---

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 endedDecember 31, 2012

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 number000-30087

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

---

Number of outstanding shares of the Companys only class of
capital or common stock as at December 31, 2012 was 180,781,093 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:

International Financial Reporting
      Standards as issuedU.S.
    by the International Accounting
      Standards BoardGAAP [   ]
    [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

---

TABLE OF CONTENTS

|**GENERAL** |                                                                      |       |                                                               | - 1 - 
|----------- | -------------------------------------------------------------------- | ----- | ------------------------------------------------------------- | ------
|            |                                                                      |       |                                                               |       
|**PART I**  |                                                                      |       |                                                               | - 2 - 
|            |                                                                      |       |                                                               |       
|            | ITEM 1 - IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | - 2 -
|            | ITEM 2 - OFFER STATISTICS AND
      EXPECTED TIMETABLE               | - 2 -
|            | ITEM 3 - KEY
      INFORMATION                                       | - 2 -
|            |                                                                      | A.    | Selected Financial Data                                       | - 2 - 
|            |                                                                      | B.    | Capitalization and Indebtedness                               | - 6 - 
|            |                                                                      | C.    | Reasons for the Offer and Use of Proceeds                     | - 6 - 
|            |                                                                      | D.    | Risk Factors                                                  | - 6 - 
|            | ITEM 4                                                               |       | INFORMATION ON THE COMPANY                                    | - 19 -
|            |                                                                      | A.    | History and Development of the Company                        | - 19 -
|            |                                                                      | B.    | Business Overview                                             | - 20 -
|            |                                                                      | C.    | Organizational Structure                                      | - 27 -
|            |                                                                      | D.    | Property, Plant and Equipment                                 | - 28 -
|            | ITEM 5                                                               |       | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                  | - 29 -
|            |                                                                      | A.    | Operating Results                                             | - 29 -
|            |                                                                      | B.    | Liquidity and Capital Resources                               | - 33 -
|            |                                                                      | C.    | Research and Development,
      Patents and Licences          | - 37 -
|            |                                                                      | D.    | Trend Information                                             | - 37 -
|            |                                                                      | E.    | Off-Balance Sheet Arrangements                                | - 37 -
|            |                                                                      | F.    | Tabular Disclosure of Contractual Obligations                 | - 38 -
|            |                                                                      | G.    | Safe Harbor                                                   | - 38 -
|            | ITEM 6                                                               |       | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                    | - 38 -
|            |                                                                      | A.    | Directors and Senior Management                               | - 38 -
|            |                                                                      | B.    | Compensation                                                  | - 46 -
|            |                                                                      | C.    | Board Practices                                               | - 53 -
|            |                                                                      | D.    | Employees                                                     | - 55 -
|            |                                                                      | E.    | Share Ownership                                               | - 56 -
|            | ITEM 7                                                               |       | MAJOR SHAREHOLDER AND RELATED
      PARTY TRANSACTIONS        | - 61 -
|            |                                                                      | A.    | Major Shareholders                                            | - 61 -
|            |                                                                      | B.    | Related Party Transactions                                    | - 62 -
|            |                                                                      | C.    | Interests of Experts and Counsel                              | - 63 -
|            | ITEM 8                                                               |       | FINANCIAL INFORMATION                                         | - 63 -
|            |                                                                      | A.    | Consolidated Statements and Other Financial
      Information | - 63 -
|            |                                                                      | B.    | Significant Changes                                           | - 63 -
|            | ITEM 9                                                               |       | THE OFFER AND LISTING                                         | - 63 -
|            |                                                                      | A.    | Offer and Listing Details
       Price History               | - 63 -
|            |                                                                      | B.    | Plan of Distribution                                          | - 65 -
|            |                                                                      | C.    | Markets                                                       | - 65 -
|            |                                                                      | D.    | Selling Shareholders                                          | - 65 -

iii

---

|             |                | E. | Dilution                                                                           | -
      66 - 
|------------ | -------------- | -- | ---------------------------------------------------------------------------------- | -------------
|             |                | F. | Expenses of the Issue                                                              | -
      66 - 
|             | ITEM
      10  |    | ADDITIONAL INFORMATION                                                             | -
      66 - 
|             |                | A. | Share Capital                                                                      | -
      66 - 
|             |                | B. | Memorandum and Articles of Incorporation                                           | -
      66 - 
|             |                | C. | Material Contracts                                                                 | -
      66 - 
|             |                | D. | Exchange Controls                                                                  | -
      66 - 
|             |                | E. | Taxation                                                                           | -
      68 - 
|             |                | F. | Dividends and Paying Agents                                                        | -
      75 - 
|             |                | G. | Statement by Experts                                                               | -
      75 - 
|             |                | H. | Documents on Display                                                               | -
      75 - 
|             |                | I. | Subsidiary Information                                                             | -
      75 - 
|             | ITEM
      11  |    | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                         | -
      75 - 
|             |                | A. | Transaction Risk and Currency Risk Management                                      | -
      75 - 
|             |                | B. | Interest Rate Risk and Equity Price Risk                                           | -
      75 - 
|             |                | C. | Exchange Rate Sensitivity                                                          | -
      75 - 
|             |                | D. | Commodity Price Risk                                                               | -
      76 - 
|             | ITEM
      12  |    | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                             | -
      76 - 
|             |                |    |                                                                                    |              
|**Part II**  |                |    |                                                                                    | -
      76 - 
|             |                |    |                                                                                    |              
|             | ITEM
      13  |    | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                    | -
      76 - 
|             | ITEM
      14  |    | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
      AND USE OF PROCEEDS | -
      76 - 
|             | ITEM
      15  |    | CONTROLS AND PROCEDURES                                                            | -
      76 - 
|             | ITEM
      16A |    | AUDIT COMMITTEE FINANCIAL EXPERTS                                                  | -
      77 - 
|             | ITEM
      16B |    | CODE OF ETHICS                                                                     | -
      77 - 
|             | ITEM
      16C |    | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                             | -
      78 - 
|             | ITEM
      16D |    | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                         | -
      78 - 
|             | ITEM
      16E |    | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
      PURCHASERS        | -
      78 - 
|             | ITEM
      16F |    | CHANGES TO REGISTRANTS CERTIFYING ACCOUNTANT                                      | -
      78 - 
|             | ITEM
      16G |    | CORPORATE GOVERNANCE                                                               | -
      79 - 
|             | ITEM
      16H |    | MINE SAFETY DISCLOSURE                                                             | -
      79 - 
|             |                |    |                                                                                    |              
|**PART III** |                |    |                                                                                    | -
      79 - 
|             |                |    |                                                                                    |              
|             | ITEM
      17  |    | FINANCIAL STATEMENTS                                                               | -
      79 - 
|             | ITEM
      18  |    | FINANCIAL STATEMENTS                                                               | -
      79 - 
|             | ITEM
      19  |    | EXHIBITS                                                                           | -
      133 -

iv

---

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, 2012 and all information included in this document should
only be considered correct as of such date.

- 1 -

---

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.

In particular, without limiting the generality of the foregoing
disclosure, 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
kilometers) 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 -

---

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.

As disclosed elsewhere in this annual report, we have now
plugged and abandoned the first well that we drilled on the Eitan License (the
Eitan #1 Well), and we have surrendered the Eitan License in accordance
with the Israeli Petroleum Law (as defined below). However, we continue to hold
interests in certain other oil and gas licenses located offshore Israel.

The selected historical information presented in the table
below for the years ended December 31, 2012 and 2011 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 31,2012
      2011
      2010
      2009($ thousands)Balance Sheet DataCash and cash equivalents
      2,394
      8,094
      8,686
      2,044Total Assets
      15,340
      10,247
      18,610
      2,437Total Liabilities
      10,330
      1,421
      7,373
      227Total Shareholders Equity
      5,010
      8,826
      11,237
      2,437


- 3 -

---

|                                                                                                        |  | Year ended December 31 |   |  | 267-day period |  
|------------------------------------------------------------------------------------------------------- |  | ---------------------- | - |  | -------------- | -
|                                                                                                        |  |                        |   |  |                |  
|                                                                                                        |  |                        |   |  |                |  
|                                                                                                        |  | 2012                   |   |  | 2011           |  
|                                                                                                        |  | $                      |   |  | $              |  
|Operating Data                                                                                          |  |                        |   |  |                |  
|Revenues and other income                                                                               |  | 1,889                  |   |  | 1,323          |  
|                                                                                                        |  |                        |   |  |                |  
|Expenses:                                                                                               |  |                        |   |  |                |  
|Exploration expenses                                                                                    |  | 1,026                  |   |  | 5,018          |  
|General and administrative expenses                                                                     |  | 5,304                  |   |  | 5,031          |  
|Impairment charge                                                                                       |  | 7,810                  |   |  | 1,226          |  
|                                                                                                        |  |                        |   |  |                |  
|Total expenses                                                                                          |  | 14,140                 |   |  | 11,275         |  
|                                                                                                        |  |                        |   |  |                |  
|Operating loss                                                                                          |  | (12,251                | ) |  | (9,952         | )
|                                                                                                        |  |                        |   |  |                |  
|Financing income                                                                                        |  | 2,480                  |   |  | 43             |  
|Financing expense                                                                                       |  | (745                   | ) |  | (109           | )
|Issuance expenses                                                                                       |  | -                      |   |  | -              |  
|                                                                                                        |  |                        |   |  |                |  
|Loss before income taxes                                                                                |  | (10,516                | ) |  | (10,018        | )
|                                                                                                        |  |                        |   |  |                |  
|Income taxes                                                                                            |  | (41                    | ) |  | (33            | )
|                                                                                                        |  |                        |   |  |                |  
|Net loss and comprehensive loss                                                                         |  | (10,557                | ) |  | (10,051        | )
|                                                                                                        |  |                        |   |  |                |  
|Basic and diluted net loss per share attributable to equity
      holders of the parent                 |  | (0.06                  | ) |  | (0.10          | )
|Weighted average number of Ordinary shares
      used in computing basic and diluted net loss per share |  | 132,940,856            |   |  | 99,813,334     |  

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 -

---

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.

- 5 -

---

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. The risks
and uncertainties described below are not the only risks and uncertainties that
we face or that an investment in our securities entails. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also impair our business operations. Any of the following risks could
materially and adversely affect our business, financial condition, prospects and
results of operations. In that case, investors may lose all or a part of their
investment. The risks discussed below also include forward-looking statements
and the out actual results may differ substantially from those discussed in
these forward-looking statements. See Note Regarding Forward Looking
Statements and Operating and Financial Review and Prospects.

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 $10.6 million for the year ended
December 31, 2012. At December 31, 2012, Adira had an accumulated deficit of
$29 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, 2012, 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.

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 and maintain ownership of
our current licenses.

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 liquidity or capital 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.

- 6 -

---

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 noted above, at December 31,
2012, we had cash and equivalents on hand of $2.4 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 needed. 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
- 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.

- 7 -

---

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”) and the Canadian dollar.  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.

- 8 -

---

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.

- 9 -

---

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. The Offshore Licenses require  us to meet certain minimum
commitments with respect to our activities on those licenses. We may apply
to extend the timing for the commitments associated with the Offshore Licenses,
but there can be no assurance that we will be able to secure any amendments to
the commitment dates associated with the licenses, if necessary.

As of the date hereof, we have missed two Ministry milestones on the Samuel License; namely we have not signed a drilling contract by March 31, 2013, and we have not spud a well by April 30, 2013. We have requested an extension of both milestones and await a formal response from the Ministry. There is no assurance that the Ministry will grant our requests.

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 not meet the timing commitments with respect to
the Offshore Licenses.

We have formally applied to revise only certain of the minimum
commitments with respect to the Offshore Licenses. We understand that rig
availability in the eastern-Mediterranean region is in low supply and,
accordingly, we may not be able to secure drilling rig contracts for drilling on
our licenses. As such, even if we have funds available to proceed with the work
programs on our licenses, we may not be able to source and secure a rig to begin
drilling. Moreover, in the event that our joint venture, farm-out and/or other
co-participants related to each of the Offshore Licenses are unable to meet
their obligations under their respective agreements related to the Offshore
Licenses or in the event that certain unforeseen circumstances occur, the timing
commitments under the Offshore Licenses may not be met. If in the future we are
required to apply for a formal extension from the Ministry from certain of the
timing commitments with respect to the Offshore Licenses, we can make no
guarantee that the Ministry will provide such extensions relating to the
Offshore Licenses. If the Ministry does not provide such extensions, the
Ministry could then begin a process to retract the applicable license or
licenses from us.

Disagreements among Gabriella License co-participants may
prevent the continued operations on the Gabriella License or result in the loss
of our working interest in the Gabriella License.

We are a party to various contracts with Modiin Energy Limited
Partnership (MELP) and Brownstone Energy Inc. (Brownstone)
related to the Gabriella License and the joint operations to explore for
hydrocarbons on that license. These contracts include the Farmout Agreement,
dated January 26, 2010; the International Operating Agreement, dated March 10,
2011 (as amended on August 24, 2012); the Memorandum of Understanding, dated
June 12, 2011; and the Letter Agreement, dated December 20, 2012. In addition,
MELP entered into a rig/drilling contract with Noble International Limited dated
July 19, 2012 (as amended three times). In connection with the License and the
contracts just mentioned, (i) MELP alleges in letters and oral communications
that we breached obligations under the contracts listed above, including failure
to transfer funds required to meet various financial obligations; and (ii) we
allege similar claims against MELP. In addition, both MELP and Adira have
accused the other of various defaults under the joint operating agreement (the
Gabriella JOA) relating to the Gabriella License, to which each of
MELP, Adira and Brownstone are parties. The Gabriella JOA provides that certain
Defaults, if not cured, will result in a partys removal from the Gabriella
JOA, and forfeiture of any working interest in the Gabriella License. Aspects of
the Memorandum of Understanding and the Letter Agreement listed above contain a
similar mechanism that would, if triggered, strip us of any interest in the
Gabriella License, cause the loss of our right to receive management fees,
royalty rights, and other payments and rights due to it from MELP and from
MELPs general partner.

- 10 -

---

Thus far, accusations to and from MELP have been in the form of
letters and oral communications, not legal action. If either party initiates
legal action, then the other will likely respond with counter-claims, and we
cannot provide any assurance that we would prevail on any of the matters in
dispute. If legal action is pursued by either side, and if we are ultimately
found to be in breach of our obligations, this could result in the loss of our
entire interest in the Gabriella License, and the loss of all associated royalty
rights, options to purchase an interest in the Yam Hadera License, management
fees, and operator fees.

In addition, even if we were to prevail in any legal action
against MELP, that could mean that a 70% share of the total funding obligations
with respect to the Gabriella License would have to be met pro rata (50/50) by
Adira and Brownstone, or new Gabriella License participants would have to agree
to take on a large portion of the funding. This would further exacerbate the
challenges with regards to liquidity, capital resources and funding that are
mentioned in other Risk Factors in this filing, unless new investors were
located, or third parties were interested in taking a working interest in the
Gabriella License directly. Finally, rather than initiating or responding to
court action filed by MELP or Adira, the parties may reach an amicable
settlement of their current disagreements. Such settlement may result in
additional changes to Adiras rights, obligations, or working interest on the
Gabriella License that are not yet known to the Company.

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 and farm-out
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 agreements, if a party 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.

Adira is owed an aggregate of $3 million of operating costs on the Samuel License from GGRI and Emmanuelle under the Joint Operating Agreement, or “JOA,” for that license, made up as follows:  Emanuelle and GGRI owe an aggregate of $2.8 million through their direct interest in the license, as JOA signatories and GGRI owes an additional $0.2 million, indirectly, through its 40% interest in Adira GeoGlobal.  The three parties are currently discussing a plan to ensure the reimbursement to Adira for such costs. If GGRI and Emanuelle do not repay Adira for the costs owed through their direct interest in the Samuel License, then in accordance with the JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. In addition, if GGRI does not repay Adira for the costs owed through GGRI’s 40% ownership interest in Adira GeoGlobal, Adira may have to seek reimbursement through continued negotiation or litigation.

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.

- 11 -

---

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.

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.

- 12 -

---

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.

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.

- 13 -

---

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.

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.

- 14 -

---

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.

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.

- 15 -

---

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.

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.

- 16 -

---

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. For the 12 months preceding the date of this annual report, the trading price of our common shares on the TSXV (as defined below) has ranged from a low of CDN$0.02 per share to a high of CDN$0.30 per share. 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.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; assuming we achieve production, 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.

- 17 -

---

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.

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

- 18 -

---

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 have any oil and gas reserves,
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 1204, Toronto, Ontario, Canada, M5H 1T1. 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.

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

- 19 -

---

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.

Capital Expenditures and Divestitures

During the year ended December 31, 2012, the Company incurred
capital expenditures of approximately $10.6 million which relates to costs
incurred in the planning and development of the three offshore wells. We have
now plugged and abandoned the Eitan #1 Well, and we have surrendered the Eitan
License in accordance with the Israeli Petroleum Law.

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

The Company only operates in the State of Israel. We currently hold a working interest in three offshore petroleum licenses: the Gabriella License No. 378, Yitzhak License No. 380 and Samuel License No. 388. We refer to these three licenses, together, as the “Offshore Licenses”. We are the operator of the Gabriella License and the Samuel License, and the “Co-Operator” of the Yitzhak License. In addition, we have options to acquire up to a 5% participating interest two licenses called the Myra and Sara Licenses, as well as an option to acquire up to a 15% participating interest in the a license called the Yam Hadera License. We currently ascribe no value to the Myra and Sara Licenses and as such we do not consider our options to be material to our operations.

As discussed below, we suspended operations on the Gabriella License for various reasons, including lack of funding by working interest parties sufficient to pursue the current work program. Please see prior discussion under “Risk Factors - Disagreements among Gabriella License partners co-participants may prevent the continued operations on the Gabriella License or result in the loss of our working interest in the Gabriella License.”  We continue to work with the all of the participants on the Gabriella License to resolve these issues and resume the work program.

As discussed below, Adira is owed an aggregate of $3 million of operating costs on the Samuel License from GGRI and Emmanuelle under the Joint Operating Agreement, or “JOA,” for that license, made up as follows:  Emanuelle and GGRI owe an aggregate of $2.8 million through their direct interest in the license, as JOA signatories and GGRI owes an additional $0.2 million, indirectly, through its 40% interest in Adira GeoGlobal.  The three parties are currently discussing a plan to ensure the reimbursement to Adira for such costs. If GGRI and Emanuelle do not repay Adira for the costs owed through their direct interest in the Samuel License, then in accordance with the JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. In addition, if GGRI does not repay Adira for the costs owed through GGRI’s 40% ownership interest in Adira GeoGlobal, Adira may have to seek reimbursement through continued negotiation or litigation.

Additionally, as of the date hereof, we have missed two Ministry milestones on the Samuel License; namely we have not signed a drilling contract by March 31, 2013, and we have not spud a well by April 30, 2013. We have requested an extension of both milestones and await a formal response from the Ministry. There is no assurance that the Ministry will grant our requests.

- 20 -

---

As disclosed in more detail in our annual report on Form 20-F
for the year ended December 31, 2011, in 2011, we relinquished our interest in
the Eitan License, onshore, and we waived our right to farm into the Notera
License, onshore. We notified the Commissioner of our surrender of the Eitan
License on December 15, 2011, pursuant to the Israeli Petroleum Law. By August
2012, we had plugged and abandoned the Eitan #1 Well, and on December 5, 2012,
we received final confirmation from the Ministry approving the surrender of the
Eitan License.

Offshore Licences

Below is a map showing the locations of the Offshore Licences,
the Myra and Sara Licenses, and the Yam Hadera License, as well as other
licenses that are not the property of the Company.



Gabriella License

The Gabriella License covers 97,000 acres (392 square
kilometers) and is approximately 10 kilometers offshore Israel between Netanya
and Ashdod. The Gabriella License was issued to the Company on July 15, 2009 for
an initial three year exploration period, subject to renewal for an additional
period of four years and a second additional period of two years in the case of
a discovery. Thereafter, a 30-50 year lease maybe granted 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, the Petroleum Commissioner of Israel (the Commissioner)
approved an extension of the expiration of the Gabriella License to February 28,
2013, and on June 11, 2012, the Commissioner approved the extension of the
expiration to September 1, 2013, with a corresponding extension of certain
milestones.

- 21 -

---

This table sets out the work program that must be completed in
order to maintain the Gabriella License:

Gabriella Work Program
      Milestone Dates1.    Spud the first well
    June 30, 20132.    Prepare a summary report of the first
      well and transfer of all of the findings, including tests, samples, logs
      (if taken), electrical logs and results of tests (if performed).
    Within three months from
      completion of the drilling in 20133.    Submit a work plan for continuation of
      the work in the license.
    Within four months from
      completion of the drilling in 2013


In January 2010, 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) to transfer 70% of the participating interests in the Gabriella
License to MELP (the Gabriella 2010 Agreement). In January 2010, a
subsidiary of Brownstone Energy Inc. (Brownstone) exercised its option
to purchase 15% of the participating interests in the Gabriella License. To
date, Brownstones interest in the Gabriella License has not been registered
with the Ministry; however Adira Israel holds Brownstones 15% interest in trust
on behalf of Brownstone pursuant to an agreement dated July 7, 2011. Adira
asserts that the parties to the Gabriella License are: Adira 15%, Brownstone 15%
and MELP 70%.

Adira Israel has the option to reacquire from MELP a 15%
participating interest in the Gabriella Licenseat any time until the
earlier of (a) six months after a discovery and (b) the end of the license
period, including all renewals. This option is not registered with the Ministry,
but exists by private contract with MELP.

All exploration and extraction activity on the Gabriella
License, and the relationship of the participating interest holders, is governed
by a joint operating agreement or JOA (the Gabriella JOA). Purusant
to the Gabriella JOA, Adira Israel is the operator of the Gabriella JOA. The
Gabriella JOA parties paid the Company an operating fee equal to 7.5% of the
cumulative, direct costs incurred to operate the Gabriella License, through
January 26, 2012. Commencing January 27, 2012, the Gabriella License
participants began paying a new operator fee of (i) a $25,000 per month, plus
(ii) an additional sliding-scale percentage of exploration expenses incurred,
ranging from 4.8% of annual exploration expenses (if less than $2 million) down
to 1.2% of annual exploration expenses (if over $6 million).

According to the Gabriella JOA, Adira may be removed as the
operator of the license. Adira has a right of first refusal to match proposals
generated from third party operators; however Adira does not currently meet the
definition of an operator under recent amendments to the Israeli law, and
therefore, it is unlikely that Adira would be positioned to bid for this work.
These amendments do not impact our current position as operator until a third
party bids for this role. The other Gabriella JOA parties may remove Adira as
operator if Adira is declared bankrupt, becomes insolvent, dissolves or
liquidates, or upon the vote of two or more non-operators holding a combined
interest of at least 75% of the working interests.

We previously received a monthly fee of $12,500 from MELP,
pursuant to the Gabriella 2010 Agreement; however those payments ended on
February 1, 2012. 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, after which time the royalty increases to an aggregate of 10.5%
(5.25% from each of MELP and MEGP).

- 22 -

---

On July 19, 2012, the Company announced that MELP executed a
drilling contract with Noble International Ltd (Noble Drilling) to
secure access to the Noble Homer Farrington drilling unit rig for a minimum of
75 days to drill one well, and possibly one sidetrack, on behalf of the
Gabriella License (the Drilling Contract). The Drilling Contract,
which, as previously reported, has since been terminated, required that MELP
provide a letter of credit or cash collateral within specified timeframes
outlined in the Drilling Contract. Pursuant to the Drilling Contract, the
parties determined that a letter of credit will be issued to secure the Drilling
Contract.

On June 12, 2012, Adira signed a Memorandum of Understanding
(MOU) with MELP, pursuant to which the Company agreed to provide its
working interest share of the collateral due to Noble Drilling. The MOU provided
that if Adira failed to pay its share of the collateral, then it would: (a)
withdraw from the Gabriella JOA; (b) assign its participating interest in the
Gabriella License to the other participants in proportion to their holdings; and
(c) relinquish all back-in rights, overriding royalty interests (ORRI)
and management fees, rights of first refusal and co-sale rights to MELP.
Pursuant to the MOU, Adira Israel has also granted MELP the MELP Yitzhak Option
(as described below).

On December 21, 2012, the Company entered into an agreement
with MELP and Brownstone (the Gabriella 2012 Agreement), wherein
certain terms regarding the parties use of the Noble Drilling unit were revised
to require MELP to provide a letter of credit to Noble Drilling in two phases
($20 million by January 3, 2013 (the First LC Amount) and $13.2 million
by January 31, 2013 (the Second LC Amount)). The Gabriella 2012
Agreement also confirmed a reduction in the daily drilling rate due to Noble
Drilling by MELP under the Drilling Contract from $500,000 per day to $415,000
per day and, to the extent used, the reduction in stand-by rates to an amount
that between $100,000 and $300,000 per day. The parties also agreed to take
possession of the Homer Ferrington drilling unit in direct continuation from its
then current drilling program, which meant the parties would need to accelerate,
by up to three months, the program previously contemplated for the Gabriella
License. According to the Gabriella 2012 Agreement, Adira's share of the
aggregated letter of credit amounted to $5 million, which was required to be
placed by January 31, 2013.On January 3, 2013, MELP announced that the Drilling
Contract had been further amended such that the First LC Amount was reduced to
$12 million, but the Second LC Amount was increased to $21.2 million.

The Gabriella 2012 Agreement, also provided that if MELP
secures a farm-in participant for a portion of its participating interest, than
Adira may agree to farm-down a portion of its participating interest, subject to
a maximum of 30% of such participating interest. Adiras proportional reduction
obligation only apply to participants that farm into MELPs participating
interest, up to a date that is was the earlier of the (a) commencement of the
first test of the first well on the Gabriella License; and (b) plugging and
abandoning or suspending of the first well on the Gabriella License. Any
consideration received by MELP from any farm-in participant will be shared
equally between Adira and MELP, provided that at a minimum, Adira will receive
50% of past costs incurred by MELP, estimated to be $1.3 million per each 10%
farmed out, as well as an ORRI of 1.5%. Additionally, Adira has a 10% tag along
right to farm-out, on the same terms as MELP, in the event that MELP farms down
its participating interest and such participant complies with certain criterion.

Finally in Gabriella 2012 Agreement, MELP granted to Adira an
option to acquire a 15% participating interest in the Yam Hadera License (as
defined below), offshore Israel. See "Yam Hadera License".

On January 31, 2013, the Company announced that Adira Israel
did not place its share of First LC Amount, for reasons explained in that
announcement.

On February 11, 2013, the Company announced that it suspended
  operations on the Gabriella License for reasons explained in that announcement.

Due to allegations made by MELP against Adira, and by
allegations made by Adira against MELP, both parties assert that the other is in
default of various obligations under the Gabriella JOA and other contracts
described above. As such, while the Company maintains that its rights under the
Gabriella JOA and such other contracts remain valid, there is no assurance that
any of the rights could effectively be pursued and realized. Additionally, while
the working interest percentage ownership of the participants remains 70% MELP,
15% Brownstone and 15% Adira; both MELP and Adira assert that the other has a 0%
interest and is obligated to withdraw from the Gabriella JOA and the Gabriella
License. Please see prior discussion under Risk Factors - Disagreements
among Gabriella License partners co-participants may prevent the
continued operations on the Gabriella License or result in the loss of our
working interest in the Gabriella License.

- 23 -

---

Yitzhak License

The Yitzhak License covers 31,555 acres (127.7 sq. km) and is
located approximately 9 km offshore and is contiguous to the Gabriella License.
The Yitzhak License was issued in October 2009 to Adira Energy (85% working
interest) and Brownstone (15% working interest) for an initial three year
exploration period and may be renewed upon fulfillment of certain conditions for
an additional four year period plus an additional 2 year renewal option in the
case of a reserve discovery. Thereafter, a 30-50 year lease may be pursued if a
discovery (as defined in the Israeli Petroleum Law) is made. During 2012, the
Commissioner approved an extension of the expiration of the Yitzhak License to
December 1, 2013, including the extension of certain milestones.

This table sets out the work program that must be completed to
maintain the Yitzhak License:

Yitzhak Work Program
      Milestone Dates1. Execute a contract with a drilling contractor.
    June 30, 20132. Spud the first well.
    October 30, 20133. Prepare a summary report of the first well and transfer
      of all of the findings, including tests, samples, logs (if taken),
      electrical logs and results of tests (if performed).
    Within three months from
      completion of the drilling4. Submit a work plan for continuation of the work in the
      license.
    Within four months from
      completion of the drilling


On January 9, 2012, the Company received approval from the
Commissioner to farm-out a 25% working interest in the Yitzhak License to two
new co-participants, thereby reducing its working interest from 85% to 60%. The
Company transferred a 5% carried working interest to AGR Group ASA
(AGR) and a 20% working interest (subject to dilution explained below)
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). Following those transfers, the Company held a 60%
working interest in the Yitzhak License, Brownstone a 15% working interest, AGR
a 5% working interest and Ellomay a 20% working interest. The Company and AGR
Petroleum Services Holdings AS are the co-operators of the Yitzhak License, and
AGR is the statutory operator of record.

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 carried by the remaining holders
of the Yitzhak License through the exploration period; (b) AGR issued to the
Company a 3% ORRI on AGRs share of production, until repayment of AGR's
expenditures in the work program and a 4.5% ORRI from that point forward; (c)
AGR will be designated lead operator in accordance with Israeli regulations
defining Operator, with the continued involvement of the Company as
co-operator which is a construction of private contract; and (d) AGR will be
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. 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 issue to the Company a 3% ORRI on Ellomays share
of production, until repayment of Ellomay's expenditures in the work program and
a 4.5% ORRI from that date forward.

- 24 -

---

The Company, Brownstone, AGR and Ellomay signed a joint
operating agreement on September 11, 2012, to regulate their commercial
relationship in respect of the Yitzhak License (the Yitzhak JOA). The
Yitzhak JOA incorporated the terms of the AGR Farm-Out Agreement and the Ellomay
Farm-Out Agreement.

According to the Ellomay Farm-Out Agreement and the Yitzhak JOA, Ellomay could elect not to fund and be subject to dilution for no consideration (i.e. the diluted interest would be transferred to Adira without cost), or it could transfer one-half of its 20% interest to a third party on negotiated terms. On October 29, 2012, Ellomay advised the Company of its intention to decrease Ellomay's interest in the Yitzhak License from 20% to 10% by paying decreased operating costs pursuant to the terms of the Yitzhak JOA. As of December 31, 2012, the Company expended $640 thousand on behalf of Ellomay in respect of the Yitzhak License for which the Company was entitled to be reimbursed by a third party if the 10% interest was transferred. This amount was recorded as a long-term receivable as of December 31, 2012. Subsequent to balance sheet date, Ellomay failed to transfer its interest to a third party, and therefore one-half of its 20% interest was transferred back to the Company without cost. In the Company’s 2013 financial statements, the receivable will be classified as an additional investment in the exploration and evaluation assets in respect of the Yitzhak License. As a result of the foregoing, as of the date hereof, the Company has a 70% interest in the Yitzhak License, Brownstone has a 15% interest, AGR has a 5% interest and Ellomay a 10% interest in the license. The new holdings have not yet been approved by the Commissioner.

On June 13, 2012, pursuant to MOU, Adira granted MELP an option
  to purchase (MELP Yitzhak Option) from Adira a 15% participating
  interest in the Yitzhak License (the MELP Yitzhak Option Interest).
  Pursuant to the MOU, MELP was able to exercise the MELP Yitzhak Option until
  the earlier of (a) December 31, 2012, and (b) the 30th day from the date Adira
  notifies MELP of the execution of an agreement with a drilling contractor in
  relation to the Yitzhak License. The Gabriella 2012 Agreement amends the exercise
  date until 14 days before signing of the rig contract for the Yitzhak License.
  If MELP exercises the MELP Yitzhak Option, then it must reimburse Adira for
  expenditures in respect of the MELP Yitzhak Option Interest incurred up to the
  date of transfer of the MELP Yitzhak Option Interest. MELP must also issue to
  Adira an ORRI of 3% with respect to all oil and gas (including any distillate
  and condensate) produced, saved and marketed from the area covered by Yitzhak
  License that is attributable to the MELP Yitzhak Option Interest, before payout,
  and 4.5% after payout. The transfer of the MELP Yitzhak Option Interest is subject
  to the approval of the Commissioner, as are all license transfers in Israel.
  As described above, due to allegations made by MELP against Adira, and by allegations
  made by Adira against MELP, both parties assert that the other is in default
  of various obligations under the Gabriella JOA and other contracts on the Gabriella
  License, including the MOU. As such, MELPs ability to exercise the MELP
  Yitzhak Option is not assured.

Samuel License

The Samuel License covers 88,708 acres (361 sq. km) and is
located approximately 17 km offshore Israel. 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 exploration period. The Samuel License may be renewed
for an additional four years and a second additional period of two years in the
case of a discovery. Thereafter, a 30-50 year lease may be granted if a
discovery (as defined in the Israeli Petroleum Law) is made. On July 2, 2012,
the Commissioner approved an extension of certain milestones associated with
the Samuel License.

This table sets out the work program that must be completed to
maintain the Samuel License:

Samuel Work Program
      Milestone Dates1. Execute a contract with a drilling contractor.
    March 31, 2013(1)2. Spud the first well.
    April 30 , 2013(2)


- 25 -

---

Samuel Work Program
      Milestone Dates3. Prepare a summary report of the first well and transfer
      of all of the findings, including tests, samples, logs (if taken),
      electrical logs and results of tests (if performed).
    Within three months from completion of the drilling4. Submit a work plan for continuation of the work in the
      license.
    Within four months from
      completion of the drilling


Notes:

| | (1) | On March 27, 2013, Adira submitted a request to the
      Ministry to extend the milestone date to March 31, 2014. As of the date
      hereof, we are waiting for a formal response.    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | On March 27, 2013, Adira submitted a request to the
      Ministry to extend the milestone date to September 30, 2014. As of the
      date hereof, we are waiting for a formal response.

The exploration and extraction activity in the Samuel License
is to be performed within the framework of a joint operating agreement (the
Samuel JOA) between GGRI, Adira Geo Global, Adira Oil, Brownstone and
Pinetree, whereby Adira GeoGlobal is the designated operator of the Samuel
License. Adira Geo Global is owned 60% by the Company and 40% by GGRI. In
accordance with the Samuel JOA, Adira Geo Global is entitled to receive 7.5% of
the cumulative direct costs to operate the Samuel License and one-half of a 3%
ORRI. According to a cooperation agreement signed a between Adira and GGRI on
August 20, 2010, GGRI is entitled to 50% of the operator fee received by Adira
Geo Global. Adira Geo Global may be removed as the operator if it is declared
bankrupt, insolvent, dissolved or liquidated or if two or more of the total
number of non-operators holding a combined interest of at least 51% agree to the
removal.

On October 26, 2012, Emanuelle Energy Limited (Emanuelle)
exercised an option to acquire a 7.13% interest in the Samuel License from GGRI
and became a signatory to the Samuel JOA thereby reducing GGRIs direct interest
in the Samuel License to 22.88%.

Adira is owed an aggregate of $3 million of operating costs on the Samuel License from GGRI and Emmanuelle under the Samuel JOA, made up as follows:  Emanuelle and GGRI owe an aggregate of $2.8 million as a result of their direct interest in the license, as Samuel JOA signatories and GGRI owes an additional $0.2 million, indirectly, through its 40% interest in Adira GeoGlobal.  The three parties are currently discussing a plan to ensure the reimbursement to Adira for such costs. If GGRI and Emanuelle do not repay Adira for the costs owed through their direct interest in the Samuel License, then in accordance with the Samuel JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. In addition, if GGRI does not repay Adira for the costs owed through GGRI’s 40% ownership interest in Adira GeoGlobal, Adira may have to seek reimbursement through continued negotiation or litigation.

Options to Acquire Interests in Petroleum Licenses

Myra and Sara Option

The Company has an option to acquire up to a 5% participating
interest in two licenses called the Myra License and Sara License. We currently
ascribe no value to the Myra and Sara Licenses and as such we do not consider
our options to be material to our operations.

Yam Hadera Option

Purusant to the Gabriella 2012 Agreement, the Company has an
option (the Yam Hadera Option) to acquire up to a 15% participating
interest in the Yam Hadera License, located 30 kilometers offshore Israel,
between Hadera and Haifa and North West of Adiras Yitzhak license. The Yam
Hadera Option is exercisable until 14 days prior to the signing of a rig
contract for the Yam Hadera License.

As we discussed above, due to allegations made by MELP against
Adira, and by allegations made by Adira against MELP, both parties assert that
the other in default of various obligations under the Gabriella JOA and other
contracts, including the Gabriella 2012 Agreement. Accordingly,
there is no assurance that the Company will be able to exercise the Yam Hadera
Option.

- 26 -

---

Reserve Reporting History

In May 2011, the Company engaged Gustavson Associates LLC
(Gustavson) as an independent contractor, to provide geophysical,
petrophysical, geological and engineering services for resource interpretation
and evaluation on the first phase of processing (often termed Fast
Track) for 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 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 described a probabilistic distribution of
contingent resources in respect of oil on the Gabriella License, prospective
resources in respect of gas for both the Gabriella License and the Yitzhak
License, and prospective resources in respect of oil on the Yitzhak License.

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

In October 2012, the Company received an independent report
from Netherland, Sewell disclosing resource estimates on the Samuel License. The
report was prepared by Netherland, Sewell in accordance with NI 51-101 and also
describes a probabilistic distribution of Prospective Resources in respect of
oil and gas on the Samuel License. The report is 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.

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  the Eitan #1 Well  which was
drilled on lands in the Hula Valley in Northern Israel covered by the Eitan
License.

We plugged and abandoned the Eitan #1 Well during the financial
year ended December 31, 2012.

Effects of Government Regulations

See Item 3D - Risk Factors.

C.             
Organizational Structure

As December 31, 2012, 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:

- 27 -

---



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, the Yitzhak License and the Yam Hadera Option; (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$3,663 per month and 424 square meters at Aba
  Hillel Silver 12, Ramat Gan, Israel, for which the lease cost is NIS 40,000
  ($11,433 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.

- 28 -

---

(c)            
Foreign Operations

During the fiscal years ended December 31, 2012 and 2011, 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 2012 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 as of and for
the year ended December 31, 2012. Our managements discussion and analysis of
financial condition and results of operations for the year ended December 31,
2012 should be read in conjunction with our audited consolidated financial
statements and related notes for the year ended December 31, 2012. 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 (collectively,
the Offshore Licenses) - namely: (a) the Gabriella License held by
Adira Israel; (b) the Yitzhak License held by Adira Israel; and (c) 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.
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.

- 29 -

---

In addition, the Company has an option to acquire up to a 5%
participating interest in two licenses called the Myra License and Sara License.
We currently ascribe no value to the Myra and Sara Licenses and as such we do
not consider our options to be 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, 2012 compared to the year ended December 31, 2011.

Revenues and Other Income

Year ended
        December 31,2012
      
      
      2011U.S. dollars in thousandsConsulting
      $
      455
      
      $
      771Operator fees
      
      544
      
      
      312Income from farm-out
      
      890
      
      
      240$
      1,889
      
      $
      1,323


Consulting fees relates to consulting services in respect of
the Offshore Licenses on a time and materials basis. For the year ended
December 31, 2012, the Company earned consulting fees of $455,000, as compared
to $771,000 for the year ended December 31, 2011. In 2012, following the
appointment of AGR as the joint operator on the Yitzhak license, the Company
ceased to charge consulting fees, and, therefore, the consulting fees earned in
2012 relate to Gabriella and Samuel only. In addition, the Company revised the
operator fee structure on the Gabriella License, which fixed the consulting fee
at $25,000 per month, which is lower than the average monthly fee earned in
2011.

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). For the year
ended December 31, 2012 the Company earned operator fees of $544,000, as
compared to $312,000 for the year ended December 31, 2011. The increase is due
to the increase exploration activity that took place in 2012.

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 as well as the reimbursement of prior costs incurred on the Yitzhak License relating to the Company’s farm out of 20% of the Yitzhak License in January 2012.

Expenses

Exploration Expenses

For the year ended December 31, 2012, exploration expenses
amounted to $1,026,000 as compared to $5,018,000 for year ended December 31,
2011. The decrease in exploration expenses in 2012 is due to the advancement of
the Company's drilling plan on its three Offshore Licenses, and as such, exploration costs are being capitalized to Exploration and Evaluation Assets, thus reducing the amount of
costs being expensed. In 2011, the Company incurred expenses in connection with
the execution of the 3D seismic program on the Gabriella License, Yitzhak
License and Samuel License.

- 30 -

---

General and Administrative Expenses

For the year ended December 31, 2012, general and administrative expenses amounted to $5,304,000 as compared to $5,031,000 for year ended December 31, 2011. The increase in operating expenses resulted primarily from increased legal and accounting expenses relating to planned capital raises that were not completed in 2012, increased activity in Israel, including the hiring of additional staff in the second half of 2011 and during 2012. The increase in the general and administrative expenses is offset by the decrease in share based compensation ($1,023,000 in 2011 as compared to $887,000 in 2012). The decrease is mainly due to the fact that most of the Company’s options that were granted in prior years are now either fully vested or expired.

Impairment Charge

For the year ended December 31, 2012, the impairment charge amounted to $7,810,000 as compared to $1,226,000 for the year ended December 31, 2011. The impairment in 2012 relates primarily to the Company’s decision to record an impairment charge of $7,596,000 in respect of the Samuel license. The Company believes that there is a low probability of realization of the asset from either the successful development or sale of the Samuel license in the near future. The impairment in 2011 is in respect of the Company’s Eitan #1 well and consumables and equipment related to the Eitan License relinquished in 2011.

Financing Income/Expense

For the year ended December 31, 2012, financing income amounted
to $2,480,000 as compared to $43,000 for the year ended December 31, 2011, and
financing expenses of $745,000 of the year ended December 31, 2012 as compared
to $109,000 in the year ended December 31, 2011. The primary reason for the
increase in financing expenses is the inclusion of offering expenses in the
amount of $726,000in financing expenses. This amount represents offering
costs incurred in the August Offering relating to the portion of the offering
that was classified as financial liability.

The warrants issued in the August offering are denominated in
Canadian dollars, while the functional currency of the Company is US dollars;
therefore the fair value of the warrants are classified as a financial liability
which is remeasured to fair value at the end of each period. The changes in fair
value are included in financing income/expenses. For the year ended December 31,
2012, the amount is income of $2,299,000.

In addition, 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 NIS and Canadian dollars. The Company has not hedged its
exposure to currency fluctuations.

Net Loss

The Company reported a net loss and comprehensive loss for the
year ended December 31, 2012 of $10.6 million as compared to a net loss and
comprehensive loss of $10 million for year ended December 31, 2011. The primary
reason for the loss in 2012 is as a result of an impairment charge in respect of
the Samuel License.

Inflation

During the years ended December 31, 2012 and 2011, 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.

- 31 -

---

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

Revenues and Other Income

For the year ended December 31, 2011 we earned revenues and
other income of $1.3 million as compared to $1.7 for the year ended December 31,
2010. The breakdown of revenues for the year ended December 31, 2011 is as
follows:

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

Exploration Expenses

For the year ended December 31, 2011, exploration expenses
amounted to $5,018,000 as compared to $1,624,000 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.

General and Administrative Expenses

For the year ended December 31, 2011, general and
administrative expenses amounted to $5,031,000 as compared to $3,067,000 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.

- 32 -

---

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.

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.

During the year ended December 31, 2012, the Company completed
a Canadian public offering of 79,012,640 units, as a price of CDN$0.14 per unit,
for gross proceeds of approximately CDN$11,061,770 (the August
Offering). Each unit consisted of one common share in the capital of our
Company and one warrant; each warrant entitles the holder to purchase one
additional common share at a price of CDN$0.20 per share until August 9, 2015.
The offering was qualified by a Canadian short form prospectus dated July 25,
2012, filed in the provinces of British Columbia, Alberta and Ontario, and was
completed in accordance with Rule 903 of Regulation S under the Securities Act
of 1933, as amended (the Securities Act). The Company concurrently
offered the units to certain accredited investors in the United States through
the U.S. registered broker-dealer affiliates of the Canadian agents, pursuant to
Rule 506 of Regulation D under the Securities Act. Commissions of 6% in broker
fees and broker warrants were paid on the offering. Each broker warrant is
exercisable for one common share at an exercise price of CDN$0.14 per common
share until August 9, 2014. The August Offering closed on August 9, 2012.

The Company has an accumulated deficit of $29 million as of
December 31, 2012, and the Company had negative cash flows from operations of
$4 million for the year ended December 31, 2012 ($6.4 million for the year
ended December 31, 2011). 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.

- 33 -

---

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.

Year ended December 31, 2012 compared to year ended
December 31, 2011

During the year ended December 31, 2012, the Company's overall
position of cash and cash equivalents decreased by $5,700,000. 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, 2012 was $3,980,000 as compared to $6,414,000 for the year ended December 31, 2011. This decrease is due to the fact that most of the Company’s exploration activities are capitalized to Exploration and Evaluation Assets and are therefore included in investment activities.

Cash used in investing activities during the year ended December 31, 2012 was $12,003,000 as compared to cash used in investing activities of $657,000 during the year ended December 31, 2011. The investment in 2012 relates primarily to the capitalization of drilling costs in respect of the Offshore Licences.

Cash provided by financing activities for the year ended December 31, 2012 was $10,351,000 as compared to $6,617,000 during the year ended December 31, 2011. The cash provided in 2012 is primarily as a result of the completion of a public offering of shares and warrants for the net proceeds of $9,801,000. Cash provided in 2011 is as a result of a private placement for net proceeds of $6,152,000, and the exercise of warrants and employee stock options during the period.

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

Year ended December 31, 2011 compared to the 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, 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 in November 2010.

Capital Resources

At December 31, 2012, the Company's cash and cash equivalents
were $2.4 million (December 31, 2011 - $8.1 million). The majority of this
balance is being held in US Dollars. The Company's working capital at December
31, 2012 was $1.2 million as compared to $8 million at December 31, 2011. The decrease in 2012 is a result of significant exploration activities that took place during the year.

- 34 -

---

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 expenditures. 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 remaining contractual commitments as of December 31, 2012, for the Offshore Licenses is approximately $197,000. Due to our allegation that MELP materially breached the Gabriella 2012 Agreement, we believe that the $5 million commitment on the First LC Amount and the Second LC Amount, is not valid.

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 and estimates that we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:

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

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, 2012, Adira has paid and aggregate of $3 million of operating costs on the Samuel License on behalf of GGRI and Emanuelle, made up as follows:  Emanuelle and GGRI owe an aggregate of $2.8 million through their direct interest in the license, as Samuel JOA signatories and GGRI owes an additional $0.2 million, indirectly, through its 40% interest in Adira GeoGlobal.  .  Subsequent to balance sheet date, Adira issued a default letter to GGRI and Emanuelle in accordance with the Samuel JOA. The three parties are currently discussing a plan to ensure the reimbursement to Adira for such costs. If GGRI and Emanuelle do not repay Adira for the costs owed through their direct interest in the Samuel License, then in accordance with the Samuel JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. In addition, if GGRI does not repay Adira for the costs owed through GGRI’s 40% ownership interest in Adira GeoGlobal, Adira may have to seek reimbursement through continued negotiation or litigation.

In addition, the Company did not sign a drilling contract for the Samuel license by March 31, 2013, nor has it spud a well by April 30, 2013, as required by the Ministry.  Adira is currently in the process of requesting extensions for both milestones from the Ministry, but it is uncertain that such extensions will be received. The Company believes that, as of December 31, 2012, the events described above, including the lack of available funding from other license participants sufficient to meet the current milestones on the Samuel License, are indicators of impairment of the Samuel license and there is a low probability of realization of the asset from either the successful development or sale of the license in the near future. Accordingly, the Company recorded an impairment charge of $7.6 million on the exploration and evaluation assets (including uncollected receivables from GGRI and Emanuelle) in respect of the Samuel license for the year ended December 31, 2012.

- 35 -

---

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 an appropriate  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.

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.

- 36 -

---

Impairment of financial assets

At the end of each reporting period, the Company assesses
whether there is objective evidence of impairment of a financial asset or group
of financial assets carried at amortized cost.

As of the date hereof, 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.

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 mainly derived from:

1. Operator fees - The Company acts as the operator or joint operator on the Offshore Licenses and is entitled to operator fees and revenues 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 and the Yam Hadera 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.

- 37 -

---

F.             
Tabular Disclosure of Contractual Obligations

The following sets forth our contractual obligations as of
December 31, 2012:

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
      231
      187
      44
      0
      0Approved funding commitment regarding our licenses
      197
      197
      0
      0
      0Total
      428
      384
      44
      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.

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 (Co-Chairman)Amos Lasker
    Director (Co-Chairman) from
      August 22, 2012Colin Kinley
    DirectorAlan Friedman (2)
    Director and Executive
      Vice-President, Corporate DevelopmentJeffrey E. Walter
    Chief Executive Officer from
      February 27, 2012 and Director from July 6, 2012Richard Crist(2)(3)
    Director from July 6, 2012Gadi Levin
    Chief Financial Officer
      Secretary Acting Principal Executive Officer from February 24 to
      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
      (NI 52-110).                                                                                                

- 38 -

---

During the 2012 financial year, Eli Barkat and Yale Renik
Cramer resigned from the Board of Directors of Adira. Subsequent to the year
end, Sheldon Inwentash resigned as a director on February 12, 2013, and Orit
Leitman, who was appointed to the Board of Directors on November 26, 2012,
resigned on March 10, 2013.

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.

Adira Energy Holding Corp. (Ontario)

|Name and
      Residence            | Position                                | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                                                  
|----------------------------------- | --------------------------------------- | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                    |                                         |                    |                                                                                                                                                                                                                                           
|Jeffrey E. Walter Annapolis MD, USA | Chief Executive Officer                 | February 27, 2012  | Chief Executive Officer of
      White Birch Energy. Principal at Energy Consultant International. Vice
      President Europe and Mediterranean for Noble Energy Inc.                                                                    
|                                    |                                         |                    |                                                                                                                                                                                                                                           
|Gadi Levin Lev Hasharon, Israel     | Chief Financial Officer                 | January 11, 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
|                                    |                                         |                    |                                                                                                                                                                                                                                           
|Alan Friedman Toronto, Canada       | President, Secretary and
      Director | April 4, 2008      | Founder, President and Chief
      Executive Officer of Rivonia Capital Inc., South African lawyer                                                                                                                                        
|                                    |                                         |                    |                                                                                                                                                                                                                                           
|Dennis Bennie Toronto, Canada       | Director                                | April 4, 2008      | Founder, XDL Venture Capital
      Fund and XDL Capital Invest                                                                                                                                                                            

Adira Energy CBM Ltd. (Israel)

|Name and
      Residence            | Position                                   | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                                                  
|----------------------------------- | ------------------------------------------ | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                    |                                            |                    |                                                                                                                                                                                                                                           
|Jeffrey E. Walter Annapolis MD, USA | Chief Executive Officer                    | February 27, 2012  | Chief Executive Officer of
      White Birch Energy. Principal at Energy Consultant International. Vice
      President Europe and Mediterranean for Noble Energy Inc.                                                                    
|                                    |                                            |                    |                                                                                                                                                                                                                                           
|Gadi Levin Lev Hasharon, Israel     | Chief Financial Officer and
      Director | February 17, 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

- 39 -

---

|Name and
      Residence             | Position                | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                                                  
|------------------------------------ | ----------------------- | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                     |                         |                    |                                                                                                                                                                                                                                           
|Adira Oil Technologies Ltd. (Israel) |                         |                    |                                                                                                                                                                                                                                           
|Name and
      Residence             | Position                | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                                                  
|                                     |                         |                    |                                                                                                                                                                                                                                           
|Jeffrey E. Walter Annapolis MD, USA  | Chief Executive Officer | February 27, 2012  | Chief Executive Officer of
      White Birch Energy. Principal at Energy Consultant International. Vice
      President Europe and Mediterranean for Noble Energy Inc.                                                                    
|                                     |                         |                    |                                                                                                                                                                                                                                           
|Gadi Levin Lev Hasharon, Israel      | Chief Financial Officer | 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

Adira Energy Israel Ltd. (Israel)

|Name and
      Residence            | Position                                   | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                                                  
|----------------------------------- | ------------------------------------------ | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                    |                                            |                    |                                                                                                                                                                                                                                           
|Jeffrey E. Walter Annapolis MD, USA | Chief Executive Officer                    | February 27, 2012  | Chief Executive Officer of
      White Birch Energy. Principal at Energy Consultant International. Vice
      President Europe and Mediterranean for Noble Energy Inc.                                                                    
|                                    |                                            |                    |                                                                                                                                                                                                                                           
|Gadi Levin Lev Hasharon, Israel     | Chief Financial Officer and
      Director | January 11, 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

Adira Energy Israel Services Ltd. (Israel)

|Name and
      Residence            | Position                | Date First Elected | Principal Occupation During Last 5 Years                                                                                                        
|----------------------------------- | ----------------------- | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------
|                                    |                         |                    |                                                                                                                                                 
|Jeffrey E. Walter Annapolis MD, USA | Chief Executive Officer | February 27, 2012  | Chief Executive Officer of
      White Birch Energy. Principal at Energy Consultant International. Vice
      President Europe and Mediterranean

- 40 -

---

|Name and
      Residence        | Position                                   | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                                                  
|------------------------------- | ------------------------------------------ | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                |                                            |                    | for Noble Energy Inc.                                                                                                                                                                                                                     
|                                |                                            |                    |                                                                                                                                                                                                                                           
|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

Adira Geo Global Ltd. (Israel)

|Name and
      Residence            | Position                                   | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                                                  
|----------------------------------- | ------------------------------------------ | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                    |                                            |                    |                                                                                                                                                                                                                                           
|Jeffrey E. Walter Annapolis MD, USA | Chief Executive Officer                    | February 27, 2012  | Chief Executive Officer of
      White Birch Energy. Principal at Energy Consultant International. Vice
      President Europe and Mediterranean for Noble Energy Inc.                                                                    
|                                    |                                            |                    |                                                                                                                                                                                                                                           
|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
|                                    |                                            |                    |                                                                                                                                                                                                                                           
|Paul Miller Calgary, AB, Canada     | Director                                   | December 17, 2010  | President and Chief Executive
      Officer of GeoGlobal Resources Inc. Prior to that, worked with Talisman
      Energy and Matrikon Inc. in various management capacities                                                               

Adira Energy Holdings (Barbados) Ltd. (Barbados)

|Name and
      Residence                                           | Position               | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                         
|------------------------------------------------------------------ | ---------------------- | ------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                   |                        |                    |                                                                                                                                                                                                                  
|Dr. J. Gordon Murphy Lascelles, St.
      James, Barbados Barbados | President and Director | June 30, 2011      | Self Employed Business and
      Technology Consultant since 1994. President and Director of Brownstone
      Ventures (Barbados) Inc. since December 2007 and of Pinetree (Barbados)
      Inc. since July 2000.

- 41 -

---

|Name and
      Residence                                               | Position | Date First Elected | Principal Occupation During Last 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 Falmouth House,
      Belair, St. Philip, Barbados | Director | August 11, 2011    | Chartered Accountant and
      partner, BDO Barbados (formerly Ward, Patel & Co.). Director of
      Barbados Insurance Managers Limited                                                                                                  

Adira Energy Investments (Barbados) Ltd.
(Barbados)

|Name and
      Residence                                               | Position               | Date First Elected | Principal Occupation During Last 5 Years                                                                                                                                                                                                  
|---------------------------------------------------------------------- | ---------------------- | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                       |                        |                    |                                                                                                                                                                                                                                           
|Dr. J. Gordon Murphy Lascelles, St.
      James, Barbados Barbados     | President and Director | June 30, 2011      | Self Employed Business and
      Technology Consultant since 1994. President and Director of Brownstone
      Ventures (Barbados) Inc. since December 2007 and of Pinetree (Barbados)
      Inc. since July 2000.                         
|                                                                       |                        |                    |                                                                                                                                                                                                                                           
|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 Falmouth House,
      Belair, St. Philip, Barbados | Director               | August 11, 2011    | Chartered Accountant and
      partner, BDO Barbados (formerly Ward, Patel & Co.). Director of
      Barbados Insurance Managers Limited                                                                                                  

The following is biographical information on directors and
offers of the Company who are acting in the capacity of director or officer as
of the date hereof:

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 1996, 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.

- 42 -

---

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.
During the past 6 years, Mr. Kinley and his team have developed an E&P
advisory firm consulting on the development of frontier oil and gas plays from
concept development through to exploration. He is experienced and practiced in
both public and private company disciplines.

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
qualified attorney and has played an integral role in the acquisition of various
mining and oil and gas assets, financings and go-public transactions for many
resource companies over the past 13 years. Mr. Friedman is also the co-founder
and Director of Eco (Atlantic) Oil & Gas Ltd., a TSXV listed oil and gas
exploration company, developing various oil assets offshore and onshore Namibia.
He was also a director and co-founder of Auryx Gold Corp., a TSX listed Namibian
gold exploration company having been sold to B2 Gold for more than $150 million.
Mr. Friedman is the President and Chief Executive Officer of Rivonia Capital
Inc. and a director of the Canada-South Africa Chamber of Business.

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.

- 43 -

---

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 and became a
director of Adira on July 6, 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 responsible 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.

Mr. Richard Crist. Mr. Crist became a director of
Adira on July 6, 2012. He has over 42 years of oil and gas experience, with a
broad range of managerial and technical expertise that includes 45 years in
corporate and senior management roles. Prior to being appointed an officer of
Gasco Energy, he held various senior managerial positions including Executive
Vice President  Business Development for Delek US, Executive Vice President,
Business Development for Elk Resources, a privately held, Denver-based oil and
gas company. Degree as an engineer of geophysics with a minor in geology from
the Colorado School of Mines in Golden, Colo. Member in good standing of the
Society of Exploration Geophysicists and the American Association of Petroleum
Geologists and is a Certified Petroleum Geologist.

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.

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.

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:

- 44 -

---

| | (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.                                         

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.

- 45 -

---

B.             
Compensation

During the year ended December 31, 2012, 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 $1,982,000,
of which $1,071,000 relates to salaries to executive officers and $911,000
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.

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 TableThe following table
provides a summary of compensation paid to the senior management employed by our
Company as of December 31, 2012 during the fiscal year then ended (inthousands 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)
      58
      104
      -
      -
      -
      -
      -
      162


- 46 -

---

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 plansJeffrey E. Walter, Chief Executive Officer(2)
      280
      169
      -
      -
      -
      -
      -
      449Gadi Levin,
        Chief Financial Officer
      191
      90
      -
      -
      -
      -
      -
      281Alan Friedman, Executive Vice President, Corporate Development
      144
      78
      -
      -
      -
      -
      -
      222Alon Polishuk, 
        Vice President, Contracts Administration and Regulations
      167
      55
      -
      -
      -
      -
      -
      222Moshe Politi 
        Chief Geologist
      183
      72
      -
      -
      -
      -
      -
      255


Notes:

|(1) | Mr. Kugler served as the Chief Executive Officer and
      Director of the Company from June 2, 2011 to February 24, 2012 and
      continued to assist the Company as a Strategic Consultant effective
      February 27, 2012 through to September 22, 2012.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Walter was appointed the Chief Executive Officer of
      the Company effective February 27, 2012.                                                                                                                                                        

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.

- 47 -

---

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.

Long-Term Incentive Plan Awards

The Company did not make any long-term incentive plan awards
during the years ended December 31, 2012 and 2011.

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
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 officers of the Company:

Mr. Dennis Bennie  Co-Chairman

Effective August 31, 2009, we entered into an agreement with
Mr. Bennie pursuant to which Mr. Bennie agreed to provide his services to us in
the capacity of Co-Chairman of the Board for a term to continue until terminated
(the Bennie Agreement). Under the Bennie Agreement, Mr. Bennie is paid
an annual salary of CDN$60,000.

- 48 -

---

Pursuant to the Bennie Agreement, each party thereto is
entitled to terminate the Bennie Agreement at any time by providing sixty days
written notice. In addition, the Company is entitled to terminate the Bennie
Agreement immediately without notice and/or payment in lieu for cause (as
defined in the Bennie Agreement).

Furthermore, if the Bennie Agreement is terminated by the
Company without cause (as defined in the Bennie Agreement), by Mr. Bennie for
good reason (as defined in the Bennie Agreement ) or due to a change of control
in the Company (as defined in the Bennie Agreement), Mr. Bennie is entitled to a
payment equal to twenty four months salary and 100% of the stock options
granted to Mr. Bennie will vest immediately.

Mr. Amos Lasker  Co-Chairman

Effective August 22, 2012, we entered into an agreement with
Mr. Lasker pursuant to which Mr. Lasker agreed to provide his services to us in
the capacity of Co-Chairman of the Board for a term to continue until terminated
(the Canadian Lasker Agreement). Under the Canadian Lasker Agreement,
Mr. Lasker was granted 300,000 stock options, exercisable at a price of CDN$0.20
(the Canadian Lasker Compensation Options). The Canadian Lasker
Compensation Options have a vesting schedule of 1/3 vesting on the day the
Canadian Lasker Compensation Option were publicly disclosed (the Grant
Date), a further 1/3 on the first anniversary of the Grant Date and the
remaining amount on the second anniversary of the Grant Date, expiring five
years after the Grant Date.

Pursuant to the Canadian Lasker Agreement, each party thereto
is entitled to terminate the Canadian Lasker Agreement at any time by providing
sixty days written notice. In addition, the Company is entitled to terminate
the Canadian Lasker Agreement immediately without notice for cause (as defined
in the Canadian Lasker Agreement).

Furthermore, if the Canadian Lasker Agreement is terminated by
the Company without cause (as defined in the Canadian Lasker Agreement), by Mr.
Lasker for good reason (as defined in the Canadian Lasker Agreement) or due to a
change of control in the Company (as defined in the Canadian Lasker Agreement),
(i) 25% of the unvested stock options granted to Mr. Lasker will be accelerated
and be vested if the Canaidan Lasker Agreement is terminated within 12 months of
its effective date, (ii) 50% of the unvested stock options granted to Mr. Lasker
will be accelerated and be vested if the Canadian Lasker Agreement is terminated
between 13 and 36 months of its effective date, or (iii) 100% of the unvested
stock options granted to Mr. Lasker will be accelerated and be vested if the
Canadian Lasker Agreement is terminated at least 37 months of its effective
date.

Effective August 22, 2012, Adira Israel entered into an
employment agreement with Mr. Lasker pursuant to which Mr. Lasker agreed to
provide his services to Adira Israel in the capacity of Vice President Business
Development for a term to continue until terminated (the Israeli Lasker
Agreement).

Under the Israeli Lasker Agreement, Mr. Lasker is paid a monthly salary of NIS 32,400 ($9,000, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund), excluding VAT. Mr. Lasker was also granted 700,000 stock options, exercisable at a price of CDN$0.20 (the “Israeli Lasker Compensation Options”). The Israeli Lasker Compensation Options have a vesting schedule of 1/3 vesting on the Grant Date, a further 1/3 on the first anniversary of the Grant Date and the remaining amount on the second anniversary of the Grant Date, expiring five years after the Grant Date.

The Israeli Lasker 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 Lasker Employment Agreement and for a period of six
months thereafter.

Pursuant to the Israeli Lasker Agreement, each party thereto is
entitled to terminate the Israeli Lasker Agreement at any time by providing
thirty days written notice. In addition, the Company is entitled to terminate
the Israeli Lasker Agreement immediately without notice and/or payment in lieu
thereof if Mr. Lasker materially breaches the Israeli Lasker Agreement or Mr.
Lasker engages in any act of dishonesty or fraud towards the Company.

Furthermore, if the Israeli Lasker Agreement is terminated by
the Company without cause (as defined in the Israeli Lasker Agreement), by Mr.
Lasker for good reason (as defined in the Israeli Lasker Agreement) or due to a
change of control in the Company (as defined in the Israeli Lasker
Agreement), Mr. Lasker is entitled to a payment equal (i) six months salary and
25% of the unvested stock options granted to Mr. Lasker will be accelerated and
be vested if the Israeli Lasker Agreement is terminated within 12 months of its
effective date, (ii) twelve months salary and 50% of the unvested stock options
granted to Mr. Lasker will be accelerated and be vested if the Israeli Lasker
Agreement is terminated between 13 and 36 months of its effective date, or (iii)
twenty four months salary and 100% of the unvested stock options granted to Mr.
Lasker will be accelerated and be vested if the Israeli Lasker Agreement is
terminated at least 37 months of its effective date.

- 49 -

---

Mr. Alan Friedman  Executive Vice President, Corporate
Development

Effective May 1, 2011, we entered into an employment agreement,
as amended and restated on December 19, 2012 and as amended further on March 22,
2013, 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 Executive Vice President of
Corporate Development 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 by providing
sixty days 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.

Furthermore, if the Friedman Service Agreement is terminated by
the Company without cause (as defined in the Friedman Service Agreement), by the
Friedman Service Company or Mr. Friedman for good reason (as defined in the
Friedman Service Agreement ) or 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 twenty four months salary and 100% of the stock
options granted to Mr. Friedman will vest immediately.

Notwithstanding the forgoing, for a 6 month period ending
August 31, 2013, 50% of Mr. Friedmans salary shall accrue and become payable on
the earlier of September 1, 2013, or the happening of certain prescribed events.
Additionally, if the Friedman Service Agreement is terminated during the 6 month
period ending August 31, 2013 by the Company without cause (as defined in the
Friedman Service Agreement), by the Friedman Service Company or Mr. Friedman for
good reason (as defined in the Friedman Service Agreement) or due to a change of
control in the Company (as defined in the Friedman Service Agreement), 50% of
Mr. Friedmans entitles (as described above) will be delayed until the earlier
of September 1, 2013, or the happening of certain prescribed events.

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

Effective February 27, 2012, we entered into an employment
agreement with Mr. Walter, as amended and restated on October 19, 2012 and
amended further on February 28, 2013, 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.

- 50 -

---

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), by the Company without Cause (as defined in the Walter Employment
Agreement) or by Mr. Walter for good reason (as defined in the Walter Employment
Agreements), Mr. Walter is entitled to a payment equal (i) six months salary
and 25% of the unvested stock options granted to Mr. Walter will be accelerated
and be vested if the Walter Employment Agreement is terminated within 12 months
of its effective date, (ii) twelve months salary and 50% of the unvested stock
options granted to Mr. Walter will be accelerated and be vested if the Walter
Employment Agreement is terminated between 13 and 36 months of its effective
date, or (iii) twenty four months salary and 100% of the unvested stock options
granted to Mr. Walter will be accelerated and be vested if the Walter Employment
Agreement is terminated at least 37 months of its effective date.

Notwithstanding the foregoing, for a 6 month period ending
August 31, 2013, 50% of Mr. Walterss salary shall accrue and become payable on
the earlier of September 1, 2013, or upon a change in control. Additionally, if
the Walter Employment Agreement is terminated during the 6 month period ending
August 31, 2013 by the Company without cause or by the Mr. Walter for good
reason, Mr. Walter is entitled to a payment equal to three months salary and
25% of the unvested stock options granted to Mr. Walter will be accelerated and
be vested.

Mr. Gadi Levin  Chief Financial Officer

Effective July 21, 2010, we entered into an employment
agreement with Mr. Levin, as amended on September 13, 2012, and March 13, 2013,
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 51,000 ($14,167, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund) 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), by the
Company without cause (as defined in the Levin Employment Agreement) or by Mr.
Levin for good reason (as defined in the Levin Employment Agreements), Mr. Levin
is entitled to a payment equal (i) six months salary and 25% of the unvested
stock options granted to Mr. Levin will be accelerated and be vested if the
Levin Employment Agreement is terminated within 12 months of its effective date,
(ii) twelve months salary and 50% of the unvested stock options granted to Mr.
Levin will be accelerated and be vested if the Levin Employment Agreement is
terminated between 13 and 36 months of its effective date, or (iii) twenty four
months salary and 100% of the unvested stock options granted to
Mr. Levin will be accelerated and be vested if the Levin Employment Agreement is
terminated at least 37 months of its effective date.

- 51 -

---

Notwithstanding the foregoing, for a six month period ending
August 31, 2013, Mr. Levins salary will be reduced by 10%. The aggregate amount
of the reduced salary during this period will paid to Mr. Levin at the earlier
of September 1, 2013, a change in control of the Company (as defined in the
Levin Employment Agreement), the resignation of Mr. Levin for good reason (as
defined in the Levin Employment Agreement), the termination of the Levin
Employment Agreement by the Company without cause (as defined in the Levin
Employment Agreement).

Mr. Alon Polishuk  Vice President Contracts and
Regulation

Effective August 1, 2011, we entered into an employment
agreement with Mr. Polishuk, as amended on September 13, 2012 and April 23,
2013, 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 44,700 ($12,417, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund), 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.

Notwithstanding the forgoing, for a two month period ending June 30, 2013, the scope of Mr. Polishuk’s employment will be part-time and his total compensation will be NIS 27,300 per month ($7,583, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund).

Pursuant to the Polishuk Employment Agreement, each party
thereto is entitled to terminate the Polishuk Employment Agreement at any time
by providing the other party (a) one months written notice, if Mr. Polishuk
elects to work during this notice period in a full-time role at his original
salary, and (b) two months written notice, if Mr. Polishuk elects to work
during such notice period in a part-time role at his revised salary.

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. The Polishuk Employment Agreement cannot be
terminated without cause prior to June 30, 2013.

Mr. Moshe Politi  Chief Geologist

Effective August 1, 2011, we entered into a revised employment
agreement with Mr. Politi, as amended on April 23, 2013, 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 ($9,167, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund), excluding VAT, and is entitled to, among other things, a vehicle allowance.

- 52 -

---

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.

Notwithstanding the forgoing, for a two month period ending June 30, 2013, the scope of Mr. Politi’s employment will be part-time and his total compensation will be NIS 28,222 per month ($7,839, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund), excluding VAT.

Pursuant to the Politi Employment Agreement, each party thereto
is entitled to terminate the Politi Employment Agreement at any time by
providing the other party (a) one months written notice, if Mr. Politi elects
to work during this notice period in a full-time role at his original salary,
and (b) two months written notice, if Mr. Politi elects to work during such
notice period in a part-time role at his revised salary.

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
Mr. Politi 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.

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. The Politi Employment Agreement cannot be terminated
without cause prior to June 30, 2013.

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s 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. 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

- 53 -

---

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.

Audit, Compensation and Disclosure Committees

Audit Committee

We have a standing Audit Committee that assists the directors
of Adira in overseeing all material aspects of the Companys reporting,
control and audit functions, except those specifically related to the
responsibilities of another standing committee of the Board. The role of the
Audit Committee includes a particular focus on the qualitative aspects of
financial reporting to shareholders and on the Companys processes for the
management of business/financial risk and for compliance with significant
applicable legal, ethical, and regulatory requirements. The Audit Committee is
responsible for, among other things, the making recommendations to our Board of
Directors with respect to the appointment and remuneration of the Companys
independent accountant. 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.

As of the date hereof, our Audit Committee is comprised of
Dennis Bennie, Richard Crist and Alan Friedman.

The Company has procedures for the review and pre-approval of
any services performed by its auditors. The procedures require that all proposed
engagements of its auditors for audit and non-audit services be submitted to the
Audit Committee for approval prior to the beginning of any such services. The
Audit Committee considers such requests, and, if acceptable to a majority of the
Audit Committee members, pre-approves such audit and non-audit services by a
resolution authorizing management to engage the Company's auditors for such
audit and non-audit services. During such deliberations, the Audit Committee
assesses, among other factors, whether the services requested would be
considered "prohibited services" as contemplated by the regulations of the SEC,
and whether the services requested and the fees related to such services could
impair the independence of the auditors.

Pursuant to section 6.1 of National Instrument 52-110  Audit
Committees ("NI 52-110"), as adopted by the Canadian Securities
Administrators (the "CSA"), the Company is exempt from the requirements
of Parts 3 and 5 of NI 52-110 for the year ended December 31, 2012, by virtue of
the Company being a "venture issuer" (as defined in NI 52-110).

Part 3 of NI 52-110 prescribes certain requirements for the
composition of audit committees of non-exempt companies that are reporting
issuers under Canadian provincial securities legislation. Part 3 of NI 52-110
requires, among other things that an audit committee be comprised of at three
directors, each of whom, is, subject to certain exceptions, independent and
financially literate in accordance with the standards set forth in NI 52-110.

Part 5 of NI 52-110 requires an annual information form that is
filed by a non-exempt reporting issuer under National Instrument 51-102 
Continuous Disclosure Obligations, as adopted the CSA, to include certain
disclosure about the issuer's audit committee, including, among other things:
the text of the audit committee's charter; the name of each audit committee
member and whether or not the member is independent and financially literate;
whether a recommendation of the audit committee to nominate or compensate an
external auditor was not adopted by the issuer's board of directors, and the
reasons for the board's decision; a description of any policies and procedures
adopted by the audit committee for the engagement of non-audit services; and
disclosure of the fees billed by the issuer's external auditor in each of the
last two fiscal years for audit, tax and other services.

Compensation Committee

We have a Compensation Committee comprised of Dennis Bennie,
Richard Crist and Colin Kinley. Currently, any material commitments, inclusive
of remuneration, are required to be pre-approved by the Board, following
recommendation of the Compensation Committee

- 54 -

---

Disclosure Committee

We have a Disclosure Committee comprised of Dennis Bennie, Alan
Friedman and Jeffery Walter 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, 2012, we and our subsidiaries together
employed a total of 16 full-time employees, out of which 12 are employed in
Israel and 4 in North America, 7 employees who performed management and
professional functions. 2 employees provide administrative services, 2 provide
legal/regulatory service, and 5 provide geological/technical services to the
Company.

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.

- 55 -

---

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)
      13,403,928
      7.41%
      7.41%
      4.53%
      4.53%Alan Friedman(3)
      6,988,267
      3.87%
      3.87%
      2.36%
      2.36%Colin Kinley(4)
      50,000
      0.03%
      0.03%
      0.02%
      0.02%Jeffrey Walter
      173,946
      0.10%
      0.10%
      0.06%
      0.06%


|(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.                                                                                                                                                                                                   

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
    Co-Chairman
    Aug. 31, 2009
    Aug. 20, 2014
    $0.25
    A
    396,000Jan. 28, 2010
    Jan. 27, 2015
    $0.61
    E
    250,000Jan. 11, 2011
    Jan. 10, 2015
    $0.80
    I
    100,000Aug. 22, 2012
    Aug. 21, 2017
    $0.20
    R
    1,520,000Alan Friedman
    Executive Vice
      President, Corporate Development and
    Aug. 31, 2009
    Aug. 20, 2014
    $0.25
    A
    396,000Aug. 31, 2009
    Aug. 20, 2014
    $0.25
    C
    250,000Jan. 28, 2010
    Jan. 27, 2015
    $0.60
    E
    250,000


- 56 -

---

Name
      Position
      Allotmentdate
      Expirationdate
      Exerciseprice
      (USDollar) (1)  Vestingdate**(2)**  TotalDirector
    Jan. 11, 2011
    Jan. 10, 2017
    $0.80
    G
    150,000Aug. 22, 2012
    Aug. 21, 2017
    $0.20
    R
    1,060,000Colin Kinley
    Director
    Aug. 31, 2009
    Aug. 20, 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. 18, 2011
    Jan. 17, 2017
    $0.80
    I
    800,000Mar. 18, 2011
    Mar. 17, 2017
    $0.80
    J
    100,000Aug. 22, 2012
    Aug. 21, 2017
    $0.20
    R
    150,000Gadi Levin
    Chief Financial
      Officer
    Jul. 22, 2010
    Jul. 21, 2015
    $0.61
    H
    250,000May. 3, 2011
    May. 2, 2016
    $0.60
    L
    250,000Aug. 22, 2012
    Aug. 21, 2017
    $0.20
    R
    910,000Jeffrey Walter
    Chief Executive
      Officer
    Mar. 14, 2012
    Mar. 13, 2017
    $0.25
    Q
    2,000,000Aug. 22, 2012
    Aug. 21, 2017
    $0.20
    R
    760,000Richard Crist
    Director
    Aug. 22, 2012
    Aug. 21, 2017
    $0.20
    R
    600,000Amos Lasker
    Co-Chairman
    Aug. 22, 2012
    Aug. 21, 2017
    $0.20
    R
    1,000,000


|(1) | The exercise prices of employee stock options in 2010 were
      set in US Dollars and in 2011 in Canadian Dollars. The tables show all
      amounts in US Dollars.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The details of the vesting terms are as
follows:                                                                                                                    
|    |                                                                                                                                                                     
|    | (i)                                                                                                                                                                 
|    |                                                                                                                                                                     
|    | (ii)                                                                                                                                                                
|    |                                                                                                                                                                     
|    | (iii)                                                                                                                                                               
|    |                                                                                                                                                                     
|    | (iv)                                                                                                                                                                
|    |                                                                                                                                                                     
|    | (v)                                                                                                                                                                 
|    |                                                                                                                                                                     
|    | (vi)                                                                                                                                                                
|    |                                                                                                                                                                     
|    | (vii)                                                                                                                                                               
|    |                                                                                                                                                                     
|    | (viii)                                                                                                                                                              

- 57 -

---

| | (ix) | Type L stock options vest 12.5% every six months over
      four years with the initial amount vested on September 3, 2011; 
| | ---- | ----------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                             
| | (x)  | Type Q stock options vest 12.5% every six months over
      four years with the initial vesting on March 14, 2013;          
| |      |                                                                                                                             
| | (xi) | Type R stock options vest 33.33% every twelve months over
      two years with the initial vesting on August 22, 2012;
  and

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
      Exercise price
      TotalDennis Bennie
    Co-Chairman of the
      Board
    Dec. 3, 2010
    Dec. 3, 2013
    $0.55
    157,000August 9, 2012
    August 9, 2015
    $0.20
    7,142,860Alan Friedman
    Executive Vice
      President, Corporate Development and Director
    Dec. 3, 2010
    Dec. 3, 2013
    $0.55
    75,000August 9, 2012
    August 9, 2015
    $0.20
    1,000,000Colin Kinley
    Director
    Dec. 3, 2010
    Dec. 3, 2013
    $0.55
    25,000Jeffrey Walter
    Director, Chief Executive
      Officer
    August 9, 2012
    August 9, 2015
    $0.20
    173,946


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, 2012.

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
    115,084,124
    0.26
    417,000Equity compensation plans not approved by securityholders
    N/A
    N/A
    N/ATotal:
    115,084,124
    0.26
    417,000


|(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
      180,781,093 - 17,661,109 = 417,000).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 58 -

---

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, 22,565,218 options had been
granted under the New Stock Option Plan as follows (527,811 options have been
exercised and 4,356,298 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.                                                                                                                                                                                                        
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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.                 

- 59 -

---

| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 14. | On August 22, 2012, 8,130,000 options were granted to
      certain directors, officers and employees of the Company. Terms of the
      options include an exercise price of CDN$0.20 per common share, a vesting
      schedule allowing for the vesting of 33.33% of the options granted every
      year with the initial amount vesting on August 22, 2012, resulting in the
      options being fully vested on August 22, 2014. The options expire on
      August 22, 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.

- 60 -

---

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, as at December 31, 2012, 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
    13,403,928(3)
    7.41%Sheldon Inwantash
    14,242,290(4)
    7.88%BRM Group Ltd.(5)
    10,000,000
    5.53%Goodman Investment Counsel Inc.
      (6)
    16,077,715
    8.89%


|(1) | Under Rule 13d3, a beneficial owner of a security
      includes any person who, directly or indirectly, through any contract,
      arrangement, understanding, relationship, or otherwise has or shares: (i)
      voting power, which includes the power to vote, or to direct the voting of
      shares; and (ii) investment power, which includes the power to dispose or
      direct the disposition of shares. Certain shares may be deemed to be
      beneficially owned by more than one person (if, for example, persons share
      the power to vote or the power to dispose of the shares). In addition,
      shares are deemed to be beneficially owned by a person if the person has
      the right to acquire the shares (for example, upon exercise of an option)
      within 60 days of the date as of which the information is provided. In
      computing the percentage ownership of any person, the amount of shares
      outstanding is deemed to include the amount of shares beneficially owned
      by such person (and only such person) by reason of these acquisition
      rights. As a result, the percentage of outstanding shares of any person as
      shown in this table does not necessarily reflect the persons actual
      ownership or voting power with respect to the number of common shares
      actually outstanding on the date hereof.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
      884,667 held by spouse.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(5) | BRM is a private investment company beneficially owned by
      Mr. Eli Barkat, Mr. Nir Barkat and Mr. Yuval Rakav.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(6) | Includes shares held by Goodman Investment Counsel Inc.
      and associated companies that are controlled by Mr. Nathan
  Goodman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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

Geographic Breakdown of Shareholders

As of December 31, 2012, 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
    2,374,043
    1.31
    57Canada
    160,895,273
    89
    44Other
    17,511,777
    9.69
    21Total
    180,781,093
    100
    122


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

Transfer Agent

- 61 -

---

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,
2012 except as follows:

| | (a) | During the year ended December 31, 2012, the Company
      incurred $357,000 in consulting fees and operating expenses to private
      companies which are controlled by directors or officers of the Company
      (year ended December 31, 2011 - $906,000).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                
| |     | 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.                                                                         

| |                              |   |                           |  |   | Year ended   |  |   |       | 
| | ---------------------------- | - | ------------------------- |  | - | ------------ |  | - | ----- | 
| |                              |   |                           |  |   | December 31, |  |   |       | 
| |                              |   | 2012                      |  |   | 2011         |  |   | 2010  | 
| |                              |   | U.S. dollars in thousands | 
| |                              |   |                           |  |   |              |  |   |       | 
| | Short-term employee benefits | $ | 1,071                     |  | $ | 911          |  | $ | 481   | 
| | Share based compensation     |   | 613                       |  |   | 850          |  |   | 595   | 
| |                              |   |                           |  |   |              |  |   |       | 
| |                              | $ | 1,684                     |  | $ | 1,761        |  | $ | 1,076 | 

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

- 62 -

---

| |                          |   | Year ended                | 
| | ------------------------ | - | ------------------------- | 
| |                          |   | December 31,              | 
| |                          |   | 2012                      | 
| |                          |   | U.S. dollars in thousands | 
| |                          |   |                           | 
| | Share based compensation | $ | 298                       | 

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.

A.             
Offer and Listing Details  Price History

Trading Markets

- 63 -

---

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)            |          |        
|2012                            | 0.34     | 0.09   
|2011                            | 0.90     | 0.21   
|2010                            | 0.90     | 0.25   
|2009                            | 0.54     | 0.05   
|2008                            | 0.50     | 0.03   
|                                |          |        
|Quarterly                       |          |        
|Fiscal 2012                     |          |        
|Fourth Quarter                  | 0.15     | 0.09   
|Third Quarter                   | 0.16     | 0.11   
|Second Quarter                  | 0.31     | 0.17   
|First Quarter                   | 0.34     | 0.15   
|                                |          |        
|                                |          |        
|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   
|                                |          |        
|                                |          |        
|Monthly                         |          |        
|April 1, 2013 to April 29, 2013 | 0.03     | 0.02   
|March 2013                      | 0.03     | 0.01   
|February 2013                   | 0.08     | 0.02   
|January 2013                    | 0.12     | 0.08   
|December 2012                   | 0.12     | 0.09   
|November 2012                   | 0.13     | 0.10   

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) |          |        
|2012                 | 0.34     | 0.09   
|2011                 | 0.90     | 0.20   
|2010(1)              | 0.90     | 0.55   
|2009(1)              | N/A      | N/A    
|2008(1)              | N/A      | N/A    

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

- 64 -

---

|                                | High ($) | Low ($)
|------------------------------- | -------- | -------
|Quarterly                       |          |        
|Fiscal 2012                     |          |        
|Fourth Quarter                  | 0.14     | 0.09   
|Third Quarter                   | 0.18     | 0.11   
|Second Quarter                  | 0.30     | 0.18   
|First Quarter                   | 0.34     | 0.16   
|                                |          |        
|                                |          |        
|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   
|                                |          |        
|                                |          |        
|Monthly                         |          |        
|April 1, 2013 to April 29, 2013 | 0.03     | 0.02   
|March 2013                      | 0.03     | 0.02   
|February 2013                   | 0.08     | 0.02   
|January 2013                    | 0.12     | 0.08   
|December 2012                   | 0.11     | 0.09   
|November 2012                   | 0.12     | 0.10   

Escrowed Securities

As of December 31, 2012, 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
    13,300,773
    7.36%Options
    1,013,100
    5.73%Warrants
    0
    0.0%


(1) Based on 180,791,093 Common Shares, 17,681,109 Options and
97,423,015 Warrants issued and outstanding as at December 31, 2012.

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.

- 65 -

---

E.             
Dilution

Not applicable.

F.             
Expenses of the Issue

Not applicable.

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 By-Laws 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 Company is party to certain joint operating agreements and
farmout agreements with respect to the Offshore Licenses, which have been
granted and are held either directly or indirectly by the Company, and are
disclosed under Item 4.B.  Business Overview. The Company is of the view that
the Offshore Licenses, joint operating agreements and farmout agreements have
been obtained or entered into in the ordinary course of its business.

The Company is 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.

- 66 -

---

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.

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 , 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 2013 threshold is CAD$444 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

- 67 -

---

| | (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                                                   
| |     |                                                                                                                                                                                                                                                                                      
| | (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.

- 68 -

---

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.

- 69 -

---

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.
Except as specifically set forth below, this summary does not discuss applicable
tax reporting requirements. 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.

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.;

- 70 -

---

- 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.

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.

- 71 -

---

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 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. Subject to applicable
limitations and provided that we are eligible for the benefits of the
Canada-U.S. Tax Convention, dividends paid by us to non-corporate U.S. Holders,
including individuals, generally will be eligible for the preferential tax rates
applicable to long-term capital gains for dividends, provided certain holding
period and other conditions are satisfied, including that we are not classified
as a PFIC (as defined below) in the tax year of distribution or in the preceding
tax year. 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, 2011 and 2012. 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 may 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.

- 72 -

---

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.

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

Individuals, estates and certain 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.

- 73 -

---

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.

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 certain threshold amounts. 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 certain financial institutions. 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, 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%, 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.

- 74 -

---

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  Organizational Structure of this Annual Report
on Form 20-F.

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:

- 75 -

---

December 312012
      
      
      2011U.S. dollars in thousandsProfit (loss) from change:5% increase in exchange rate US/CAN
      
      (153
      )
      
      675% decrease in exchange rate US/CAN
      
      153
      
      
      (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, as amended
(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.

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, 2012. 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, 2012.

Managements Annual Report on Internal Control Over
Financial Reporting

- 76 -

---

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, 2012. 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, 2012.

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, 2012, 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

As disclosed above, as of the date hereof, our Audit Committee
is comprised of Dennis Bennie, Richard Crist and Alan Friedman.

The Board has determined that Messrs. Bennie and Crist meet the
SECs definition of an audit committee financial expert, as defined in Item 16
of Form 20-F. Although we are not currently subject to any law, rule or
regulation in the United States requiring that we establish or maintain an audit
committee, the Board has determined that Messrs. Bennie and Crist meet the
definition of an independent director, as defined in Section 803 of the NYSE
MKT Company Guide.

ITEM 16B       
 CODE OF ETHICS

We have adopted a Code of Business Conduct 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. The Code of Business Conduct meets the
requirements for a code of ethics within the meaning of that term in Item 16B
of Form 20-F. The text of our Code of Business Conduct is also posted on our
website at www.adiraenergy.com, under the
Company tab. In addition, a copy of our Code of Business Conduct 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.

- 77 -

---

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 312012
      2011Audit Fees:
      $155,000
      $110,000Audit Related Fees:
      $88,000
      $18,000Tax Fees:
      $120,000
      $64,000Total:
      $363,000
      $174,000


Audit Fees

This category includes the aggregate fees billed by our
independent auditor for the audit of our consolidated annual financial
statements, reviews of interim financial statements and attestation services
that are provided in connection with statutory and regulatory filings or
engagements.

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.

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

From August 23, 2010 until March 16, 2011, MSCM LLP acted as
our independent auditors. On March 16, 2011 we appointed Kost Forer Gabbay and
Kasierer, a member firm of Ernst & Young Global, as our new auditors. MSCM
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 there were no
disagreements between our Company and our independent auditors on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.

- 78 -

---

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 30,
  2013;
- Consolidated statement of financial position for the fiscal years ended
  December 31, 2012 and 2011;
- Consolidated statements of comprehensive income for the fiscal years ended
  December 31, 2012 and 2011;
- Consolidated statements of changes in shareholders equity for the fiscal
  years ended December 31, 2012 and 2011;
- Consolidated statements of cash flows for the fiscal years ended December
  31, 2012 and 2011; and
- Notes to consolidated financial statements

- 79 -

---

ADIRA ENERGY LTD. (Canadian Company)

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2012

U.S. DOLLARS IN THOUSANDS



INDEX

|                                                            | Page    
|----------------------------------------------------------- | --------
|                                                            |         
|Report of Independent
    Registered Public Accounting Firm | 81      
|                                                            |         
|Consolidated
    Statements of Financial Position           | 82      
|                                                            |         
|Consolidated
    Statements of Comprehensive Loss           | 83      
|                                                            |         
|Consolidated
    Statements of Changes in Equity            | 84      
|                                                            |         
|Consolidated
    Statements of Cash Flows                   | 85      
|                                                            |         
|Notes to Consolidated
    Financial Statements              | 86 - 132

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

---



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, 2012 and 2011, and the
related consolidated statements of comprehensive loss, changes in equity and
cash flows for each of the three years in the period ended December 31, 2012.
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, 2012 and 2011 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2012, 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, 2012 the
Company has an accumulated deficit of $29 million and a negative cash flow from
operations of $4 million for the year ended December 31, 2012. 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.

|                 | KOST FORER GABBAY &             
|---------------- | --------------------------------
|Tel-Aviv, Israel | KASIERER                        
|April 30, 2013   | A Member of Ernst & Young Global

- 81 -

---

|ADIRA ENERGY LTD.                                  
|---------------------------------------------------
|                                                   
|CONSOLIDATED
      STATEMENTS OF FINANCIAL POSITION
|U.S. dollars in thousands                          

|                                                          |        |  |   | December 31, |  
|--------------------------------------------------------- | ------ |  | - | ------------ | -
|                                                          | Note   |  |   | 2012         |  
|ASSETS                                                    |        |  |   |              |  
|                                                          |        |  |   |              |  
|CURRENT ASSETS:                                           |        |  |   |              |  
|Cash and cash equivalents                                 | 4      |  | $ | 2,394        |  
|Restricted deposits                                       | 5      |  |   | 1,082        |  
|Accounts receivable                                       | 6      |  |   | 360          |  
|Other receivables and prepaid
      expenses              | 7      |  |   | 4,701        |  
|                                                          |        |  |   |              |  
|Total current assets                                      |        |  |   | 8,537        |  
|                                                          |        |  |   |              |  
|NON-CURRENT ASSETS:                                       |        |  |   |              |  
|Restricted deposits                                       | 5      |  |   | -            |  
|Property and equipment, net                               | 8      |  |   | 276          |  
|Long - term receivables                                   | 9b (2) |  |   | 640          |  
|Exploration and evaluation assets                         | 9      |  |   | 5,887        |  
|                                                          |        |  |   |              |  
|Total non-current assets                                  |        |  |   | 6,803        |  
|                                                          |        |  |   |              |  
|Total assets                                              |        |  | $ | 15,340       |  
|                                                          |        |  |   |              |  
|LIABILITIES AND EQUITY                                    |        |  |   |              |  
|                                                          |        |  |   |              |  
|CURRENT LIABILITIES:                                      |        |  |   |              |  
|Trade payables                                            | 10     |  | $ | 5,841        |  
|Other accounts payable and accrued
      liabilities      | 11     |  |   | 1,476        |  
|                                                          |        |  |   |              |  
|Total current liabilities                                 |        |  |   | 7,317        |  
|                                                          |        |  |   |              |  
|LONG-TERM LIABILITIES                                     |        |  |   |              |  
|Share warrants                                            | 14b    |  |   | 3,013        |  
|                                                          |        |  |   |              |  
|Total long-term liabilities                               |        |  |   | 3,013        |  
|                                                          |        |  |   |              |  
|EQUITY:                                                   |        |  |   |              |  
|Share capital                                             | 14     |  |   | -            |  
|Additional paid-in capital                                |        |  |   | 33,966       |  
|Accumulated deficit                                       |        |  |   | (28,956      | )
|                                                          |        |  |   |              |  
|Equity attributable to equity
      holders of the parent |        |  |   | 5,010        |  
|Non-controlling interests                                 |        |  |   | -            |  
|                                                          |        |  |   |              |  
|Total equity                                              |        |  |   | 5,010        |  
|                                                          |        |  |   |              |  
|Total liabilities and equity                              |        |  | $ | 15,340       |  

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

Approved on Behalf of the Board:

|April 30, 2013                    |  |                                    |  |              
|--------------------------------- |  | ---------------------------------- |  | -------------
|Date of approval of the financial |  | Dennis Bennie                      |  | Alan Friedman
|statements                        |  | Chairman of the board of directors |  | Director     

- 82 -

---

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

|                                                                                                        |  |      |  |   | Year ended   |  
|------------------------------------------------------------------------------------------------------- |  | ---- |  | - | ------------ | -
|                                                                                                        |  |      |  |   | December 31, |  
|                                                                                                        |  | Note |  |   | 2012         |  
|                                                                                                        |  |      |  |   |              |  
|Revenues and other income                                                                               |  | 17   |  | $ | 1,889        |  
|                                                                                                        |  |      |  |   |              |  
|Expenses:                                                                                               |  |      |  |   |              |  
|Exploration expenses                                                                                    |  | 9    |  |   | 1,026        |  
|General and administrative expenses                                                                     |  | 18   |  |   | 5,304        |  
|Impairment charge                                                                                       |  | 9    |  |   | 7,810        |  
|                                                                                                        |  |      |  |   |              |  
|Total expenses                                                                                          |  |      |  |   | 14,140       |  
|                                                                                                        |  |      |  |   |              |  
|Operating loss                                                                                          |  |      |  |   | (12,251      | )
|                                                                                                        |  |      |  |   |              |  
|Financing income                                                                                        |  | 19   |  |   | 2,480        |  
|Financing expense                                                                                       |  | 19   |  |   | (745         | )
|                                                                                                        |  |      |  |   |              |  
|Loss before income taxes                                                                                |  |      |  |   | (10,516      | )
|Income taxes                                                                                            |  | 13   |  |   | (41          | )
|                                                                                                        |  |      |  |   |              |  
|Net loss and comprehensive loss                                                                         |  |      |  | $ | (10,557      | )
|                                                                                                        |  |      |  |   |              |  
|Net loss and comprehensive loss attributed to:                                                          |  |      |  |   |              |  
|Equity holders of the parent                                                                            |  |      |  |   | (8,554       | )
|Non-controlling interests                                                                               |  |      |  | $ | (2,003       | )
|                                                                                                        |  |      |  |   |              |  
|                                                                                                        |  |      |  | $ | (10,557      | )
|                                                                                                        |  |      |  |   |              |  
|Basic and diluted net loss per share attributable to equity
      holders of the parent                 |  |      |  |   | (0.06        | )
|                                                                                                        |  |      |  |   |              |  
|Weighted average number of Ordinary shares used in computing
      basic and diluted net loss per share |  |      |  |   | 132,940,856  |  

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

- 83 -

---

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

|                                                                         |  |             |  |  |         |  |   | Attributable to equity holders |  |   |             |   |   |        |  
|------------------------------------------------------------------------ |  | ----------- |  |  | ------- |  | - | ------------------------------ |  | - | ----------- | - | - | ------ | -
|                                                                         |  |             |  |  |         |  |   | of the parent                  |  |   |             |   |   |        |  
|                                                                         |  |             |  |  |         |  |   | Additional                     |  |   |             |   |   |        |  
|                                                                         |  | Number of   |  |  | Share   |  |   | paid in                        |  |   | Accumulated |   |   |        |  
|                                                                         |  | shares      |  |  | capital |  |   | capital                        |  |   | deficit     |   |   | Total  |  
|                                                                         |  |             |  |  |         |  |   |                                |  |   |             |   |   |        |  
|Balance as of January 1, 2010                                            |  | 62,640,001  |  |  | -       |  | $ | 8,932                          |  | $ | (6,722      | ) | $ | 2,210  |  
|                                                                         |  |             |  |  |         |  |   |                                |  |   |             |   |   |        |  
|Shares and warrants issued in private placement,
      net (Note 14b(i)) |  | 27,500,000  |  |  | -       |  |   | *)10,077                       |  |   | -           |   |   | 10,077 |  
|                                                                         |  |             |  |  |         |  |   |                                |  |   |             |   |   |        |  
|Investment in equity of subsidiary by non-controlling
      interests    |  | -           |  |  | -       |  |   | -                              |  |   | -           |   |   | -      |  
|Share-based compensation                                                 |  | -           |  |  | -       |  |   | 1,277                          |  |   | -           |   |   | 1,277  |  
|Net loss                                                                 |  | -           |  |  | -       |  |   | -                              |  |   | (2,958      | ) |   | (2,958 | )
|                                                                         |  |             |  |  |         |  |   |                                |  |   |             |   |   |        |  
|Balance as of December 31, 2010                                          |  | 90,140,001  |  |  | -       |  |   | 20,286                         |  |   | (9,680      | ) |   | 10,606 |  
|                                                                         |  |             |  |  |         |  |   |                                |  |   |             |   |   |        |  
|Shares issued in private placement, net (Note
      14b(ii))             |  | 10,483,871  |  |  | -       |  |   | *)6,152                        |  |   | -           |   |   | 6,152  |  
|Exercise of warrants and options                                         |  | 1,144,581   |  |  | -       |  |   | 314                            |  |   | -           |   |   | 314    |  
|Investment in equity of subsidiary by non-controlling
      interests    |  | -           |  |  | -       |  |   | -                              |  |   | -           |   |   | -      |  
|Share-based compensation                                                 |  | -           |  |  | -       |  |   | 1,023                          |  |   | -           |   |   | 1,023  |  
|Net loss                                                                 |  | -           |  |  | -       |  |   | -                              |  |   | (9,489      | ) |   | (9,489 | )
|                                                                         |  |             |  |  |         |  |   |                                |  |   |             |   |   |        |  
|Balance as of December 31, 2011                                          |  | 101,768,453 |  |  | -       |  |   | 27,775                         |  |   | (19,169     | ) |   | 8,606  |  
|                                                                         |  |             |  |  |         |  |   |                                |  |   |             |   |   |        |  
|Shares issued in private placement, net (Note
      14b(iii))            |  | 79,012,640  |  |  | -       |  |   | *)5,215                        |  |   | -           |   |   | 5,215  |  
|Investment in equity of subsidiary by non-controlling interests          |  | -           |  |  | -       |  |   | -                              |  |   | -           |   |   | -      |  
|Share-based compensation                                                 |  | -           |  |  | -       |  |   | 976                            |  |   | -           |   |   | 976    |  
|Net loss                                                                 |  | -           |  |  | -       |  |   | -                              |  |   | (8,554      | ) |   | (8,554 | )
|Adjustment of non-controlling interests **)                              |  | -           |  |  | -       |  |   | -                              |  |   | (1,233      | ) |   | (1,233 | )
|                                                                         |  |             |  |  |         |  |   |                                |  |   |             |   |   |        |  
|Balance as of December 31, 2012                                          |  | 180,781,093 |  |  | -       |  | $ | 33,966                         |  | $ | (28,956     | ) | $ | 5,010  |  

|*)  | Net of issuance expenses of $923, $472 and $791 in the
      years 2010, 2011 and 2012, respectively.
|--- | -----------------------------------------------------------------------------------------------------
|**) | Due to assumption of liabilities of a
  subsidiary.                                                  

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

- 84 -

---

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

|                                                                                         |   | Year ended   |  
|---------------------------------------------------------------------------------------- | - | ------------ | -
|                                                                                         |   | December 31, |  
|                                                                                         |   | 2012         |  
|Cash flows from operating activities:                                                    |   |              |  
|Net loss                                                                                 | $ | (10,557      | )
|                                                                                         |   |              |  
|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                                  |   | 68           |  
|Depreciation                                                                             |   | 96           |  
|Impairment charge                                                                        |   | 7,810        |  
|Issuance expenses                                                                        |   | 726          |  
|Reevaluation of warrants                                                                 |   | (2,299       | )
|Share-based compensation                                                                 |   | 976          |  
|                                                                                         |   |              |  
|                                                                                         |   | 7,377        |  
|                                                                                         |   |              |  
|Changes in operating asset and liability items:                                          |   |              |  
|Decrease (increase) in accounts receivable, other receivables
      and prepaid expenses |   | (6,696       | )
|Increase (decrease) in trade payables                                                    |   | 5,359        |  
|Increase in other accounts payable and accrued liabilities                               |   | 537          |  
|                                                                                         |   |              |  
|                                                                                         |   | (800         | )
|                                                                                         |   |              |  
|Net cash used in operating activities                                                    |   | (3,980       | )
|                                                                                         |   |              |  
|Cash flows from investing activities:                                                    |   |              |  
|Expenditures on exploration and evaluation
      assets                                  |   | (10,654      | )
|Purchase of property and equipment                                                       |   | (70          | )
|Increase in long term receivables                                                        |   | (640         | )
|Decrease (increase) in restricted cash                                                   |   | (639         | )
|                                                                                         |   |              |  
|Net cash used in investing activities                                                    |   | (12,003      | )
|                                                                                         |   |              |  
|Cash flows from financing activities:                                                    |   |              |  
|Proceeds from issuance of warrants, net of
      issuance expenses                       |   | 4,586        |  
|Proceeds from issue of shares, net of issuance expenses                                  |   | 5,215        |  
|Investment in equity of subsidiary by non-controlling
      interests                    |   | 550          |  
|Proceeds from exercise of warrants and options to employees                              |   | -            |  
|                                                                                         |   |              |  
|Net cash provided by financing activities                                                |   | 10,351       |  
|                                                                                         |   |              |  
|Exchange rate differences for cash and cash equivalents                                  |   | (68          | )
|                                                                                         |   |              |  
|Increase (decrease) in cash and cash equivalents                                         |   | (5,700       | )
|Cash and cash equivalents at the beginning
      of the year                             |   | 8,094        |  
|                                                                                         |   |              |  
|Cash and cash equivalents at the end of the
      year                                   | $ | 2,394        |  

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

- 85 -

---

|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, 2012 were authorized for issue in accordance with a
      resolution of the directors on April 29, 2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company has been granted three offshore petroleum
      licenses in Israel. The Company's wholly-owned Canadian subsidiary, Adira
      Energy Holdings Corp. owns three wholly owned active Israeli subsidiaries
      as follows as of December 31, 2012: (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 60% 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") and (iii) Adira Energy Israel Services Ltd. provides
      services in respect of the entities described above. Adira Energy Holdings
      Corp. also owns 60% of the subsidiary, Adira Geo Global Limited ("AGG"),
      which owns a 30% interest in Samuel.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Adira Energy Israel Limited is the operator of Gabriella,
      a co-operator of 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

- 86 -

---

|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, 2012, the Company has an accumulated deficit of $28,956
      and, in 2012, the Company had negative cash flows from operations of
      $3,980. 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.

|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.                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                      
| |    | 2.                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                      
| |    | 3.                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                      
| | 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.

- 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                                                                                                                                                         
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                               
|        | 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.

The key assumptions made in the
financial statements concerning uncertainties at the end of the reporting period
and the critical estimates computed by the Company that may result in a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below.

| | - | Impairment of Exploration and Evaluation Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   | The Company reviews its Exploration and Evaluation Assets
      for impairment at least once a year and when facts and circumstances
      suggest that the carrying amount of an exploration and evaluation asset
      may exceed its recoverable amount. This requires management to make
      judgments, estimates and assumptions with respect to the probability that
      the carrying amount of the exploration and evaluation asset will be
      recovered in full from successful development or by sale. See Note 9 for
      further details.

| | b. | Consolidated financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | 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.

- 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.)
|------- | ---------------------------------------------

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.

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.

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.                   

- 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.)
|------- | ---------------------------------------------

| | - | 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.

| | c. | Unincorporated 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.                                       

- 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.)
|------- | ---------------------------------------------

| | e. | Functional currency and foreign currency:                                                                                                                                                                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| | 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, 2012 and 2011.                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| | h. | Financial instruments:                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                  

- 91 -

---

|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. | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

- 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 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.

- 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.)
|------- | ---------------------------------------------

| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 6. | Issue of a unit of securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The issue of a unit of securities involves the allocation
      of the proceeds received (before issue expenses) to the components of the
      securities issued in the unit based on the following order: financial
      derivatives and other financial instruments measured at fair value in each
      period. Then fair value is determined for financial liabilities and
      compound instruments (such as convertible debentures) that are presented
      at amortized cost. The proceeds allocated to equity instruments are the
      residual amount calculated as the difference between the total proceeds
      and the proceeds allocated as above. Issue costs are allocated to each
      component pro rata to the amounts determined for each component in the
      unit.

| | i. | 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.

Depreciation of an asset ceases at the
earlier of the date that the asset is classified as held for sale and the date
that the asset is derecognized. An asset is derecognized on disposal or when no
further economic benefits are expected from its use. The gain or loss arising
from the derecognition of the asset (determined as the difference between the
net disposal proceeds and the carrying amount in the financial statements) is
included in profit or loss when the asset is derecognized.

- 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.)
|------- | ---------------------------------------------

| | j. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | k. | 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | l. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

- 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.)
|------- | ---------------------------------------------

| | 1. | Current taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The current tax liability is measured using the tax rates
      and tax laws that have been enacted or substantively enacted by the end of
      reporting period as well as adjustments required in connection with the
      tax liability in respect of previous years.                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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".

| | m. | 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. Fair value measurement of all options and warrants granted is
      determined using an appropriate 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. No
expense is recognized for awards that do not ultimately vest.

- 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.)
|------- | ---------------------------------------------

| |    | 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | n. | 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.

- 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.)
|------- | ---------------------------------------------

| | o. | 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 or
      at a rate ranging from 1.2%-4.8% of the total exploration costs incurred
      by the respective UJV's depending on the annual expenditures in the UJV.
      Revenues from operator fees are recognized in accordance with the terms of
      the Joint Operating Agreements, as exploration costs 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | p. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | q. | 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
      includes 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 for all
      periods presented have not been included in the calculation of diluted
      loss per share, as they are antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

- 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.)
|------- | ---------------------------------------------

| | r. | 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 related 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | s. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | t. | Reclassification:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Certain amounts have been reclassified in comparative
      data in order to conform to current year's presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | u. | Disclosure of new IFRSs in the period prior to their
      adoption:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

The IASB issued certain 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.

The IASB also 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.

- 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 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.                                                                                                                                                                                                                                                                   

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:                                               
| |    |                                                                                                                                                                                                                                                                                                                                                              
| |    | -                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                              
| |    | -                                                                                                                                                                                                                                                                                                                                                            

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.

- 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 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.                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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".

- 101 -

---

|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 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.

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.

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.

- 102 -

---

|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.

- 103 -

---

|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.

- 104 -

---

|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.

- 105 -

---

|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,              | 
| | ------------------- | - | ------------------------- | 
| |                     |   | 2012                      | 
| |                     |   | U.S. dollars in thousands | 
| |                     |   |                           | 
| | In US Dollars       | $ | 2,205                     | 
| | In Canadian Dollars |   | 73                        | 
| | In NIS              |   | 116                       | 
| |                     |   |                           | 
| |                     | $ | 2,394                     | 

|NOTE 5:- | RESTRICTED CASH                                                                                                                                                                                                                                                                   
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                   
|         | Short-term restricted cash of $ 100 as of December 31,
      2012 and 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, 2011
      and short-term restricted cash of $67 as of December 31, 2012 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 and short-term restricted cash of $915 as of December 31, 2012
      relates to deposits held by a financial institution as security in
      connection with the 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, 2012 and 2011.                                                                                       

- 106 -

---

|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,                    | 
| | ---------------------- | - | ------------------------------- | 
| |                        |   | 2012                            | 
| |                        |   | U.S. dollars in
      thousands | 
| |                        |   |                                 | 
| | Receivable from UJVs   | $ | 3,563                           | 
| | Government authorities |   | 889                             | 
| | Prepaid expenses       |   | 175                             | 
| | Other receivables      |   | 26                              | 
| | Consumables            |   | 48                              | 
| |                        |   |                                 | 
| |                        | $ | 4,701                           | 

|NOTE 8:- | PROPERTY AND EQUIPMENT,
      NET
|-------- | ---------------------------------
|         |                                  
|         | Composition and
      movement:  
|         |                                  
|         | 2012                             

| |                                       |   |                           |  |   | Office        |  |   | Computer      |  |   |       | 
| | ------------------------------------- | - | ------------------------- |  | - | ------------- |  | - | ------------- |  | - | ----- | 
| |                                       |   | Drilling rig              |  |   | furniture     |  |   | and           |  |   |       | 
| |                                       |   | and related               |  |   | and           |  |   | peripheral    |  |   |       | 
| |                                       |   | equipment                 |  |   | **equipment** |  |   | **equipment** |  |   | Total | 
| |                                       |   | U.S. dollars in thousands | 
| | Cost:                                 |   |                           |  |   |               |  |   |               |  |   |       | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at January 1, 2012            | $ | 426                       |  | $ | 83            |  | $ | 215           |  | $ | 724   | 
| | Purchases during the year             |   | -                         |  |   | -             |  |   | 70            |  |   | 70    | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at December 31, 2012          |   | 426                       |  |   | 83            |  |   | 285           |  |   | 794   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Accumulated depreciation:             |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at January 1, 2012            |   | 191                       |  |   | 14            |  |   | 60            |  |   | 265   | 
| | Additions during the year:            |   |                           |  |   |               |  |   |               |  |   |       | 
| | Depreciation for the year **)         |   | -                         |  |   | 16            |  |   | 80            |  |   | 96    | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Provision for impairment *)           |   | 157                       |  |   | -             |  |   | -             |  |   | -     | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Balance at December 31, 2012          |   | 348                       |  |   | 30            |  |   | 140           |  |   | 518   | 
| |                                       |   |                           |  |   |               |  |   |               |  |   |       | 
| | Depreciated cost at December 31, 2012 | $ | 78                        |  | $ | 53            |  | $ | 145           |  | $ | 276   | 

| | *) | Following the Eitan license relinquishment in 2011 (See
      Note 9a), an impairment loss of $157 was recognized in the Statement of
      Comprehensive Loss for 2012.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | On January 2012, the Company activated a program for the
      sale of the drilling rig and related equipment and commenced marketing the
      equipment for sale. Accordingly, the equipment was accounted for as held
      for sale under IFRS 5 and therefore was not depreciated during
  2012.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 107 -

---

|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.)
|-------- | -----------------------------------------

| |                                       |   |                           |  |   | 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 was recognized in the Statement of
      Comprehensive Loss for 2011.

|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.

- 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 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.

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 and in December 2012. The
Company received a final confirmation from the Ministry approving the surrender
of the Eitan License.

As a result of the above, the Company
recorded in 2011 $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 and recorded a $214
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 capitalized are as follows:

| |                      |   | Year ended December
      31, | 
| | -------------------- | - | ----------------------------- | 
| |                      |   | 2012                          | 
| |                      |   | U.S. dollars in thousands     | 
| |                      |   |                               | 
| | Exploration expenses | $ | 116                           | 

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

- 109 -

---

|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.)
|------- | -----------------------------------------

As of December 31, 2012, the Company
has a 15% working interest in Gabriella. In addition, the Company is the
operator of the Gabriella License and is entitled to an operating fee as
described below.

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). Modiin completed this funding commitment in
2011.

In addition, Modiin agreed to 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% (the "Modiin Management Fees"); 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% (the "Modiin Royalty" and together with the Modiin Buy Back Option and Modiin Management Fees, the "Modiin Farmout Rights"). 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 ("Modiin Buy Back Option"). The exercise price for this option is the
actual costs incurred by Modiin on the 15% interest up until the exercise date.

All exploration and extraction activity on the Gabriella License, and the relationship of the participating interest holders, is governed by a joint operating agreement or "JOA" (the "Gabriella JOA").  The Gabriella JOA parties paid the Company an operating fee equal to 7.5% of the cumulative, direct costs incurred to operate the Gabriella License, through January 26, 2012. Commencing January 27, 2012, the Gabriella License participants began paying a new operator fee of (i) a $25 per month, plus (ii) an additional sliding-scale percentage of exploration expenses incurred, ranging from 4.8% of annual exploration expenses (if less than $2,000) down to 1.2% of annual exploration expenses (if over $6,000).

- 110 -

---

|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.)
|------- | -----------------------------------------

On July 19, 2012, the Company announced that MELP executed a drilling contract with  Noble International Ltd ("Noble Drilling") to secure access to the Noble Homer Farrington drilling unit rig for a minimum of 75 days to drill one well, and possibly one  sidetrack on behalf of the Gabriella License (the "Drilling Contract"). The Drilling Contract, which has since been terminated as previously reported,  required that MELP provide a letter of credit or cash collateral within specified time frames outlined in the Drilling Contract. Pursuant to the Drilling Contract, the parties determined that a letter of credit will be issued to secure the Drilling Contract.

On June 12, 2012, of the Company signed a Memorandum of Understanding ("MOU") with MELP and Brownstone, pursuant to which the parties agreed to authorize MELP to sign the Drilling Contract and the Company agreed to provide its working interest share of the collateral due to Noble Drilling. The MOU provided that if Adira failed to pay its share of the collateral, then it would: (a) withdraw from the Gabriella JOA; (b) assign its participating interest in the Gabriella License to the other participants in proportion to their holdings; and (c) relinquish all back-in rights, overriding royalty interests ("ORRI") and management fees, rights of first refusal and co-sale rights to MELP.  Pursuant to the MOU, Adira Israel also granted MELP the MELP Yitzhak Option (as described below).

On December 21, 2012, the Company entered into an agreement with MELP and Brownstone (the "Gabriella 2012 Agreement"), wherein certain terms regarding the parties’ use of the Noble Drilling unit were revised to require  MELP to provide letter of credit to Noble Drilling in two phases ($20 million by January 3, 2013 (the "First LC Amount") and $13.2 million by January 31, 2013 (the "Second LC Amount")) and confirmed a reduction  in the daily drilling rate due to Noble Drilling by MELP under the Drilling Contract from $500,000 per day to $415,000 per day, and to the extent used, reduction in stand-by rates to between $100,000 and $300,000 per day. The parties also agreed to take possession of the Homer Ferrington drilling unit in direct continuation from its then current drilling program, which meant the parties would need to accelerate, by up to three months, the program previously contemplated for the Gabriella License. According to the Gabriella 2012 Agreement, Adira's share of the aggregated letter of credit amounted to $5,000, which was required to be placed by January 31, 2013.

In addition, the parties agreed that: (i) in order to facilitate farm-in transactions to the License, in the event that MELP secures a farm-in partner of its participating interest, Adira will proportionally reduce its Modiin Farmout Rights for up to a maximum of 30% of such participating interest. Adira’s proportional reduction obligation will only be applied to partners that have farmed into MELP’s participating interest, up to a date that is the earlier of the (a) commencement of the first test of the first well on the Gabriella License; or (b) plugging and abandoning or suspending of the first well on the Gabriella License. Any consideration received by MELP from any farm in partner will be shared equally between Adira and MELP, provided that at a minimum, Adira will receive 50% of past costs incurred by MELP, estimated to be $1.3 million per each 10% farmed out, as well as an ORRI of 1.5%,. (ii) Adira will have a 10% tag along rights to farm-out, on the same terms to the farm in partner that farms into MELP’s participating interest in the Gabriella License, in the event that such partner complies with certain criterion, (iii) MELP has granted to Adira an irrevocable option to purchase (the "Yam Hadera Option") from MELP a 15% participating interest in the Yam Hadera petroleum license (the "Yam Hadera License") offshore Israel. See also Note 9b(4).

- 111 -

---

|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.)
|------- | -----------------------------------------

Subsequent to balance sheet date, the
Drilling Contract was further amended as described in Note 20.

Exploration activities of Gabriella
since inception and throughout the year ended December 31, 2012 amounted to
$27,336. The Company's 15% interest in the first $8,000 thousand of exploration
expense was 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,                    |  
| | -------------------------------------- | - | ------------------------------- | -
| |                                        |   | 2012                            |  
| |                                        |   | U.S. dollars in
      thousands |  
| |                                        |   |                                 |  
| | Cash and cash equivalents              | $ | 475                             |  
| | Other receivables and prepaid expenses |   | 335                             |  
| | Exploration and evaluation assets (*)  |   | 2,646                           |  
| | Trade payables                         |   | (512                            | )
| |                                        |   |                                 |  
| |                                        | $ | 2,944                           |  

(*) This amount primarily includes
$1,597 relating to tangibles (piping tubes, etc.), $240 relating to a seabed
survey and $580 relating to project management costs (including well
design).

| |                      |   | Year ended                      | 
| | -------------------- | - | ------------------------------- | 
| |                      |   | December 31,                    | 
| |                      |   | 2012                            | 
| |                      |   | U.S. dollars in
      thousands | 
| |                      |   |                                 | 
| | Exploration expenses | $ | 48                              | 

- 112 -

---

|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.)
|------- | -----------------------------------------

| | (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 9 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. As of December 31, 2012, the Company had received
  a renewal of te Yitzhak license to December 2013, including extension of certain
  milestones.

In 2011, the Company had 85% working
interest in this license. Brownstone has a 15% participating interest in the
Yitzhak license. In addition, until January 1, 2012, the Company was the
operator of the Yitzhak License and was entitled to receive a 7.5% operating fee
on all its expenditures.

In November 2011, an agreement was
signed between Adira Israel and Ellomay Oil and Gas 2011 LP ("Ellomay"), whose
general partner is a wholly owned subsidiary of Ellomay Capital Ltd. ("Ellomay
Capital") for the transfer of rights in the Yitzhak license (the "Agreement")
according to which Ellomay would receive 20% (out of 100%) 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 below), Ellomay paid
Adira approximately $361, which was recognized as income in 2012.

In addition, on November 29, 2011 the
Company entered into an agreement with AGR Petroleum Services Holding AS ("AGR
PSH"), a related party, AGR Group ASA ("AGR") whereby AGR PSH would act as chief
operator in the Yitzhak License, and would receive 5% (out of 100%)
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 Minstry
("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%.

On January 9, 2012, the Ministry
approved the farm-out of an aggregate of 25% of its interest in the Yitzhak
License to the two new partners, 5% to AGR and 20% to

- 113 -

---

|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.)
|------- | -----------------------------------------

Ellomay, Accordingly, as of December
  31, 2012, the Company has 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 PSH are currently the co-operators of the Yitzhak License. The Company,
  Brownstone, AGR and Ellomay signed a joint operating agreement to regulate their
  commercial relationship in respect of the Yitzhak License on September 11, 2012
  (the Yitzhak JOA). The Yitzhak JOA incorporated the terms of the
  AGR Farm-Out Agreement and the Ellomay Farm-Out Agreement. The Company does
  not expect to receive material operator fees from on account of the Yitzhak
  License.

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.

According to the Ellomay Farm-Out
Agreement and the Yitzhak JOA, Ellomay could elect not to fund the Yitzhak
license and be subject to dilution for no consideration (i.e. the diluted
interest would be transferred to Adira without cost), or it could transfer
one-half of its 20% interest to a third party on negotiated terms. On October
29, 2012, Ellomay advised the Company of its intention to decrease Ellomay's
interest in the Yitzhak License from 20% to 10% by paying decreased operating
costs pursuant to the terms of the Yitzhak JOA. As of December 31, 2012, the
Company expended $640 on behalf of Ellomay in respect of the Yitzhak License for
which the Company was entitled to be reimbursed by a third party if the 10%
interest was transferred. This amount was recorded as a long-term receivable as
of December 31, 2012. Subsequent to balance sheet date, Ellomay failed to
transfer timely its interest to a third party, and therefore one-half of its 20%
interest was transferred back to the Company without cost. In 2013, the
receivable will be classified as an additional investment in the exploration and
evaluation assets in respect of the Yitzhak License. As of the date the
financial statements were approved, the Company has a 70% interest in the
Yitzhak License, Brownstone has a 15% interest, AGR has a 5% interest and
Ellomay a 10% interest in the license. The new holdings have not yet been
approved by the Minstry.

On June 13, 2012, pursuant to an MOU with MELP (see Note 9b(1)), Adira granted MELP, an option to purchase ("MELP Yitzhak Option") from Adira a 15% participating interest in the Yitzhak License (the "MELP Yitzhak Option Interest").  MELP may exercise the MELP Yitzhak Option until the later of (a) December 31, 2012, and (b) the 30th day from the date Adira notifies MELP of the execution of an agreement with a drilling contractor in relation to the Yitzhak License. The  Gabriella 2012 Agreement amends the exercise date until 14 days before signing of the rig contract for the Yitzhak License. If MELP exercises the MELP Yitzhak Option, then it must reimburse Adira for expenditures in respect of the MELP Yitzhak Option Interest incurred up to the date of transfer of the MELP Yitzhak Option Interest. MELP must also issue to Adira an ORRI of 3% with respect to all oil and gas (including any distillate and condensate) produced, saved and marketed from the area covered by Yitzhak License that is attributable to the MELP Yitzhak Option Interest, before payout, and 4.5% after payout. The transfer of the MELP Yitzhak Option Interest is subject to the approval of the Minstry.

- 114 -

---

|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 Yitzhak license is as follows:

| |                                        |   | December 31,                    |  
| | -------------------------------------- | - | ------------------------------- | -
| |                                        |   | 2012                            |  
| |                                        |   | U.S. dollars in
      thousands |  
| |                                        |   |                                 |  
| | Cash and cash equivalents              | $ | 2                               |  
| | Prepaid expenses and other receivables |   | 103                             |  
| | Exploration and evaluation assets (*)  |   | 2,328                           |  
| | Trade payables                         |   | (124                            | )
| |                                        |   |                                 |  
| |                                        | $ | 2,309                           |  

(*) This amount primarily includes
$1,017 relating to a seabed survey and $795 relating to project management costs
(including well design).

| |                      |   | Year ended                      | 
| | -------------------- | - | ------------------------------- | 
| |                      |   | December 31,                    | 
| |                      |   | 2012                            | 
| |                      |   | U.S. dollars in
      thousands | 
| |                      |   |                                 | 
| | Exploration expenses | $ | 113                             | 

| | (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, 2012, 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. AGG is also entitled to a 3%
      overriding royalty. The operator fee and ORRI are shared equally between
      Adira and Geo Global Resources Inc. ("GGRI").



- 115 -

---

|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.)
|------- | -----------------------------------------

On October 26, 2012, Emanuelle Energy
  Limited ("Emanuelle") exercised an option to acquire a 7.13% interest
  in the Samuel License from GGRI and became a signatory to the Samuel JOA thereby
  reducing GGRIs interest in the Samuel License to 22.88%.

As of December 31, 2012, Adira paid
$3,000 of operating costs on behalf of GGRI and Emmanuelle, which are holding a
total of 42% of the Samuel License. GGRI's obligation arises from GGRIs direct
interest in the license and indirectly through GGRIs 40% in Adira GeoGlobal.
Subsequent to balance sheet date, Adira issued a default letter to GGRI and
Emmanuelle and in accordance with the Samuel JOA, Adira may seek reimbursement
of these costs from the other Samuel License participants in proportion to their
respective interests in the Samuel License, and all of the participants,
including Adira, will each receive a proportionate increase in their interests
in the Samuel License. Adira and GGRI are currently discussing a plan to ensure
that GGRI reimburses Adira for costs advanced by Adira.

Adira did not sign a drilling contract
for the drilling of the first well milestone by March 31, 2013, as required by
the Ministry. Adira is currently in the process of requesting an extension for
the timetable of the milestones from the Ministry and it is uncertain that such
an extension will be received.

As of December 31, 2012, the Company
believes that events described above including the lack of available funding
from the license partners sufficient to meet the current milestones timetable,
there are indicators of impairment of the Samuel license and there is a low
probability of realization of the asset from either the successful development
or sale of the license in the near future. Therefore, as of December 31, 2012,
the Company recorded a $7,596 non-cash impairment charge arising from the
write-off of exploration and evaluation (including uncollected recivables from
GGRI and Emmanuelle) assets in the statement of comprehensive loss.

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

| |                                        |   | December 31,                    |  
| | -------------------------------------- | - | ------------------------------- | -
| |                                        |   | 2012                            |  
| |                                        |   | U.S. dollars in
      thousands |  
| |                                        |   |                                 |  
| | Cash and cash equivalents              | $ | 7                               |  
| | Prepaid expenses and other receivables |   | 765                             |  
| | Exploration and evaluation assets (*)  |   | 875                             |  
| | Trade payables                         |   | (1,211                          | )
| |                                        |   |                                 |  
| |                                        | $ | 436                             |  

- 116 -

---

|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.)
|------- | -----------------------------------------

(*) This amount includes the estimated
  net realizable value of the tangible equipment for offshore drilling (piping
  tubes, etc.)

| |                      |   | Year ended                      | 
| | -------------------- | - | ------------------------------- | 
| |                      |   | December 31,                    | 
| |                      |   | 2012                            | 
| |                      |   | U.S. dollars in
      thousands | 
| |                      |   |                                 | 
| | Exploration expenses | $ | 217                             | 

| | (4) | Yam Hadera:                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | Pursuant to the Gabriella 2012 Agreement, the Company has
      an option (the "Yam Hadera Option") to acquire up to a 15% participating
      interest in the Yam Hadera petroleum license (the "Yam Hadera License"),
      located 30 kilometers offshore Israel, between Hadera and Haifa and North
      West of Adiras Yitzhak license. The Yam Hadera Option is exercisable
      until 14 days prior to the signing of a rig contract for the Yam Hadera
  License.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | As described in Note 20, due to allegations made by MELP
      against Adira, and by allegations made by Adira against MELP, subsequent
      to balance sheet date, both parties assert that the other in default of
      various obligations under the Gabriella JOA and other contracts described
      above. Accordingly, there is no assurance that the Company will be able to
      exercise the Yam Hadera Option.                                                

|          | 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 $532, $625 and $156 for the years ended December 31,
      2012, 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,                    | 
| | ------------------------------- | - | ------------------------------- | 
| |                                 |   | 2012                            | 
| |                                 |   | U.S. dollars in
      thousands | 
| |                                 |   |                                 | 
| | Employees in respect of payroll | $ | 201                             | 
| | Accrued expenses                |   | 1,239                           | 
| | Other                           |   | 36                              | 
| |                                 |   |                                 | 
| |                                 | $ | 1,476                           | 

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

- 117 -

---

|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 $3,476 and $8,537 as of December 31, 2012 and December
      31, 2011, respectively, and on accounts and other receivables in the sum
      of $5,061 and $1,213 on December 31, 2012 and December 31, 2011,
      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, 2012, the Company had cash and cash
      equivalents and restricted cash of $3,476, and accounts and other
      receivables of $5,061 against trade and other payables in the amount of
      $7,317.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | As of December 31, 2011, the Company had cash and cash
      equivalents and restricted cash of $8,537 and accounts and other
      receivables of $1,213 against trade and other payables in the amount of
      $1,421.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

- 118 -

---

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

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

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 or the Canadian dollar would not have a
  significant effect on the Company.

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

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

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.

- 119 -

---

|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%.

- 120 -

---

|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, 2012, carryforward losses in Canada
      are approximately $3,500 expiring through 2032. As of December 31, 2012,
      carryforward losses in Israel are approximately $18,000 and may be carried
      forward indefinitely.                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                         
| |    | Net deferred tax assets relating to carryforward operating
      losses and other temporary differences of approximately $4,500 were not
      recognized because their utilization in the foreseeable future is not
      probable.                                                                                                                                    

- 121 -

---

|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:
| | -- | -----------------------------------------------------------------------

| |                                 |   | Year ended                      | 
| | ------------------------------- | - | ------------------------------- | 
| |                                 |   | December 31,                    | 
| |                                 |   | 2012                            | 
| |                                 |   | U.S. dollars in
      thousands | 
| |                                 |   |                                 | 
| | Current taxes                   | $ | 3                               | 
| | Taxes in respect of prior years |   | 38                              | 
| |                                 |   |                                 | 
| |                                 | $ | 41                              | 

| | 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:

| |                                                                         |   | Year ended                      |  
| | ----------------------------------------------------------------------- | - | ------------------------------- | -
| |                                                                         |   | December 31,                    |  
| |                                                                         |   | 2012                            |  
| |                                                                         |   | U.S. dollars in
      thousands |  
| |                                                                         |   |                                 |  
| | Loss before income taxes                                                | $ | (10,516                         | )
| |                                                                         |   |                                 |  
| | Statutory tax rate                                                      |   | 26.5%                           |  
| |                                                                         |   |                                 |  
| | Tax benefit computed at the statutory tax rate                          | $ | (2,787                          | )
| |                                                                         |   |                                 |  
| | Increase in taxes on income resulting from
      the following factors: |   |                                 |  
| | Taxes in respect of prior years                                         |   | 38                              |  
| | Increase in tax due to tax rate differences
      in Israel             |   | 149                             |  
| | Non-deductible expenses                                                 |   | 179                             |  
| | Non-recognition of tax benefit in respect of
      losses               |   | 2,462                           |  
| |                                                                         |   |                                 |  
| | Taxes on income                                                         | $ | 41                              |  

- 122 -

---

|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)                                                                
| |    |                                                                      
| |    |                                                                      
| |    |                                                                      
| |    |                                                                      
| |    |                                                                      
| |    |                                                                      

- 123 -

---

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

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

| | 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, 2012, an aggregate of 417,000 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, 2012 and 2011 were as
follows:                                                                                                                                                  

| |                            |  | Number of   |   |  | Weighted       | 
| | -------------------------- |  | ----------- | - |  | -------------- | 
| |                            |  | options     |   |  | average        | 
| |                            |  | outstanding |   |  | exercise price | 
| |                            |  |             |   |  |                | 
| | Balance, January 1, 2011   |  | 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           | 
| | Options granted            |  | 10,130,000  |   |  | 0.21           | 
| | Options forfeited          |  | (1,853,109  | ) |  | 0.56           | 
| |                            |  |             |   |  |                | 
| | Balance, December 31, 2012 |  | 17,661,109  |   |  | 0.34           | 

- 124 -

---

|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,
2012:

| |                    |  |                    |  |   |            |  |   |              |  |  |                 |  |  |                 |  |  | Average     | 
| | ------------------ |  | ------------------ |  | - | ---------- |  | - | ------------ |  |  | --------------- |  |  | --------------- |  |  | ----------- | 
| |                    |  |                    |  |   |            |  |   |              |  |  | Number of       |  |  | Number of       |  |  | remaining   | 
| |                    |  |                    |  |   | Grant date |  |   | **Exercise** |  |  | options         |  |  | options         |  |  | contractual | 
| | Grant date         |  | Expiry date        |  |   | fair value |  |   | price *)     |  |  | **outstanding** |  |  | **exercisable** |  |  | life        | 
| |                    |  |                    |  |   |            |  |   |              |  |  |                 |  |  |                 |  |  |             | 
| | August 31, 2009    |  | August 20, 2014    |  | $ | 0.29       |  | $ | 0.25         |  |  | 1,708,000       |  |  | 1,648,000       |  |  | 1.64        | 
| | September 23, 2009 |  | September 23, 2014 |  | $ | 0.22       |  | $ | 0.25         |  |  | 400,000         |  |  | 400,000         |  |  | 1.73        | 
| | January 28, 2010   |  | January 27, 2015   |  | $ | 0.56       |  | $ | 0.61         |  |  | 970,000         |  |  | 947,604         |  |  | 2.08        | 
| | July 22, 2010      |  | July 21, 2015      |  | $ | 0.25       |  | $ | 0.61         |  |  | 850,000         |  |  | 850,000         |  |  | 2.56        | 
| | January 11, 2011   |  | January 10, 2016   |  | $ | 0.66       |  | $ | 0.80         |  |  | 1,050,000       |  |  | 459,375         |  |  | 3.03        | 
| | March 18, 2011     |  | March 17, 2016     |  | $ | 0.59       |  | $ | 0.80         |  |  | 100,000         |  |  | 43,750          |  |  | 3.21        | 
| | May 3, 2011        |  | May 2, 2016        |  | $ | 0.52       |  | $ | 0.60         |  |  | 415,000         |  |  | 155,625         |  |  | 3.34        | 
| | June 1, 2011       |  | May 31, 2016       |  | $ | 0.43       |  | $ | 0.50         |  |  | 1,138,109       |  |  | 426,791         |  |  | 3.42        | 
| | June 27, 2011      |  | June 26, 2016      |  | $ | 0.42       |  | $ | 0.50         |  |  | 100,000         |  |  | 37,500          |  |  | 3.49        | 
| | September 8, 2011  |  | September 7, 2016  |  | $ | 0.41       |  | $ | 0.50         |  |  | 250,000         |  |  | 62,500          |  |  | 3.58        | 
| | December 1, 2011   |  | November 30, 2016  |  | $ | 0.22       |  | $ | 0.50         |  |  | 570,000         |  |  | 142,500         |  |  | 3.92        | 
| | March 14, 2012     |  | March 13, 2017     |  | $ | 0.15       |  | $ | 0.25         |  |  | 2,000,000       |  |  | 250,000         |  |  | 4.20        | 
| | August 22, 2012    |  | August 21, 2017    |  | $ | 0.07       |  | $ | 0.20         |  |  | 8,110,000       |  |  | 2,703,333       |  |  | 4.64        | 
| |                    |  |                    |  |   |            |  |   |              |  |  |                 |  |  |                 |  |  |             | 
| |                    |  |                    |  |   |            |  |   |              |  |  | 17,661,109      |  |  | 8,126,978       |  |  |             | 

| | *) | The exercise price of all options granted in 2011 and
      2012 is denominated in Canadian Dollars and was translated to USD in the
      table above using the exchange rate as of December 31,
  2012.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock options granted are expensed as
share-based payments. For grants made until December 31, 2011, the Company uses
the Black-Scholes option pricing model to value stock options granted. For
grants made from January 1, 2012, the Company uses the Binominal 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:

| |                     | 2012     | 2011      | 2010     
| | ------------------- | -------- | --------- | ---------
| |                     |          |           |          
| | Dividend yield      | 0%       | 0%        | 0%       
| | Expected volatility | 80%-104% | 112%-115% | 113%-175%
| | Risk-free interest  | 1%-1.8%  | 1.3%-2.6% | 1.7%-2.4%
| | Forfeiture rate     | 0%-5%    | 0%-5%     | 0%       
| | Expected life       | 5        | 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.

- 125 -

---

|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 | 
| |                                 |  |            |   |   |                | 
| | Balance as of January 1, 2011   |  | 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         | 
| | Warrants Granted                |  | 82,365,640 |   | $ | (*0.20         | 
| |                                 |  |            |   |   |                | 
| | Balance as of December 31, 2012 |  | 97,423,015 |   | $ | 0.25           | 

The following tables summarize
information applicable to warrants outstanding as of December 31, 2012:

| |                  |  |                  |  |   | Grant date |  |   | Exercise |  |  | Number of  | 
| | ---------------- |  | ---------------- |  | - | ---------- |  | - | -------- |  |  | ---------- | 
| | Issue date       |  | Expiry date      |  |   | fair value |  |   | price    |  |  | warrants   | 
| |                  |  |                  |  |   |            |  |   |          |  |  |            | 
| | December 3, 2010 |  | December 3, 2013 |  | $ | 0.34       |  | $ | 0.55     |  |  | 13,750,000 | 
| | December 3, 2010 |  | December 3, 2013 |  | $ | 0.35       |  | $ | 0.40     |  |  | 1,307,375  | 
| | August 9, 2012   |  | August 9, 2015   |  | $ | 0.07       |  | $ | (*0.20   |  |  | 79,012,640 | 
| | August 9, 2012   |  | August 9, 2014   |  | $ | 0.07       |  | $ | (*0.14   |  |  | 3,353,000  | 
| |                  |  |                  |  |   |            |  |   |          |  |  |            | 
| |                  |  |                  |  |   |            |  |   |          |  |  | 97,423,015 | 

| | *) | The exercise price of warrants granted in 2012 is denominated in Canadian Dollars and was translated to USD in the table above using the exchange rate as of December 31, 2012.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.

- 126 -

---

|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 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.

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 TRANSACTIONS
|------------------------------------

| | a. | For the year ended December 31, 2012, the Company
      recognized $357 for advisory fees and operating expenses to private
      companies controlled by the directors or by officers of the Company (2011
      - $906).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                           
| |    | 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.                                                       

| |                              |   | Year ended                      | 
| | ---------------------------- | - | ------------------------------- | 
| |                              |   | December 31,                    | 
| |                              |   | 2012                            | 
| |                              |   | U.S. dollars in
      thousands | 
| |                              |   |                                 | 
| | Short-term employee benefits | $ | 1,071                           | 
| | Share based compensation     |   | 613                             | 
| |                              |   |                                 | 
| |                              | $ | 1,684                           | 
| |                              |   |                                 | 
| | Number of people             |   | 7                               | 

- 127 -

---

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

|NOTE 15:- RELATED PARTY TRANSACTIONS (Cont.)
|--------------------------------------------

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

| |                          |   | Year ended                | 
| | ------------------------ | - | ------------------------- | 
| |                          |   | December 31,              | 
| |                          |   | 2012                      | 
| |                          |   | U.S. dollars in thousands | 
| |                          |   |                           | 
| | Share based compensation | $ | 298                       | 
| |                          |   |                           | 
| | Number of people         |   | 4                         | 

|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,              | 
| |                                             |   | 2012                      | 
| |                                             |   | U.S. dollars in thousands | 
| |                                             |   |                           | 
| | Within one year                             | $ | 187                       | 
| | After one year but not more than five years |   | 44                        | 
| |                                             |   |                           | 
| |                                             | $ | 231                       | 

| | 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 April 30, 2013 and on the Gabriella license by June 30,
      2013 and on Yitzhak license by October 30, 2013. 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, 2012 the Company
      believes that it complies with the conditions and obligations
  above.

- 128 -

---

|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 or work
    programs.                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The Company's share of the remaining contractual commitments as of December 31, 2012, for the Offshore Licenses is approximately $197. Due to our allegations that MELP materially breached the Gabriella 2012 Agreement, per company's managment the $5,000 commitment on the First LC Amount and the Second LC Amount, is not valid as of the date of the financial statements. See Note 20.
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| | d. | Legislative limitations:                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               

- 129 -

---

|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:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      |   | Year ended                      | 
| | -------------------- | - | ------------------------------- | 
| |                      |   | December 31,                    | 
| |                      |   | 2012                            | 
| |                      |   | U.S. dollars in
      thousands | 
| |                      |   |                                 | 
| | Consulting           | $ | 455                             | 
| | Operator fees        |   | 544                             | 
| | Income from farm-out |   | 890                             | 
| | Other income         |   | -                               | 
| |                      |   |                                 | 
| |                      | $ | 1,889                           | 

| | b. | Revenues from major customers (UJVs), each one of which
      exceeds 10% of the consolidated revenues, as of the years ended December
      31, 2012, 2011 and 2010 are as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |            |   | Year ended                | 
| | ---------- | - | ------------------------- | 
| |            |   | December 31               | 
| |            |   | 2012                      | 
| |            |   | U.S. dollars in thousands | 
| |            |   |                           | 
| | Customer A | $ | 461                       | 
| | Customer B |   | 529                       | 
| | Customer C |   | 529                       | 
| | Customer D |   | 370                       | 
| |            |   |                           | 
| |            | $ | 1,889                     | 

- 130 -

---

|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
|------------- | -----------------------------------------

| |                              |   | Year ended                | 
| | ---------------------------- | - | ------------------------- | 
| |                              |   | December 31               | 
| |                              |   | 2012                      | 
| |                              |   | U.S. dollars in thousands | 
| |                              |   |                           | 
| | Payroll and related payments | $ | 759                       | 
| | Share-based compensation     |   | 887                       | 
| | Professional fees            |   | 2,397                     | 
| | Rent and office expenses     |   | 287                       | 
| | Depreciation                 |   | 96                        | 
| | Travel                       |   | 350                       | 
| | Insurance                    |   | 31                        | 
| | Others                       |   | 497                       | 
| |                              |   |                           | 
| |                              | $ | 5,304                     | 

|NOTE 19:- | FINANCING INCOME AND
      EXPENSES                                                                                                                                                                       
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                           
|          | Financing income in 2012 includes $2,299 in respect of the remeasurement of warrants to their fair value. See note 14b(iii).                                                                              
|          |                                                                                                                                                                                                           
|          | Financing expense in 2012 includes $726 in respect to the offering expeses related to the warrants issued in the August 2012 offering that were classified as a financial liability. See note 14b(iii).   
|          |                                                                                                                                                                                                           
|NOTE 20:- | SUBSEQUENT EVENTS                                                                                                                                                                                         
|          |                                                                                                                                                                                                           
|          | Gabriella License (See also Note 9b(1))                                                                                                                                                                   
|          |                                                                                                                                                                                                           
|          | On January 3, 2013, MELP announced that the Drilling
      Contract had been further amended such that the First LC Amount was
      reduced to $12,000 but the Second LC Amount was increased to $21,000.
|          |                                                                                                                                                                                                           
|          | As of January 31, 2013, the Company did not place its share of the letter of credit in the amount of $5,000, due to the Company’s alleged breaches by MELP of the MOU, and the Gabriella 2012 Agreement.  
|          |                                                                                                                                                                                                           
|          | On February 1, 2013, the Company sent a default letter to MELP for its failure to pay the last cash call issued under the Gabriella JOA. This was followed by a second default notice on March 3, 2013.   

- 131 -

---

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

|**NOTE 20:-** | SUBSEQUENT EVENTS (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              | On February 11, 2013, the Company announced that it
      suspended operations on the Gabriella License due to lack of funding and
      lack of reasonable expectation of funding by certain parties sufficient to
      pursue the current work program; lack of agreement among the license
      holders regarding how to proceed under the circumstances; and due to the
      fact that MELP has not met its obligations under the Gabriella JOA or
      under other agreements in place among the JOA parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              | Due to allegations made by MELP against Adira, alleging
      the Companys breach of the Gabriella JOA, the MOU and the Gabriella 2012
      Agreement and by allegations made by Adira against MELP, both parties
      assert that the other is in default of various obligations under the
      Gabriella JOA and other contracts described above. As such, while the
      Company maintains that its rights under the Gabriella JOA and such other
      contracts remain valid, there is no assurance that any of the rights could
      effectively be pursued and realized. Additionally, while the working
      interest percentage ownership of the participants remains 70% MELP, 15%
      Brownstone and 15% Adira; both MELP and Adira assert that the other has a
      0% interest and is obligated to withdraw from the Gabriella JOA and the
      Gabriella License. The Gabriella license holders have been holding
      discussions regarding the above matters.

- - - - - - - -

- 132 -

---

ITEM
19           EXHIBITS

The following exhibits are included in this Form 20-F:

ExhibitNumber            
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
      2009 Stock Option Plan (2)4.2
      Nominee Agreement with BRM Group Ltd (4)8.1
      List of Subsidiaries (5)12.1
      Certificate of Principal
          Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
          of 2002 (5)


- 133 -

---

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.                                                                                     

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 30, 2013

- 134 -

---