----

| EQUAL ENERGY LTD.          |
|---------------------------------|
| MANAGEMENTS’ REPORT  |

----

| EQUAL ENERGY LTD.                                                        |
|-------------------------------------------------------------------------------|
| INDEPENDENT AUDITORS’ REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM  |

----

| EQUAL ENERGY LTD.            |
|-----------------------------------|
| CONSOLIDATED BALANCE SHEETS  |

| As at December 31 (in thousands of Canadian dollars) |   | 2010   |    |   | 2009   |   |
|------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                 |   |   |    |   |   |   |
| Assets                                               |   |   |    |   |   |   |
| Current assets                                       |   |   |    |   |   |   |
| Cash and cash equivalents                            |   |   | 2,505   |   |   |   | 19,680 |   |
| Accounts receivable (notes 4 and 12)                 |   |   | 24,891  |   |   |   | 23,677 |   |
| Prepaid expenses, deposits and other                 |   |   | 2,093   |   |   |   | 1,998 |   |
| Current portion of long-term receivables (note 4)    |   |   | -       |   |   |   | 11,196 |   |
| Commodity contracts (note 12)                        |   |   | 81      |   |   |   | 993 |   |
| Future income tax asset (note 9)                     |   |   | 187     |   |   |   | - |   |
|                                                 |   |   | 29,757  |   |   |   | 57,544 |   |
| Long-term receivable (note 4)                        |   |   | -       |   |   |   | 5,491 |   |
| Property, plant and equipment (note 5)               |   |   | 397,997 |   |   |   | 399,237 |   |
|                                                 |   |   | 427,754 |   |   |   | 462,272 |   |
|                                                 |   |   |    |   |   |   |   |   |
| Liabilities                                          |   |   |    |   |   |   |   |   |
| Current liabilities                                  |   |   |    |   |   |   |   |   |
| Accounts payable and accrued liabilities             |   |   | 31,321  |   |   |   | 27,997 |   |
| Due to JV Participant (note 4)                       |   |   | 10,046  |   |   |   | - |   |
| Deferred revenues (note 4)                           |   |   | 1,926   |   |   |   | - |   |
| Commodity contracts (note 12)                        |   |   | 743     |   |   |   | 755 |   |
| Future income tax liability (note 9)                 |   |   | -       |   |   |   | 69 |   |
|                                                 |   |   | 44,036  |   |   |   | 28,821 |   |
| Long-term debt (note 6)                              |   |   | 24,865  |   |   |   | 70,000 |   |
| Convertible debentures (note 7)                      |   |   | 117,019 |   |   |   | 114,863 |   |
| Asset retirement obligations (note 8)                |   |   | 21,221  |   |   |   | 21,055 |   |
| Future income tax liability (note 9)                 |   |   | 7,101   |   |   |   | 8,487 |   |
|                                                 |   |   | 214,242 |   |   |   | 243,226 |   |
|                                                 |   |   |    |   |   |   |   |   |
| Shareholders’ equity (notes 1 and 10)          |   |   |    |   |   |   |   |   |
| Common shares                                        |   |   | 259,055 |   |   |   | - |   |
| Unitholders’ capital                           |   |   | -       |   |   |   | 674,106 |   |
| Equity component of convertible debentures (note 7)  |   |   | 3,949   |   |   |   | 3,951 |   |
| Contributed surplus                                  |   |   | 12,321  |   |   |   | 11,064 |   |
|                                                 |   |   |    |   |   |   |   |   |
| Accumulated other comprehensive loss (note 11)       |   |   | (33,624 | )      |   |   | (22,474 | ) |
| Deficit (note 1)                                     |   |   | (28,189 | )      |   |   | (447,601 | ) |
|                                                 |   |   | (61,813 | )      |   |   | (470,075 | ) |
|                                                 |   |   | 213,512 |   |   |   | 219,046 |   |
|                                                 |   |   |    |   |   |   |   |   |
|                                                 |   |   | 427,754 |   |   |   | 462,272 |   |

----

| EQUAL ENERGY LTD.                                 |
|--------------------------------------------------------|
| CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS |

| For the year ended December 31(in thousands of Canadian dollars except per share amounts) |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |
|-------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2010                                                                                      | 2009                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |
| Revenues                                                                                  |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Oil and natural gas                                                                       | 137,675                                                                                                                                                                                                                                                                                                                                                       | 124,611                                                                                                                                                                                                                                       |   |
| Realized gain on commodity contracts (note 12)                                            | 6,038                                                                                                                                                                                                                                                                                                                                                         | 15,895                                                                                                                                                                                                                                        |   |
| Unrealized gain/(loss) on commodity contracts (note 12)                                   | (912)                                                                                                                                                                                                                                                                                                                                                         | (13,678)                                                                                                                                                                                                                                      |   |
| Royalties                                                                                 | (29,330)                                                                                                                                                                                                                                                                                                                                                      | (26,570)                                                                                                                                                                                                                                      |   |
|                                                                                      | 113,471                                                                                                                                                                                                                                                                                                                                                       | 100,258                                                                                                                                                                                                                                       |   |
| Expenses                                                                                  |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Production                                                                                | 35,826                                                                                                                                                                                                                                                                                                                                                        | 39,659                                                                                                                                                                                                                                        |   |
| Transportation                                                                            | 2,370                                                                                                                                                                                                                                                                                                                                                         | 2,519                                                                                                                                                                                                                                         |   |
| General and administrative                                                                | 19,227                                                                                                                                                                                                                                                                                                                                                        | 15,707                                                                                                                                                                                                                                        |   |
| Recovery of receivables                                                                   | -                                                                                                                                                                                                                                                                                                                                                             | (2,110)                                                                                                                                                                                                                                       |   |
| Interest expense (note 13)                                                                | 13,538                                                                                                                                                                                                                                                                                                                                                        | 11,461                                                                                                                                                                                                                                        |   |
| Share-based compensation expense (note 10)                                                | 3,636                                                                                                                                                                                                                                                                                                                                                         | 3,580                                                                                                                                                                                                                                         |   |
| Depletion, depreciation and accretion (notes 5 and 8)                                     | 75,286                                                                                                                                                                                                                                                                                                                                                        | 86,877                                                                                                                                                                                                                                        |   |
|     Foreign exchange (gain) loss                                           | (1,290)                                                                                                                                                                                                                                                                                                                                                       | 1,441                                                                                                                                                                                                                                         |
|                                                                                      |                      148,593                                                                                                                                                                                                                              | 159,134                                                                                                                                                                                                                                       |
|   Loss before income taxes                                                           | (35,122)                                                                                                                                                                                                                                                                                                                                                      |                                        (58,876) |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Income taxes (note 9)                                                                     |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Current                                                                                   | 693                                                                                                                                                                                                                                                                                                                                                           | -                                                                                                                                                                                                                                             |   |
|     Future taxes reduction                                            | (1,279)                                                                                                                                                                                                                                                                                                                                                       | (17,594)                                                                                                                                                                                                                                      |   |
|                                                                                      | (586)                                                                                                                                                                                                                                                                                                                                                         | (17,594)                                                                                                                                                                                                                                      |   |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Loss                                                                                      | (34,536)                                                                                                                                                                                                                                                                                                                                                      | (41,282)                                                                                                                                                                                                                                      |   |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Other comprehensive loss                                                                  |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Foreign currency translation adjustment (note 11)                                         | (11,150)                                                                                                                                                                                                                                                                                                                                                      | (40,945)                                                                                                                                                                                                                                      |   |
| Comprehensive loss                                                                        | (45,686)                                                                                                                                                                                                                                                                                                                                                      | (82,227)                                                                                                                                                                                                                                      |   |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Loss per share (note 10)   – Basic and diluted                            |                                                           (1.40) | (1.95)                                                                                                                                                                                                                                        |   |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| CONSOLIDATED STATEMENTS OF DEFICIT                                                        |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| (in thousands of Canadian dollars)                                                        |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                          |   |
| Deficit, beginning of year                                                                | (447,601)                                                                                                                                                                                                                                                                                                                                                     | (406,319)                                                                                                                                                                                                                                     |   |
| Reduction of deficit on Arrangement (note 1)                                              | 453,948                                                                                                                                                                                                                                                                                                                                                       | -                                                                                                                                                                                                                                             |   |
| Loss                                                                                      | (34,536)                                                                                                                                                                                                                                                                                                                                                      | (41,282)                                                                                                                                                                                                                                      |   |
| Deficit, end of year                                                                      | (28,189)                                                                                                                                                                                                                                                                                                                                                      | (447,601)                                                                                                                                                                                                                                     |   |

----

| EQUAL ENERGY LTD.                |
|---------------------------------------|
| CONSOLIDATED STATEMENTS OF CASH FLOWS |

|                                                                   |   |   |    |   |   |   |
|------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| For the year ended December 31 (in thousands of Canadian dollars) |   | 2010   |    |   | 2009   |   |
| Cash provided by (used in):                                            |   |   |    |   |   |   |
| Operating                                                              |   |   |    |   |   |   |
| Loss                                                                   |   |   | (34,536 | )      |   |   | (41,282 | ) |
| Depletion, depreciation and accretion (notes 5 and 8)                  |   |   | 75,286  |   |   |   | 86,877 |   |
| Future taxes (reduction) (note 9)                                      |   |   | (1,279  | )      |   |   | (17,594 | ) |
| Unrealized commodity contracts loss (note 12)                          |   |   | 912     |   |   |   | 14,127 |   |
| Foreign exchange loss                                                  |   |   | 383     |   |   |   | 1,159 |   |
| Share-based compensation (note 10)                                     |   |   | 3,636   |   |   |   | 3,580 |   |
| Non-cash interest expense on convertible debentures                    |   |   | 2,238   |   |   |   | 1,888 |   |
| Cash paid on asset retirement obligations (note 8)                     |   |   | (1,589  | )      |   |   | (2,533 | ) |
|                                                                   |   |   | 45,051  |   |   |   | 46,222 |   |
| Changes in non-cash working capital items (note 16)                    |   |   | (10,615 | )      |   |   | 5,248 |   |
|                                                              |   |   | 34,436  |   |   |   | 51,470 |   |
| Financing                                                              |   |   |    |   |   |   |   |   |
| Repayment of long-term debt (note 6)                                   |   |   | (43,630 | )      |   |   | (25,466 | ) |
| Redemption of convertible debentures                                   |   |   | (82     | )      |   |   | (147 | ) |
| Issue of shares, net of issuance costs (note 10)                       |   |   | 35,641  |   |   |   | - |   |
|                                                              |   |   | (8,071  | )      |   |   | (25,613 | ) |
| Investing                                                              |   |   |    |   |   |   |   |   |
| Property, plant and equipment additions                                |   |   | (77,678 | )      |   |   | (22,206 | ) |
| Capital expenditure to be recovered (note 4)                           |   |   | -       |   |   |   | (1,744 | ) |
| Repayment of long-term receivable (note 4)                             |   |   | 3,503   |   |   |   | 11,004 |   |
| Proceeds on disposal of property, plant andequipment                   |   |   | 26,272  |   |   |   | - |   |
| Changes in non-cash working capital items (note 16)                    |   |   | 5,189   |   |   |   | (5,345 | ) |
|                                                              |   |   | (42,714 | )      |   |   | (18,291 | ) |
| Foreign exchange on financial balances                                 |   |   | (826    | )      |   |   | (1,524 | ) |
| Change in cash and cash equivalents                                    |   |   | (17,175 | )      |   |   | 6,042 |   |
| Cash and cash equivalents, beginning of year                           |   |   | 19,680  |   |   |   | 13,638 |   |
| Cash and cash equivalents, end of year                                 |   |   | 2,505   |   |   |   | 19,680 |   |

----

| EQUAL ENERGY LTD.                           |
|--------------------------------------------------|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |

| 1. | Structure of the business |
|----|---------------------------|

| 2.   | Significant accounting policies |
|----------------|---------------------------------|

| (a)   | Basis of accounting |
|-----------------|---------------------|

| (a)   | Cash and cash equivalents |
|-----------------|---------------------------|

| (b)   | Revenue recognition |
|-----------------|---------------------|

| (c)   | Petroleum and natural gas properties |
|-----------------|--------------------------------------|

| (d)   | Impairment test |
|-----------------|-----------------|

| 3. | New accounting standards |
|----|--------------------------|

| 4. | JV Participant |
|----|----------------|

| (in thousands of Canadian dollars)                                                  |   | December 31, 2010 |      |   | December 31, 2009 |   |
|-------------------------------------------------------------------------------------|--------|-------------------|-----------|--------|-------------------|--------|
| Petroleum and natural gas properties, including production and processing equipment |   |              | 1,139,381 |   |              |   | 1,076,903 |   |
| Accumulated depletion and depreciation                                              |   |              | (741,384  | )      |              |   | (677,666 | ) |
| Net book value                                                                      |   |              | 397,997   |   |              |   | 399,237 |   |

|   Year   |  WTI Oil($U.S./bbl) | Edmonton LightCrude Oil($Cdn/bbl) |  AECO Gas($Cdn/MMbtu) |  Henry Hub($U.S./MMbtu) | ForeignExchangeRate (US$/CAD) |
|--------------------|--------------------------|-----------------------------------|----------------------------|------------------------------|-------------------------------|
| 2011               | 85.00                    | 84.20                             | 4.25                       | 4.55                         | 0.975                         |
| 2012               | 87.70                    | 88.40                             | 4.90                       | 5.30                         | 0.975                         |
| 2013               | 90.50                    | 91.80                             | 5.40                       | 5.75                         | 0.975                         |
| 2014               | 93.40                    | 94.80                             | 5.90                       | 6.30                         | 0.975                         |
| 2015               | 96.30                    | 97.70                             | 6.35                       | 6.80                         | 0.975                         |
| 2016               | 99.40                    | 100.90                            | 6.75                       | 7.35                         | 0.975                         |
| EscalateThereafter | Average2% per year       | Average2% per year                | Average2% per year         | Average2% per year           | 0.975                         |

| (in thousands of Canadian dollars) |   | December 31, 2010 |   |   | December 31, 2009 |   |
|------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
| Long-term debt                     |   |              | 24,865 |   |              |   | 70,000 |   |

|  (in thousands of Canadian dollars) |   | 8% Series |   |   | 8.25% Series |   |   | Total  |   |   | Equity Component |   |
|------------------------------------------|--------|-----------|--------|--------|--------------|--------|--------|--------|--------|--------|------------------|--------|
| Balance, December 31, 2008               |   |      | 76,962 |   |         |   | 36,458 |   |   |   | 113,420          |   |   |   | 3,977 |   |
| Accretion                                |   |      | 995    |   |         |   | 893    |   |   |   | 1,888            |   |   |   | - |   |
| Converted                                |   |      | -      |   |         |   | (298   | )      |   |   | (298             | )      |   |   | (22 | ) |
| Redeemed                                 |   |      | (117   | )      |         |   | (30    | )      |   |   | (147             | )      |   |   | (4 | ) |
| Balance, December 31, 2009               |   |      | 77,840 |   |         |   | 37,023 |   |   |   | 114,863          |   |   |   | 3,951 |   |
| Accretion                                |   |      | 1,185  |   |         |   | 1,053  |   |   |   | 2,238            |   |   |   | - |   |
| Redeemed                                 |   |      | (82    | )      |         |   | -      |   |   |   | (82              | )      |   |   | (2 | ) |
| Balance at December 31, 2010             |   |      | 78,943 |   |         |   | 38,076 |   |   |   | 117,019          |   |   |   | 3,949 |   |

| (in thousands of Canadian dollars) |   | December 31, 2010 |   |   | December 31, 2009 |   |
|------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
| Balance, beginning of year         |   |              | 21,055 |   |              |   | 22,151 |   |
| Additions                          |   |              | 161    |   |              |   | 51 |   |
| Accretion expense                  |   |              | 1,607  |   |              |   | 1,754 |   |
| Acquisitions                       |   |              | 139    |   |              |   | 24 |   |
| Dispositions                       |   |              | (10    | )      |              |   | - |   |
| Costs incurred                     |   |              | (1,589 | )      |              |   | (2,533 | ) |
| Foreign exchange                   |   |              | (142   | )      |              |   | (392 | ) |
| Balance, end of year               |   |              | 21,221 |   |              |   | 21,055 |   |

| 9.   | Income taxes |
|----------------|--------------|

| (in thousands of Canadian dollars)                                  |   | 2010   |    |   | 2009   |   |
|---------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Loss before income taxes                                            |   |   | (35,122 | )      |   |   | (58,876 | ) |
| Combined Canadian federal and provincial income tax rate            |   |   | 28.2    | %      |   |   | 29.2 | % |
| Computed income tax expense (reduction)                             |   |   | (9,904  | )      |   |   | (17,192 | ) |
|                                                                |   |   |    |   |   |   |   |   |
| Increase (decrease) resulting from:                                 |   |   |    |   |   |   |   |   |
| Other non-deductible items                                          |   |   | 1,671   |   |   |   | 1,604 |   |
| Difference between U.S. and Canadian tax rates and foreign exchange |   |   | 628     |   |   |   | 166 |   |
| Change in tax rates                                                 |   |   | 1,063   |   |   |   | 749 |   |
| Capital tax                                                         |   |   | 693     |   |   |   | - |   |
| Other                                                               |   |   | 5,263   |   |   |   | (2,921 | ) |
|                                                                |   |   | (586    | )      |   |   | (17,594 | ) |

| (in thousands of Canadian dollars)                         |   | 2010   |    |   | 2009   |   |
|------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Future income tax assets:                                  |   |   |    |   |   |   |
| Non-capital loss carry-forwards and other                  |   |   | 17,256  |   |   |   | 25,175 |   |
| Asset retirement obligations                               |   |   | 5,746   |   |   |   | 5,741 |   |
| Commodity contracts                                        |   |   | 210     |   |   |   | 212 |   |
| Financing charges                                          |   |   | 459     |   |   |   | 740 |   |
|                                                       |   |   | 23,671  |   |   |   | 31,868 |   |
| Future income tax liabilities:                             |   |   |    |   |   |   |   |   |
| Property, plant and equipment                              |   |   | (30,562 | )      |   |   | (40,143 | ) |
| Commodity contracts                                        |   |   | (23     | )      |   |   | (281 | ) |
| Net future income tax liability                            |   |   | (6,914  | )      |   |   | (8,556 | ) |
| Current portion of net future income tax asset (liability) |   |   | 187     |   |   |   | (69 | ) |
| Non-current net future income tax liability                |   |   | (7,101  | )      |   |   | (8,487 | ) |

| (in thousands of Canadian dollars except number of  shares) |   | Number of Units |       |   | Amount |   |
|-----------------------------------------------------------------------|--------|-----------------|------------|--------|--------|--------|
| Balance at December 31, 2008                                          |   |            | 62,158,987 |   |   |   | 669,667 |   |
| Issued under restricted unit plan                                     |   |            | 701,870    |   |   |   | 951 |   |
| Issued under performance unit plan                                    |   |            | 194,774    |   |   |   | 448 |   |
| Issued on property acquisition                                        |   |            | 2,000,000  |   |   |   | 2,720 |   |
| Issued on conversion of debentures                                    |   |            | 47,058     |   |   |   | 320 |   |
| Balance at December 31, 2009                                          |   |            | 65,102,689 |   |   |   | 674,106 |   |
| Issued under restricted unit plan                                     |   |            | 605,337    |   |   |   | 1,577 |   |
| Balance at May 31, 2010 – prior to the Arrangement              |   |            | 65,708,026 |   |   |   | 675,683 |   |

| b.   | Common shares |
|----------------|---------------|

| (in thousands of Canadian dollars except number of shares)       |   | Number of Shares |       |   | Amount |   |
|------------------------------------------------------------------|--------|------------------|------------|--------|--------|--------|
| Conversion – Effected through Plan of Arrangement          |   |             | 21,902,530 |   |   |   | 675,683 |   |
| Reduction in common shares for deficit                           |   |             | -          |   |   |   | (453,948 | ) |
| Issued under restricted share plan                               |   |             | 193,729    |   |   |   | 1,105 |   |
| Issued under equity offering  (net of issue costs/tax) |   |             | 5,613,600  |   |   |   | 36,215 |   |
| Balance at December 31, 2010                                     |   |             | 27,709,859 |   |   |   | 259,055 |   |

| (in thousands of Canadian dollars)                                   |   |   |   |
|----------------------------------------------------------------------|--------|--------|--------|
| Balance at December 31, 2008                                         |   |   | 8,620  |   |
| Unit option based compensation                                       |   |   | 106    |   |
| Restricted and performance unit compensation                         |   |   | 3,737  |   |
| Transfer to trust units on restricted and performance unit exercises |   |   | (1,399 | ) |
| Balance at December 31, 2009                                         |   |   | 11,064 |   |
| Share option based compensation                                      |   |   | 545    |   |
| Restricted and performance share compensation                        |   |   | 3,394  |   |
| Transfer to shares on restricted share exercises                     |   |   | (2,682 | ) |
| Balance at December 31, 2010                                         |   |   | 12,321 |   |

| (in Canadian dollars, except for number of options) |   | Number ofoptions(1) |      |   | Weighted-average exercise price (1) |   |
|-----------------------------------------------------|--------|---------------------|-----------|--------|-------------------------------------|--------|
| Options outstanding at December 31, 2008            |   |                | 347,331   |   |                                | $      | 23.25 |   |
| Options forfeited                                   |   |                | (112,000  | )      |                                |   | 30.51 |   |
| Options outstanding at December 31, 2009            |   |                | 235,331   |   |                                | $      | 19.80 |   |
| Options granted                                     |   |                | 986,708   |   |                                |   | 5.91 |   |
| Options forfeited                                   |   |                | (163,887  | )      |                                |   | 12.86 |   |
| Options outstanding at December 31, 2010            |   |                | 1,058,152 |   |                                | $      | 7.92 |   |
| Options exercisable at December 31, 2010            |   |                | 182,998   |   |                                | $      | 17.71 |   |

| (in Canadian dollars, except for number of options) |            |   |              |      |    |                            |   |   |                                              |   |
|-----------------------------------------------------|-----------------|--------|-------------------|-----------|---------|---------------------------------|--------|--------|---------------------------------------------------|--------|
| Exercise price range (1)                            |            |   | Number of options |      |    | Weighted average exercise price |   |   | Weighted average remaining contract life in years |   |   | Number of options exercisable |   |   | Weighted average price of exercisable options |   |
| $                                                   | 4.65 to $6.36   |   |              |      | 898,155 |                            |   | $      | 5.72                                              |   |   |   | 3.02 |   |   |   | 66,667 |   |   | $ | 5.25 |   |
| $                                                   | 8.19 to $8.43   |   |              |      | 113,666 |                            |   |   | 8.34                                              |   |   |   | 1.88 |   |   |   | 70,000 |   |   |   | 8.43 |   |
| $                                                   | 46.47 to $60.36 |   |              |      | 46,331  |                            |   |   | 49.66                                             |   |   |   | 0.35 |   |   |   | 46,331 |   |   |   | 49.66 |   |
| Balance at December 31, 2010                        |            |   |              | 1,058,152 |    |                            | $      | 7.92   |                                              |   |   | 2.78 |   |   |   | 182,998 |   |   | $ | 17.71 |   |

|                                                      |   | 2010   |   |   | 2009   |   |
|-----------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Weighted-average fair value of options granted ($/option) |   |   | 2.30   |   |   |   | - |   |
| Risk-free interest rate (%)                               |   |   | 1.71   |   |   |   | 0.5 |   |
| Estimated hold period prior to exercise (years)           |   |   | 4.0    |   |   |   | 4.0 |   |
| Expected volatility (%)                                   |   |   | 50     |   |   |   | 40 |   |
| Expected cash distribution yield (%)                      |   |   | -      |   |   |   | - |   |

|                                    |   | Number of restricted shares (1) |     |   | Weighted-average grant date fair value(1) |   |   | Number of performance shares (1) |   |   | Weighted-average grant date fair value(1) |   |
|-----------------------------------------|--------|---------------------------------|----------|--------|-------------------------------------------|--------|--------|----------------------------------|--------|--------|-------------------------------------------|--------|
| Shares outstanding at December 31, 2008 |   |                            | 759,882  |   |                                      | $      | 12.39  |                             |   |   | 58,132                                    |   |   | $ | 12.51 |   |
| Granted                                 |   |                            | 112,446  |   |                                      |   | 4.92   |                             |   |   | -                                         |   |   |   | - |   |
| Forfeited                               |   |                            | (114,427 | )      |                                      |   | 13.11  |                             |   |   | (25,670                                   | )      |   |   | 19.59 |   |
| Vested                                  |   |                            | (223,171 | )      |                                      |   | 11.97  |                             |   |   | (32,462                                   | )      |   |   | 6.90 |   |
| Shares outstanding at December 31, 2009 |   |                            | 534,730  |   |                                      | $      | 10.41  |                             |   |   | -                                         |   |   |   | - |   |
| Granted                                 |   |                            | 438,279  |   |                                      |   | 5.24   |                             |   |   | -                                         |   |   |   | - |   |
| Forfeited                               |   |                            | (69,354  | )      |                                      |   | 11.09  |                             |   |   | -                                         |   |   |   | - |   |
| Vested                                  |   |                            | (395,896 | )      |                                      |   | 8.91   |                             |   |   | -                                         |   |   |   | - |   |
| Shares outstanding at December 31, 2010 |   |                            | 507,759  |   |                                      | $      | 7.03   |                             |   |   | -                                         |   |   |   | - |   |

| For the year ended December 31, 2010                                                          |   |       |    |   |                                    |   |       |            |   |
|-----------------------------------------------------------------------------------------------|--------|------------|---------|--------|-----------------------------------------|--------|------------|-----------------|--------|
|   (in thousands  of Canadian dollars except shares and per share amounts) |   |  Loss |    |   | Weighted Average Shares Outstanding (1) |   |       |  Per Share |   |
| Basic and diluted                                                                             |   |       | (34,536 | )      |                                    |   | 24,594,866 |            |   | $ | (1.40 | ) |

| For the year ended December 31, 2009                                                          |   |       |    |   |                                    |   |       |                |   |
|-----------------------------------------------------------------------------------------------|--------|------------|---------|--------|-----------------------------------------|--------|------------|---------------------|--------|
|   (in thousands  of Canadian dollars except shares and per share amounts) |   |  Loss |    |   | Weighted Average Shares Outstanding (1) |   |       |  Per Share (1) |   |
| Basic and diluted                                                                             |   |       | (41,282 | )      |                                    |   | 21,119,378 |                |   | $ | (1.95 | ) |

| (in thousands of Canadian dollars)                   |   |   |    |
|------------------------------------------------------|--------|--------|---------|
| Balance, December 31, 2008                           |   |   | 18,471  |   |
| Cumulative translation of self-sustaining operations |   |   | (40,775 | ) |
| Foreign exchange gain realized                       |   |   | (170    | ) |
| Balance, December 31, 2009                           |   |   | (22,474 | ) |
| Cumulative translation of self-sustaining operations |   |   | (11,150 | ) |
| Balance at December 31, 2010                         |   |   | (33,624 | ) |

| 12. | Risk management |
|-----|-----------------|

| ·   | Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1.  Prices in Level 2 are either directly or indirectly observable as of the reporting date.  Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Level 3 - Valuations in this level are those with inputs for the asset or liability that are not based on observable market data. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------|

| As at December 31, 2010            |   |
|------------------------------------|--------|
|                               |   |   |   |   |   |   |   | Fair Value Measurements Using: |   |
| (in thousands of Canadian dollars) |   | Carrying Amount |   |   | FairValue |   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
| Commodity contracts asset          |   |   | 81 |   |   |   | 81 |   |   |   | - |   |   |   | 81 |   |   |   | - |   |
| Commodity contracts liability      |   |   | (743 | ) |   |   | (743 | ) |   |   | - |   |   |   | (743 | ) |   |   | - |   |
| Commodity contracts (net)          |   |   | (662 | ) |   |   | (662 | ) |   |   | - |   |   |   | (662 | ) |   |   | - |   |

| As at December 31, 2009            |   |
|------------------------------------|--------|
|                               |   |   |   |   |   |   |   | Fair Value Measurements Using: |   |
| (in thousands of Canadian dollars) |   | Carrying Amount |   |   | FairValue |   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
| Commodity contracts asset          |   |   | 993 |   |   |   | 993 |   |   |   | - |   |   |   | 993 |   |   |   | - |   |
| Commodity contracts liability      |   |   | (755 | ) |   |   | (755 | ) |   |   | - |   |   |   | (755 | ) |   |   | - |   |
| Commodity contracts (net)          |   |   | 238 |   |   |   | 238 |   |   |   | - |   |   |   | 238 |   |   |   | - |   |

|   | · | maintaining sound financial condition; |
|--------|--------|----------------------------------------|

|   | · | financing operations; and |
|--------|--------|---------------------------|

|   | · | ensuring liquidity in the Canadian and U.S. operations. |
|--------|--------|---------------------------------------------------------|

|   | · | prepare budget documents at prevailing market rates to ensure clear, corporate alignment to performance management and achievement of targets; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | recognize and observe the extent of operating risk within the business; |
|--------|--------|-------------------------------------------------------------------------|

|   | · | identify the magnitude of the impact of market risk factors on the overall risk of the business and take advantage of natural risk reductions that arise from these relationships; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | utilize financial instruments, including derivatives to manage the remaining residual risk to levels that are within the risk tolerance of the Company. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

| Derivative Instrument        | Commodity | Price (2)                                                | Volume per day (2)     | Period                                    |
|------------------------------|-----------|----------------------------------------------------------|------------------------|-------------------------------------------|
| Fixed                        | Gas       | 5.45 ($/GJ)(5.56 ($/mcf))                                | 1,000 GJ(981 mcf)      | March 1, 2010 – February 28, 2011   |
| Fixed                        | Gas       | 4.48 (US$/mmbtu)(4.64 US$/mcf)                           | 2,000 mmbtu(1,932 mcf) | April 1, 2011 –October 31, 2011     |
| Fixed                        | Gas       | 4.53 (US$/mmbtu)(4.69 US$/mcf)                           | 2,000 mmbtu(1,932 mcf) | April 1, 2011 –October 31, 2011     |
| Fixed                        | Gas       | 4.50 (US$/mmbtu)(4.66 US$/mcf)                           | 2,000 mmbtu(1,932 mcf) | April 1, 2011 –March 31, 2012       |
| Fixed Basis Differential (1) | Gas       | Differential Fixed @ $0.33 US$/mmbtu($0.34 US$/mcf) | 5,000 mmbtu(4,831 mcf) | April 1, 2011 –October 31, 2011     |
|                         |      |                                                     |                   |                                      |
| Fixed                        | Oil       | 89.66 ($/bbl)                                            | 200 bbl                | January 1, 2011 – December 31, 2011 |
| Fixed                        | Oil       | 90.00 ($/bbl)                                            | 200 bbl                | January 1, 2011 – December 31, 2011 |
| Fixed                        | Oil       | 93.00 ($/bbl)                                            | 200 bbl                | January 1, 2011 – December 31, 2011 |
| Fixed                        | Oil       | 94.00 ($/bbl)                                            | 200 bbl                | January 1, 2011 – December 31, 2011 |
| Fixed                        | Oil       | 94.60 ($/bbl)                                            | 200 bbl                | January 1, 2011 – December 31, 2011 |

| (1)   | NYMEX / Southern Star (Oklahoma) basis differential. |
|-----------------|------------------------------------------------------|

| (2)   |      Conversion rates of 1.0350 mmbtu per mcf and 1.0194 GJ per mcf. |
|-----------------|-----------------------------------------------------------------------------------------------|

| Type of contract | Commodity | Price                     | Volume per day    | Period                                  |
|------------------|-----------|---------------------------|-------------------|-----------------------------------------|
| Fixed Sale       | Gas       | 5.48 ($/GJ)(5.59 ($/mcf)) | 1,000 GJ(981 mcf) | March 1, 2010 – February 28, 2011 |

| (in thousands of Canadian dollars)    |   | Year endedDecember 31, 2010 |   |   | Year endedDecember 31, 2009 |   |
|---------------------------------------|--------|-----------------------------|--------|--------|-----------------------------|--------|
| Realized commodity contracts gain     |   |                        | 6,038  |   |                        |   | 15,895 |   |
| Unrealized commodity contracts (loss) |   |                        | (912   | )      |                        |   | (14,127 | ) |
| Net gain on commodity contracts       |   |                        | 5,126  |   |                        |   | 1,768 |   |

|                               |   | Increase (decrease) to pre-tax net income                |   |
|------------------------------------|--------|----------------------------------------------------------|--------|
| (in thousands of Canadian dollars) |   | Decrease in market price($1.00 per bbl and$0.50 per mcf) |   |   | Increase in market price($1.00 per bbl and $0.50 per mcf) |   |
| Crude oil derivative contracts     |   |                                                     | 365    |   |   |   | (365 | ) |
| Natural gas derivative contracts   |   |                                                     | 852    |   |   |   | (852 | ) |
|                               |   | Decrease in differential price($0.02 per mcf)            |   |   | Increase in differential price($0.02 per mcf) |   |
| Fixed basis differential contracts |   |                                                     | (21    | ) |   |   | 21 |   |

| (in thousands  of dollars) As at December 31, 2010   |   | Canadian division(in U.S. dollars) |    |   | U.S. division(in U.S. dollars) |   |
|---------------------------------------------------------------------|--------|------------------------------------|---------|--------|--------------------------------|--------|
| Cash and cash equivalents                                           |   |                               | 753     |   |                           |   | 2,167 |   |
| Accounts receivable                                                 |   |                               | -       |   |                           |   | 12,668 |   |
| Commodity contracts                                                 |   |                               | (212    | )      |                           |   | (20 | ) |
| Accounts payable                                                    |   |                               | (21     | )      |                           |   | (10,065 | ) |
| Due to JV Participant (Note 4)                                      |   |                               | -       |   |                           |   | (10,101 | ) |
| Long-term debt                                                      |   |                               | (25,000 | )      |                           |   | - |   |
| Net exposure                                                        |   |                               | (24,480 | )      |                           |   | (5,351 | ) |
|                                                                |   |                               |    |   |                           |   |   |   |
| Effect of a $0.02 increase in U.S. to Cdn exchange  rate: |   |                               |    |   |                           |   |   |   |
| Change to pre-tax net income                                        |   |                               | (490    | )      |                           |   | - |   |
| Change to other comprehensive income                                |   |                               | -       |   |                           |   | (107 | ) |
| Effect of a $0.02 decrease in U.S. to Cdn exchange rate:            |   |                               |    |   |                           |   |   |   |
| Change to pre-tax net income                                        |   |                               | 490     |   |                           |   | - |   |
| Change to other comprehensive income                                |   |                               | -       |   |                           |   | 107 |   |

|                                          |   | Change to pre-tax net income         |   |
|-----------------------------------------------|--------|--------------------------------------|--------|
| (in thousands  of Canadian dollars) |   | 1% decrease in market interest rates |   |   | 1% increase in market interest rates |   |
| Interest on long-term debt                    |   |                                 | 476    |   |   |   | (476 | ) |

| (in thousands  of Canadian dollars) |   | December 31, 2010 |   |   | December 31, 2009 |   |
|-----------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
| Accounts receivable – trade             |   |              | 16,415 |   |              |   | 15,398 |   |
| Accounts receivable – joint venture     |   |              | 2,985  |   |              |   | 1,033 |   |
| Accounts receivable – other             |   |              | 6,335  |   |              |   | 8,400 |   |
| Allowance for doubtful accounts               |   |              | (844   | )      |              |   | (1,154 | ) |
|                                          |   |              | 24,891 |   |              |   | 23,677 |   |

| (in thousands  of Canadian dollars) |   |   |   |   |          |   |
|-----------------------------------------------|--------|--------|--------|--------|---------------|--------|
| As at December 31, 2010                       |   | Trade  |   |   | Joint Venture |   |
| Current                                       |   |   | 15,722 |   |          |   | 1,999 |   |
| Over 30 days                                  |   |   | 573    |   |          |   | 586 |   |
| Over 60 days                                  |   |   | 119    |   |          |   | 199 |   |
| Over 90 days                                  |   |   | 1      |   |          |   | 201 |   |
|                                          |   |   | 16,415 |   |          |   | 2,985 |   |

|   | · | the financial strength of the counterparties is assessed; |
|--------|--------|-----------------------------------------------------------|

|   | · | the total exposure is reviewed regularly and extension of credit is limited; and |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | collateral may be required from some counterparties. |
|--------|--------|------------------------------------------------------|

|                                       |   |
|--------------------------------------------|--------|
| (in thousands of Canadian dollars)         |   | 2011 |   |   | 2012 |   |   |   | 2013 – 2015 |   |   | Total |   |   | Fair Value |   |
| Long-term debt (1)                         |   |   | - |   |   |   | 24,865 |   |   |   | - |   |   |   | 24,865 |   |   |   | 24,865 |   |
| Interest on long-termdebt (2)              |   |   | 748 |   |   |   | 374 |   |   |   | - |   |   |   | 1,122 |   |   |   | 1,122 |   |
| Convertible debentures                     |   |   | 80,127 |   |   |   | 39,648 |   |   |   | - |   |   |   | 119,775 |   |   |   | 122,563 |   |
| Interest on convertible debentures (3)     |   |   | 9,681 |   |   |   | 1,635 |   |   |   | - |   |   |   | 11,316 |   |   |   | 11,316 |   |
| Accounts payable & accrued liabilities |   |   | 31,321 |   |   |   | - |   |   |   | - |   |   |   | 31,321 |   |   |   | 31,321 |   |
| Due to JV Participant                      |   |   | 10,046 |   |   |   | - |   |   |   | - |   |   |   | 10,046 |   |   |   | 10,046 |   |
| Commodity contracts                        |   |   | 743 |   |   |   | - |   |   |   | - |   |   |   | 743 |   |   |   | 743 |   |
| Total obligations                          |   |   | 132,666 |   |   |   | 66,522 |   |   |   | - |   |   |   | 199,188 |   |   |   | 201,976 |   |

|                                     |   | Year ended        |   |   | Year ended        |   |
|------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|  (in thousands of Canadian dollars) |   | December 31, 2010 |   |   | December 31, 2009 |   |
| Interest on long-term debt               |   |              | 2,364  |   |              |   | 2,814 |   |
| Interest on convertible debentures       |   |              | 11,922 |   |              |   | 11,607 |   |
| Interest income (1)                 |   |              | (748   | )      |              |   | (2,960 | ) |
|                                     |   |              | 13,538 |   |              |   | 11,461 |   |

|                               |   |
|------------------------------------|--------|
| (in thousands of Canadian dollars) |   | 2011 |   |   | 2012 |   |   | 2013 |   |   |   | 2014 – 2015 |   |   | Total |   |
| Office leases (1)                  |   |   | 1,787 |   |   |   | 1,232 |   |   |   | 1,188 |   |   |   | 2,190 |   |   |   | 6,397 |   |
| Vehicle and other operating leases |   |   | 250 |   |   |   | 71 |   |   |   | 10 |   |   |   | 4 |   |   |   | 335 |   |
| Total obligations                  |   |   | 2,037 |   |   |   | 1,303 |   |   |   | 1,198 |   |   |   | 2,194 |   |   |   | 6,732 |   |

|  (in thousands  of Canadian dollars) |   | December 31, 2010 |    |   | December 31, 2009 |   |
|-----------------------------------------------------|--------|-------------------|---------|--------|-------------------|--------|
| Accounts receivable                                 |   |              | (3,819  | )      |              |   | 11,682 |   |
| Prepaid expenses, deposits and other                |   |              | (95     | )      |              |   | (39 | ) |
| Accounts payable and accrued liabilities            |   |              | 3,324   |   |              |   | (9,952 | ) |
| Foreign exchange on working capital                 |   |              | (4,836  | )      |              |   | (1,788 | ) |
| Changes in non-cash working capital                 |   |              | (5,426  | )      |              |   | (97 | ) |
| Changes in non-cash operating working capital       |   |              | (10,615 | )      |              |   | 5,248 |   |
| Changes in non-cash investing working capital       |   |              | 5,189   |   |              |   | (5,345 | ) |

| 17. | Capital disclosures |
|-----|---------------------|

| (in thousands  of Canadian dollars) |   | December 31, 2010 |    |   | December 31, 2009 |   |
|-----------------------------------------------|--------|-------------------|---------|--------|-------------------|--------|
| Components of capital:                        |   |              |    |   |              |   |
| Shareholders’ equity                    |   |              | 213,512 |   |              |   | 219,046 |   |
| Convertible debentures                        |   |              | 117,019 |   |              |   | 114,863 |   |
| Long-term debt                                |   |              | 24,865  |   |              |   | 70,000 |   |
| Less:                                         |   |              |    |   |              |   |   |   |
| Cash and cash equivalents                     |   |              | (2,505  | )      |              |   | (19,680 | ) |
|                                          |   |              | 352,891 |   |              |   | 384,229 |   |

| ·   | to reduce debt, with the long term goal to improve the balance sheet based on a ratio of total debt to annual funds from operations; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------|

| ·   | to manage capital in a manner which balances the interest of equity and debt holders; |
|--------------------|---------------------------------------------------------------------------------------|

| ·   | to manage capital in a manner that will maintain compliance with its financial covenants; and |
|--------------------|-----------------------------------------------------------------------------------------------|

| ·   | to maintain a capital base so as to maintain investor, creditor and market confidence and to sustain future exploration and development. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|

| (in thousands of Canadian dollars except for ratios) |   | December 31, 2010 |   |   | December 31, 2009 |   |
|------------------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
| Interest coverage (1):                               |   |              |   |   |              |   |
| Cash flow over the prior four quarters               |   |              | 58,688 |   |              |   | 61,288 |   |
| Interest expenses over the prior four quarters       |   |              | 12,048 |   |              |   | 12,533 |   |
|                                                 |   | 4.87 : 1.00       |   |   | 4.89 : 1.00       |   |

|   | (1) | Note these amounts are defined terms within the credit agreements. |
|--------|-----|--------------------------------------------------------------------|

|                               |   |   |    |   |   |   |
|------------------------------------|--------|--------|---------|--------|--------|--------|
| (in thousands of Canadian dollars) |   | 2010   |    |   | 2009   |   |
| Revenue                            |   |   |    |   |   |   |
|    Canada           |   |   | 73,950  |   |   |   | 61,650 |   |
|    U.S.             |   |   | 68,851  |   |   |   | 65,178 |   |
|                               |   |   | 142,801 |   |   |   | 126,828 |   |
| Property, plant and equipment      |   |   |    |   |   |   |   |   |
|    Canada           |   |   | 184,965 |   |   |   | 192,277 |   |
|    U.S.             |   |   | 213,032 |   |   |   | 206,960 |   |
|                               |   |   | 397,997 |   |   |   | 399,237 |   |

----

| EQUAL ENERGY LTD.  |
|-------------------------|
|               |

| Key PersonnelDon KlapkoPresident and Chief Executive Officer Dell ChapmanSenior Vice President, Finance andChief Financial Officer John ReaderSenior Vice President, Corporate Development andChief Operating Officer Terry FullertonSenior Vice President, Exploration John ChimahuskySenior Vice President and Chief OperatingOfficer U.S. Operations    Board of DirectorsJohn BrussaPeter Carpenter (4)Michael Doyle (1) (2) (3)Victor Dusik (1) (2) (3) (4)Roger Giovanetto (1) (2) (3) (4)Brian Illing (4)Don Klapko (1) Audit Committee member(2) Compensation Committee member(3) Governance and Nominating Committee member(4) Reserves & HSE Committee member   | Legal CounselStikeman Elliott LLPCalgary, Alberta  AuditorsKPMG LLPCalgary, Alberta  BankersBank of Nova ScotiaCalgary, Alberta  Independent Reservoir EngineersMcDaniel & Associates Consultants Ltd.Calgary, Alberta Haas Petroleum Engineering Services Inc.Dallas, Texas  Trustee and Transfer AgentOlympia Trust CompanyCalgary, Alberta  Stock Exchange ListingsNew York Stock ExchangeShares: EQU Toronto Stock ExchangeShares: EQUDebentures: EQU.DB.A and EQU.DB.B  Head OfficeEqual Energy Ltd.2700, 500 - 4th Avenue S.W.Calgary, Alberta  T2P 2V6 Telephone: 403-263-0262Toll Free: 877-263-0262Fax: 403-294-1197 Email: info@equalenergy.caWebsite: www.equalenergy.ca  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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