the
      expenses paid by Adira until the date of execution of the Agreement in
      respect of the Transferred Rights plus interest of Libor + 1%. Therefore,
      following the closing in February 2012 (see Note 19), Ellomay will pay
      Adira approximately $ 390 in 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | In addition, on November 29, 2011 the Company entered
      into an agreement with AGR Petroleum Services Holding ("AGR"), whereby AGR
      would act as chief operator in the Yitzhak License, and would receive 5%
      (out of 100%) non-specific participation rights in the Yitzhak License.
      Adira Israel will act as a joint operator, in accordance with the
      provisions of the JOA agreement and/or a services agreement to be signed
      and/or another agreement to be signed between the parties. All the
      partners (Ellomay, Brownstone and Adira) undertook to bear their
      proportionate share in AGR's expenses (5%) from the date of execution of
      the Agreement until the date of approval of a development plan by the
      Petroleum Commissioner ("Coverage of Expenses"). From the date of approval
      of the work plan as aforesaid, AGR shall bear its expenses according to
      its proportionate share in the participation rights (5%). AGR's income
      from the production of gas and petroleum in accordance with its
      proportionate share in its participation rights in the license shall be
      used to repay the Coverage of Expenses plus interest of Libor +
  1%.

- 107 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 9: | EXPLORATION AND EVALUATION
      ASSETS (Cont.)
|------- | -----------------------------------------------

Until reimbursement of all the
expenses incurred by AGR and Ellomay in connection with the license, AGR and
Ellomay shall pay Adira Israel overriding royalties at the rate of 3% of their
full share in income deriving from petroleum and/or gas and/or other valuable
materials actually produced and extracted from the license. After reimbursement
of the expenses as aforesaid, AGR and Ellomay shall pay Adira Israel overriding
royalties at the rate of 4.5% of their full share in rights in petroleum and/or
gas and/or other valuable materials actually produced and extracted from the
license. The transfer of the rights is subject, inter alia, to the
approval of the Petroleum Commissioner (see Note 19), the last date for receipt
of which under the Agreement is April 30, 2012, as well as the services
agreement and the JOA agreement taking effect.

The Company's proportionate share of
the Yitzhak license is as follows:

| |                                        |   | December 31,                    |  
| | -------------------------------------- | - | ------------------------------- | -
| |                                        |   | 2011                            |  
| |                                        |   | U.S. dollars in
      thousands |  
| |                                        |   |                                 |  
| | Cash and cash equivalents              | $ | 92                              |  
| | Restricted cash                        |   | -                               |  
| | Prepaid expenses and other receivables |   | -                               |  
| | Trade payables                         |   | (225                            | )
| |                                        |   |                                 |  
| |                                        | $ | (133                            | )

| |                      |   |                                 |  |  |              |  |   | 267-day | 
| | -------------------- | - | ------------------------------- |  |  | ------------ |  | - | ------- | 
| |                      |   | Year ended                      |  |  | period ended | 
| |                      |   | December 31,                    |  |  | December 31, | 
| |                      |   | 2011                            |  |  | 2010         |  |   | 2009    | 
| |                      |   | U.S. dollars in
      thousands | 
| |                      |   |                                 |  |  |              |  |   |         | 
| | Exploration expenses | $ | 433 $                           |  |  | 883          |  | $ | -       | 

| | (3) | Samuel:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The Samuel license was issued in August 2010 and covers
      88,708 acres (361 sq. km) approximately 17 km offshore Israel adjacent to
      the shoreline between Ashkelon and Palmachim. The license was issued to a
      consortium led by the Company (through the Company's subsidiaries, AOT and
      AGG). As of December 31, 2011 the Company has a working interest of 41.25%
      in this license. In accordance with the Joint Operating Agreement, AGG is
      the operator of the Samuel License and is entitled to receive a 7.5%
      operating fee on all its expenditures (see note 16c). AGG is also entitled
      to a 3% overriding royalty. The operator fee and ORRI are shared equally
      between Adira and Geo Global Resources Inc.
("GGR").

- 108 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 9: | EXPLORATION AND EVALUATION ASSETS
      (Cont.)
|------- | -----------------------------------------------

The Company's proportionate share of
the Samuel license is as follows:

| |                                        |   | December 31,                    |  
| | -------------------------------------- | - | ------------------------------- | -
| |                                        |   | 2011                            |  
| |                                        |   | U.S. dollars in
      thousands |  
| |                                        |   |                                 |  
| | Cash and cash equivalents              | $ | 124                             |  
| | Prepaid expenses and other receivables |   | 16                              |  
| | Trade payables                         |   | (354                            | )
| |                                        |   |                                 |  
| |                                        | $ | (214                            | )

| |                      |   |                                 |  |   |              |  |   | 267-day | 
| | -------------------- | - | ------------------------------- |  | - | ------------ |  | - | ------- | 
| |                      |   | Year ended                      |  |   | period ended | 
| |                      |   | December 31,                    |  |   | December 31, | 
| |                      |   | 2011                            |  |   | 2010         |  |   | 2009    | 
| |                      |   | U.S. dollars in
      thousands | 
| |                      |   |                                 |  |   |              |  |   |         | 
| | Exploration expenses | $ | 3,163                           |  | $ | 17           |  | $ | -       | 

The Company has recognized exploration
expenses for which it has not charged its license partners, in accordance with
the terms and conditions set forth in the partnership agreements. These
exploration expenses amounted to $ 366 and $ 17 for the years ended December 31,
2011 and 2010, respectively.

|NOTE 10:- | TRADE PAYABLES                                                                         
|--------- | ---------------------------------------------------------------------------------------
|          |                                                                                        
|          | Trade payables are non-interest bearing and are
      normally settled on 60-day terms.
|          |                                                                                        
|NOTE 11:- | OTHER ACCOUNTS PAYABLE AND ACCRUED
      LIABILITIES                                   

| |                                 |   | December 31,                    | 
| | ------------------------------- | - | ------------------------------- | 
| |                                 |   | 2011                            | 
| |                                 |   | U.S. dollars in
      thousands | 
| |                                 |   |                                 | 
| | Employees in respect of payroll | $ | 80                              | 
| | Accrued expenses                |   | 824                             | 
| | Other                           |   | 35                              | 
| |                                 |   |                                 | 
| |                                 | $ | 939                             | 

Accounts payable are non-interest
bearing and have an average term of 30 days.

- 109 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 12:- | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                             
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                   
|          | The Company's activities expose it to various financial
      risks, such as market risks (foreign currency risk, consumer price index
      risk, interest risk and price risk), credit risk and liquidity risk. The
      Company's comprehensive risk management program focuses on actions to
      minimize potential adverse effects on the Company's financial performance.

| | a. | Credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Concentration of credit risk exists with respect to the
      Company's cash and cash equivalent balances and receivables. The Company's
      exposure is for cash held in bank accounts, including restricted deposits,
      in the amount of $ 8,537 and $ 9,692 as of December 31, 2011 and December
      31, 2010, respectively, and on accounts and other receivables in the sum
      of $ 1,108 and $ 7,977 on December 31, 2011 and December 31, 2010,
      respectively.                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company manages credit risk, in respect of cash and
      cash equivalents, and restricted cash, by holding them at major Canadian
      and Israeli financial institutions in accordance with the Company's
      investment policy. The Company places its temporary cash and cash
      equivalents with high credit quality financial institutions. The Company
      regularly monitors credit extended to customers and their general
      financial condition. The Company historically has not had significant
      past-due receivables.                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | b. | Liquidity risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Liquidity risk is the risk that the Company will
      encounter difficulty in obtaining funds to meet current obligations and
      future commitments. The Company's approach to managing liquidity risk is
      to forecast cash requirements to determine whether it will have sufficient
      funds to meet its current liabilities when due. The Company maintains
      sufficient working capital in order to meet short-term business
      requirements. As of December 31, 2011, the Company had cash and cash
      equivalents and restricted cash of $ 8,537, and accounts and other
      receivables of $ 1,108 against trade and other payables in the amount of $
      1,421.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | As of December 31, 2010, the Company had cash and cash
      equivalents and restricted cash of $ 9,692 and accounts and other
      receivables of $ 7,977 against trade and other payables in the amount of $
      7,373.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | c. | Market risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Market risk is the risk that the fair value or future
      cash flows of a financial instrument will fluctuate because of changes in
      market prices. Market risk is comprised of two types of risk: interest
      rate risk and foreign currency risk.                                                                                                                                                                                                                                                                                                                                                                                                                                     

- 110 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 12:- FINANCIAL INSTRUMENTS (Cont.)
|---------------------------------------

| | 1. | Interest rate risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company is not exposed to significant interest rate
      risk due to the short-term maturity of its cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 2. | Foreign currency risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company is exposed to financial risk related to the
      fluctuation of foreign exchange rates. The Company operates in Israel.
      Most of the Company's monetary assets are held in U.S. dollars and most of
      the Company's expenditures are made in U.S. dollars. However, the Company
      also has expenditures in new Israeli shekels ("NIS") and Canadian dollars.
      The Company has not hedged its exposure to currency fluctuations. An
      increase or decrease of 5% of the NIS relative to the U.S dollar would not
      have a significant effect on the Company.

| |                                     |  | December 31               |  
| | ----------------------------------- |  | ------------------------- | -
| |                                     |  | 2011                      |  
| |                                     |  | U.S. dollars in thousands |  
| | Profit (loss) from change:          |  |                           |  
| |                                     |  |                           |  
| | 5% increase in exchange rate US/CAN |  | 67                        |  
| |                                     |  |                           |  
| | 5% decrease in exchange rate US/CAN |  | (67                       | )

The Company recorded net financing
expenses in respect of exchange rates of $ 109 during the year ended December
31, 2011.

- 111 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 13:- TAXES ON INCOME
|-------------------------

| | a. | Tax rates applicable to the Company:
| | -- | ------------------------------------
| |    |                                     
| |    | 1.                                  
| |    |                                     
| |    | 2.                                  
| |    |                                     
| |    |                                     
| |    |                                     
| |    | 3.                                  
| |    |                                     
| |    |                                     

| | a) | Leaving the rate of royalties to the State unchanged
      (12.5%).
| | -- | -------------------------------------------------------------------
| | b) | Cancelling the depletion deduction.                                
| | c) | Imposing a petroleum and gas profits
  levy:                       

The levy will be calculated according
to a proposed R-factor mechanism, according to the ratio between the net
cumulative income from the project and the cumulative investments as defined in
the Law. A minimum levy of 20% will be charged from the stage at which the
R-factor ratio reaches 1.5, and when the ratio increases, the levy is
progressively raised up to a maximum rate of 50%, when the ratio reaches 2.3.
Further provisions were also set forth regarding the levy, including that the
levy will be recognized as an expense for income tax calculation; the borders of
the levy will not include export facilities; the levy will be calculated and
imposed in respect of each reservoir separately (ring fencing); payment by a
petroleum right holder which is calculated as a percentage of the petroleum
extracted, the payment recipient will be liable for payment of a levy in
accordance with the amount of the payment received thereby, which amount will be
deducted from the levy amount for which the petroleum right holder is liable.

- 112 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 13:- TAXES ON INCOME (Cont.)
|---------------------------------

| | d) | Accelerated depreciation will be granted for the
      investments at the rate of 10%, with a possibility of electing
      depreciation up to the amount of the taxable income in that
year.                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                
| | e) | Taxation of a petroleum partnership - the Law sets forth
      provisions regarding the manner of calculation and reporting of the
      profits of the partners in partnerships engaging in oil exploration,
      including the manner of calculation and payment of the tax arising from
      such profits.
| |    |                                                                                                                                                                                                                                                                                                                
| | f) | The following transition provisions were set
  forth:                                                                                                                                                                                                                                                          

i)        A petroleum venture
in respect of which the date of commencement of commercial production occurs
before the commencement date, the provisions of this Law shall apply with the
following modifications:

| | - | If such venture is subject to a levy payment duty in the
      tax year in which the date of commencement occurs, the levy rate in that
      tax year shall be one half the rate of the levy which would have been
      imposed on the petroleum profits but for the provisions of this paragraph,
      and no more than 10%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | If the levy coefficient in the tax year in which the
      commencement date occurs exceeds 1.5, rules are determined for the manner
      of calculation of the levy coefficient in each subsequent tax year.                                                                                                                  
| | - | The levy rate imposed on the petroleum profits of the
      venture in each of the tax years 2012 to 2015 will be equal to one half
      the levy rate which would have been imposed on the petroleum profits as
      aforesaid, but for the provisions of this paragraph.                                                    

| | ii) | A venture in respect of which the date of commencement of
      commercial production occurs in the period from the date of commencement
      until January 1, 2014, shall be subject, inter aliato the
      following provisions:
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | The minimal levy coefficient shall be 2 instead of 1.5,
      and the maximum - 2.8 instead of 2.3.     
| | - | --------------------------------------------------------------------------------------------------------
| |   |                                                                                                         
| | - | The depreciation rate for an asset acquired in the years
      2011 to 2013 shall be 15% instead of 10%.

- 113 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 13:- TAXES ON INCOME (Cont.)
|---------------------------------

| | g) | An Amendment to the Income Tax Regulations (Deductions
      from the Income of Petroleum Rights Holders) (Amendment), 5771-2011,
      cancelled the recognition as a current expense of development expenses in
      respect of reservoirs, commercial production from which shall commence
      after January 1, 2014, and they shall be subject to the depreciation rules
      set forth in the Law. It is stated that the depletion deduction was
      canceled in the Amendment to the Income Tax Regulations (Deductions from
      the Income of Petroleum Rights Holders) (Amendment), 5771-2011, effective
      May 1, 2011. The provisions regarding the imposition of the petroleum and
      gas profits levy are effective from April 10, 2011, and the provision
      regarding the taxation of a petroleum partnership (Section above) is
      effective from the tax year 2011. The cancellation of the gradual
      reduction in the corporate tax rate, as described in a(2) above, will
      decrease the levy per the Petroleum Taxation law from 2016 and threafter
      to a maximum rate of 45.52% from the Company's oil and gas
  revenue.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    | At this time, the expected implications of the Law on the
      Company's business cannot be fully estimated. However, it may already be
      estimated that the implementation of the Law could significantly increase
      the tax burden and adversely affect the Company's business and activity,
      as compared with the situation before the Law took effect.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                         
| | b. | Tax assessments:                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company's and its subsidiaries have not yet received
      final tax assessments since their incorporation.                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                         
| | c. | Carryforward losses for tax purposes and other temporary
      differences:                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                         
| |    | As of December 31, 2011, carryforward losses in Canada
      are approximately $ 3,664 expiring through 2031. As of December 31, 2011,
      carryforward losses in Israel are approximately $ 8,237 and may be carried
      forward indefinitely.                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                         
| |    | Deferred tax assets relating to carryforward operating
      losses and other temporary differences of approximately $ 3,231 were not
      recognized because their utilization in the foreseeable future is not
      probable.                                                                                                                                       

- 114 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 13:- TAXES ON INCOME (Cont.)
|---------------------------------

| | d. | Taxes on income included in the statements of
      comprehensive loss:
| | -- | -----------------------------------------------------------------------

| |                                 |   |                                 |  |   |              |  |   | 267-day | 
| | ------------------------------- | - | ------------------------------- |  | - | ------------ |  | - | ------- | 
| |                                 |   | Year ended                      |  |   | period ended | 
| |                                 |   | December 31,                    |  |   | December 31, | 
| |                                 |   | 2011                            |  |   | 2010         |  |   | 2009    | 
| |                                 |   | U.S. dollars in
      thousands | 
| |                                 |   |                                 |  |   |              |  |   |         | 
| | Current taxes                   | $ | 13                              |  | $ | 15           |  | $ | 1       | 
| | Taxes in respect of prior years |   | 20                              |  |   | -            |  |   | -       | 
| |                                 |   |                                 |  |   |              |  |   |         | 
| |                                 | $ | 33                              |  | $ | 15           |  | $ | 1       | 

| | e. | Theoretical tax:                                                                                                                                                                                                                                                                              
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                               
| |    | A reconciliation between the tax expense, assuming that
      all the income and expenses, gains and losses in the statement of
      comprehensive loss were taxed at the statutory tax rate and the taxes on
      income recorded in the statement of comprehensive loss is as
    follows:

| |                                                                         |   |                           |   |   |              |   |   | 267-day |  
| | ----------------------------------------------------------------------- | - | ------------------------- | - | - | ------------ | - | - | ------- | -
| |                                                                         |   | Year ended                |   |   | period ended |  
| |                                                                         |   | December 31,              |   |   | December 31, |  
| |                                                                         |   | 2011                      |   |   | 2010         |   |   | 2009    |  
| |                                                                         |   | U.S. dollars in thousands |  
| |                                                                         |   |                           |   |   |              |   |   |         |  
| | Loss before income taxes                                                | $ | (10,018                   | ) | $ | (2,989       | ) | $ | (6,721  | )
| |                                                                         |   |                           |   |   |              |   |   |         |  
| | Statutory tax rate                                                      |   | 28.25%                    |   |   | 31%          |   |   | 33%     |  
| |                                                                         |   |                           |   |   |              |   |   |         |  
| | Tax benefit computed at the statutory tax rate                          | $ | (2,830                    | ) | $ | (927         | ) | $ | (2,218  | )
| |                                                                         |   |                           |   |   |              |   |   |         |  
| | Increase in taxes on income resulting from
      the following factors: |   |                           |   |   |              |   |   |         |  
| | Taxes in respect of prior years                                         |   | 20                        |   |   | -            |   |   | -       |  
| | Increase in tax due to tax rate differences
      in Israel             |   | 240                       |   |   | 37           |   |   | 130     |  
| | Non-deductible expenses                                                 |   | 224                       |   |   | 328          |   |   | 1,888   |  
| | Non-recognition of tax benefit in respect of
      losses               |   | 2,379                     |   |   | 577          |   |   | 201     |  
| |                                                                         |   |                           |   |   |              |   |   |         |  
| | Taxes on income                                                         | $ | 33                        |   | $ | 15           |   | $ | 1       |  

- 115 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 14:- SHARE CAPITAL
|-----------------------

| | a. | Authorized:                                                          
| | -- | ---------------------------------------------------------------------
| |    |                                                                      
| |    | Unlimited number of Common shares without nominal or par
      value.
| |    |                                                                      
| | b. | Issued and outstanding Common shares:                                
| |    |                                                                      
| |    | (i)                                                                  
| |    |                                                                      
| |    | (ii)                                                                 
| |    |                                                                      
| |    | (iii)                                                                
| |    |                                                                      
| |    | (iv)                                                                 
| |    |                                                                      
| |    | (v)                                                                  
| |    |                                                                      
| |    |                                                                      

- 116 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 14:- SHARE CAPITAL (Cont.)
|-------------------------------

| | (vi) | On February 16, 2011, the Company issued 10,483,871
      common shares at CAD $ 0.62 per share for net proceeds of $
  6,152.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------

| | c. | Stock Option Plan:                                                                                                                                                                                                                                                       
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                          
| |    | Under the Company's August 31, 2009 Stock Option Plan
      ("the Incentive Stock Option Plan"), options may be granted to employees,
      officers, consultants, service providers and directors of the Company or
      its subsidiaries.                             
| |    |                                                                                                                                                                                                                                                                          
| |    | Stock options may be issued up to 10% of the Company's
      outstanding Common shares at a term and an exercise price to be determined
      by the Company's Board of Directors. The maximum term of the options is
      ten years from the date of grant.            
| |    |                                                                                                                                                                                                                                                                          
| |    | As of December 31, 2011, an aggregate of 792,627 of the
      Company's options were still available for future grant.                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                          
| |    | The Company typically grants stock options with vesting
      periods of between two to four years, generally with the exercise price at
      the closing price of the stock on the date of the grant and an expiration
      date of five years from the date of grant.
| |    |                                                                                                                                                                                                                                                                          
| |    | A summary of the stock option plan and changes during the
      years ended December 31, 2011 and 2010 were as
follows:                                                                                                                                                  

| |                            |  | Number of   |   |  | Weighted       | 
| | -------------------------- |  | ----------- | - |  | -------------- | 
| |                            |  | options     |   |  | average        | 
| |                            |  | outstanding |   |  | exercise price | 
| |                            |  |             |   |  |                | 
| | Options granted            |  | 3,984,000   |   |  | 0.25           | 
| |                            |  |             |   |  |                | 
| | Balance, December 31, 2009 |  | 3,984,000   |   |  | 0.25           | 
| | Options granted            |  | 2,745,000   |   |  | 0.60           | 
| | Options forfeited          |  | (1,070,000  | ) |  | 0.43           | 
| |                            |  |             |   |  |                | 
| | Balance, December 31, 2010 |  | 5,659,000   |   |  | 0.39           | 
| | Options granted            |  | 5,706,218   |   |  | *) 0.62        | 
| | Options exercised          |  | (527,811    | ) |  | 0.25           | 
| | Options forfeited          |  | (1,453,189  | ) |  | *)
      0.49  | 
| |                            |  |             |   |  |                | 
| | Balance, December 31, 2011 |  | 9,384,218   |   |  | 0.52           | 

| |  |  | (*) | The exercise price of all options granted in 2011 is
      denominated in Canadian Dollars and was translated to USD in the table
      above using the exchange rate as of December 31,
2011.
| |  |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 117 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 14:- SHARE CAPITAL (Cont.)
|-------------------------------

The following tables summarize
information about stock options outstanding and exercisable as of:

December 31, 2011:

AverageNumber of
    
    Number of
    
    remainingGrant date
    
    **Exercise**
    
    options
    
    options
    
    contractualGrant date
    
    Expiry date
    
    fair value
    
    price *)
    
    **outstanding**
    
    **exercisable**
    
    lifeAugust 31, 2009
    
    August 20, 2014
    
    $ 0.29
    
    $ 0.25
    
    1,833,000
    
    1,523,565
    
    2.64September 23, 2009
    
    September 23, 2014
    
    $ 0.22
    
    $ 0.25
    
    400,000
    
    400,000
    
    2.73January 28, 2010
    
    January 27, 2015
    
    $ 0.55
    
    $ 0.60
    
    970,000
    
    799,896
    
    3.08July 22, 2010
    
    July 21, 2015
    
    $ 0.25
    
    $ 0.60
    
    925,000
    
    693,750
    
    3.56January 11, 2011
    
    January 10, 2016
    
    $ 0.65
    
    $ 0.81
    
    1,250,000
    
    156,250
    
    4.03March 18, 2011
    
    March 17, 2016
    
    $ 0.58
    
    $ 0.73
    
    300,000
    
    212,500
    
    4.21May 3, 2011
    
    May 2, 2016
    
    $ 0.51
    
    $ 0.61
    
    455,000
    
    56,875
    
    4.34June 1, 2011
    
    May 31, 2016
    
    $ 0.42
    
    $ 0.51
    
    2,276,218
    
    284,527
    
    4.42June 27, 2011
    
    June 26, 2016
    
    $ 0.41
    
    $ 0.51
    
    100,000
    
    12,500
    
    4.49September 8, 2011
    
    September 7, 2016
    
    $ 0.40
    
    $ 0.51
    
    250,000
    
    -
    
    4.69December 1, 2011
    
    November 30,2016
    
    $ 0.29
    
    $ 0.51
    
    625,000
    
    -
    
    4.929,384,218
    
    4,139,863


| | (*) | The exercise price of all options granted in 2011 is
      denominated in Canadian Dollars and was translated to USD in the table
      above using the exchange rate as of December 31,
2011.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock options granted are expensed as
share-based payments. The Company uses the Black-Scholes option pricing model to
value stock options granted.

The fair value of options granted is
amortized over their vesting period and estimated at the date of grant with the
following assumptions:

| |                     | 2011      |  | 2010     
| | ------------------- | --------- |  | ---------
| |                     |           |  |          
| | Dividend yield      | 0%        |  | 0%       
| | Expected volatility | 112%-115% |  | 113%-175%
| | Risk-free interest  | 1.3%-2.6% |  | 1.7%-2.4%
| | Forfeiture rate     | 0%-5%     |  | 0%       
| | Expected life       | 5         |  | 5        

Expected volatility is based on
historical volatility of comparable companies, as the Company does not have
sufficient history to determine the expected volatility of its shares. The
expected term of options granted represents the period of time that options
granted are expected to be outstanding. The risk free interest rate is based on
the yield of Canadian Treasury bonds with equivalent terms. The dividend yield
is based on the Company's historical and future expectation of dividends
payouts. The Company has not paid cash dividends historically and has no plans
to pay cash dividends in the foreseeable future.

- 118 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 14:- SHARE CAPITAL (Cont.)
|-------------------------------

| | d. | Share purchase warrants:                                                                                              
| | -- | ----------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                       
| |    | The Company has share purchase warrants outstanding
      entitling the holders to acquire Common shares as
  follows:

| |                                 |  |            |   |   | Weighted       | 
| | ------------------------------- |  | ---------- | - | - | -------------- | 
| |                                 |  | Number of  |   |   | average        | 
| |                                 |  | warrants   |   |   | exercise price | 
| |                                 |  |            |   |   |                | 
| | Warrants issued                 |  | 4,500,770  |   | $ | 0.47           | 
| |                                 |  |            |   |   |                | 
| | Balance as of December 31, 2009 |  | 4,500,770  |   | $ | 0.47           | 
| | Warrants issued                 |  | 15,057,375 |   | $ | 0.54           | 
| |                                 |  |            |   |   |                | 
| | Balance as of December 31, 2010 |  | 19,558,145 |   | $ | 0.52           | 
| | Warrants Exercised              |  | (616,770   | ) | $ | 0.30           | 
| | Warrants Expired                |  | (3,884,000 | ) | $ | 0.50           | 
| |                                 |  |            |   |   |                | 
| | Balance as of December 31, 2011 |  | 15,057,375 |   | $ | 0.54           | 

The following tables summarized
information applicable to warrants and broker warrants outstanding as of
December 31, 2011:

Grant date
    
    
      Exercise
    
    
    Number ofIssue
      date
    
      Expiry date
    
    
      fair value
    
    
      Price
    
    
    warrantsDecember 3, 2010
    
      December 3, 2013
    
    $
      0.34
    
    $
      0.55
    
    
    13,750,000December 3, 2010
    
      December 3, 2013
    
    $
      0.35
    
    $
      0.40
    
    
    1,307,37515,057,375


| | e. | Capital management in the Company:                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The Company is in the early stage of gas and petroleum
      exploration. The Company has negative cash flows from current operations.
      The Company's primary source of funds comes from the issuance of share
      capital. The Company does not use other sources of financing that require
      fixed payments of interest and principal and is not subject to any
      externally imposed capital requirements.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The Company defines its capital as share capital. To
      effectively manage the Company's capital requirements, the Company has a
      planning and budgeting process in place. The Company supervises the actual
      expenditure against the budget to manage its costs and
  commitments.                                                                                                                           

- 119 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 14:- SHARE CAPITAL (Cont.)
|-------------------------------

The Company's capital management
objective is to maximize investment returns for shareholders within the context
of relevant opportunities and risks associated with the Company's operating
segment. Achieving this objective requires management to consider the underlying
nature of exploration activities, availability of capital, the cost of various
capital alternatives and other factors. Establishing and adjusting capital
requirements is a continuous administrative process.

Although the Company has been
successful at raising funds in the past through the issuance of share capital,
it is uncertain whether it will continue to raise this financing due to
uncertain economic conditions.

|NOTE 15:- RELATED PARTY BALANCES AND TRANSACTION
|------------------------------------------------

| | a. | For the year ended December 31, 2011, the Company
      recognized $ 906 for advisory fees and operating expenses to private
      companies controlled by the directors or by officers of the Company (2010
      - $ 574).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                             
| |    | These transactions are in the ordinary course of business
      and are measured at the amount of consideration set and agreed by the
      related parties.                                                                
| |    |                                                                                                                                                                                                                             
| | b. | Compensation to directors and key management
      personnel:                                                                                                                                                               
| |    |                                                                                                                                                                                                                             
| |    | The CEO, CFO, COO, V.P. Business Development, Head
      Geologist, V.P. Contracts and Regulation, and the directors are considered
      key management personnel.                                                         

| |                              |   |                                 |  |   |              |  |   | 267-day | 
| | ---------------------------- | - | ------------------------------- |  | - | ------------ |  | - | ------- | 
| |                              |   | Year ended                      |  |   | period ended | 
| |                              |   | December 31,                    |  |   | December 31, | 
| |                              |   | 2011                            |  |   | 2010         |  |   | 2009    | 
| |                              |   | U.S. dollars in
      thousands | 
| |                              |   |                                 |  |   |              |  |   |         | 
| | Short-term employee benefits | $ | 911                             |  | $ | 481          |  | $ | 61      | 
| | Share based compensation     |   | 850                             |  |   | 595          |  |   | 250     | 
| |                              |   |                                 |  |   |              |  |   |         | 
| |                              | $ | 1,761                           |  | $ | 1,076        |  | $ | 311     | 
| |                              |   |                                 |  |   |              |  |   |         | 
| | Number of people             |   | 7                               |  |   | 5            |  |   | 4       | 

- 120 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 15:- RELATED PARTY BALANCES AND TRANSACTION
      (Cont.)
|--------------------------------------------------------------

Benefits in respect of key management
persons (including directors) who are not employed by the Company:

| |                          |   |                                 |  |   |              |  |   | 267-day | 
| | ------------------------ | - | ------------------------------- |  | - | ------------ |  | - | ------- | 
| |                          |   | Year ended                      |  |   | period ended | 
| |                          |   | December 31,                    |  |   | December 31, | 
| |                          |   | 2011                            |  |   | 2010         |  |   | 2009    | 
| |                          |   | U.S. dollars in
      thousands | 
| |                          |   |                                 |  |   |              |  |   |         | 
| | Share based compensation | $ | 206                             |  | $ | 243          |  | $ | 55      | 
| |                          |   |                                 |  |   |              |  |   |         | 
| | Number of people         |   | 5                               |  |   | 3            |  |   | 1       | 

|NOTE 16:- COMMITMENTS AND CONTINGENCIES
|---------------------------------------

| | a. | Leases:                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                   
| |    | The Company has agreements for the lease of the offices
      in Toronto, Canada and Ramat- Gan, Israel for periods through 2014. Future
      minimum lease payments under non- cancelable operating leases are as
      follows:

| |                                             |   | Year ended                      | 
| | ------------------------------------------- | - | ------------------------------- | 
| |                                             |   | December 31,                    | 
| |                                             |   | 2011                            | 
| |                                             |   | U.S. dollars in
      thousands | 
| |                                             |   |                                 | 
| | Within one year                             | $ | 171                             | 
| | After one year but not more than five years |   | 168                             | 
| |                                             |   |                                 | 
| |                                             | $ | 339                             | 

| | b. | Licenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The Company has commitments to the Ministry to complete
      the work programs on all of the Company's licenses. Based on the current
      commitments, the Company is required to spud at least one well on the
      Samuel license by October 1, 2012 and on the Gabriella and Yitzhak
      licenses by December 1, 2012. The validity of the petroleum licenses of
      the Company are conditional upon fulfillment of certain obligations on
      dates set in the conditions of the petroleum assets. In the event of
      non-fulfillment of the conditions, the petroleum rights are subject to
      cancellation. As of December 31, 2011 the Company believes that it
      complies with the conditions and obligations
above.

- 121 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 16:- COMMITMENTS AND CONTINGENCIES (Cont.)
|-----------------------------------------------

| | c. | Joint venture commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The JOA's of each of the joint ventures in which the
      Company has a participating interest require that the Company commit to
      fund its proportionate share of the approved budget and work
    programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | As of the date of these financial statements, the
      Company's funding commitment for 2012 to the Offshore Licenses amounts to
      approximately $ 6,004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | d. | Geoglobal Resources Inc.:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In August 2010, the Company signed a definitive
      co-operation agreement with Geo Global Resources Inc., and its
      wholly-owned subsidiary, Geo Global Resources (India) Inc. (collectively
      "GGR") confirming the terms whereby GGR has agreed to assign an option it
      has to acquire up to a 5% participating interest in each of two deep water
      licenses offshore Israel known as Petroleum License No's 347 "Myra" and
      348 "Sara", to the Company ("the S&M Option"). The Sara and Myra
      Licenses are each subject to joint operating agreements ("JOA") among the
      holders of the participating interests in the respective licenses, which
      joint operating agreements govern the operations with respect to the
      exploration work on the licenses and the change of any interest holders in
      these licenses.                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On October 28, 2010, by notice to the other joint holders
      of interests under the JOA's (the "S&M Consortium"), and with the
      consent of the Company, GGR gave notice of its intent to exercise the
      S&M Option pursuant to the terms of the JOA's but has to date not
      formally exercised the S&M Option nor have funds been paid on behalf
      of any party for such exercise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | GGR has agreed to hold the S&M Option in the S&M
      Licenses (and all rights pursuant thereto) in trust for the Company (the
      "Beneficiary S&M Interest").                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | As a condition to the Company obtaining title to the
      Beneficiary S&M Interest, the Company will (i) be required to become a
      signatory to the joint operating agreements; and (ii) obtain the approval
      of the Petroleum Commissioner in the Ministry. Upon obtaining the
      Company's interest and receipt of the approvals, the Company will be
      required to pay $1,200 in one lump sum payment to certain parties of the
      joint operating agreements. Additionally, GGR granted to the partners in
      Sara and Myra an option to purchase up to 12.5% of the participation
      rights in the Samuel License not later than the sending of a processed
      three-dimensional seismic survey including analysis of the information
      relating to the Samuel License (the "First Option"). Subject to the
      exercise of the First Option, GGR granted to the partners in Sara and Myra
      an additional option to purchase an additional 7.5% until commencement of
      the first drilling in the area of the Samuel
License.

- 122 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 16:- COMMITMENTS AND CONTINGENCIES (Cont.)
|-----------------------------------------------

| |    | Under the cooperation agreement signed between the
      Company and GRR, the parties agreed that upon receipt of the approval of
      the partners in the Myra and Sara licenses to transfer the option in Myra
      and Sara to the Company and registration of the Company as the owner of
      the rights under the option, the following provision will apply in
      relation to the Samuel License: (a) in the event the partners in Sara and
      Myra would be interested in exercising the options in Samuel, the rate of
      the holdings of the Company and GRR in the Samuel License would be diluted
      proportionately to their holdings, (b) GGR and the Company would act to
      increase the level of the participation rights of GGR in the Samuel
      License by 3%, with appropriate dilution of the level of participation
      rights of Adira Oil Technologies Ltd, such that the rate of the holdings
      in the Samuel License would be: GGR - 45%; Adira - 38.25%; Brownstone -
      6.75%; Pinetree - 10%.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Additionally, the Company will be expected to pay its pro
      rata share of expenditures, pursuant to the joint operating agreements.
      The S&M Interest is dependent upon a number of circumstances beyond
      the control of the Company and there is no assurance that the Company will
      be able to take title of this asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | On December 6, 2011, Modiin Energy Limited Partnership
      and ILDC Energy Ltd. (the Sara and Myra consortium company) each reported
      separately that the option granted to GGR in the Sara and Myra licenses
      expired since GGR did not meet the conditions of the option. On December
      8, 2011, GGR reported that the Sara and Myra option expired due to failure
      of the Company to meet the conditions of the option. On December 8, 2011,
      the Company notified GGR that it believes the option is valid and
      exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | e. | Legislative limitations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| | 1. | The Petroleum Law, 5712-1952 and regulations enacted by
      virtue thereof:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Petroleum and gas exploration and production in Israel
      are regulated mainly by the Petroleum Law and the regulations enacted by
      virtue thereof and by the Natural Gas Sector Law, 5762-2002. The Petroleum
      Law includes stringent conditions for the submission of applications for
      receipt of petroleum assets and transfer of rights in petroleum assets in
      accordance with the Petroleum Law.                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2. | The Natural Gas Sector Law, 5762-2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The purpose of the Natural Gas Sector Law is to create
      conditions for the development of the natural gas sector and carrying out
      of competition therein and regulating the activity in the natural gas
      sector. The law, and the regulations enacted thereunder, prescribe
      provisions regarding storage, transmission, distribution and marketing of
      natural gas in Israel, including the construction and operation of a
      transmission system, a distribution network, a Liquid Natural Gas (LNG)
      facility, and a natural gas storage facility in Israel which require the
      receipt of a license from the Minister of Energy and Water
    Resources.

- 123 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 16:- COMMITMENTS AND CONTINGENCIES (Cont.)
|-----------------------------------------------

| | 3. | At the beginning of 2011, the Ministry of Environmental
      Protection published directives for the protection of the environment
      regarding new and existing gas and petroleum drillings (for all stages,
      including trial, development, production) in order to prevent land,
      unsaturated zone and water source
contamination.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 17:- REVENUES AND OTHER INCOME
|-----------------------------------

| | a. | The Company operates in one segment, the oil and gas
      business and conducts its operations in Israel with its head office in
      Canada. Details of the Company's revenues and other income (all of which
      are derived from Israel) are as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                       |   |                                 |  |   |              |  |   | 267-day | 
| | ------------------------------------- | - | ------------------------------- |  | - | ------------ |  | - | ------- | 
| |                                       |   | Year ended                      |  |   | period ended | 
| |                                       |   | December 31,                    |  |   | December 31, | 
| |                                       |   | 2011                            |  |   | 2010         |  |   | 2009    | 
| |                                       |   | U.S. dollars in
      thousands | 
| |                                       |   |                                 |  |   |              |  |   |         | 
| | Consulting                            | $ | 771                             |  | $ | 810          |  | $ | -       | 
| | Operator fees                         |   | 312                             |  |   | 455          |  |   | -       | 
| | Income from farm-out (See Note 9b(1)) |   | 240                             |  |   | 330          |  |   | -       | 
| | Other income                          |   | -                               |  |   | 112          |  |   | -       | 
| |                                       |   |                                 |  |   |              |  |   |         | 
| |                                       | $ | 1,323                           |  | $ | 1,707        |  | $ | -       | 

| | b. | Revenues from major customers (UJVs), each one of which
      exceeds 10% of the consolidated revenues, as of the years ended December
      31, 2011 and 2010 and for the 267 day period ended December 31, 2009, are
      as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |            |   |                           |  |   |              |  |   | 267-day | 
| | ---------- | - | ------------------------- |  | - | ------------ |  | - | ------- | 
| |            |   | Year ended                |  |   | period ended | 
| |            |   | December 31               |  |   | December 31, | 
| |            |   | 2011                      |  |   | 2010         |  |   | 2009    | 
| |            |   | U.S. dollars in thousands | 
| |            |   |                           |  |   |              |  |   |         | 
| | Customer A | $ | 591                       |  | $ | 1,121        |  | $ | -       | 
| | Customer B |   | 449                       |  |   | -            |  |   | -       | 
| | Customer C |   | 150                       |  |   | -            |  |   | -       | 
| |            |   |                           |  |   |              |  |   |         | 
| |            | $ | 1,190                     |  | $ | 1,121        |  | $ | -       | 

- 124 -

---

|ADIRA ENERGY LTD.                                         
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS          
|U.S. dollars in thousands, except share and per share data

|NOTE 18:- GENERAL AND ADMINISTRATIVE EXPENSES
|---------------------------------------------

| |                              |   |                                 |  |   |              |  |   | 267-day | 
| | ---------------------------- | - | ------------------------------- |  | - | ------------ |  | - | ------- | 
| |                              |   | Year ended                      |  |   | period ended | 
| |                              |   | December 31                     |  |   | December 31, | 
| |                              |   | 2011                            |  |   | 2010         |  |   | 2009    | 
| |                              |   | U.S. dollars in
      thousands | 
| |                              |   |                                 |  |   |              |  |   |         | 
| | Payroll and related payments | $ | 761                             |  | $ | 503          |  | $ | 21      | 
| | Share-based compensation     |   | 1,023                           |  |   | 1,277        |  |   | 937     | 
| | Professional fees            |   | 2,068                           |  |   | 1,034        |  |   | 552     | 
| | Rent and office expenses     |   | 411                             |  |   | 140          |  |   | 23      | 
| | Depreciation                 |   | 80                              |  |   | 12           |  |   | -       | 
| | Travel                       |   | 529                             |  |   | 184          |  |   | 99      | 
| | Insurance                    |   | 97                              |  |   | 3            |  |   | 7       | 
| | Others                       |   | 321                             |  |   | 53           |  |   | -       | 
| |                              |   |                                 |  |   |              |  |   |         | 
| |                              | $ | 5,290                           |  | $ | 3,206        |  | $ | 1,639   | 

|NOTE 19:- SUBSEQUENT EVENTS
|---------------------------

| | a. | On January 9, 2012, the Petroleum Commissioner approved
      the changes to the working interest ownership in the Yitzhak license as
      per Note 9 (b) (2), such that working interests in this license, following
      the closing in February 2012, are as follows: Adira 60%, Ellomay 20%,
      Brownstone 15% and AGR 5%.                                                                                                                                                                                                                                                                                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | b. | In February 2012, the Company appointed a new CEO. The
      outgoing CEO became a Strategic Consultant. The agreement with the
      Company's former CEO, was terminated and the Company signed a new
      consulting agreement, for the provision of strategic consultancy services
      to the Company. In accordance with the new agreement, one half of the
      options that were previously granted to the former CEO (i.e. 1,138,109
      options) will be cancelled. The remaining options will continue to vest in
      accordance with the original terms of the option agreement even in the
      event of the termination of the new agreement prior to May 31,
  2013.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | c. | On February 23, 2012, the Company received an approval
      from the Petroleum Commissioner of Israel to update the expiration of the
      Gabriella and Yitzhak licenses to February 28, 2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | d. | In March 2012, the Company granted 2,000,000 options to
      its new CEO. The options vest equally over four years and have an exercise
      price of CAD $ 0.25. The total fair value of the options at the date of
      grant amounted to approximately $ 408.                                                                                                                                                                                                                                                                                                                                                                                                                        

- - - - - - - -

- 125 -

---

ITEM
  19           EXHIBITS

The following exhibits are included in this Form 20-F:

|Exhibit |                                                                                                                                        
|------- | ---------------------------------------------------------------------------------------------------------------------------------------
|Number  | Description                                                                                                                            
|        |                                                                                                                                        
|1.1     | Articles of
        Conversion (1)                                                                                                     
|        |                                                                                                                                        
|1.2     | Articles of
        Continuance (1)                                                                                                    
|        |                                                                                                                                        
|1.3     | By-Laws (1)                                                                                                                            
|        |                                                                                                                                        
|1.4     | Certificate
        and Articles of Amendment (3)                                                                                      
|        |                                                                                                                                        
|4.1     | Securities Exchange
        Agreement among the Company, Adira Energy, Alan Friedman, Dennis Bennie
        and Ilan Diamond.(2)       
|        |                                                                                                                                        
|4.2     | Form of Securities
        Exchange Agreement among the Company, Adira Energy and the Minority Shareholders
        of Adira Energy.(2)
|        |                                                                                                                                        
|4.3     | 2009 Stock Option
        Plan (2)                                                                                                     
|        |                                                                                                                                        
|4.4     | Agency Agreement
        between Adira Energy and DS Apex Mergers & Acquisitions Ltd dated
        November 22, 2010 (4)               
|        |                                                                                                                                        
|4.5     | Nominee Agreement
        with BRM Group Ltd (4)                                                                                       
|        |                                                                                                                                        
|8.1     | List
        of Subsidiaries (5)                                                                                                       

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|12.1 | Certificate of Principal Executive Officer pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002 (5)
|---- | --------------------------------------------------------------------------------------------------------------
|     |                                                                                                               
|12.2 | Certificate of Chief Financial Officer pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002 (5)    
|     |                                                                                                               
|13.1 | Certificate of Principal Executive Officer pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 (5)
|     |                                                                                                               
|13.2 | Certificate of Chief Financial Officer pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 (5)    

|(1) | Incorporated by reference from our current report on Form 8-K filed with
      the SEC on December 2, 2008.     
|--- | ----------------------------------------------------------------------------------------------------------------
|(2) | Incorporated by reference from our Form 20-F shell company report filed
      with the SEC on September 4, 2009.
|(3) | Incorporated by reference from our Form 20-F report filed with the SEC
      on January 22, 2010.               
|(4) | Incorporated by reference from our Form 20-F report filed with the SEC
      on February 3, 2011.               
|(5) | Filed as an exhibit hereto.                                                                                     



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SIGNATURES

The Registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this Form 20-F on its behalf.

ADIRA ENERGY LTD.

|Per:   | /s/ Jeffrey  Walter    
|------ | -----------------------
|Name:  | Jeffrey  Walter        
|Title: | Chief Executive Officer

Date: April 26, 2012

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