----

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

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| EQUAL ENERGY LTD.                                         |
|----------------------------------------------------------------|
| REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  |

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| EQUAL ENERGY LTD.                                         |
|----------------------------------------------------------------|
| REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  |

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| EQUAL ENERGY LTD.                              |
|-----------------------------------------------------|
| CONSOLIDATED STATEMENTS OF FINANCIAL POSITION  |

|  (in thousands of Canadian dollars)                                   |   | December 31, 2011 |    |   | December 31, 2010 |   |    | January 1, 2010 |   |
|----------------------------------------------------------------------------|--------|-------------------|---------|--------|-------------------|--------|---------|-----------------|--------|
| Assets                                                                     |   |              |    |   |              |   |    |            |   |
| Current assets                                                             |   |              |    |   |              |   |    |            |   |
| Cash and cash equivalents                                                  |   |              | 5,553   |   |              |   | 2,505   |            |   |   | 19,680 |   |
| Accounts receivable                                                        |   |              | 25,174  |   |              |   | 24,891  |            |   |   | 23,677 |   |
| Prepaid expenses, deposits and other                                       |   |              | 870     |   |              |   | 2,093   |            |   |   | 1,998 |   |
| Assets held for sale (notes 5 and 20)                                      |   |              | 9,678   |   |              |   | -       |            |   |   | - |   |
| Due from JV Participant (note 4)                                           |   |              | -       |   |              |   | -       |            |   |   | 11,196 |   |
| Commodity contracts (note 12)                                              |   |              | 4,813   |   |              |   | -       |            |   |   | 993 |   |
|                                                                       |   |              | 46,088  |   |              |   | 29,489  |            |   |   | 57,544 |   |
| Long-term receivable (note 4)                                              |   |              | -       |   |              |   | -       |            |   |   | 5,491 |   |
| Property, plant and equipment (note 5)                                     |   |              | 404,995 |   |              |   | 337,251 |            |   |   | 350,802 |   |
| Exploration and evaluation assets (note 6)                                 |   |              | 6,429   |   |              |   | 15,094  |            |   |   | 4,762 |   |
| Deferred income tax asset (note 10)                                        |   |              | 9,042   |   |              |   | 10,652  |            |   |   | 9,690 |   |
|                                                                       |   |              | 466,554 |   |              |   | 392,486 |            |   |   | 428,289 |   |
|                                                                       |   |              |    |   |              |   |    |            |   |   |   |   |
| Liabilities                                                                |   |              |    |   |              |   |    |            |   |   |   |   |
| Current liabilities                                                        |   |              |    |   |              |   |    |            |   |   |   |   |
| Accounts payable and accrued liabilities                                   |   |              | 24,239  |   |              |   | 31,321  |            |   |   | 27,997 |   |
| Liabilities associated with assets held for sale (notes 9 and 20)          |   |              | 1,378   |   |              |   | -       |            |   |   | - |   |
| Current portion of decommissioning provision (note 9)                      |   |              | 557     |   |              |   | -       |            |   |   | - |   |
| Due to JV Participant (note 4)                                             |   |              | -       |   |              |   | 10,046  |            |   |   | - |   |
| Deferred revenues (note 4)                                                 |   |              | -       |   |              |   | 1,926   |            |   |   | - |   |
|    Commodity contracts (note 12)                            |   |              | -       |   |              |   | 763     |            |   |   | 755 |   |
|                                                                       |   |              | 26,174  |   |              |   | 44,056  |            |   |   | 28,752 |   |
| Long-term debt (note 7)                                                    |   |              | 138,820 |   |              |   | 24,865  |            |   |   | 70,000 |   |
| Convertible debentures (note 8)                                            |   |              | 41,327  |   |              |   | 119,902 |            |   |   | 114,764 |   |
| Decommissioning provision (note 9)                                         |   |              | 31,178  |   |              |   | 26,084  |            |   |   | 25,774 |   |
| Deferred income tax liability (note 10)                                    |   |              | 8,177   |   |              |   | 5,357   |            |   |   | 2,921 |   |
| Unit-based liability                                                       |   |              | -       |   |              |   | -       |            |   |   | 1,904 |   |
| Unitholders’ capital (note 1)                                        |   |              | -       |   |              |   | -       |            |   |   | 682,906 |   |
|                                                                       |   |              | 245,676 |   |              |   | 220,264 |            |   |   | 927,021 |   |
|                                                                       |   |              |    |   |              |   |    |            |   |   |   |   |
| Shareholders’ equity (notes 1 and 11)                                |   |              |    |   |              |   |    |            |   |   |   |   |
| Common shares                                                              |   |              | 273,108 |   |              |   | 223,664 |            |   |   | - |   |
| Contributed surplus                                                        |   |              | 5,859   |   |              |   | 2,727   |            |   |   | - |   |
| Equity component of convertible    debentures (note 8) |   |              | 1,588   |   |              |   | -       |            |   |   | - |   |
| Accumulated other comprehensive loss                                       |   |              | (3,172  | )      |              |   | (11,624 | )               |   |   | - |   |
| Deficit (note 1)                                                           |   |              | (56,505 | )      |              |   | (42,545 | )               |   |   | (498,732 | ) |
|                                                                       |   |              | 220,878 |   |              |   | 172,222 |            |   |   | (498,732 | ) |
|                                                                       |   |              | 466,554 |   |              |   | 392,486 |            |   |   | 428,289 |   |

----

| EQUAL ENERGY LTD.                                                |
|-----------------------------------------------------------------------|
| CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY  |

| (in thousands of Canadian dollars except shares and units)                             |   |                    |       |   |          |   |     |                |   |   |                                       |   |   |                                     |   |   |                       |   |        |                                         |   |   |
|----------------------------------------------------------------------------------------|--------|-------------------------|------------|--------|---------------|--------|----------|---------------------|--------|--------|--------------------------------------------|--------|--------|------------------------------------------|--------|--------|----------------------------|--------|-------------|----------------------------------------------|--------|--------|
|                                                                                   |   | Number of common shares |       |   | Share capital |   |     | Contributed surplus |   |   | Equity component of convertible debentures |   |   | Number of trust units(pre-consolidation) |   |   | Unitholders’ capital |   |        | Accumulatedother comprehensive income/(loss) |   |   | Deficit |   |   | Shareholders’ equity |   |
| Balances, January 1, 2010                                                              |   |                    | -          |   |          | $      | -        |                |   | $      | -                                          |   |   | $                                        | -      |   |                       |   | 65,102,689  |                                         |   | $      | 682,906 |   |   | $ | - |   |   | $ | (498,732 | ) |   | $ | 184,174 |   |
| Issue of trust units under restrictedunit plan                                         |   |                    | -          |   |          |   | -        |                |   |   | -                                          |   |   |                                     | -      |   |                       |   | 605,337     |                                         |   |   | 1,277 |   |   |   | - |   |   |   | - |   |   |   | 1,277 |   |
| Amortization of deferred trust unit issue costs                                        |   |                    | -          |   |          |   | -        |                |   |   | -                                          |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | 1,000 |   |   |   | - |   |   |   | - |   |   |   | 1,000 |   |
| Comprehensive loss and loss for the period                                             |   |                    | -          |   |          |   | -        |                |   |   | -                                          |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | (806 | ) |   |   | (107 | ) |   |   | (913 | ) |
| Balances, May 31, 2010 – immediately prior to the Plan of  Arrangement |   |                    | -          |   |          | $      | -        |                |   | $      | -                                          |   |   | $                                        | -      |   |                       |   | 65,708,026  |                                         |   | $      | 685,183 |   |   | $ | (806 | ) |   | $ | (498,839 | ) |   | $ | 185,538 |   |
| Conversion – effected through Plan of Arrangement                                |   |                    | 21,902,530 |   |          |   | 685,183  |                |   |   | 2,659                                      |   |   |                                     | -      |   |                       |   | (65,708,026 | )                                            |   |   | (685,183 | ) |   |   | - |   |   |   | - |   |   |   | 2,659 |   |
| Reduction in share capital for deficit                                                 |   |                    | -          |   |          |   | (498,839 | )                   |   |   | -                                          |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | 498,839 |   |   |   | - |   |
| Balances, May 31, 2010 – immediately after the Plan of  Arrangement    |   |                    | 21,902,530 |   |          | $      | 186,344  |                |   | $      | 2,659                                      |   |   | $                                        | -      |   |                       |   | -           |                                         |   | $      | - |   |   | $ | (806 | ) |   | $ | - |   |   | $ | 188,197 |   |
| Issue of common shares under restricted share plan                                     |   |                    | 193,729    |   |          |   | 1,105    |                |   |   | (1,105                                     | )      |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Issue of common shares under equity offering (net of issue costs/tax)                  |   |                    | 5,613,600  |   |          |   | 36,215   |                |   |   | -                                          |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 36,215 |   |
| Share-based compensation before capitalization                                         |   |                    | -          |   |          |   | -        |                |   |   | 1,173                                      |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,173 |   |
| Comprehensive loss and loss for the period                                             |   |                    | -          |   |          |   | -        |                |   |   | -                                          |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | (10,818 | ) |   |   | (42,545 | ) |   |   | (53,363 | ) |
| Balances, December 31, 2010                                                            |   |                    | 27,709,859 |   |          | $      | 223,664  |                |   | $      | 2,727                                      |   |   | $                                        | -      |   |                       |   | -           |                                         |   | $      | - |   |   | $ | (11,624 | ) |   | $ | (42,545 | ) |   | $ | 172,222 |   |
| Issue of common shares under restricted share plan                                     |   |                    | 194,576    |   |          |   | 1,142    |                |   |   | (1,142                                     | )      |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Issue of common shares on exercise of options                                          |   |                    | 25,000     |   |          |   | 134      |                |   |   | (10                                        | )      |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 124 |   |
| Issue of common shares under equity offering (net of issue costs/tax)                  |   |                    | 6,850,000  |   |          |   | 48,168   |                |   |   | -                                          |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 48,168 |   |
| Share-based compensation before capitalization                                         |   |                    | -          |   |          |   | -        |                |   |   | 4,284                                      |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 4,284 |   |
| Issue of convertible debentures                                                        |   |                    | -          |   |          |   | -        |                |   |   | -                                          |   |   |                                     | 1,588  |   |                       |   | -           |                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,588 |   |
| Comprehensive income and loss for the year                                             |   |                    | -          |   |          |   | -        |                |   |   | -                                          |   |   |                                     | -      |   |                       |   | -           |                                         |   |   | - |   |   |   | 8,452 |   |   |   | (13,960 | ) |   |   | (5,508 | ) |
| Balances, December 31, 2011                                                            |   |                    | 34,779,435 |   |          | $      | 273,108  |                |   | $      | 5,859                                      |   |   | $                                        | 1,588  |   |                       |   | -           |                                         |   | $      | - |   |   | $ | (3,172 | ) |   | $ | (56,505 | ) |   | $ | 220,878 |   |

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

|                                                              |   | For the year ended December 31 |     |
|-------------------------------------------------------------------|--------|--------------------------------|----------|
| (in thousands of Canadian dollars except per share amounts)       |   | 2011                           |     |   | 2010 |   |
|                                                              |   |                           |     |   |   |   |
| Oil, NGL and natural gas revenues                                 |   |                           | 161,494  |   |   |   | 137,675 |   |
| Realized gain on commodity contracts (note 12)                    |   |                           | 2,220    |   |   |   | 6,038 |   |
| Unrealized gain/(loss) on commodity contracts (note 12)           |   |                           | 5,525    |   |   |   | (1,013 | ) |
| Royalty expense                                                   |   |                           | (33,054  | ) |   |   | (29,330 | ) |
| Revenues, net of royalty expense                                  |   |                           | 136,185  |   |   |   | 113,370 |   |
|                                                              |   |                           |     |   |   |   |   |   |
| Operating expenses                                                |   |                           |     |   |   |   |   |   |
| Production                                                        |   |                           | (41,557  | ) |   |   | (35,826 | ) |
| Transportation                                                    |   |                           | (1,665   | ) |   |   | (2,370 | ) |
| General and administrative                                        |   |                           | (12,914  | ) |   |   | (19,227 | ) |
| Share-based compensation expense (note 11)                        |   |                           | (3,968   | ) |   |   | (2,900 | ) |
| Depletion and depreciation  (note 5)                    |   |                           | (53,229  | ) |   |   | (47,252 | ) |
| Impairment in property, plant and equipment (note 5)              |   |                           | (27,486  | ) |   |   | (31,114 | ) |
|                                                              |   |                           | (140,819 | ) |   |   | (138,689 | ) |
| Other income/(expenses)                                           |   |                           |     |   |   |   |   |   |
| Interest expense (note 13)                                        |   |                           | (12,042  | ) |   |   | (11,226 | ) |
|    Accretion of decommissioning provision (note 9) |   |                           | (727     | ) |   |   | (769 | ) |
| Gain on sale of assets                                            |   |                           | 17,595   |   |   |   | 2,005 |   |
| Transaction costs on asset acquisition  (note 5)        |   |                           | (1,767   | ) |   |   | - |   |
| Redemption premium on convertible debentures (note 8)             |   |                           | (2,880   | ) |   |   | - |   |
|    Revaluation of convertible debentures (note 8)  |   |                           | -        |   |   |   | (5,295 | ) |
| Amortization of trust unit issue costs                            |   |                           | -        |   |   |   | (1,000 | ) |
| Realized foreign exchange gain/(loss)                             |   |                           | (240     | ) |   |   | 1,674 |   |
| Unrealized foreign exchange loss                                  |   |                           | (4,416   | ) |   |   | (384 | ) |
|                                                              |   |                           | (4,477   | ) |   |   | (14,995 | ) |
| Loss before taxes                                                 |   |                           | (9,111   | ) |   |   | (40,314 | ) |
|                                                              |   |                           |     |   |   |   |   |   |
| Taxes (note 10)                                                   |   |                           |     |   |   |   |   |   |
| Current tax expense                                               |   |                           | (391     | ) |   |   | (694 | ) |
| Deferred tax expense                                              |   |                           | (4,458   | ) |   |   | (1,644 | ) |
|                                                              |   |                           | (4,849   | ) |   |   | (2,338 | ) |
|                                                              |   |                           |     |   |   |   |   |   |
| Loss                                                              |   |                           | (13,960  | ) |   |   | (42,652 | ) |
|                                                              |   |                           |     |   |   |   |   |   |
| Other comprehensive income/(loss)                                 |   |                           |     |   |   |   |   |   |
| Foreign currency translation adjustment                           |   |                           | 8,452    |   |   |   | (11,624 | ) |
| Comprehensive loss                                                |   |                           | (5,508   | ) |   |   | (54,276 | ) |
|                                                              |   |                           |     |   |   |   |   |   |
| Loss per share (note 11)   – Basic and diluted    |   |                           | (0.44    | ) |   |   | (1.73 | ) |

----

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

|                                                                       |   | Year ended December 31 |     |
|----------------------------------------------------------------------------|--------|------------------------|----------|
| (in thousands of Canadian dollars)                                         |   | 2011                   |     |   | 2010 |   |
| Cash provided by (used in):                                                |   |                   |     |   |   |   |
| Operating                                                                  |   |                   |     |   |   |   |
|    Loss                                                     |   |                   | (13,960  | ) |   |   | (42,652 | ) |
| Share-based compensation (note 11)                                         |   |                   | 3,968    |   |   |   | 2,900 |   |
| Depletion and depreciation (note 5)                                        |   |                   | 53,229   |   |   |   | 47,252 |   |
| Impairment in property, plant and equipment (note 5)                       |   |                   | 27,486   |   |   |   | 31,114 |   |
| Non-cash interest on convertible debenture (note 8)                        |   |                   | 732      |   |   |   | (74 | ) |
| Accretion of decommissioning provision  (note 9)                 |   |                   | 727      |   |   |   | 769 |   |
| Unrealized commodity contracts (gain)/loss (note 12)                       |   |                   | (5,525   | ) |   |   | 1,013 |   |
| Gain on sale of assets (note 5)                                            |   |                   | (17,595  | ) |   |   | (2,005 | ) |
| Transactions costs on asset acquisition (note 5)                           |   |                   | 1,767    |   |   |   | - |   |
| Redemption premium on convertible debentures (note 8)                      |   |                   | 2,975    |   |   |   | - |   |
| Revaluation of convertible debentures (note 8)                             |   |                   | -        |   |   |   | 5,295 |   |
| Amortization of trust unit issue costs                                     |   |                   | -        |   |   |   | 1,000 |   |
| Unrealized foreign exchange loss                                           |   |                   | 4,416    |   |   |   | 384 |   |
| Deferred tax expense                                                       |   |                   | 4,458    |   |   |   | 1,644 |   |
|  Funds from operations                                                |   |                   | 62,678   |   |   |   | 46,640 |   |
| Cash paid on decommissioning provision (note 9)                            |   |                   | (1,652   | ) |   |   | (1,589 | ) |
| Transaction costs on asset acquisition (note 5)                            |   |                   | (1,767   | ) |   |   | - |   |
| Changes in non-cash working capital items (note 16)                        |   |                   | (2,980   | ) |   |   | (10,615 | ) |
|                                                                  |   |                   | 56,279   |   |   |   | 34,436 |   |
| Financing                                                                  |   |                   |     |   |   |   |   |   |
| Increase/(decrease) in long-term debt (note 7)                             |   |                   | 109,047  |   |   |   | (43,630 | ) |
| Issue of shares, net of issuance costs                                     |   |                   | 47,417   |   |   |   | 35,641 |   |
| Issuance of convertible debentures, net of costs (note 8)                  |   |                   | 42,741   |   |   |   | - |   |
|     Redemption of convertible debentures (note 8)      |   |                   | (119,618 | ) |   |   | (82 | ) |
|     Redemption fee on convertible debentures (notes 8) |   |                   | (2,975   | ) |   |   | - |   |
|                                                                  |   |                   | 76,612   |   |   |   | (8,071 | ) |
| Investing                                                                  |   |                   |     |   |   |   |   |   |
| Property, plant and equipment additions (note 5)                           |   |                   | (81,591  | ) |   |   | (77,678 | ) |
| Asset acquisition (note 5)                                                 |   |                   | (86,098  | ) |   |   | - |   |
| Repayment of long-term receivable (note 4)                                 |   |                   | -        |   |   |   | 3,503 |   |
| Proceeds on disposal of property, plant andequipment (note 5)              |   |                   | 41,144   |   |   |   | 26,272 |   |
| Changes in non-cash working capital items (note 16)                        |   |                   | (3,360   | ) |   |   | 5,189 |   |
|                                                                  |   |                   | (129,905 | ) |   |   | (42,714 | ) |
| Foreign exchange on financial balances                                     |   |                   | 62       |   |   |   | (826 | ) |
| Change in cash and cash equivalents                                        |   |                   | 3,048    |   |   |   | (17,175 | ) |
| Cash and cash equivalents, beginning of year                               |   |                   | 2,505    |   |   |   | 19,680 |   |
| Cash and cash equivalents, end of year                                     |   |                   | 5,553    |   |   |   | 2,505 |   |

| Supplementary cash flow information |   |   |   |   |
|-------------------------------------|--------|--------|--------|--------|
| Cash interest paid                  |   |   | 10,945 | 12,048 |
| Cash income taxes paid              |   |   | 391    | 693    |

----

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

| 1. | Reporting entity |
|----|------------------|

| 2.   | Basis of preparation |
|----------------|----------------------|

| 3.   | Significant accounting policies |
|----------------|---------------------------------|

| ·   |       IFRS 10, "Consolidated Financial Statements", which is the result of the IASB’s project to replace Standing Interpretations Committee 12, "Consolidation – Special Purpose Entities" and the consolidation requirements of IAS 27, "Consolidated and Separate Financial Statements".  The new standard eliminates the current risk and rewards approach and establishes control as the single basis for determining the consolidation of an entity. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |       IFRS 11, "Joint Arrangements", which is the result of the IASB’s project to replace IAS 31, “Interests in Joint Ventures”.  The new standard redefines joint operations and joint ventures and requires joint operations to be proportionately consolidated and joint ventures to be equity accounted.  Under IAS 31, joint ventures could be proportionately consolidated. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |       IFRS 12, "Disclosure of Interests in Other Entities", which outlines the required disclosures for interests in subsidiaries and joint arrangements.  The new disclosures require information that will assist financial statement users to evaluate the nature, risks and financial effects associated with an entity’s interests in subsidiaries and joint arrangements. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |       IFRS 13, "Fair Value Measurement", which provides a common definition of fair value, establishes a framework for measuring fair value under IFRS and enhances the disclosures required for fair value measurements.  The standard applies where fair value measurements are required and does not require new fair value measurements. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |       IFRS 9, "Financial Instruments", which is the result of the first phase of the IASB’s project to replace IAS 39, "Financial Instruments: Recognition and Measurement".  The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | JV Participant (also see Note 5) |
|----|----------------------------------|

| 5. | Property, plant and equipment (“PP&E”) |
|----|--------------------------------------------------------|

| Cost or deemed cost(in thousands of Canadian dollars) |   | Canadian Operations |    |   | U.S. Operations |   |    | Total  |   |
|-------------------------------------------------------|--------|---------------------|---------|--------|-----------------|--------|---------|--------|--------|
| Balance at January 1, 2010                            |   |                | 146,003 |   |            |   | 204,799 |   |   |   | 350,802 |   |
| Capital expenditures                                  |   |                | 30,953  |   |            |   | 5,811   |   |   |   | 36,764 |   |
| Transfers from exploration and evaluation             |   |                | 3,043   |   |            |   | 4,261   |   |   |   | 7,304 |   |
| Acquisitions                                          |   |                | 17,804  |   |            |   | 5,485   |   |   |   | 23,289 |   |
| Divestures                                            |   |                | (24,374 | )      |            |   | (22     | )      |   |   | (24,396 | ) |
| Reclassification of long-term receivable              |   |                | -       |   |            |   | 12,519  |   |   |   | 12,519 |   |
| JV Participant court ruling                           |   |                | -       |   |            |   | 18,198  |   |   |   | 18,198 |   |
| Non-cash additions                                    |   |                | 911     |   |            |   | 391     |   |   |   | 1,302 |   |
| Foreign currency translation and other                |   |                | -       |   |            |   | (11,052 | )      |   |   | (11,052 | ) |
| Balance at December 31, 2010                          |   |                | 174,340 |   |            |   | 240,390 |   |   |   | 414,730 |   |
| Capital expenditures                                  |   |                | 35,577  |   |            |   | 34,223  |   |   |   | 69,800 |   |
| Transfers from exploration and evaluation             |   |                | 20,311  |   |            |   | 242     |   |   |   | 20,553 |   |
| Divestures                                            |   |                | (61,411 | )      |            |   | -       |   |   |   | (61,411 | ) |
| JV Participant court ruling                           |   |                | -       |   |            |   | (17,259 | )      |   |   | (17,259 | ) |
| Acquisition of working interestsfrom Petroflow (1)    |   |                | -       |   |            |   | 92,378  |   |   |   | 92,378 |   |
| Non-cash additions                                    |   |                | 12,687  |   |            |   | 6,686   |   |   |   | 19,373 |   |
| Foreign currency translation adjustment               |   |                | -       |   |            |   | 8,891   |   |   |   | 8,891 |   |
| Balance at December 31, 2011                          |   |                | 181,504 |   |            |   | 365,551 |   |   |   | 547,055 |   |

| Depletion, depreciation and impairment losses(in thousands of Canadian dollars) |   | Canadian Operations |    |   | U.S. Operations |   |   | Total  |   |
|---------------------------------------------------------------------------------|--------|---------------------|---------|--------|-----------------|--------|--------|--------|--------|
| Balance at January 1, 2010                                                      |   |                | -       |   |            |   | -      |   |   |   | - |   |
| Depletion and depreciation                                                      |   |                | 25,000  |   |            |   | 22,252 |   |   |   | 47,252 |   |
| Impairments                                                                     |   |                | 31,114  |   |            |   | -      |   |   |   | 31,114 |   |
| Divestures                                                                      |   |                | (129    | )      |            |   | -      |   |   |   | (129 | ) |
| Foreign currency translation adjustment                                         |   |                | -       |   |            |   | (758   | )      |   |   | (758 | ) |
| Balance at December 31, 2010                                                    |   |                | 55,985  |   |            |   | 21,494 |   |   |   | 77,479 |   |
| Depletion and depreciation                                                      |   |                | 24,115  |   |            |   | 29,114 |   |   |   | 53,229 |   |
| Impairments                                                                     |   |                | 27,486  |   |            |   | -      |   |   |   | 27,486 |   |
| Divestitures                                                                    |   |                | (27,002 | )      |            |   | -      |   |   |   | (27,002 | ) |
| Foreign currency translation adjustment                                         |   |                | -       |   |            |   | 1,190  |   |   |   | 1,190 |   |
| Balance at December 31, 2011                                                    |   |                | 80,584  |   |            |   | 51,798 |   |   |   | 132,382 |   |

| Net book value(in thousands of Canadian dollars) |   | Canadian Operations |    |   | U.S. Operations |   |    | Total  |   |
|--------------------------------------------------|--------|---------------------|---------|--------|-----------------|--------|---------|--------|--------|
|                                             |   |                |    |   |            |   |    |   |   |
| At January 1, 2010                               |   |                | 146,003 |   |            |   | 204,799 |   |   |   | 350,802 |   |
| At December 31, 2010                             |   |                | 118,355 |   |            |   | 218,896 |   |   |   | 337,251 |   |
| Property, plant and equipment                    |   |                | 91,242  |   |            |   | 313,753 |   |   |   | 404,995 |   |
| Assets held for sale                             |   |                | 9,678   |   |            |   | -       |   |   |   | 9,678 |   |
| At December 31, 2011                             |   |                | 100,920 |   |            |   | 313,753 |   |   |   | 414,673 |   |

|   Year   |  WTI Oil($U.S./bbl) | Edmonton LightCrude Oil($Cdn/bbl) |  AECO Gas($Cdn/MMbtu) |  Henry Hub($U.S./MMbtu) | ForeignExchangeRate (US$/CAD) |
|--------------------|--------------------------|-----------------------------------|----------------------------|------------------------------|-------------------------------|
| 2012               | 97.50                    | 99.00                             | 3.50                       | 3.75                         | 0.975                         |
| 2013               | 97.50                    | 99.00                             | 4.20                       | 4.50                         | 0.975                         |
| 2014               | 100.00                   | 101.50                            | 4.70                       | 5.05                         | 0.975                         |
| 2015               | 100.80                   | 102.30                            | 5.10                       | 5.50                         | 0.975                         |
| 2016               | 101.70                   | 103.20                            | 5.55                       | 5.95                         | 0.975                         |
| 2017               | 102.70                   | 104.20                            | 5.90                       | 6.35                         | 0.975                         |
| EscalateThereafter | Average2% per year       | Average2% per year                | Average2% per year         | Average2% per year           | 0.975                         |

| 6.   | Exploration and evaluation assets |
|----------------|-----------------------------------|

|  (in thousands of Canadian dollars)   |   | Canadian Operations |    |   | U.S. Operations |   |   | Total  |   |
|--------------------------------------------|--------|---------------------|---------|--------|-----------------|--------|--------|--------|--------|
| As at January 1, 2010                      |   |                | 2,603   |   |            |   | 2,159  |   |   |   | 4,762 |   |
| Capital expenditures                       |   |                | 15,247  |   |            |   | 2,378  |   |   |   | 17,625 |   |
| Transfers to property, plant and equipment |   |                | (3,043  | )      |            |   | (4,261 | )      |   |   | (7,304 | ) |
| Non-cash additions                         |   |                | 102     |   |            |   | 24     |   |   |   | 126 |   |
| Foreign currency translation and other     |   |                | -       |   |            |   | (115   | )      |   |   | (115 | ) |
| Balance, December 31, 2010                 |   |                | 14,909  |   |            |   | 185    |   |   |   | 15,094 |   |
| Capital expenditures                       |   |                | 11,744  |   |            |   | 47     |   |   |   | 11,791 |   |
| Transfers to property, plant and equipment |   |                | (20,311 | )      |            |   | (242   | )      |   |   | (20,553 | ) |
| Non-cash additions                         |   |                | 87      |   |            |   | -      |   |   |   | 87 |   |
| Foreign currency translation and other     |   |                | -       |   |            |   | 10     |   |   |   | 10 |   |
| Balance at December 31, 2011               |   |                | 6,429   |   |            |   | -      |   |   |   | 6,429 |   |

| (in thousands of Canadian dollars) |   | December 31, 2011 |    |   | December 31, 2010 |   |
|------------------------------------|--------|-------------------|---------|--------|-------------------|--------|
| Long-term debt                     |   |              | 138,820 |   |              |   | 24,865 |   |

| 8. | Convertible debentures |
|----|------------------------|

|  (in thousands of Canadian dollars) |   | EQU.DB8% Series |    |   | EQU.DB.A8.25% Series |   |    | EQU.DB.B6.75% Series |   |   | Total  |   |   | Equity Component |     |
|------------------------------------------|--------|-----------------|---------|--------|----------------------|--------|---------|----------------------|--------|--------|--------|--------|--------|------------------|----------|
| Balance, January 1, 2010                 |   |            | 76,999  |   |                 |   | 37,765  |                 |   |   | -      |   |   |             | 114,764  |   |   |   | - |   |
| Revaluation                              |   |            | 3,412   |   |                 |   | 1,883   |                 |   |   | -      |   |   |             | 5,295    |   |   |   | - |   |
| Amortization of premium                  |   |            | (74     | )      |                 |   | -       |                 |   |   | -      |   |   |             | (74      | ) |   |   | - |   |
| Redeemed                                 |   |            | (83     | )      |                 |   | -       |                 |   |   | -      |   |   |             | (83      | ) |   |   | - |   |
| Balance, December 31, 2010               |   |            | 80,254  |   |                 |   | 39,648  |                 |   |   | -      |   |   |             | 119,902  |   |   |   | - |   |
| Issuance, net of costs                   |   |            | -       |   |                 |   | -       |                 |   |   | 40,574 |   |   |             | 40,574   |   |   |   | 2,167 |   |
| Deferred tax                             |   |            | -       |   |                 |   | -       |                 |   |   | -      |   |   |             | -        |   |   |   | (579 | ) |
| Accretion and amortization               |   |            | (21     | )      |                 |   | -       |                 |   |   | 753    |   |   |             | 732      |   |   |   | - |   |
| Redeemed                                 |   |            | (80,233 | )      |                 |   | (39,648 | )                    |   |   | -      |   |   |             | (119,881 | ) |   |   | - |   |
| Balance at December 31, 2011             |   |            | -       |   |                 |   | -       |                 |   |   | 41,327 |   |   |             | 41,327   |   |   |   | 1,588 |   |

| 9. | Decommissioning provision |
|----|---------------------------|

| (in thousands of Canadian dollars)               |   | December 31, 2011 |    |   | December 31, 2010 |   |
|--------------------------------------------------|--------|-------------------|---------|--------|-------------------|--------|
| Balance, beginning of year                       |   |              | 26,084  |   |              |   | 25,774 |   |
| Additions                                        |   |              | 771     |   |              |   | 413 |   |
| Accretion expense                                |   |              | 727     |   |              |   | 769 |   |
| Acquisitions                                     |   |              | 722     |   |              |   | 232 |   |
| Dispositions                                     |   |              | (11,230 | )      |              |   | (17 | ) |
| Costs incurred                                   |   |              | (1,652  | )      |              |   | (1,590 | ) |
| Change in estimate                               |   |              | 17,564  |   |              |   | 710 |   |
| Foreign exchange                                 |   |              | 127     |   |              |   | (207 | ) |
| Balance, end of year                             |   |              | 33,113  |   |              |   | 26,084 |   |
| Liabilities associated with assets held for sale |   |              | 1,378   |   |              |   | - |   |
| Current decommissioning provision                |   |              | 557     |   |              |   | - |   |
| Non-current decommissioning provision            |   |              | 31,178  |   |              |   | 26,084 |   |
| Balance, end of year                             |   |              | 33,113  |   |              |   | 26,084 |   |

| 10. | Income taxes |
|-----|--------------|

| (in thousands of Canadian dollars)                                  |   | 2011   |   |   | 2010   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Loss before income taxes                                            |   |   | (9,111 | )      |   |   | (40,314 | ) |
| Combined Canadian federal and provincial income tax rate            |   |   | 26.7   | %      |   |   | 28.2 | % |
| Computed income tax expense (reduction)                             |   |   | (2,433 | )      |   |   | (11,369 | ) |
|                                                                |   |   |   |   |   |   |   |   |
| Increase (decrease) resulting from:                                 |   |   |   |   |   |   |   |   |
| Other non-deductible items                                          |   |   | 1,828  |   |   |   | 832 |   |
| Difference between U.S. and Canadian tax rates and foreign exchange |   |   | 915    |   |   |   | 801 |   |
| Change in tax rates                                                 |   |   | 477    |   |   |   | 5,606 |   |
| Capital tax                                                         |   |   | 391    |   |   |   | 694 |   |
| Other                                                               |   |   | 3,671  |   |   |   | 5,774 |   |
|                                                                |   |   | 4,849  |   |   |   | 2,338 |   |

|                               |                               | Recognized in earnings |    |    | Financial position as at December 31 |   |
|------------------------------------|------------------------------------|------------------------|---------|---------|--------------------------------------|--------|
| 2011                               | (in thousands of Canadian dollars) |                   | 2010    |    |                                 | 2011   |   |   | 2010 |   |
| Assets                             |                               |                   |    |    |                                 |   |   |   |   |   |   |   |
|                               | Provision for reclamation          |                   |    | 2,933   |                                 |   |   | 94 |   |   |   | 10,127 |   |   |   | 7,135 |   |
|                               | Share issue costs                  |                   |    | 276     |                                 |   |   | (1,076 | ) |   |   | 1,478 |   |   |   | 450 |   |
|                               | Income tax losses                  |                   |    | 14,728  |                                 |   |   | (7,430 | ) |   |   | 35,152 |   |   |   | 20,281 |   |
| Deferred tax assets                |                               |                   | 17,937  |    |                                 |   | (8,412 | ) |   |   | 46,757 |   |   |   | 27,866 |   |
| Liabilities                        |                               |                   |    |    |                                 |   |   |   |   |   |   |   |   |   |   |   |
|                               | Property, plant and equipment      |                   |    | (18,928 | )                                    |   |   | 7,537 |   |   |   | (36,431 | ) |   |   | (17,171) |   |
|                               | Partnership                        |                   |    | (2,097  | )                                    |   |   | 261 |   |   |   | (1,907 | ) |   |   | 206 |   |
|                               | Risk Management                    |                   |    | (351    | )                                    |   |   | 1,315 |   |   |   | (918 | ) |   |   | 11 |   |
|                               | Debentures                         |                   |    | (1,379  | )                                    |   |   | (650 | ) |   |   | (6,678 | ) |   |   | (5,298 | ) |
|                               | Other                              |                   |    | 360     |                                 |   |   | (1,695 | ) |   |   | 42 |   |   |   | (319 | ) |
| Deferred tax liabilities           |                               |                   | (22,395 | )       |                                 |   | 6,768 |   |   |   | (45,892 | ) |   |   | (22,571 | ) |
| Net deferred tax asset (liability) |                               |                   | (4,458  | )       |                                 |   | (1,644 | ) |   |   | 865 |   |   |   | 5,295 |   |
|                               |                               |                   |    |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred tax allocated as          |                               |                   |    |    |                                 |   |   |   |   |   |   |   |   |   |   |   |
|                               | Deferred tax assets                |                   |    |    |                                 |   |   |   |   |   |   | 9,042 |   |   |   | 10,652 |   |
|                               | Deferred tax liabilities           |                   |    |    |                                 |   |   |   |   |   |   | (8,177 | ) |   |   | (5,357 | ) |
| Net deferred tax asset (liability) |                               |                   |    |    |                                 |   |   |   |   |   | 865 |   |   |   | 5,295 |   |

| (in thousands of Canadian dollars)    | 2011    | 2010    |
|---------------------------------------|---------|---------|
| Deferred tax asset, beginning of year | 5,295   | 6,769   |
| Expense for the year in net earnings  | (4,458) | (1,644) |
| Foreign exchange                      | 28      | 170     |
| Balance, end of year                  | 865     | 5,295   |

|                               |   | As at December 31 |    |
|------------------------------------|--------|-------------------|---------|
| (in thousands of Canadian dollars) |   | 2011              |    |   | 2010 |   |
| Canada                             |   |              | 174,277 |   |   |   | 140,895 |   |
| United States                      |   |              | 258,056 |   |   |   | 167,452 |   |
|                               |   |              | 432,333 |   |   |   | 308,347 |   |

| 11. | Shareholders’ equity |
|-----|----------------------------|

| (in Canadian dollars, except for number of options) |   | Number ofoptions(1) |      |   | Weighted-average exercise price (1) |   |
|-----------------------------------------------------|--------|---------------------|-----------|--------|-------------------------------------|--------|
| 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 exercised                                   |   |                | (25,000   | )      |                                |   | 4.95 |   |
| Options granted                                     |   |                | 568,713   |   |                                |   | 7.16 |   |
| Options forfeited                                   |   |                | (298,370  | )      |                                |   | 13.03 |   |
| Options outstanding at December 31, 2011            |   |                | 1,303,495 |   |                                | $      | 6.47 |   |
| Options exercisable at December 31, 2011            |   |                | 184,945   |   |                                | $      | 6.56 |   |

| (1)   | Restated to reflect the three for one exchange of trust units for common shares. |
|-----------------|----------------------------------------------------------------------------------|

| (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 $5.90                                      | 251,850           | $     4.85 | 2.77                                              | 32,334 | $    4.94 |
| $6.15 to $6.75                                      | 476,764           | 6.25                                | 1.97                                              | 99,444 | 6.23 |
| $7.13 to $7.26                                      | 501,215           | 7.25                                | 3.02                                              | 8,000 | 7,13 |
| $8.19 to $8.43                                      | 73,666            | 8.29                                | 1.32                                              | 45,167 | 8.36 |
| Balance at December 31, 2011                        | 1,303,495         | $    6.47       | 2.49                                              | 184,945 | $    6.56 |

|                                                      | 2011 | 2010 |
|-----------------------------------------------------------|------|------|
| Weighted-average fair value of options granted ($/option) | 2.92 | 2.30 |
| Risk-free interest rate (%)                               | 2.00 | 1.71 |
| Estimated hold period prior to exercise (years)           | 4.0  | 4.0  |
| Expected volatility (%)                                   | 50   | 50   |
| Expected cash distribution yield (%)                      | -    | -    |

|                                    |   | Number of restricted shares (1) |     |   | Weighted-average grant date fair value(1) |   |
|-----------------------------------------|--------|---------------------------------|----------|--------|-------------------------------------------|--------|
| 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 |   |
| Granted                                 |   |                            | 740,105  |   |                                      |   | 7.17 |   |
| Forfeited                               |   |                            | (107,003 | )      |                                      |   | 5.67 |   |
| Vested                                  |   |                            | (194,576 | )      |                                      |   | 10.52 |   |
| Shares outstanding at December 31, 2011 |   |                            | 946,285  |   |                                      | $      | 6.57 |   |

| For the year ended December 31, 2011                                                          |   |       |    |   |                                |   |       |            |   |
|-----------------------------------------------------------------------------------------------|--------|------------|---------|--------|-------------------------------------|--------|------------|-----------------|--------|
|   (in thousands  of Canadian dollars except shares and per share amounts) |   |  Loss |    |   | Weighted Average Shares Outstanding |   |       |  Per Share |   |
| Basic and diluted                                                                             |   |       | (13,960 | )      |                                |   | 32,039,817 |            |   | $ | (0.44 | ) |

| 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 (1) |   |
| Basic and diluted                                                                             |   |       | (42,652 | )      |                                    |   | 24,594,866 |                |   | $ | (1.73 | ) |

| 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, 2011            |   |
|------------------------------------|--------|
|                               |   |   |   |   |   |   |   | Fair Value Measurements Using: |   |
| (in thousands of Canadian dollars) |   | Carrying Amount |   |   | FairValue |   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
| Commodity contracts asset          |   |   | 4,813 |   |   |   | 4,813 |   |   |   | - |   |   |   | 4,813 |   |   |   | - |   |
| Commodity contracts liability      |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Commodity contracts (net)          |   |   | 4,813 |   |   |   | 4,813 |   |   |   | - |   |   |   | 4,813 |   |   |   | - |   |

| 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          |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Commodity contracts liability      |   |   | (763 | ) |   |   | (763 | ) |   |   | - |   |   |   | (763 | ) |   |   | - |   |
| Commodity contracts (net)          |   |   | (763 | ) |   |   | (763 | ) |   |   | - |   |   |   | (763 | ) |   |   | - |   |

|   | · | 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       | 4.50 (US$/mmbtu)(4.66 US$/mcf)                           | 2,000 mmbtu(1,932 mcf) | April 1, 2011 –March 31, 2012       |
| Fixed                        | Gas       | 4.83 (US$/mmbtu)(5.00 US$/mcf)                           | 2,000 mmbtu(1,932 mcf) | April 1, 2011 –March 31, 2012       |
| Fixed                        | Gas       | 4.95 (US$/mmbtu)(5.12 US$/mcf)                           | 2,000 mmbtu(1,932 mcf) | January 1, 2012 – December 31, 2012 |
| Fixed                        | Gas       | 5.00 (US$/mmbtu)(5.18 US$/mcf)                           | 5,000 mmbtu(4,831 mcf) | January 1, 2012 – December 31, 2012 |
|                         |      |                                                     |                   |                                      |
| Fixed Basis Differential (1) | Gas       | Differential Fixed @ $0.35 US$/mmbtu($0.36 US$/mcf) | 7,000 mmbtu(6,763 mcf) | January 1, 2012 – December 31, 2012 |
|                         |      |                                                     |                   |                                      |
| Fixed                        | Oil       | 100.00 ($/bbl)                                           | 200 bbl                | January 1, 2012 – December 31, 2012 |
| Fixed                        | Oil       | 101.05 ($/bbl)                                           | 200 bbl                | January 1, 2012 – December 31, 2012 |
| Fixed                        | Oil       | 101.95 ($/bbl)                                           | 200 bbl                | January 1, 2012 – December 31, 2012 |
| Fixed                        | Oil       | 103.00 ($/bbl)                                           | 200 bbl                | January 1, 2012 – December 31, 2012 |

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

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

| (in thousands of Canadian dollars)    |   | 2011   |   |   | 2010   |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|
| Realized commodity contracts gain     |   |   | 2,220  |   |   |   | 6,038 |   |
| Unrealized commodity contracts (loss) |   |   | 5,525  |   |   |   | (1,013 | ) |
| Net gain on commodity contracts       |   |   | 7,745  |   |   |   | 5,025 |   |

|                               |   | 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     |   |                                                     | 293    |   |   |   | (293 | ) |
| Natural gas derivative contracts   |   |                                                     | 1,463  |   |   |   | (1,463 | ) |
|                               |   | Decrease in differential price($0.02 per mcf)            |   |   | Increase in differential price($0.02 per mcf) |   |
| Fixed basis differential contracts |   |                                                     | (51    | ) |   |   | 51 |   |

| (in thousands  of dollars) As at December 31, 2011   |   | Canadian division(in U.S. dollars) |     |   | U.S. division(in U.S. dollars) |   |
|---------------------------------------------------------------------|--------|------------------------------------|----------|--------|--------------------------------|--------|
| Cash and cash equivalents                                           |   |                               | 3,050    |   |                           |   | 720 |   |
| Accounts receivable                                                 |   |                               | -        |   |                           |   | 19,412 |   |
| Commodity contracts                                                 |   |                               | -        |   |                           |   | 4,597 |   |
| Accounts payable                                                    |   |                               | (252     | )      |                           |   | (12,581 | ) |
| Long-term debt                                                      |   |                               | (136,500 | )      |                           |   | - |   |
| Net exposure                                                        |   |                               | (133,702 | )      |                           |   | 12,148 |   |
|                                                                |   |                               |     |   |                           |   |   |   |
| Effect of a $0.02 increase in U.S. to Cdn exchange  rate: |   |                               |     |   |                           |   |   |   |
| Change to pre-tax net income                                        |   |                               | (2,674   | )      |                           |   | - |   |
| Change to other comprehensive income                                |   |                               | -        |   |                           |   | 243 |   |
| Effect of a $0.02 decrease in U.S. to Cdn exchange rate:            |   |                               |     |   |                           |   |   |   |
| Change to pre-tax net income                                        |   |                               | 2,674    |   |                           |   | - |   |
| Change to other comprehensive income                                |   |                               | -        |   |                           |   | (243 | ) |

|                               |   | 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         |   |                                 | 1,011  |   |   |   | (1,011 | ) |

| 13. | Interest expense |
|-----|------------------|

|                                     |   |   |   |   |   |   |
|------------------------------------------|--------|--------|--------|--------|--------|--------|
|  (in thousands of Canadian dollars) |   | 2011   |   |   | 2010   |   |
| Interest on long-term debt               |   |   | 4,250  |   |   |   | 2,364 |   |
| Interest on convertible debentures       |   |   | 7,820  |   |   |   | 9,610 |   |
| Interest income (1)                 |   |   | (28    | )      |   |   | (748 | ) |
|                                     |   |   | 12,042 |   |   |   | 11,226 |   |

| (1)   |  Included in interest income in 2010 is $0.7 million pertaining to the long-term receivable from the JV Participant (Note 4). |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------|

| 14. | Commitments |
|-----|-------------|

|                               |   |
|------------------------------------|--------|
| (in thousands of Canadian dollars) |   | 2012 |   |   | 2013 |   |   | 2014 |   |   |   | 2015 – 2016 |   |   | Total |   |
| Office leases (1)                  |   |   | 1,211 |   |   |   | 1,169 |   |   |   | 1,178 |   |   |   | 1,472 |   |   |   | 5,030 |   |
| Vehicle and other operating leases |   |   | 168 |   |   |   | 101 |   |   |   | 76 |   |   |   | - |   |   |   | 345 |   |
| Total obligations                  |   |   | 1,379 |   |   |   | 1,270 |   |   |   | 1,254 |   |   |   | 1,472 |   |   |   | 5,375 |   |

| 15. | Contingencies |
|-----|---------------|

| 16. | Changes in non-cash working capital |
|-----|-------------------------------------|

| (in thousands  of Canadian dollars) |   | December 31, 2011 |   |   | December 31, 2010 |
|-----------------------------------------------|--------|-------------------|--------|--------|-------------------|
| Accounts receivable                           |   |              | (283   | )      |              |   | (3,819 | ) |
| Prepaid expenses, deposits and other          |   |              | 1,223  |   |              |   | (95 | ) |
| Accounts payable and accrued liabilities      |   |              | (7,082 | )      |              |   | 3,324 |   |
| Foreign exchange on working capital           |   |              | (198   | )      |              |   | (4,836 | ) |
| Changes in non-cash working capital           |   |              | (6,340 | )      |              |   | (5,426 | ) |
| Changes in non-cash operating working capital |   |              | (2,980 | )      |              |   | (10,615 | ) |
| Changes in non-cash investing working capital |   |              | (3,360 | )      |              |   | 5,189 |   |

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

| (in thousands  of Canadian dollars) |   | December 31, 2011 |    |   | December 31, 2010 |   |
|-----------------------------------------------|--------|-------------------|---------|--------|-------------------|--------|
| Components of capital:                        |   |              |    |   |              |   |
| Shareholders’ equity                    |   |              | 220,878 |   |              |   | 172,222 |   |
| Convertible debentures                        |   |              | 41,327  |   |              |   | 119,902 |   |
| Long-term debt                                |   |              | 138,820 |   |              |   | 24,865 |   |
| Less:                                         |   |              |    |   |              |   |   |   |
| Cash and cash equivalents                     |   |              | (5,553  | )      |              |   | (2,505 | ) |
|                                          |   |              | 395,472 |   |              |   | 314,484 |   |

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

| ·   | 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, 2011 |   |   | December 31, 2010 |   |
|------------------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
| Interest coverage (1):                               |   |              |   |   |              |   |
| Cash flow over the prior four quarters               |   |              | 69,246 |   |              |   | 58,688 |   |
| Interest expenses over the prior four quarters       |   |              | 11,338 |   |              |   | 12,048 |   |
|                                                 |   | 6.11 : 1.00       |   |   | 4.87 : 1.00       |   |

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

| 18. | Personnel expenses |
|-----|--------------------|

| (in thousands of Canadian dollars)           |   | 2011   |   |   | 2010   |   |
|----------------------------------------------|--------|--------|--------|--------|--------|--------|
| Wages and salaries                           |   |   | 14,703 |   |   |   | 15,513 |   |
| Benefits and other personnel costs           |   |   | 2,314  |   |   |   | 2,486 |   |
| Share-based payments                         |   |   | 4,284  |   |   |   | 3,205 |   |
| Employee remuneration                        |   |   | 21,301 |   |   |   | 21,204 |   |
| Capitalized portion of employee remuneration |   |   | (1,490 | )      |   |   | (1,604 | ) |
|                                         |   |   | 19,811 |   |   |   | 19,600 |   |
| Personnel expenses included in:              |   |   |   |   |   |   |   |   |
| Production expenses                          |   |   | 6,750  |   |   |   | 6,568 |   |
| General and administrative expenses          |   |   | 9,093  |   |   |   | 10,132 |   |
| Share-based compensation                     |   |   | 3,968  |   |   |   | 2,900 |   |
|                                         |   |   | 19,811 |   |   |   | 19,600 |   |

| (in thousands of Canadian dollars)   |   | 2011   |   |   | 2010   |   |
|--------------------------------------|--------|--------|--------|--------|--------|--------|
| Salaries, benefits and director fees |   |   | 2,252  |   |   |   | 2,368 |   |
| Share-based payments                 |   |   | 1,930  |   |   |   | 1,500 |   |
|                                 |   |   | 4,183  |   |   |   | 3,868 |   |

| 19. | Segmented information |
|-----|-----------------------|

| For the year ended December 31, 2011(in thousands of Canadian dollars) | Canada   | United States | Corporate | Total     |
|------------------------------------------------------------------------|----------|---------------|-----------|-----------|
| Oil, NGL and natural gas revenues                                      | 72,655   | 88,839        | -         | 161,494   |
| Realized gain on commodity contracts                                   | -        | -             | 2,220     | 2,220     |
| Unrealized gain on commodity contracts                                 | -        | -             | 5,525     | 5,525     |
| Royalty expense                                                        | (11,416) | (21,638)      | -         | (33,054)  |
| Revenues, net of royalty expense                                       | 61,239   | 67,201        | 7,745     | 136,185   |
|                                                                   |     |          |      |      |
| Operating expenses                                                     |     |          |      |      |
| Production                                                             | (24,649) | (16,908)      | -         | (41,557)  |
| Transportation                                                         | (1,665)  | -             | -         | (1,665)   |
| General and administrative                                             | (6,009)  | (3,319)       | (3,586)   | (12,914)  |
| Share-based compensation expense                                       | (1,708)  | (330)         | (1,930)   | (3,968)   |
| Depletion and depreciation                                             | (24,115) | (29,114)      | -         | (53,229)  |
| Impairment of property, plant and equipment                            | (27,486) | -             | -         | (27,486)  |
|                                                                   | (85,632) | (49,671)      | (5,516)   | (140,819) |
| Other income/(expenses)                                                |     |          |      |      |
| Interest expense                                                       | -        | -             | (12,042)  | (12,042)  |
| Accretion of decommissioning provision                                 | (568)    | (159)         | -         | (727)     |
| Gain/(loss) on sale of assets                                          | 17,772   | (177)         | -         | 17,595    |
| Transaction costs on asset acquisition                                 | -        | -             | (1,767)   | (1,767)   |
| Redemption premium on convertible debentures                           | -        | -             | (2,880)   | (2,880)   |
| Realized foreign exchange loss                                         | -        | -             | (240)     | (240)     |
| Unrealized foreign exchange loss                                       | -        | -             | (4,416)   | (4,416)   |
|                                                                   | 17,204   | (336)         | (21,345)  | (4,477)   |
| Income/(loss) before taxes                                             | (7,189)  | 17,194        | (19,116)  | (9,111)   |   |   |
|                                                                   |     |          |      |      |   |   |
| Taxes                                                                  |     |          |      |      |   |   |
| Current tax expense                                                    | (391)    | -             | -         | (391)     |   |
| Deferred tax expense                                                   | (1,783)  | (2,675)       | -         | (4,458)   |   |
|                                                                   | (2,174)  | (2,675)       | -         | (4,849)   |   |
|                                                                   |     |          |      |      |   |   |   |
| Net income/(loss)                                                      | (9,363)  | 14,519        | (19,116)  | (13,960)  |

| For the year ended December 31, 2010(in thousands of Canadian dollars) |   | Canada |    |   | United States |   |    | Corporate |   |   | Total   |   |
|------------------------------------------------------------------------|--------|--------|---------|--------|---------------|--------|---------|-----------|--------|--------|---------|--------|
| Oil, NGL and natural gas revenues                                      |   |   | 73,667  |   |          |   | 64,008  |      |   |   | -       |   |   |   | 137,675 |   |
| Realized gain on commodity contracts                                   |   |   | -       |   |          |   | -       |      |   |   | 6,038   |   |   |   | 6,038 |   |
| Unrealized loss on commodity contracts                                 |   |   | -       |   |          |   | -       |      |   |   | (1,013  | )      |   |   | (1,013 | ) |
| Royalty expense                                                        |   |   | (13,890 | )      |          |   | (15,440 | )         |   |   | -       |   |   |   | (29,330 | ) |
| Revenues, net of royalty expense                                       |   |   | 59,777  |   |          |   | 48,568  |      |   |   | 5,025   |   |   |   | 113,370 |   |
|                                                                   |   |   |    |   |          |   |    |      |   |   |    |   |   |   |   |   |
| Operating expenses                                                     |   |   |    |   |          |   |    |      |   |   |    |   |   |   |   |   |
| Production                                                             |   |   | (25,365 | )      |          |   | (10,461 | )         |   |   | -       |   |   |   | (35,826 | ) |
| Transportation                                                         |   |   | (2,370  | )      |          |   | -       |      |   |   | -       |   |   |   | (2,370 | ) |
| General and administrative                                             |   |   | (5,631  | )      |          |   | (8,524  | )         |   |   | (5,072  | )      |   |   | (19,227 | ) |
| Share-based compensation expense                                       |   |   | (1,173  | )      |          |   | (227    | )         |   |   | (1,500  | )      |   |   | (2,900 | ) |
| Depletion and depreciation                                             |   |   | (24,976 | )      |          |   | (22,276 | )         |   |   | -       |   |   |   | (47,252 | ) |
| Impairment of property, plant and equipment                            |   |   | (31,114 | )      |          |   | -       |      |   |   | -       |   |   |   | (31,114 | ) |
|                                                                   |   |   | (90,629 | )      |          |   | (41,488 | )         |   |   | (6,572  | )      |   |   | (138,689 | ) |
| Other income/(expenses)                                                |   |   |    |   |          |   |    |      |   |   |    |   |   |   |   |   |
| Interest expense                                                       |   |   | -       |   |          |   | -       |      |   |   | (11,226 | )      |   |   | (11,226 | ) |
| Accretion of decommissioning provision                                 |   |   | (652    | )      |          |   | (117    | )         |   |   | -       |   |   |   | (769 | ) |
| Gain on sale of assets                                                 |   |   | 2,005   |   |          |   | -       |      |   |   | -       |   |   |   | 2,005 |   |
| Revaluation of convertible debentures                                  |   |   | -       |   |          |   | -       |      |   |   | (5,295  | )      |   |   | (5,295 | ) |
| Amortization of trust unit issue costs                                 |   |   | -       |   |          |   | -       |      |   |   | (1,000  | )      |   |   | (1,000 | ) |
| Realized foreign exchange gain                                         |   |   | -       |   |          |   | -       |      |   |   | 1,674   |   |   |   | 1,674 |   |
| Unrealized foreign exchange loss                                       |   |   | -       |   |          |   | -       |      |   |   | (384    | )      |   |   | (384 | ) |
|                                                                   |   |   | 1,353   |   |          |   | (117    | )         |   |   | (16,231 | )      |   |   | (14,995 | ) |
| Income/(loss) before taxes                                             |   |   | (29,499 | )      |          |   | 6,963   |      |   |   | (17,778 | )      |   |   | (40,314 | ) |
|                                                                   |   |   |    |   |          |   |    |      |   |   |    |   |   |   |   |   |
| Taxes                                                                  |   |   |    |   |          |   |    |      |   |   |    |   |   |   |   |   |
| Current tax expense                                                    |   |   | (399    | )      |          |   | (295    | )         |   |   | -       |   |   |   | (694 | ) |
| Deferred tax expense                                                   |   |   | 388     |   |          |   | (2,032  | )         |   |   | -       |   |   |   | (1,644 | ) |
|                                                                   |   |   | (11     | )      |          |   | (2,327  | )         |   |   | -       |   |   |   | (2,338 | ) |
|                                                                   |   |   |    |   |          |   |    |      |   |   |    |   |   |   |   |   |
| Net income/(loss)                                                      |   |   | (29,510 | )      |          |   | 4,636   |      |   |   | (17,778 | )      |   |   | (42,652 | ) |

| As at December 31, 2011                  |   |    |          |
|------------------------------------------|--------|---------|---------------|
|  (in thousands of Canadian dollars) |   | Canada  | United States | Corporate | Total |
| Total assets                             |   | 126,865 | 334,876       | 4,813 | 466,554 |
| Total liabilities                        |   | 33,717  | 31,814        | 180,145 | 245,676 |

| As at December 31, 2010                  |   |    |          |
|------------------------------------------|--------|---------|---------------|
|  (in thousands of Canadian dollars) |   | Canada  | United States | Corporate | Total |   |
| Total assets                             |   | 157,525 | 234,961       | - | 392,486 |   |
| Total liabilities                        |   | 43,524  | 31,211        | 145,529 | 220,264 |   |

| 20. | Subsequent event |
|-----|------------------|

| 21. | First time adoption of IFRS |
|-----|-----------------------------|

----

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

|  (in thousands of Canadian dollars)                          | PreviousCanadian GAAPJanuary 1, 2010 | Notes   |  IFRSJanuary 1, 2010 |
|-------------------------------------------------------------------|--------------------------------------|---------|---------------------------|
|                                                              |                                 | A       | B                         | C | D | E | F | G | H | I |   |
| Assets                                                            |                                 |    |                      |   |   |   |   |   |   |   |   |
| Current assets                                                    | 57,544                               |    |                      |   |   |   |   |   |   |   | 57,544 |
| Long-term receivable                                              | 5,491                                |    |                      |   |   |   |   |   |   |   | 5,491 |
| Property, plant and equipment                                     | 399,237                              | (4,762) | (43,673)                  |   |   |   |   |   |   |   | 350,802 |
| Exploration and evaluation assets                                 | -                                    | 4,762   |                      |   |   |   |   |   |   |   | 4,762 |
| Deferred income tax asset                                         | -                                    |    |                      |   |   |   |   |   |   | 9,690 | 9,690 |
|                                                              | 462,272                              |    |                      |   |   |   |   |   |   |   | 428,289 |
|                                                              |                                 |    |                      |   |   |   |   |   |   |   |   |
| Liabilities                                                       |                                 |    |                      |   |   |   |   |   |   |   |   |
| Current liabilities                                               | 28,821                               |    |                      |   |   |   |   |   |   | (69) | 28,752 |
| Long-term debt                                                    | 70,000                               |    |                      |   |   |   |   |   |   |   | 70,000 |
| Convertible debentures                                            | 114,863                              |    |                      | (99) |   |   |   |   |   |   | 114,764 |
| Decommissioning provision                                         | 21,055                               |    |                      |   | 4,719 |   |   |   |   |   | 25,774 |
| Deferred income tax liability                                     | 8,487                                |    |                      |   |   |   |   |   |   | (5,566) | 2,921 |
| Unit-based liability                                              | -                                    |    |                      |   |   |   | 1,904 |   |   |   | 1,904 |
| Unitholders’ capital                                        | -                                    |    |                      |   |   | 674,106 |   | 8,800 |   |   | 682,906 |
|                                                              | 243,226                              |    |                      |   |   |   |   |   |   |   | 927,021 |
|                                                              |                                 |    |                      |   |   |   |   |   |   |   |   |
| Shareholders’ equity                                        |                                 |    |                      |   |   |   |   |   |   |   |   |
| Unitholders’ capital                                        | 674,106                              |    |                      |   |   | (674,106) |   |   |   |   | - |
| Equity component of convertible    debentures | 3,951                                |    |                      | (3,951) |   |   |   |   |   |   | - |
| Contributed surplus                                               | 11,064                               |    |                      |   |   |   | (11,064) |   |   |   | - |
| Accumulated other comprehensive loss                              | (22,474)                             |    |                      |   |   |   |   |   | 22,474 |   | - |
| Deficit                                                           | (447,601)                            |    | (43,673)                  | 4,050 | (4,719) |   | 9,160 | (8,800) | (22,474) | 15,325 | (498,732) |
|                                                              | 219,046                              |    |                      |   |   |   |   |   |   |   | (498,732) |
|                                                              |                                 |    |                      |   |   |   |   |   |   |   |   |
|                                                              | 462,272                              |    |                      |   |   |   |   |   |   |   | 428,289 |

| (in thousands of Canadian dollars)                                | PreviousCanadian GAAPDecember 31, 2010 | Notes    |  IFRSDecember 31, 2010 |
|-------------------------------------------------------------------|----------------------------------------|----------|-----------------------------|
|                                                              |                                   | A        | B                           | C | D | E | F | G | H | I | J |   |
| Assets                                                            |                                   |     |                        |   |   |   |   |   |   |   |   |   |
| Current assets                                                    | 29,757                                 |     |                        |   |   |   |   |   |   | (187) | (81) | 29,489 |
| Property, plant and equipment                                     | 397,997                                | (15,094) | (45,652)                    |   |   |   |   |   |   |   |   | 337,251 |
| Exploration and evaluation assets                                 | -                                      | 15,094   |                        |   |   |   |   |   |   |   |   | 15,094 |
| Deferred income tax asset                                         | -                                      |     |                        |   |   |   |   |   |   | 10,652 |   | 10,652 |
|                                                              | 427,754                                |     |                        |   |   |   |   |   |   |   |   | 392,486 |
|                                                              |                                   |     |                        |   |   |   |   |   |   |   |   |   |
| Liabilities                                                       |                                   |     |                        |   |   |   |   |   |   |   |   |   |
| Current liabilities                                               | 44,036                                 |     |                        |   |   |   |   |   |   |   | 20 | 44,056 |
| Long-term debt                                                    | 24,865                                 |     |                        |   |   |   |   |   |   |   |   | 24,865 |
| Convertible debentures                                            | 117,019                                |     |                        | 2,883 |   |   |   |   |   |   |   | 119,902 |
| Decommissioning provision                                         | 21,221                                 |     |                        |   | 4,863 |   |   |   |   |   |   | 26,084 |
| Deferred income tax liability                                     | 7,101                                  |     |                        |   |   |   |   |   |   | (1,744) |   | 5,357 |
|                                                              | 214,242                                |     |                        |   |   |   |   |   |   |   |   | 220,264 |
|                                                              |                                   |     |                        |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                                        |                                   |     |                        |   |   |   |   |   |   |   |   |   |
| Common shares                                                     | 259,055                                |     |                        |   |   | (45,191) |   | 9,800 |   |   |   | 223,664 |
| Equity component of convertible    debentures | 3,949                                  |     |                        | (3,949) |   |   |   |   |   |   |   | - |
| Contributed surplus                                               | 12,321                                 |     |                        |   |   |   | (9,594) |   |   |   |   | 2,727 |
| Accumulated other comprehensive loss                              | (33,624)                               |     |                        |   |   |   |   |   | 22,000 |   |   | (11,624) |
| Deficit                                                           | (28,189)                               |     | (45,652)                    | 1,066 | (4,863) | 45,191 | 9,594 | (9,800) | (22,000) | 12,209 | (101) | (42,545) |
|                                                              | 213,512                                |     |                        |   |   |   |   |   |   |   |   | 172,222 |
|                                                              |                                   |     |                        |   |   |   |   |   |   |   |   |   |
|                                                              | 427,754                                |     |                        |   |   |   |   |   |   |   |   | 392,486 |

----

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

|  (in thousands of Canadian dollars)                       | PreviousCanadian GAAPYear endedDecember 31, 2010 | Notes    | IFRSYear endedDecember 31, 2010 |
|----------------------------------------------------------------|--------------------------------------------------|----------|---------------------------------|
|                                                           |                                             | B        | C                               | D | E | F | H | I | J |   |
| Oil, NGL and natural gas revenues                              | 137,675                                          |     |                            |   |   |   |   |   |   | 137,675 |
| Realized gain on commodity contracts                           | 6,038                                            |     |                            |   |   |   |   |   |   | 6,038 |
| Unrealized gain/(loss) on commodity   contracts | (912)                                            |     |                            |   |   |   |   |   | (101) | (1,013) |
| Royalty expense                                                | (29,330)                                         |     |                            |   |   |   |   |   |   | (29,330) |
| Revenues, net of royalty expense                               | 113,471                                          |     |                            |   |   |   |   |   |   | 113,370 |
|                                                           |                                             |     |                            |   |   |   |   |   |   |   |
| Operating expenses                                             |                                             |     |                            |   |   |   |   |   |   |   |
| Production                                                     | (35,826)                                         |     |                            |   |   |   |   |   |   | (35,826) |
| Transportation                                                 | (2,370)                                          |     |                            |   |   |   |   |   |   | (2,370) |
| General and administrative                                     | (19,227)                                         |     |                            |   |   |   |   |   |   | (19,227) |
| Share-based compensation expense                               | (3,636)                                          |     |                            |   |   | 736 |   |   |   | (2,900) |
| Depletion and depreciation                                     | (73,676)                                         | 26,424   |                            |   |   |   |   |   |   | (47,252) |
| Impairment of property, plant and   equipment   | -                                                | (31,114) |                            |   |   |   |   |   |   | (31,114) |
|                                                           | (134,735)                                        |     |                            |   |   |   |   |   |   | (138,689) |
| Other income/(expenses)                                        |                                             |     |                            |   |   |   |   |   |   |   |
| Interest expense                                               | (11,300)                                         |     |                            |   |   |   |   |   |   | (11,300) |
| Amortization of convertible debentures                         | (2,238)                                          |     | 2,312                           |   |   |   |   |   |   | 74 |
| Accretion of decommissioning provision                         | (1,610)                                          |     |                            | 841 |   |   |   |   |   | (769) |
| Gain/(loss) on sale of disposal of assets                      | -                                                | 2,005    |                            |   |   |   |   |   |   | 2,005 |
| Revaluation of convertible debentures                          | -                                                |     | (5,295)                         |   |   |   |   |   |   | (5,295) |
| Amortization of trust unit issue costs                         | -                                                |     |                            |   | (1,000) |   |   |   |   | (1,000) |
| Foreign exchange gain/(loss)                                   | 1,290                                            |     |                            |   |   |   |   |   |   | 1,290 |
|                                                           | (13,858)                                         |     |                            |   |   |   |   |   |   | (14,995) |
| Loss before taxes                                              | (35,121)                                         |     |                            |   |   |   |   |   |   | (40,314) |
|                                                           |                                             |     |                            |   |   |   |   |   |   |   |
| Taxes                                                          |                                             |     |                            |   |   |   |   |   |   |   |
| Current tax (expense)                                          | (694)                                            |     |                            |   |   |   |   |   |   | (694) |
| Deferred tax (expense)                                         | 1,279                                            |     |                            |   |   |   |   | (2,923) |   | (1,644) |
|                                                           | 585                                              |     |                            |   |   |   |   |   |   | (2,338) |
|                                                           |                                             |     |                            |   |   |   |   |   |   |   |
| Loss                                                           | (34,536)                                         |     |                            |   |   |   |   |   |   | (42,652) |
| Other comprehensive loss                                       |                                             |     |                            |   |   |   |   |   |   |   |
| Foreign currency translation adjustment                        | (11,150)                                         |     |                            |   |   |   | (474) |   |   | (11,624) |
| Comprehensive loss                                             | (45,686)                                         |     |                            |   |   |   |   |   |   | (54,276) |
| Loss per share - basic and diluted                             | (1.40)                                           |     |                            |   |   |   |   |   |   | (1.73) |
|                                                           |                                             |     |                            |   |   |   |   |   |   |   |

| 21.3    Reconciliation of Consolidated Statement of Cash Flows |
|------------------------------------------------------------------------------------|

| 21.4    Notes to the IFRS Reconciliation |
|--------------------------------------------------------------|

| A.   | Exploration and evaluation (E&E) assets |
|----------------|---------------------------------------------|

| B.   | Property, plant and equipment, impairment and depletion |
|----------------|---------------------------------------------------------|

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

| 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 DirectorsDaniel Botterill (4)Peter Carpenter (4)Michael Doyle (1) (2) (3)Victor Dusik (1) (2) (3)Roger Giovanetto (2) (3) (4)Don KlapkoRobert Wilkinson (1)(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.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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