Ithaca Energy Inc.
LSE : IAE

April 26, 2011 02:02 ET

2010 Financial Results & Reserves Update

FOR: ITHACA ENERGY INC.

TSX VENTURE, AIM SYMBOL: IAE

April 26, 2011

Ithaca Energy Inc.: 2010 Financial Results & Reserves Update

Record Earnings US$54 million and Cash flow from Operations of US$94.6 million

Proved and Probable Reserves Increase

LONDON, UNITED KINGDOM and CALGARY, ALBERTA--(Marketwire - April 26, 2011) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Ithaca Energy Inc. (TSX VENTURE:IAE)(AIM:IAE) announces its financial results for the twelve months ended

December 31, 2010 and the Company's independently evaluated reserves as at December 31, 2010. A presentation is

available on the Company's website at www.ithacaenergy.com with further details regarding this release.

HIGHLIGHTS

For the year ended December 31, 2010

Financial

-- Earnings before income tax US$38.0 million (2009: US$7.9 million)

-- Net Earnings US$54.0 million after recognizing deferred/future tax asset

(2009: US$7.9 million)

-- Record Cashflow from Operations of US$94.6 million (2009: US$53.9

million)

-- Cash US$201.9 million , inclusive of US$6.3 million restricted cash

(2009: US$35.5 million)

-- Netback US$57 / boe (2009: US$37 / boe)

-- approx. US$150 million cash raised through the issue of 92.7 million

common shares

-- Signed and completed US$140 million senior debt facility - no debt drawn

at December 31, 2010

-- Tax losses attributable to upstream oil and gas activities of US$215.7

million mitigating impact of UK tax changes

Reserves

-- Net 1P Reserves 22.30 million barrels of oil equivalent ("mmboe") (2009:

15.99 mmboe)

-- Net 2P Reserves 46.05 mmboe (2009: 37.19 mmboe)

-- Net 2P Reserves Pre-Tax Net Present Value US$912.37 million (2009:

US$768.35 million)

The following table shows the movement of reserves through 2010 and also shows the movement versus the December

31 2009 Sproule report.

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

Net Present

Value

Dec 31

2010(ii)

Net Reserves Net Reserves (US$ MM)

Net Reserves Apr 30 Dec 31 Before Tax

Dec 31 2009 2010(i) 2010(ii) discounted at

Category (mmboe) (mmboe) (mmboe) 10%

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

Proved, 1P 15.99 20.88 22.30 $ 339.30

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

Probable 21.20 21.09 23.75 $ 573.07

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

Proved plus

Probable, 2P 37.19 41.96 46.05 $ 912.37

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

Possible 41.98 35.00 40.07 $ 997.09

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

Proved plus

Probable plus

Possible, 3P 79.17 76.96 86.12 $ 1909.46

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

(i) post successful Stella appraisal well (ii) post acquisition of SNS

assets from GDF

Since the last reserves evaluation at April 30 2010, post the successful Stella appraisal well, net Proved and

Probable ("2P") reserves rose approx. 10%, from 41.96 mmboe to 46.05 mmboe as at December 31 2010. The major

contributory factor was the acquisition of the gas basin assets from GDF Suez E&P UK Ltd however Jacky also had

a modest upward revision, while Athena and Stella area assets remained unchanged.

No account has been taken of the Cook and Maclure acquisition of assets from Hess. Integration of the reserves

associated with the Cook and Maclure acquisition is pending completion of the transaction.

Other ongoing activities including the drilling of a second production well at Jacky, the J03 well, and the

results of drilling the final development wells at Athena may precipitate an interim reserves evaluation in due

course.

Operational

-- Combined production from Beatrice and Jacky averaged 9,336 barrels of

oil per day ("bopd") gross (4,485 bopd net to Ithaca) over the year as

measured at the Nigg storage facility. The addition of Anglia and Topaz

production from mid December 2010 increased overall production to 4,529

bopd net to Ithaca

-- Successfully completed the first wells of the Beatrice Alpha well

workover program, increasing production by approximately 100% in each

well

-- Drilled a successful appraisal well and sidetrack on the Stella field

proving the presence of significant additional volumes of hydrocarbon

and excellent quality reservoir. As a result, Total Proved ("1P")

reserves post the well, increased by 30.6% from 15.99 mmboe to 20.88

mmboe

-- Received Field Development Plan approval from the UK Department for

Energy and Climate Change ("DECC") for the Athena oil field on September

21 2010

-- Awarded, as operator, Block 29/10d in the UKCS 26th Seaward Production

License Round, expanding the Company's portfolio in the Greater Stella

Area

Commercial

-- Completed a transaction to acquire certain UK North Sea gas interests

from GDF SUEZ E&P UK Ltd for an adjusted cash consideration of GBP 6.7

million (approximately $10.5 million)(the "GdF Acquisition") with an

effective date of January 1, 2010. The GdF Acquisition included operated

interests in the producing Anglia Field, the Garnet and Opal

discoveries, and a non operated interest in the producing Topaz Field.

SIGNIFICANT POST 2010 EVENTS

-- Completed drilling of a water injection well for the Athena field

development, the first of a 180 day campaign of drilling and completion

activities. The drilling of the final production well for the

development of the Athena field is in advanced stages

-- Commenced the drilling of a second production well, J03, on the Jacky

field

-- Lawrie Payne, Non-Executive Chairman of the Board, retired and resigned

from the Board of Directors and was replaced by Jack C. Lee

-- Entered into an agreement to acquire a 28.46% non-operated interest in

the Cook oil field and a 7.41% non-operated interest in the Maclure oil

field from Hess Limited ("Hess") for a consideration of $74.5 million

and the transfer from Ithaca to Hess of a 10% interest in each of

exploration Blocks 42/25b, 43/16a and 43/21c in the Southern North Sea

(the "Cook Acquisition"). The transaction is expected to complete in Q3

2011 with an effective date of January 1, 2011

-- Purchased two 'Put Options' for a portion of 2010 production; 804,500

barrels of oil with a floor price of US$105 per barrel and 300,000

barrels of oil with a floor price of US$115 per barrel

-- Signed an Earn In agreement with CMI to drill an appraisal well on the

Hurricane discovery. CMI will pay 40% of gross Hurricane appraisal well

costs in exchange for a 31% equity interest in Block 29/10b. In

addition, upon successful appraisal, CMI will pay 40% of gross costs of

a drill stem well test of any sidetrack. Ithaca anticipates that the

appraisal well will be commenced in Q4 2011.

Iain McKendrick, CEO, commented,

"The Company has transformed its financial position over the past year. Earnings of US$54million combined with

a US$150 million equity raise have delivered a strong balance sheet with cash of over US$200 million. These

resources, together with the Company's undrawn debt facility underpin the execution of the Company's ongoing

development projects, Athena and Stella, and provide a platform from which to continue with the delivery of its

successful asset acquisition strategy."

Notes:

The Company currently has 258,535,295 Common Shares outstanding with one voting right per Common Share. There

are no Common Shares held by Ithaca in treasury. The total number of voting shares in the Company is therefore

258,535,295. This figure of 258,535,295 Common Shares may be used by shareholders in the Company as the

denominator for the calculations by which they will determine if they are required to notify their interest in,

or a change in their interest in, the share capital of the Company under the UK Financial Services Authority's

Disclosure and Transparency Rules.

The Company's petroleum and natural gas reserves (the "reserves") were independently evaluated by Sproule

(www.sproule.com) (the "Sproule Report") in accordance with the Canadian Oil and Gas Evaluation Handbook

("COGEH") reserves definitions and evaluation practices and procedures as specified by National Instrument 51-

101 ("NI 51-101"). The evaluation uses Sproule's forecast prices and costs at December 1, 2010.

The Company's Form 51-101 F1 Statement of reserves data for the year ended December 31, 2010 ("Statement of

Reserves Data"), which includes the disclosure and reports relating to reserves data and other oil and gas

information along with the Form 51-101F2 Report on Reserves Data by Sproule and Form 51-101F3 Report of

Management and Directors on Reserves Data and Other Information are contained in the Company's Annual

Information Form for the year ended December 31, 2010 (the "AIF") which is available for review at

www.sedar.com.

Further details on the above are provided in the Consolidated Financial Statements, Management's Discussion and

Analysis, and AIF for the year ended December 31, 2010, which have been filed with securities regulatory

authorities in Canada. These documents are available on the System for Electronic Document Analysis and

Retrieval at www.sedar.com and on the Company's website: www.ithacaenergy.com.

Notes to oil and gas disclosure:

In accordance with AIM Guidelines, Hugh Morel, BSc Physics and Geology (Durham), PhD Hydrogeology (London) and

senior petroleum engineer at Ithaca Energy is the qualified person that has reviewed the technical information

contained in this press release. Dr Morel has 30 years operating experience in the upstream oil industry.

About Ithaca Energy:

Ithaca Energy Inc. and its wholly owned subsidiary Ithaca Energy (UK) Limited ("Ithaca" or "the Company"), is

an oil and gas exploration, development and production company active in the United Kingdom's Continental Shelf

("UKCS"). The goal of Ithaca, in the near term, is to maximize production and achieve early production from the

development of existing discoveries on properties held by Ithaca, to originate and participate in exploration

and appraisal on properties held by Ithaca when capital permits, and to consider other opportunities for growth

as they are identified from time to time by Ithaca.

Not for Distribution to U.S. Newswire Services or for Dissemination in the United States

Forward-looking statements

Some of the statements in this announcement are forward-looking. Forward-looking statements include statements

regarding the intent, belief and current expectations of Ithaca Energy Inc. or its officers with respect to

various matters. When used in this announcement, the words "anticipate", "continue", "estimate", "expect",

"may", "will", "project", "plan", "should", "believe", "could", "target" and similar expressions, and the

negatives thereof, are intended to identify forward-looking statements. Such statements are not promises or

guarantees, and are subject to known and unknown risks and uncertainties and other factors that may cause

actual results or events to differ materially from those anticipated in such forward-looking statements or

information. These forward-looking statements speak only as of the date of this announcement. Ithaca Energy

Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any

forward-looking statement contained herein to reflect any change in its expectations with regard thereto or any

change in events, conditions or circumstances on which any forward-looking statement is based except as

required by applicable securities laws.

The term "boe" may be misleading, particularly if used in isolation. A boe conversion of 6 Mcf: 1 bbl is based

on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a

value equivalency at the wellhead.

ITHACA ENERGY INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE YEAR ENDED DECEMBER 31, 2010

The following is management's discussion and analysis ("MD&A") of the operating and financial results of Ithaca

Energy Inc. (the "Corporation" or "Ithaca" or the "Company") for the year ended December 31, 2010. The

information is provided as of April 21, 2011. The 2010 results have been compared to the results of 2009. This

discussion and analysis should be read in conjunction with the Corporation's consolidated financial statements

as at December 31, 2010 and 2009 together with the accompanying notes, MD&A and Annual Information Form ("AIF")

for the 2010 fiscal year. These documents and additional information about Ithaca are available on SEDAR at

www.sedar.com.

Certain statements contained in this MD&A, including estimates of reserves, estimates of future cash flows and

estimates of future production as well as other statements about future events or anticipated results, are

forward-looking statements. The forward-looking statements contained herein are based on assumptions and are

subject to known and unknown risks, uncertainties and other factors. Should the underlying assumptions prove

incorrect or should one or more of these risks, uncertainties or factors materialize, actual results may vary

significantly from those expected. See "Forward-Looking Information", below.

All financial data contained herein is presented in accordance with Canadian generally accepted accounting

principles ("GAAP") and is expressed in United States dollars ("$"), unless otherwise stated.

BUSINESS OF THE CORPORATION

Ithaca is an oil and gas exploration, development and production company active in the United Kingdom's

Continental Shelf ("UKCS"). The goal of Ithaca, in the near term, is to maximize production and achieve early

production from the development of existing discoveries on properties held by Ithaca, to originate and

participate in exploration and appraisal on properties held by Ithaca when capital permits, and to consider

other opportunities for growth as they are identified from time to time by Ithaca.

The Corporation's common shares are listed for trading on the TSX Venture Exchange and the Alternative

Investment Market of the London Stock Exchange under the symbol "IAE".

NON-GAAP MEASURES

'Operating costs per boe' referred to in this MD&A are not prescribed by GAAP. This non-GAAP financial measure

does not have any standardized meaning and therefore is unlikely to be comparable to similar measures presented

by other companies. Ithaca includes operating costs per barrel data because investors may use this information

to analyze operating performance. The additional information should not be considered in isolation or as a

substitute for measures of performance prepared in accordance with GAAP. See "Results of Operations" section

for details.

'Cash flow from operations' referred to in this MD&A is not prescribed by GAAP. The Corporation uses this

measure to help evaluate its performance. As an indicator of the Corporation's performance, cash flow from

operations should not be considered as an alternative to, or more meaningful than, cash flows from operating

activities as determined in accordance with GAAP. The Corporation's determination of cash flow from operations

does not have any standardized meaning and therefore may not be comparable to similar measures presented by

other companies. The Corporation considers cash flow from operations to be a key measure as it demonstrates the

Corporation's ability to generate the cash necessary to fund operations and support activities related to its

major assets. Cash flows from operations are determined by adding back changes in non-cash operating working

capital to cash provided by operating activities.

BOE PRESENTATION

The calculation of barrels of oil equivalent ("boe") is based on a conversion rate of six thousand cubic feet

of natural gas ("mcf") to one barrel of crude oil ("bbl"). The term boe may be misleading, particularly if used

in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method

primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

2010 HIGHLIGHTS

Ithaca achieved the following highlights during 2010:

Financial

-- Earnings before income tax $38.0 million (2009 $7.9 million)

-- Net Earnings $54.0 million after recognition of a future tax asset (2009

$7.9 million)

-- Record Cashflow from Operations of $94.6 million (2009 $53.9 million)

-- Cash $201.9 million , inclusive of $6.3 million restricted cash (2009

$35.5 million)

-- Netback $57 / boe (2009 $37 / boe)

-- Closed new equity raise, generating over $150 million

-- Signed and completed $140 million senior debt facility (the "Credit

Facility") - no debt drawn at December 31, 2010

-- Tax losses attributable to upstream oil and gas activities of $215.7

million (2009 $233.0 million)

Rising Earnings before income tax in 2010 compared to the prior year were driven by rising production from

Beatrice and Jacky, a higher realized average oil price of $80.37 / bbl ($68.65 / bbl in 2009) and a reduction

in operating and depletion, depreciation, and amortization ("DD&A") costs.

The strong cash flow from operations combined with the equity raise proceeds increased the Company's overall

cash balance to $201.9 million at December 31, 2010.

The combination of the above factors has placed the Company in a strong financial position, with current

projects fully funded through to first production.

Operational

Beatrice & Jacky

-- Combined production from Beatrice and Jacky averaged 9,336 barrels of

oil per day ("bopd") gross (4,485 bopd net to Ithaca) over the year as

measured at the Nigg storage facility.

-- Production from Beatrice Alpha was reinstated in March 2010 after

repairs and modifications to the vessel protection systems were

completed.

-- As a result of the well intervention program that occurred from Q4 2009

to Q1 2010 the production from the Beatrice Bravo facility was

increased.

-- In May coiled tubing work commenced on the Beatrice Alpha platform to

undertake preparatory 'clean up' work on a number of production wells. A

Hydraulic Workover Unit ("HWU") was mobilized to the platform in early

July 2010. The HWU is undertaking the replacement of electric

submersible pumps in four production wells.

-- In Q3 2010, the first of the Beatrice Alpha well workover program was

completed (the A04 well) increasing production on the well by 100%. In

September 2010 production from Jacky was halted temporarily to allow a

chemical 'squeeze' operation which has successfully protected the

reservoir from potential scale damage and maintained productivity.

-- In Q4 2010, activities commenced to workover the second well of the five

well campaign (Beatrice Alpha well A23). Stable production was

reinstated by the end of 2010 and increased production by approximately

115%

-- In December the Corporation announced that in Q1 2011 it planned to

drill a second production well on the Jacky field to access additional

reserves. Daily production from this well is expected to initially

exceed 5,000 bopd (2,375 bopd net to Ithaca) when the well is expected

to come on stream in Q2 2011.

Stella

-- In February 2010 the Galaxy II rig commenced drilling at the Stella

appraisal well location in block 30/6a. In April 2010 Ithaca announced

that the Stella field appraisal well (30/6a-8) had proved the presence

of significant additional volumes of hydrocarbon and excellent quality

reservoir. A successful drill stem test was performed providing critical

information allowing development planning to commence. The total

measured hydrocarbon column height was shown to be in excess of 820 feet

and the well confirmed connected hydrocarbons more than 500 feet lower

than in any previous wells. As planned, a sidetrack well (30/6a-8Z) was

subsequently drilled and confirmed a fully hydrocarbon-saturated

reservoir interval in the Andrew sandstone. Successful sampling and

pressure tests also provided essential fluid composition information to

appropriately size and plan the development of the Stella field. All

objectives were fully met by the drilling program.

-- Following a successful drill stem test of the Stella appraisal well and

subsequent interim reserves audit, the Company announced a significant

increase in reserves. Total Proved ("1P") reserves increased by 30.6%

from 15.99 million barrels of oil equivalent ("mmboe") to 20.88 mmboe

and total Proved plus Probable ("2P") reserves increased by 12.8% from

37.19 mmboe to 41.96 mmboe.

-- In September 2010 the earn in agreement signed on October 27, 2009

between Ithaca and Challenger Minerals (North Sea) Limited ("CMI") was

completed. Under the terms of the earn in CMI paid 27% of gross Stella

appraisal well costs in exchange for an 18% equity interest in the

Stella and Harrier discoveries, thereby carrying a part of Ithaca's

share of drilling costs. In addition, due to the successful appraisal of

Stella, CMI will carry Ithaca on a further Stella or Harrier development

well for up to GBP 2 million ($3.2 million) or 9%, whichever is the

lesser. The revised Ithaca interests in the Stella and Harrier

discoveries are now 50.33%.

Athena

-- On September 21, 2010, Field Development Plan approval was received from

the UK Department for Energy and Climate Change ("DECC") for the Athena

oil field.

-- Key contracts on the Athena development were awarded through 2010,

including the charter of the Floating Production, Storage and Offloading

("FPSO") vessel 'BW Carmen' (now renamed 'BW Athena') from BW Offshore;

the provision of drilling management services and the supply of the

Sedco 704 semi-submersible drilling rig from Applied Drilling Technology

International ("ADTI") (a subsidiary of Transocean Ltd.); and the

installation of subsea equipment and the FPSO mooring system from Bibby

Offshore Limited.

UKCS 26th Seaward Production License Round

-- In November 2010, the Corporation was successful in the UKCS 26th

Seaward Production License Round, expanding the Company's portfolio in

the Greater Stella Area. Ithaca was offered, as operator, one new

license from the 26th Round, namely Block 29/10d (the "block"). The

block lies in the Greater Stella Area and is neighbour to Block 29/10b

(Hurricane discovery) and Block 30/6a (Stella and Harrier discoveries).

Ithaca has identified a large structure encompassed by the block which

is known as the Helios discovery.

Corporate

-- In May 2010, the Company announced the appointment of Ron Brenneman,

formerly Chief Executive Officer of Petro-Canada, as non-executive

director of the Company.

-- In July 2010, the Corporation signed and completed the Credit Facility

for up to $140 million with the Bank of Scotland Plc as Lead Arranger.

The loan term is up to five years and in accordance with normal industry

borrowing base facilities.

-- In July the Company completed a "bought deal" equity issue, with a

syndicate of underwriters led by CIBC World Markets, of 47.6 million

common shares in Ithaca at a price of C$1.70 per common share for

aggregate gross proceeds of C$81 million (the "Bought Deal Offering").

At the same time completion took place of a private placement of 45.1

million common shares in Ithaca to purchasers in the United Kingdom at a

price of GBP 1.07 per common share (approximately equivalent to C$1.70

per common share) for aggregate proceeds of approximately C$77 million

(the "Private Placement"). Together, the equity issues generated gross

proceeds of C$158 million (approximately $153 million).

-- In August 2010 an agreement was entered into to acquire certain UK North

Sea gas interests from GDF SUEZ E&P UK Ltd for a cash consideration of

GBP 11.25 million (approximately $16.9 million) (the "GdF Acquisition").

The GdF Acquisition included operated interests in the producing Anglia

Field, the Garnet and Opal discoveries, and a non operated interest in

the producing Topaz Field. The Corporation completed the transaction on

December 17, 2010 for an adjusted cash consideration of GBP 6.7 million

(approx $10.5 million) with an effective date of January 1, 2010. The

adjustment results from free cash flow generated by strong production

throughout 2010 since the effective date. The Company believes the GdF

Acquisition has the potential to create significant additional value

through the further exploitation and optimization of the acquired

interests.

-- In September 2010 the Company entered into an agreement with Gemini Oil

& Gas Fund II, L.P. ("Gemini") in relation to the Company's interest in

the Athena field (the "Agreement"). The Agreement provided that the

Company would not make any payment to Gemini in relation to proceeds

received by the Company as part of the previously announced Athena asset

sale of interests in 2008 and 2009 involving transactions which relate

to certain assets sold by the Company to Dyas UK Limited. In exchange

for and in consideration of Gemini's waiver of any right to proceeds

from the disposal of equity interest in the Athena discovery and in

substitution for any previously awarded or agreed warrants, Ithaca

granted to Gemini warrants to acquire up to 2,500,000 Common Shares in

Ithaca. The warrants were available for exercise at a price of C$2.25

per share on or before March 21, 2011. The total fair value attributed

the warrants issued in the quarter was $0.3 million. In addition to

these terms, the Agreement terminated all rights that Gemini has in

respect of the Company's interests.

HIGHLIGHTS SUBSEQUENT TO YEAR END:

-- In January 2011, preparation works commenced to re-certify existing

equipment and install new equipment on the FPSO BW Athena at dockside in

Dubai. All work is anticipated to be completed in Q3 2011 allowing the

vessel to return to UK waters and arrive on location at Athena at end Q3

2011.

-- In February 2011, Lawrie Payne, Non-Executive Chairman of the Board,

notified the Company of his intention to retire from service of the

Company and resigned from the Board of Directors effective February 22,

2011. Jack C. Lee succeeded Lawrie Payne as Non-Executive Chairman

effective as of the same date.

-- In February 2011 the Company successfully completed the drilling of a

water injection well for the Athena field development. The well was

drilled down flank from three successful appraisal wells and was the

first well of a 180 day campaign of drilling and completion activities.

-- In March 2011 the Sedco 704 semi submersible drilling unit commenced the

drilling of the final production well for the development of the Athena

field. The well is being drilled from the Athena drill centre and is the

final well to be drilled. As at the date hereof, the well is progressing

on schedule. The well has been directionally drilled to the north west

of the field and has entered the top reservoir (Top Scapa A sands).

These operations precede subsea equipment installation and hook-up of

the BW Athena FPSO later in the year.

-- In March 2011 the Energy Enhancer jack-up drilling unit commenced

drilling on a second production well on the Jacky field. The well is

being drilled to access additional reserves and Increase production as

part of a field management strategy. The drilling unit was positioned

over the Jacky platform to drill from an existing spare wellbay to

facilitate early tie in to the existing production stream.

-- In March 2011 mechanical issues were experienced on the Energy Enhancer

jack-up drilling unit that is currently drilling the J03 well on the

Jacky field. This caused an increase in the time that production was

suspended from the J01 well to complete the 'top hole section' of the

J03 well. Following successful repair to the drilling mud handling

system onboard the rig and completion of the top hole section,

production from the J01 well was reinstated by the end of March.

-- In March 2011 Gemini exercised all warrants granted to acquire 2,500,000

common shares of the Company at C$2.25 per share.

-- In April 2011 the Corporation entered into an agreement to acquire a

28.46% non-operated interest in the Cook oil field and a 7.41% non-

operated interest in the Maclure oil field from Hess Limited ("Hess")

for a consideration of $74.5 million and the transfer from Ithaca to

Hess of a 10% interest in each of exploration Blocks 42/25b, 43/16a and

43/21c in the Southern North Sea (the "Cook & Maclure Acquisition"). The

acquisition of Maclure is subject to pre-emption within 30 days of

notification to other parties in the Maclure field. The Company has

commissioned Sproule International Ltd ("Sproule") to provide a Reserves

Audit Opinion on Cook and Maclure. The opinion from Sproule is

anticipated in mid May, 2011 and, on receipt, the Company expects to

make a further, more detailed announcement including information on

reserves and other potential upsides associated with the Cook & Maclure

Acquisition together with details, if any, of pre-emption by any Maclure

parties. The transaction is expected to complete in Q3 2011 with an

effective date of January 1, 2011.

-- In April 2011 the Company signed an earn in agreement with CMI to drill

an appraisal well on the Hurricane discovery. Under the terms of the

agreement CMI has agreed to pay a share of the initial well costs in

return for an option, exercisable within 90 days of abandonment or

suspension of the initial appraisal and any sidetrack well, to acquire

an interest in Block 29/10b. CMI will pay 40% of gross Hurricane

appraisal well costs in exchange for a 31% equity interest in Block

29/10b, thereby carrying a part of Ithaca's share of all costs of

drilling an initial appraisal well. In addition, upon successful

appraisal, CMI will pay 40% of gross costs of a drill stem well test of

any sidetrack. All additional costs, including those for planned

sidetrack drilling, shall be apportioned such that CMI shall pay its 31%

pro rata share. The transaction is subject to agreed 'turnkey' terms

with ADTI for the provision of a suitable drilling unit and well

management services. Upon agreement of 'turnkey' terms and provision of

a suitable rig, Ithaca anticipates that the appraisal well will be

commenced in Q4 2011.

-- In April 2011 both downhole electrical submersible pumps ("ESP") in the

Jacky production well, J01, failed. Technical experts confirmed that

both ESP units developed electrical faults under routine operations, and

must be replaced. The well is now free flowing and gross production from

the J01 well following this event has reduced to approximately 700

barrels of oil per day ("bopd")(approximately 335 bopd net to Ithaca);

prior to this, under ESP support gross production was approximately

2,800 bopd (1,330 bopd net to Ithaca) as measured at the Nigg storage

facility. The Company intends to continue to free flow the J01

production well until the J03 well has reached the target reservoir

formation, the Beatrice "A" Sand, and has been completed. This operation

is anticipated to last until mid May. The Northern Enhancer rig

(currently located over the Jacky platform) will then be utilised to

undertake a workover operation to replace the failed ESPs in the J01

production well; this is expected to take a further 15 days. Production

from the J03 well is planned to be optimised throughout the J01 work

over operation period.

RESULTS OF OPERATIONS

Oil and gas sales revenue has increased 31% to $132.4 million. This was due to an increase in total net

production, an increase in average realized prices, and the addition of gas sales from the Anglia and Topaz

fields from December 17, 2010. Oil production has increased 11% from 4,042 bopd in 2009 to 4,485 bopd for 2010

predominantly due to a full year of production on Jacky compared to less than 9 months of production in 2009

(Jacky achieved first oil in April 2009) and optimization of production on Beatrice. The Corporation has also

benefited from an increase in average realized oil prices of over 17% from $68.65/bbl in 2009 to $80.37/bbl,

due to an increase in the 'spot' Brent oil price in the year. The acquisition of the producing gas assets from

GDF SUEZ E&P UK Ltd that completed in December 2010 also contributed to increased revenue in 2010.

Operating costs have decreased 18% in 2010 to $37.9 million. On a per barrel of oil equivalent basis, operating

costs moved from $31 / boe in 2009 to $23 / boe in 2010. This rate has reduced steadily through the

reinstatement of Beatrice Bravo production, the start-up of Jacky production in April 2009, and the continuing

focus on optimisation of production through the workover program on the shared operating costs centre of

Beatrice and Jacky.

General and administrative ("G&A") costs have decreased 49% in 2010 to $3.4 million. Tight cost control

combined with increased capitalization of costs associated with higher levels of project work has delivered the

reduction in costs charged to the income statement.

DD&A expense for the year has decreased 6% in 2010 to $50 million. Although production has increased year on

year, a reduction in expense has been achieved as a result of a decrease in the depletion rate per barrel of

oil and gas properties from $35 / boe to $30 / boe due to the increases in proved reserves reported in 2010.

The Corporation recorded a $5.1 million loss on derivatives for the year ended December 31, 2010 (2009: $8.1

million gain). $3.1 million of the loss resulted from a currency instrument put in place to remove the currency

fluctuation risk between closing of the $150 million equity raise and receipt of the funds. This objective was

achieved however GAAP necessitated that the proceeds were recorded as $153.2 million and $3.1 million was

recorded as a one-off derivatives loss. A loss of $2.0 million was also generated from the foreign currency

instrument taken out in the year which ensured Sterling required to fund operating costs was available at a

rate of no worse than USD1.60 / GBP 1.00.

In the year ended December 31, 2010, a charge of $1.2 million (2009 - $0.6 million) was recorded for stock

based compensation. The increase in stock based compensation charged relates to an increase in staff numbers

combined with the issue of 10,100,000 options during 2010.

The reduction in financing, interest and bank charges in the year ended December 31, 2010 is due to the

repayment of all outstanding debt in 2009. From Q2 2010 charges have included amortization of fees in relation

to the Credit Facility.

At the year end the Corporation recognized a derivative financial instrument liability of $4.4 million in

respect of the marking to market of a gas sales contract acquired as part of the GDF Acquisition. This has no

impact on Earnings for the year.

A future tax asset of $16 million has been recognized in the year, arising from a combination of accumulated

tax losses and accelerated capital allowances. While the company was loss making, it was not prudent to

recognize a future tax asset as it was more likely than not that the asset would not be realized. However as a

result of the last two years of earnings history and with earnings forecast to continue, it is appropriate to

recognize the asset in 2010.

All of the above contributed to Earnings before income tax of $38.0 million and Net Earnings of $54.0 million

for the year ended December 31, 2010. This was achieved through the building of production levels, strong

commodity prices and successful reductions in operating and depletion costs per boe in the year. This compared

to Net Earnings of $7.9 million in 2009, a period with lower commodity prices, higher unit operating costs and

higher depletion rates due to lower proved reserves.

SUMMARY OF QUARTERLY RESULTS

The following table provides a summary of quarterly results of the Corporation for its eight most recently

completed quarters:

31/12/2010 30/09/2010 30/06/2010 31/03/2010

$'000 $'000 $'000 $'000

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

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

REVENUE

Oil & Gas Sales 33,721 35,434 33,094 30,102

Other income 539 531 1,035 665

Interest income 56 50 3 2

34,316 36,015 34,133 30,769

- - - -

COSTS AND EXPENSES - - - -

General and

administrative 689 1,166 740 776

Operating 9,460 10,241 9,460 8,689

DD&A 12,350 13,287 13,104 11,248

(Gain) / Loss on

foreign exchange (990) (1,766) 362 1,576

Revaluation of Nigg

Heel of Tank 142 191 5 (184)

(Gain) / Loss on

Financial

Instruments 439 1,936 582 2,158

Stock based

compensation 304 433 (640) 1,151

Interest and bank

charges 196 77 4 4

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

22,590 25,565 23,617 25,418

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

EARNINGS / (LOSSES)

BEFORE TAX 11,726 10,450 10,516 5,351

- - - -

INCOME TAXES -

current (80)

INCOME TAXES -

future 16,074 - - -

- - - -

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

NET EARNINGS 27,720 10,450 10,516 5,351

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

- - - -

NET EARNINGS /

(LOSS) PER SHARE 0.11 0.05 0.06 0.03

- - - -

Deficit, beginning

of period (4,114) (14,564) (23,886) (29,236)

- - - -

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

Surplus / (Deficit)

end of period 23,606 (4,114) (14,564) (23,886)

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

31/12/2009(i) 30/09/2009(i) 30/06/2009(i) 31/03/2009(i)

(Restated)

$'000 $'000 $'000 $'000

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

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

REVENUE

Oil & Gas Sales 33,850 36,375 28,280 2,776

Other income 5,809 924 1,477 970

Interest income 16 96 146 92

39,676 37,395 29,903 3,837

- - - -

COSTS AND EXPENSES - - - -

General and

administrative (447) 2,500 1,918 2,644

Operating 13,665 8,712 11,724 12,211

DD&A 12,894 20,379 17,585 2,468

(Gain) / Loss on

foreign exchange 2,319 2,051 (891) (227)

Revaluation of Nigg

Heel of Tank (363) (4) 484 -

(Gain) / Loss on

Financial

Instruments (5,361) 4,325 (5,602) (1,441)

Stock based

compensation (600) 468 332 438

Interest and bank

charges (0) 108 573 12

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

22,107 38,540 26,123 16,104

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

EARNINGS / (LOSSES)

BEFORE TAX 17,569 (1,145) 3,780 (12,267)

- - - -

INCOME TAXES -

current

INCOME TAXES -

future (81) - - -

- - - -

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

NET EARNINGS 17,488 (1,145) 3,780 (12,267)

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

- - - -

NET EARNINGS /

(LOSS) PER SHARE 0.11 - 0.01 0.02 - 0.08

- - - -

Deficit, beginning

of period (46,724) (45,580) (49,360) (37,093)

- - - -

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

Surplus / (Deficit)

end of period (29,236) (46,724) (45,580) (49,360)

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

(i) Certain comparative figures have been reclassified to conform with the

current year's financial statement presentation

Significant factors and trends that have impacted the Corporation's results

during the above periods include:

-- The Jacky field commenced its first oil production along with the

restart of production from the Beatrice Bravo facility in April 2009.

-- The optimization of production on Beatrice Bravo and Alpha through the

workover campaigns.

-- Fluctuations in underlying commodity prices. Commodity prices have

generally risen through the periods in which the Corporation had

production. The Corporation has utilized forward sales contracts and

foreign exchange contracts to take advantage of higher commodity prices

while reducing the exposure to price volatility. These contracts can

cause volatility in net income as a result of unrealized gains and

losses due to movements in the oil price and US Dollar: British Pounds

Sterling exchange rate.

FOURTH QUARTER

Oil and gas sales revenue decreased less than 1% to $33.7 million from Q4 2009. The decrease was due to a 19%

decrease in total net oil production to 3,966 bopd, predominantly due to the natural decline of production on

Jacky, offset by a 21% increase in average realized oil prices to $90.25 / bbl and the addition of gas

production from the producing gas assets acquired from GDF SUEZ E&P UK Ltd that completed on December 17, 2010.

No significant transactions or adjustments occurred in Q4 2010 outwith the normal course of business.

SELECTED ANNUAL INFORMATION

The consolidated financial statements of the Corporation and the financial data contained in the MD&A are

prepared in accordance with GAAP. The consolidated financial statements include the accounts of Ithaca and its

wholly-owned subsidiary Ithaca Energy (UK) Limited ("Ithaca UK"). All inter-company transactions and balances

have been eliminated on consolidation. A significant portion of the Corporation's North Sea oil and gas

activities are carried out jointly with others. The consolidated financial statements reflect only the

Corporation's proportionate interest in such activities.

The following table sets forth selected consolidated financial information of the Corporation for its three

most recently completed fiscal years.

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

Year ended December 31,

($'000) 2010 2009 2008

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

Total revenues 135,233 110,812 3,282

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

Net Earnings 54,037 7,938 (30,447)

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

Total assets 561,851 309,140 357,670

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

Total long-term liabilities 28,118 10,674 72,745

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

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

Net gain / (loss) per share ($) 0.27 0.05 (0.23)

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

Net gain / (loss) per share diluted basis ($) 0.26 0.05 (0.23)

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

LIQUIDITY AND CAPITAL RESOURCES

As at December 31, 2010, Ithaca had working capital of $224.9 million including a free cash balance of $195.6

million. Available cash has been, and is currently, invested in money market deposit accounts with the Bank of

Scotland. Management has received confirmation from the financial institution that these funds are available on

demand. The restricted cash of $6.3 million comprises $5.9 million currently held by the Bank of Scotland as

decommissioning security provided as part of the acquisition of gas interests from GDF SUEZ E&P UK Ltd and $0.4

million held by the Bank of Scotland as cash security for a bank guarantee that Ithaca UK provided to the Crown

Estate when it was granted Field Development Plan approval for the Jacky Field.

During the year ended December 31, 2010 there was a cash inflow from operating, investing and financing

activities of $165.7 million (2009 inflow of $2.9 million). The net inflow was due to: positive cash flows from

operating activities of $93.8 million; positive cash flows from financing activities of $143.3 million,

predominantly due to the Bought Deal Offering and Private Placement that completed in the year; offset by a

decrease in cashflows from investing activities, being $63.8 million investment in fixed assets, $4.5 million

realized foreign exchange loss on derivatives and movements in capex related working capital. The fixed asset

investment in the year predominantly related to the Beatrice workovers, the appraisal well drilling on Stella,

and capital expenditure on the Athena development.

The combination of the proceeds from the Bought Deal Offering and Private Placement, together with debt made

available from the Credit Facility and a portion of anticipated cash flows from current operations, means that

all of the Corporation's current projects are anticipated to be fully funded through to first production.

COMMITMENTS

The Corporation has the following financial commitments of which the largest component relates to the

Engineering (Athena and Stella projects):

Year ended 2011 2012 2013 2014 Subsequent

to 2014

US$ US$ US$ US$ US$

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

Office lease 248 247 247 247 804

Exploration license fees 1,275 1,635 1,977 - -

Engineering 20,466 - - - -

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

Total 21,989 1,882 2,224 247 804

OUTSTANDING SHARE INFORMATION

As at December 31, 2010, Ithaca had 255,789,464 common shares outstanding along with 20,146,003 options to

employees and directors to acquire common shares.

The total number of options outstanding is inclusive of 10,100,000 options granted to employees and directors

through the year in accordance with the Company's stock option plan. The options were approved by the Board of

Directors at a range of prices from C$1.54 to C$2.25 which were the closing prices on the TSX Venture Exchange

on the dates of grant. Each of the options granted may be exercised for a period of four years from the grant

date. One third of the options will vest at the end of each of the first, second and third years from the

effective date of grant.

In addition, Ithaca granted Gemini 2,500,000 warrants to purchase common shares of the Corporation in 2010.

These warrants were exercised after the year end on March 3, 2011.

As at April 21, 2011, Ithaca had 258,535,295 common shares outstanding along with 19,798,505 options to

employees and directors to acquire common shares.

CRITICAL ACCOUNTING ESTIMATES

Ithaca's significant accounting policies are disclosed in note 2 to the December 31, 2010 consolidated

financial statements. Certain accounting policies require that management make appropriate decisions with

respect to the formulation of estimates and assumptions that affect the reported amounts of assets,

liabilities, revenues and expenses. These accounting policies are discussed below and are included to aid the

reader in assessing the critical accounting policies and practices of the Corporation and the likelihood of

materially different results being reported. Ithaca's management reviews these estimates regularly. The

emergence of new information and changed circumstances may result in actual results or changes to estimated

amounts that differ materially from current estimates.

The following assessment of significant accounting policies and associated estimates is not meant to be

exhaustive. The Company might realize different results from the application of new accounting standards

promulgated, from time to time, by various rule-making bodies.

Capitalized costs relating to the exploration and development of oil and gas reserves, along with estimated

future capital expenditures required in order to develop proved reserves, are depreciated on a unit-of-

production basis using estimated proved reserves as adjusted for production.

The carrying value of property, plant and equipment is reviewed annually for impairment. The carrying value is

assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved

reserves exceeds the carrying value of the property, plant and equipment. If the carrying value of the property

plant and equipment is not assessed to be recoverable, an impairment loss is recognized to the extent that the

carrying value exceeds the sum of the cash flows, discounted using a risk-free rate, expected from the

production of proved and probable reserves. The cost recovery ceiling test and calculation of impairment are

based on estimates of reserves, production rates, oil and gas prices, future costs and other relevant

assumptions. By their nature, these estimates are subject to measurement uncertainty and the impact on the

financial statements could be material.

Liability recognition for asset retirement obligations ("ARO") associated with oil and gas wells are determined

using estimated costs discounted based on the estimated life of the asset. Over time, the liability is accreted

up to the actual expected cash outlay to perform the abandonment and reclamation.

Financial assets or liabilities are only recognized when the entity becomes a party to the contractual

provisions of the financial instrument. Financial assets and financial liabilities are, with certain

exceptions, initially measured at fair value.

Derivative financial instruments are required to be recorded on the balance sheet at fair value. Any changes in

fair value are immediately recorded as a net gain or loss in the statement of net income.

In order to recognize stock based compensation expense, the Corporation estimates the fair value of stock

options granted using assumptions related to interest rates, expected life of the option, volatility of the

underlying security and expected dividend yields. These assumptions may vary over time.

The determination of the Corporation's income and other tax liabilities / assets requires interpretation of

complex laws and regulations. Tax filings are subject to audit and potential reassessment after the lapse of

considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated

and recorded on the financial statements.

The accrual method of accounting will require management to incorporate certain estimates of revenues,

production costs and other costs as at a specific reporting date. In addition, the Company must estimate

capital expenditures on capital projects that are in progress or recently completed where actual costs have not

been received as of the reporting date.

OFF-BALANCE SHEET ARRANGEMENTS

The Corporation has certain lease agreements which were entered into in the normal course of operations, all of

which are disclosed under the heading "Commitments", above. All leases have been treated as operating leases

whereby the lease payments are included in operating expenses or general and administrative expenses depending

on the nature of the lease. No asset or liability value has been assigned to these leases on the balance sheet

as at December 31, 2010.

RELATED PARTY TRANSACTIONS

A director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The

amount of fees paid to Burstall Winger LLP in 2010 was $0.6 million (2009 - $0.2 million). All related party

transactions are in the normal course of business and have been measured at the exchange values, being the

consideration established and agreed to by the parties and on normal commercial terms comparable to those

charged by third parties.

RISKS AND UNCERTAINTIES

The business of exploring for, developing and producing oil and natural gas reserves is inherently risky. There

is substantial risk that the manpower and capital employed will not result in the finding of new reserves in

economic quantities. There is a risk that the sale of reserves may be delayed due to processing constraints,

lack of pipeline capacity or lack of markets.

The Corporation is dependent upon the production rates and oil price to fund the current development program.

In order to mitigate the Corporation's risk to fluctuations in oil price, the Corporation has taken out a

number of commodity derivatives. As at December 31, 2010, the Corporation had one forward swap outstanding for

80,600 bbls to hedge a proportion of December 2010 production, priced in January 2011. In March 2011, a 'put'

option to sell 804,500 bbls of the Corporation's 2011 forecast production at $105 / bbl was entered into. In

April 2011 a further 'put' option to sell an additional 300,000 bbls of the Corporation's forecast 2011

production at $115 / bbl was entered into.

The Corporation is exposed to financial risks including financial market volatility, fluctuation in interest

rates and various foreign exchange rates. Given the increasing development expenditure and operating costs in

currencies other than the United States dollar, the Board of the Corporation has a hedging policy to mitigate

foreign exchange rate risk on committed expenditure. On October 12, 2009, the Corporation entered into a

contract with the Bank of Scotland to hedge its British Pounds Sterling 2010 forecast operating costs,

including general and administrative expenses. The hedge amounts to $4 million per month (total $48 million) at

a $/GBP rate of no worse than $1.60/GBP 1.00 and allows the Corporation to benefit from spot movements down to

$1.4975: GBP 1.00. A realized loss of $1.3 million has been recognized on the contract for the year ended

December 31, 2010. The contract expired on December 31, 2010.

On July 7, 2010, in order to protect against the strengthening of the US Dollar and secure the gross proceeds

from the equity raise of $150 million the Corporation entered into a foreign exchange forward contract to swap

the Canadian dollars and GBP proceeds of the Bought Deal Offering and the Private Placement in exchange for US

Dollars when the proceeds where estimated to be received at contracted rates of USD$ / CAD$ and USD / GBP .

During the hedged period the US Dollar weakened hence the forex hedges prevented an exchange gain being

realized and forex losses of $3.1 million were recorded.

In 2011 in order to protect against movements in USD/GBP exchange rates, the Corporation holds GBP denominated

cash on deposit in order to match the forecast 2011 GBP denominated expenditure.

A further risk relates to the Corporation's ability to meet the conditions precedent for a full drawdown on the

Credit Facility. Ability to drawdown the Credit Facility is based on the Corporation meeting certain tests

including coverage ratio tests, liquidity tests and development funding tests which are determined by a

detailed economic model of the Corporation. There can be no assurance that the Corporation will satisfy such

tests in order to have access to the full amount of the Credit Facility, however at present the Corporation

believes that there are no circumstances present that would lead to failure to meet those tests.

In addition, the Facility contains covenants that require the Corporation to meet certain financial tests and

that restrict, among other things, the ability of Ithaca to incur additional debt or dispose of assets. To the

extent the cash flow from operations is not adequate to fund Ithaca's cash requirements, external financing may

be required. Lack of timely access to such additional financing, or which may not be on favorable terms, could

limit the future growth of the business of Ithaca. To the extent that external sources of capital, including

public and private markets, become limited or unavailable, Ithaca's ability to make the necessary capital

investments to maintain or expand its current business and to make necessary principal payments under the

Credit Facility may be impaired. At present the Corporation believes that there are no circumstances present

that would lead to failure to meet those certain financial tests.

A failure to access adequate capital to continue its expenditure program may require that the Corporation meet

any liquidity shortfalls through the selected divestment of its portfolio or delays to existing development

programs. As is standard to a Credit facility, the Corporation's and Ithaca UK assets have been pledged as

Credit Facility collateral and are subject to foreclosure in the event the Corporation or Ithaca UK defaults.

At present the Corporation believes that there are no circumstances present that would lead to selected

divestment, delays to existing programs or a default relating to the Credit Facility.

The Corporation is and may in the future be exposed to third-party credit risk through its contractual

arrangements with its current and future joint venture partners, marketers of its petroleum production and

other parties. The Corporation extends unsecured credit to these parties, and therefore, the collection of any

receivables may be affected by changes in the economic environment or other conditions. Management believes the

risk is mitigated by the financial position of the parties. The Corporation has entered in to a five year

marketing agreement with BP Oil International Limited to sell all of its North Sea oil production. All gas

production, acquired through the purchase of the Anglia and Topaz fields from GDF SUEZ E&P UK Ltd, is sold

through three contracts on a monthly basis to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. The

Corporation has not experienced any material credit loss in the collection of accounts receivable to date.

The Corporation's properties will be generally held in the form of licenses, concessions, permits and

regulatory consents ("Authorizations"). The Corporation's activities are dependent upon the grant and

maintenance of appropriate Authorizations, which may not be granted; may be made subject to limitations which,

if not met, will result in the termination or withdrawal of the Authorization; or may be otherwise withdrawn.

Also, in the majority of its licenses, the Corporation is often a joint interest-holder with another third

party over which it has no control. An Authorization may be revoked by the relevant regulatory authority if the

other interest-holder is no longer deemed to be financially credible. There can be no assurance that any of the

obligations required to maintain each Authorization will be met. Although the Corporation believes that the

Authorizations will be renewed following expiry or granted (as the case may be), there can be no assurance that

such Authorizations will be renewed or granted or as to the terms of such renewals or grants. The termination

or expiration of the Corporation's Authorizations may have a material adverse effect on the Corporation's

results of operations and business.

In addition, the areas covered by the Authorizations are or may be subject to agreements with the proprietors

of the land. If such agreements are terminated, found void or otherwise challenged, the Corporation may suffer

significant damage through the loss of opportunity to identify and extract oil or gas.

The Corporation is also subject to the risks associated with owning oil and natural gas properties, including

environmental risks associated with air, land and water. The Corporation takes out market insurance to mitigate

many of these operational, construction and environmental risks. In all areas of the Corporation's business

there is competition with entities that may have greater technical and financial resources. There are numerous

uncertainties in estimating the Corporation's reserve base due to the complexities in estimating the magnitude

and timing of future production, revenue, expenses and capital. All of the Corporation's operations are

conducted offshore in the UKCS; as such Ithaca is exposed to operational risk associated with weather delays

that can result in a material delay in project execution. Third parties operate some of the assets in which the

Corporation has interests. As a result, the Corporation may have limited ability to exercise influence over the

operations of these assets and their associated costs. The success and timing of these activities may be

outside the Corporation's control.

It should be noted that the Corporation is not required to certify the design and evaluation of the

Corporation's disclosure controls and procedures and internal control over financial reporting and it has not

completed such an evaluation. Furthermore, given the size of the Corporation there are inherent limitations on

the certifying officers to design and implement on a cost effective basis disclosure controls and procedures

and internal control over financial reporting that may result in additional risks to the quality, reliability,

transparency, and timeliness of annual filings.

For additional detail regarding the Corporation's risks and uncertainties, refer to the Corporation's most

recent Annual Information Form filed on SEDAR at www.sedar.com.

CONTROL ENVIRONMENT

As of December 31, 2010, there were no changes in our internal control over financial reporting that occurred

during 2010 that have materially affected, or are reasonably likely to materially affect, our internal control

over financial reporting.

Based on their inherent limitations, disclosure controls and procedures and internal controls over financial

reporting may not prevent or detect misstatements and even those options determined to be effective can provide

only reasonable assurance with respect to financial statement preparation and presentation.

CHANGES IN ACCOUNTING POLICIES

The consolidated financial statements for the year ended December 31, 2010 have been prepared following the

same accounting policies and methods of computation as the consolidated financial statements as at December 31,

2009.

IMPACT OF FUTURE ACCOUNTING CHANGES

In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed the changeover from GAAP to IFRS will

be required for publicly accountable enterprises, for interim and annual financial statements effective, for

fiscal years beginning on or after January 1, 2011, with corporations required to report comparatives in

accordance with IFRS for the year preceding implementation of the change.

IFRS adoption is currently scheduled for the Corporation's fiscal year commencing January 1, 2011. Ithaca's

financial statements up to and including the December 31, 2010 financial statements continue to be reported in

accordance with GAAP as it exists on each reporting date. Financial statements for the quarter ended March 31,

2011, including comparative amounts, will be prepared on an IFRS basis.

In July 2009, the International Accounting Standards Board ("IASB") issued amendments to IFRS 1 "First time

adoption of IFRS" allowing additional exemptions for first-time adopters. These amendments allow an entity that

used full cost accounting under its previous GAAP to elect to measure oil and gas assets, including exploration

and evaluation assets and development and production assets, being allocated pro rata using reserves volumes or

reserve values as of the date of the adoption, providing that all assets are tested for impairment on adoption.

Ithaca is currently planning to adopt this exemption.

The Corporation has completed the diagnostic assessment phase by performing comparisons of the differences

between GAAP and IFRS. The Corporation currently follows full cost accounting as prescribed in the Accounting

Guideline ("AcG") 16, "Oil and Gas Accounting-Full Cost." Conversion to IFRS may have a significant impact on

how the company accounts for costs pertaining to oil and gas activities and the Corporation has determined that

the most significant impact of IFRS conversion is to property, plant and equipment (PP&E).

The Corporation has completed the initial procedures required to convert its opening balance sheet at 1 January

2010. The resulting proposed adjustments are discussed below but are subject to final review and audit.

Although the conversion may have a significant impact on accounting for PP&E going forward, at the opening

balance sheet date, the "Deemed Cost" exemption has been taken, with the existing cost pool being allocated

across oil and gas assets on a pro rata basis using reserve values as of that date. The assets have

subsequently been assessed for impairment at the date of transition and no impairment adjustment is required,

hence the total value of PP&E remains unchanged.

The ARO liability at 1 January 2010 has been recalculated as required under IAS 37 and an increase in the

liability of approximately $0.8m is proposed as a result of discount rate changes.

Contingent consideration amounts on transactions prior to 1 January 2010 are in the process of being valued in

accordance with IAS 39. On transition to IFRS, this is likely to result in a liability of between $5m and $10m

being recognized.

Other opening balance sheet adjustments are still being finalized but are not expected to be significant.

The Corporation is also in the process of finalizing its accounting policy choices under IFRS.

The Corporation's transition plan remains on schedule and all changes to comply with IFRS required from January

1, 2011 will have been incorporated as required.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

All financial instruments are initially measured in the balance sheet at fair value. Subsequent measurement of

the financial instruments is based on their classification. The Corporation has classified each financial

instrument into one of these five categories: held-for-trading, held-to-maturity investments, loans and

receivables, available-for-sale financial assets or other financial liabilities. Loans and receivables, held-to-

maturity investments and other financial liabilities are measured at amortized cost using the effective

interest rate method. For all financial assets and financial liabilities that are not classified as held-for-

trading, the transaction costs that are directly attributable to the acquisition or issue of a financial asset

or financial liability are adjusted to the fair value initially recognized for that financial instrument. These

costs are expensed using the effective interest rate method and are recorded within interest expense. Held-for-

trading financial assets are measured at fair value and changes in fair value are recognized in net income.

Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in

other comprehensive income until the instrument is derecognized or impaired. All derivative instruments are

recorded in the balance sheet at fair value unless they qualify for the expected purchase, sale and usage

exemption. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in

which case changes in fair value are recorded in other comprehensive income.

The Corporation has classified its cash and cash equivalents, restricted cash, commodity hedge and long term

liability as held-for-trading, which are measured at fair value with changes being recognized in net income.

Accounts receivable are classified as loans and receivables; operating bank loans, accounts payable and accrued

liabilities are classified as other liabilities, all of which are measured at amortized cost. The

classification of all financial instruments is the same at inception and at December 31, 2010.

FORWARD-LOOKING INFORMATION

This MD&A and any documents incorporated by reference herein contain certain forward-looking statements and

forward-looking information which are based on the Corporation's internal expectations, estimates, projections,

assumptions and beliefs as at the date of such statements or information, including, among other things,

assumptions with respect to production, future capital expenditures and cash flow. The reader is cautioned that

assumptions used in the preparation of such information may prove to be incorrect. The use of any of the words

"anticipate", "continue", "estimate", "expect", "may", "will", "project", "plan", "should", "believe", "could",

"scheduled", "targeted" and similar expressions are intended to identify forward-looking statements and forward-

looking information. These statements are not guarantees of future performance and involve known and unknown

risks, uncertainties and other factors that may cause actual results or events to differ materially from those

anticipated in such forward-looking statements or information. The Corporation believes that the expectations

reflected in those forward-looking statements and information are reasonable but no assurance can be given that

these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-

looking statements and information included in this MD&A and any documents incorporated by reference herein

should not be unduly relied upon. Such forward-looking statements and information speak only as of the date of

this MD&A and any documents incorporated by reference herein and the Corporation does not undertake any

obligation to publicly update or revise any forward-looking statements or information, except as required by

applicable laws.

In particular, this MD&A and any documents incorporated by reference herein, contains specific forward-looking

statements and information pertaining to the following:

-- the quality of and future net revenues from the Corporation's reserves;

-- oil, natural gas liquids ("NGLs") and natural gas production levels;

-- commodity prices, foreign currency exchange rates and interest rates;

-- capital expenditure programs and other expenditures;

-- the sale, farming in, farming out or development of certain exploration

properties using third party resources;

-- supply and demand for oil, NGLs and natural gas;

-- the Corporation's ability to raise capital;

-- the Corporation's acquisition strategy, the criteria to be considered in

connection therewith and the benefits to be derived therefrom;

-- the Corporation's ability to continually add to reserves;

-- schedules and timing of certain projects and the Corporation's strategy

for growth;

-- the Corporation's future operating and financial results;

-- the ability of the Corporation to optimize operations and reduce

operational expenditures;

-- treatment under governmental and other regulatory regimes and tax,

environmental and other laws;

-- production rates;

-- targeted production levels;

-- timing and cost of the development of the Corporation's reserves; and

-- estimates of production volumes and reserves in connection with the Cook

& Maclure Acquisition.

With respect to forward-looking statements contained in this MD&A and any documents incorporated by reference

herein, the Corporation has made assumptions regarding, among other things:

-- Ithaca's ability to obtain additional drilling rigs and other equipment

in a timely manner, as required;

-- Access to third party hosts and associated pipelines can be negotiated

and accessed within the expected timeframe;

-- Field development plan approval and operational construction and

development is obtained within expected timeframes;

-- The Corporation's development plan for the Stella and Harrier

discoveries will be implemented as planned;

-- Reserves volumes assigned to Ithaca's properties;

-- Ability to recover reserves volumes assigned to Ithaca's properties;

-- Revenues do not decrease below anticipated levels and operating costs do

not increase significantly above anticipated levels;

-- future oil, NGLs and natural gas production levels from Ithaca's

properties and the prices obtained from the sales of such production;

-- the level of future capital expenditure required to exploit and develop

reserves;

-- Ithaca's ability to obtain financing on acceptable terms, in particular,

the Corporation's ability to access the Credit Facility;

-- Ithaca's reliance on partners and their ability to meet commitments

under relevant agreements; and

-- the state of the debt and equity markets in the current economic

environment.

The Corporation's actual results could differ materially from those anticipated in these forward-looking

statements and information as a result of assumptions proving inaccurate and of both known and unknown risks,

including the risk factors set forth in this MD&A and under the heading "Risk Factors" in the AIF and the

documents incorporated by reference herein, and those set forth below:

-- risks associated with the exploration for and development of oil and

natural gas reserves in the North Sea;

-- risks associated with offshore development and production including

transport facilities;

-- operational risks and liabilities that are not covered by insurance;

-- volatility in market prices for oil, NGLs and natural gas;

-- the ability of the Corporation to fund its substantial capital

requirements and operations;

-- risks associated with ensuring title to the Corporation's properties;

-- changes in environmental, health and safety or other legislation

applicable to the Corporation's operations, and the Corporation's

ability to comply with current and future environmental, health and

safety and other laws;

-- the accuracy of oil and gas reserve estimates and estimated production

levels as they are affected by the Corporation's exploration and

development drilling and estimated decline rates;

-- the Corporation's success at acquisition, exploration, exploitation and

development of reserves;

-- the Corporation's reliance on key operational and management personnel;

-- the ability of the Corporation to obtain and maintain all of its

required permits and licenses;

-- competition for, among other things, capital, drilling equipment,

acquisitions of reserves, undeveloped lands and skilled personnel;

-- changes in general economic, market and business conditions in Canada,

North America, the United Kingdom, Europe and worldwide, specifically

being the unavailability of the debt and equity markets to the

Corporation during the current economic crisis;

-- actions by governmental or regulatory authorities including changes in

income tax laws or changes in tax laws, royalty rates and incentive

programs relating to the oil and gas industry including the recent

increase in UK taxes;

-- adverse regulatory rulings, orders and decisions;

-- risks associated with the nature of the common shares; and

-- the impact of adoption of IFRS as opposed to GAAP from January 1, 2011.

Statements relating to reserves are deemed to be forward-looking statements, as they involve the implied

assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced

in the future. Many of these risk factors, other specific risks, uncertainties and material assumptions are

discussed in further detail throughout the AIF and in the MD&A. Readers are specifically referred to the risk

factors described in the AIF under "Risk Factors" and in other documents the Corporation files from time to

time with securities regulatory authorities. Copies of these documents are available without charge from Ithaca

or electronically on the internet on Ithaca's SEDAR profile at www.sedar.com.

The estimates of reserves and future net revenue for individual properties may not reflect the same confidence

level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation.

Independent Auditor's Report

To the Shareholders of Ithaca Energy Inc.

We have audited the accompanying consolidated financial statements of Ithaca Energy Inc. which comprise the

consolidated balance sheets as at December 31, 2010 and December 31, 2009 and the consolidated statements of

net and comprehensive income, shareholders' equity, and cash flows for the years then ended, and the related

notes including a summary of significant accounting policies.

Management's responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements

in accordance with Canadian generally accepted accounting principles, and for such internal control as

management determines is necessary to enable the preparation of consolidated financial statements that are free

from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We

conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require

that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about

whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the

consolidated financial statements. The procedures selected depend on the auditor's judgment, including the

assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud

or error. In making those risk assessments, the auditor considers internal control relevant to the entity's

preparation and fair presentation of the consolidated financial statements in order to design audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of

accounting policies used and the reasonableness of accounting estimates made by management, as well as

evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a

basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial

position of the Company and its subsidiaries as at December 31, 2010 and December 31, 2009 and the results of

its operations and their cash flows for the years then ended in accordance with Canadian generally accepted

accounting principles.

Chartered Accountants

Calgary, Alberta, Canada

April 21, 2011

"PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which

is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal

entity.

Consolidated Balance Sheets

December 31, December 31,

2010 2009

US$'000 US$'000

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

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

ASSETS

Current assets

Cash and cash equivalents 195,581 29,886

Accounts receivable 93,434 67,166

Restricted cash (note 3) - 5,224

Deposits, prepaid expenses and other 11,820 351

Foreign exchange forward contract (note 13) - 686

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

300,835 103,313

Restricted cash (note 3) 6,308 352

Loan fees (note 5) 521 -

Future Income Taxes asset (note 11) 16,074 -

Property, plant and equipment (note 4) 238,113 205,475

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

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

561,851 309,140

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

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

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Accounts payable and accrued liabilities 75,563 43,613

Commodity hedge (note 13) 349 397

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

75,912 44,010

Derivative financial instruments (note 14) 4,378 -

Long term liability on Beatrice acquisition (note

6) 2,872 2,718

Asset retirement obligations (note 7) 20,868 7,956

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

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

104,030 54,684

Shareholders' equity

Share capital (note 8) 422,373 277,075

Warrants issued (note 8) 311 -

Contributed surplus (note 9) 11,531 7,812

Surplus / (Deficit) 23,606 (30,431)

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

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

457,821 254,456

561,851 309,140

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

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

Commitments (note 12)

"Approved on behalf of the Board"

"John Summers"

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

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

Director

"Jay Zammit"

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

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

Director

Consolidated Statements of Net and Comprehensive Income

2010 2009

(i)

US$'000 US$'000

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

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

REVENUES

Oil & Gas sales 132,350 101,282

Other income 2,771 9,179

Interest income 112 351

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

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

135,233 110,812

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

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

COSTS AND EXPENSES

General and administrative 3,372 6,616

Operating 37,850 46,312

Depletion, depreciation and accretion (note 4

and note 7) 49,989 53,326

(Gain) / loss on foreign exchange (818) 3,253

Revaluation of long term liability (note 6) 154 117

(Gain) / loss on derivatives (note 13) 5,114 (8,080)

Stock based compensation (note 8(c)) 1,248 638

Financing, interest and bank charges 281 692

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

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

97,190 102,874

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

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

Net and comprehensive income before tax 38,043 7,938

Income taxes - current (80) (81)

Income taxes - future 16,074 -

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

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

Net and comprehensive income 54,037 7,857

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

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

Net and comprehensive income per share (basic)

(note 10) 0.27 0.05

Net and comprehensive income per share (diluted)

(note 10) 0.26 0.05

(i) Reclassified, see note 19

Consolidated Statements of Shareholders' Equity

(all amounts are

US$'000)

Contributed Warrants Surplus /

Share Capital Surplus Issued (Deficit) Total

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

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

Balance, Jan 1

2009 277,030 5,126 - (38,287) 243,869

Stock based

compensation - 2,707 - - 2,707

Options

exercised 45 (21) - - 24

Net income for

the year - - - 7,856 7,856

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

Balance, Dec 31

2009 277,075 7,812 - (30,431) 254,456

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

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

Balance, Jan 1

2010 277,075 7,812 - (30,431) 254,456

Stock based

compensation - 3,992 - - 3,992

Options

exercised 578 (273) - - 305

Issued for cash 153,248 - - - 153,248

Share issue

costs (8,528) - - - (8,528)

Warrants issued - - 311 - 311

Net income for

the period - - - 54,037 54,037

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

Balance, Dec 31

2010 422,373 11,531 311 23,606 457,821

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

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

Consolidated Statements of Cash Flows

2010 2009

(i)

US$'000 US$'000

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

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

CASH PROVIDED BY (USED IN):

OPERATING ACTIVITIES:

Net profit / (loss) 54,037 7,856

Items not affecting cash

Depletion, depreciation and accretion 49,989 53,326

Unrealized loss / (gain) on derivatives 638 (289)

Revaluation of long term liability 154 117

Stock based compensation 1,248 638

Amortization of loan fees 155 -

Future income taxes (recovered) (16,074) -

Realized loss / (gain) on derivatives 4,476 (7,791)

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

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

Cashflow from operations 94,623 53,858

Changes in non-cash working capital relating to

operating activities (836) (33,299)

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

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

93,787 20,559

FINANCING ACTIVITIES:

Proceeds from issuance of shares 153,553 22

Share Issue Costs (8,528) -

(Increase) / Decrease in Restricted Cash (732) 6,729

Loan issue costs (962) -

Loan proceeds / (repayment) - (61,200)

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

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

143,331 (54,449)

INVESTING ACTIVITIES:

Proceeds on disposal - 101,649

Oil and natural gas properties (63,516) (63,578)

Other non-current assets (313) (103)

Realized loss / (gain) on derivatives (4,476) 7,791

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

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

(68,305) 45,759

Changes in non-cash working capital relating to

investing activities (2,765) (9,440)

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

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

(71,070) 36,319

Gain / (loss) on foreign exchange (353) 513

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

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

INCREASE IN CASH AND CASH EQUIVALENTS 165,695 2,942

Cash and cash equivalents, beginning of year 29,886 26,944

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

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

Cash and cash equivalents, end of year 195,581 29,886

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

(i) Reclassified, see note 19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended December 31, 2010

All figures are in US Dollars, except where otherwise stated.

1. NATURE OF OPERATIONS

Ithaca Energy Inc. (the "Corporation" or "Ithaca"), incorporated in Alberta, Canada on April 27, 2004, is a

publicly traded company involved in the exploration, development and production of oil and gas in the North

Sea. The Corporation's shares are listed on the TSX Venture Exchange in Canada and the London Stock Exchange's

Alternative Investment Market in the United Kingdom under the symbol "IAE". Ithaca has a wholly-owned

subsidiary Ithaca Energy (UK) Limited ("Ithaca UK"), incorporated in Scotland.

2. SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with Canadian generally accepted

accounting principles.

Principles of consolidation

The consolidated financial statements of the Corporation include the accounts of Ithaca and its wholly-owned

subsidiary Ithaca UK. All inter-company transactions and balances have been eliminated.

Revenue Recognition

Oil, gas and condensate revenues associated with the sale of the Corporation's crude oil and natural gas are

recognised when title passes to the customer and collectability is reasonably assured. Revenues from the

production of oil and natural gas properties in which the Corporation has an interest with joint venture

partners are recognized on the basis of the Corporation's working interest in those properties (the entitlement

method). Differences between the production sold and the Corporation's share of production are recognized

within cost of sales at market value. The costs associated with the delivery, including operating and

maintenance costs and transportation expenses are recognised in the same period in which the related revenue is

earned and recorded.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and

assumptions regarding certain assets, liabilities, revenues and expenses. Such estimates must often be made

based on unsettled transactions and other events and a precise determination of many assets and liabilities is

dependent upon future events. Actual results may differ from estimated amounts.

The amounts recorded for depletion, depreciation of property and equipment, long-term liability, stock-based

compensation, derivatives, warrants, and future income taxes are based on estimates. The ceiling test and

depletion charges are based on estimates of proved reserves, production rates, prices, future costs and other

relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on

the financial statements of changes in such estimates in future periods could be material.

Cash and Cash Equivalents

For the purpose of cash flow statements, cash and cash equivalents include investments with an original

maturity of three months or less.

Restricted Cash

Cash that is held for security for bank guarantees is reported in the balance sheet and cash flow statements

separately. If the expected duration of the restriction is less than twelve months then it is shown in current

assets.

Financial Instruments

All financial instruments are initially recognized at fair value on the balance sheet. The Corporation's

financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, loan fees,

accounts payable, accrued liabilities and the long term liability on the Beatrice acquisition. The Company

classifies its financial instruments into one of the following categories: held-for-trading financial assets

and financial liabilities; held-to-maturity investments; loans and receivables; available-for-sale financial

assets; and other financial liabilities. All financial instruments are required to be measured at fair value on

initial recognition. Measurement in subsequent periods is dependent on the classification of the respective

financial instrument.

Held-for-trading financial instruments are subsequently measured at fair value with changes in fair value

recognized in net earnings. Available-for-sale financial assets are subsequently measured at fair value with

changes in fair value recognized in other comprehensive income, net of tax. All other categories of financial

instruments are measured at amortized cost using the effective interest method. Cash and cash equivalents are

classified as held-for-trading and are measured at fair value. Accounts receivable are classified as loans and

receivables. Accounts payable, accrued liabilities, certain other long-term liabilities, and long-term debt are

classified as other financial liabilities. Although the Company does not intend to trade its derivative

financial instruments, risk management assets and liabilities are classified as held-for-trading for accounting

purposes.

Financial assets and liabilities are categorized using a three-level hierarchy that reflects the significance

of the inputs used in making fair value measurements for these assets and liabilities. The fair values of

financial assets and liabilities included in Level 1 are determined by reference to quoted prices in active

markets for identical assets and liabilities. Fair values of financial assets and liabilities in Level 2 are

based on inputs other than Level 1 quoted prices that are observable for the asset or liability either directly

(as prices) or indirectly (derived from prices). The fair values of Level 3 financial assets and liabilities

are not based on observable market data. The disclosure of the fair value hierarchy excludes financial assets

and liabilities where book value approximates fair value due to the liquid nature of the asset or liability.

Transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability

and original issue discounts on long-term debt have been included in the carrying value of the related

financial asset or liability and are amortized to consolidated net earnings over the life of the financial

instrument using the effective interest method.

Analysis of the fair values of financial instruments and further details as to how they are measured are

provided in notes 13 to 15.

Foreign Currency Translation

Items included in the financial statements are measured using the currency of the primary economic environment

in which the Corporation operates (the 'functional currency'). The consolidated financial statements are

presented in United States Dollars, which is the Corporation's and Ithaca UK's functional and presentation

currency. Foreign currency transactions are translated into the functional currency under the temporal method

using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses

resulting from the settlement of such transactions and from the translation at year end exchange rates of

monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.

Property, Plant and Equipment

(a) Oil and Natural Gas Operations

The Corporation follows the full cost method of accounting for exploration and development expenditures whereby

all costs relating to the acquisition, exploration and development of oil and natural gas reserves are

capitalized. Such costs include lease acquisitions, geological and geophysical data, lease rentals on

undeveloped properties, drilling both productive and non-productive wells, production equipment, and overhead

charges directly related to acquisition, exploration and development activities. Proceeds received from

disposals of properties and equipment are credited against capitalized costs unless the disposal would alter

the rate of depletion and depreciation by more than 20 percent, in which case a gain or loss on disposal is

recorded.

All costs of acquisition, exploration and development of oil and natural gas reserves, associated tangible

plant and equipment costs, and estimated costs of future development of proved developed reserves are depleted

and depreciated by the unit of production method based on estimated gross proved reserves before royalties as

determined by independent evaluators. Natural gas reserves are converted to equivalent units using their

relative energy content of six thousand cubic feet of natural gas to one barrel of oil. The costs of acquiring

and evaluating unproved properties are excluded from costs subject to depletion. These properties are assessed

periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is

considered to be impaired, the cost of the property or the amount of the impairment is added to the costs

subject to depletion.

Petroleum and natural gas assets are evaluated annually to determine whether the costs are recoverable. The

costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of

proved reserves exceed the carrying value of the petroleum and natural gas assets. If the carrying value of the

petroleum and natural gas assets is not assessed to be recoverable, an impairment loss is recognized to the

extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of

proved and probable reserves. The cash flows are estimated using future product prices and costs and are

discounted using the risk-free interest rate.

(b) Non Oil and Natural Gas Operations

Computer and office equipment is recorded at cost and depreciated over its estimated useful life on a straight-

line basis over three years. Furniture and fixtures are recorded at cost and depreciated over their estimated

useful lives on a straight-line basis over five years.

Capitalized Interest

Interest costs associated with major development projects are capitalized until the project is substantially

completed. These costs are subsequently depleted together with the related assets.

Joint Interest Operations

Substantially all of the Corporation's oil and natural gas activities are carried out jointly with others.

These consolidated financial statements reflect only the Corporation's proportionate interest in such

activities.

Asset Retirement Obligation

The Corporation records the present value of legal obligations associated with the retirement of long-lived

tangible assets, such as producing well sites and processing plants, in the period in which they are incurred

with a corresponding increase in the carrying amount of the related long-lived asset. In subsequent periods,

the asset estimate obligation is adjusted for the passage of time and any changes in the estimated amount or

timing of the settlement of the obligations. The carrying amounts of the long-lived assets are depleted using

the unit of production method. Actual costs to retire tangible assets are deducted from the liability as

incurred.

Stock based Compensation

The Corporation has a stock based compensation plan as described in note 9 (b). The Corporation's proportionate

share of stock based compensation expense is recorded in the statement of net and comprehensive income or

capitalized for all options granted in the year, with the gross increase recorded as contributed surplus.

Compensation costs are based on the estimated fair values at the time of the grant and the expense or

capitalized amount is recognized over the vesting period of the options. Upon the exercise of the stock

options, consideration paid together with the amount previously recognized in contributed surplus is recorded

as an increase in share capital. In the event that vested options expire unexercised, previously recognized

compensation expense associated with such stock options is not reversed. In the event that unvested options are

forfeited or expired, previously recognized compensation expense associated with the unvested portion of such

stock options is reversed.

Earnings per Share

Basic earnings per common share are calculated on the net earnings using the weighted average number of shares

outstanding during the fiscal period. Diluted earnings per share information is calculated using the treasury

stock method which assumes that proceeds obtained upon exercise of options and warrants would be used to

purchase common shares at the average market price for the period. No adjustment to diluted earnings per share

is made if the result of this calculation is anti-dilutive.

Income Taxes

Income taxes are accounted for using the liability method of tax allocation. Future income taxes are recognized

for the future income tax consequences attributable to differences between the carrying values of assets and

liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using

enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which

temporary differences are expected to be recovered or settled. The effect on future income tax assets and

liabilities of a change in rates is included in earnings in the period of the enactment date. Future income tax

assets are recorded in the consolidated financial statements if realization is considered more likely than not.

Recent Accounting Pronouncements

In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed the changeover to IFRS from GAAP will

be required for publicly accountable enterprises for interim and annual financial statements effective for

fiscal years beginning on or after January 1, 2011, including comparatives for 2010. Ithaca's financial

statements up to and including the December 31, 2010 financial statements will continue to be reported in

accordance with GAAP as it exists on each reporting date. Financial statements for the quarter ended March 31,

2011, including comparative amounts, will be prepared on an IFRS basis.

In July 2009, the International Accounting Standards Board ("IASB") issued amendments to IFRS 1 "First time

adoption of IFRS" allowing additional exemptions for first-time adopters. These amendments allow an entity that

used full cost accounting under its previous GAAP to elect to measure oil and gas assets including exploration

and evaluation assets and development and production assets being allocated pro rata using reserves volumes or

reserve values as of the date of the adoption, providing that all assets are tested for impairment on adoption.

Ithaca is currently planning to adopt this exemption.

IFRS adoption is currently scheduled for the Corporation's fiscal year commencing January 1, 2011.

3. RESTRICTED CASH

Restricted cash of $5.9 million is held by the Bank of Scotland as decommissioning security provided as part of

the acquisition of gas interests from GDF SUEZ E&P UK.

Further restricted cash of $0.4 million is held by the Bank of Scotland as cash security for a Bank Guarantee

that Ithaca Energy (UK) Limited provided to the Crown Estate when it was granted Field Development Plan

approval for the Jacky Field.

$5.2 million of restricted cash held by the Bank of Scotland in 2009 as cash security for the 2010 foreign

exchange forward contract was released in January 2010.

4. PROPERTY, PLANT AND EQUIPMENT

December 31, December 31,

2010 2009

US$'000 US$'000

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

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

Oil and natural gas properties 341,067 259,285

Less accumulated depletion (103,437) (54,327)

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

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

237,630 204,958

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

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

Other non-current assets 1,587 1,274

Less accumulated depreciation and amortization (1,104) (757)

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

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

483 517

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

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

Total property, plant and equipment 238,113 205,475

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

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

The depletion charge in the year ended December 31, 2010 was $49.1 million (2009: $52.1 million). As at

December 31, 2010, oil and natural gas properties included $221.2 million (Dec 31, 2009: $189.5 million)

relating to proved properties and $16.4 million (Dec 31, 2009: $15.5 million) relating to unproved properties.

During the year ended December 31, 2010, the Corporation capitalized $4.9 million (2009: $8.4 million) of

overhead directly related to exploration, appraisal and development activities. The Corporation did not

capitalize any interest (2009: $2 million) in the year ended December 31, 2010.

Disposal

The Corporation announced on July 29, 2009 that it had completed a transaction with Dyas UK Limited ("Dyas"),

whereby Dyas purchased an interest in certain assets of the Corporation for $101.6 million and the Corporation

agreed to repay the loans of $61.2 million and GBP 5 million ($8.2 million) from Dyas ("Dyas Transaction").

Cash of $32.2 million was paid immediately to Ithaca and a further $8.4 million was paid upon the outstanding

transfer of an interest in Stella.

The majority of the proceeds were credited to Property, Plant and Equipment, with no gain or loss on disposal.

Acquisitions

On October 28, 2009, the Corporation signed an agreement for the acquisition from Maersk Oil North Sea UK

Limited and Maersk Oil Exploration UK Limited of additional interest in the Stella and Harrier discoveries and

the Hurricane discovery. Ithaca paid $10 million in consideration for this purchase and is committed to pay a

further $3 million at Field Development approval and $5 million at first oil.

On the same date Ithaca entered into a "farm out" agreement with Challenger Minerals (North Sea) Limited

("CMI") whereby CMI committed to pay 27% of gross Stella appraisal well costs in exchange for an option to

acquire 18% equity interest in the Stella and Harrier discoveries prior to August 1, 2010, thereby carrying a

part of Ithaca's share of drilling costs. CMI will also carry Ithaca on a further Stella or Harrier development

well for up to GBP 2 million ($3.2 million) or 9%, whichever is lower. On September 23, 2010, the Corporation

completed the farm out agreement. The revised interests in the Stella and Harrier discoveries are 50.33%

(interest in Hurricane remains at 100%).

On August 4, 2010, the Corporation entered into an agreement to acquire certain UK North Sea gas interests from

GDF SUEZ E&P UK Ltd for a cash consideration of GBP 11.25 million (approx $16.9 million). The effective date of

the acquisition was January 1, 2010. On December 17, 2010 the Corporation completed the transaction for an

adjusted cash consideration of GBP 6.7 million (approx $10.5 million). The adjustment results from free cash

flow generated by strong production throughout 2010 since the effective date.

A ceiling test was performed for 2010 and 2009 and there was no impairment of proved oil and gas properties.

There was no impairment (2009: nil) relating to unproved oil and gas properties in 2010.

The forecasted future prices used in the ceiling test were as follows:

Oil reference price Gas reference price

($ / Bbl) (GBP / MMBtu)

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

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

2011 87.15 5.54

2012 87.87 5.84

2013 87.48 6.01

2014 87.58 5.16

2015 88.89 5.24

5. LOAN FACILITY

On July 12, 2010, the Corporation signed and completed a Senior Secured Borrowing Base Facility agreement (the

"Facility") for up to US$140 million with the Bank of Scotland Plc. The loan term is up to five years and will

attract interest at LIBOR plus 3-4.5%. Loan issue costs of $0.9 million have been incurred in the year ended

December 31, 2010 and are being amortized over the period of the loan (approx $0.2 million amortized in the

year ended December 31, 2010).

The Corporation is subject to financial and operating covenants related to the Facility. Failure to meet the

terms of one or more of these covenants may constitute an event of default as defined in the Facility

agreement, potentially resulting in accelerated repayment of the debt obligations.

The Corporation is in compliance with its financial and operating covenants.

No funds are currently drawn down under the Facility.

6. LONG TERM LIABILITY ON BEATRICE ACQUISITION

December 31, December 31,

2010 2009

US$'000 US$'000

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

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

Balance, beginning of the period 2,718 4,137

Disposal - (1,536)

Revaluation in the period 154 117

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

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

Balance, end of the period 2,872 2,718

On completion of the acquisition of the Beatrice Facilities on November 10, 2008 there were 75,000 barrels of

oil in an oil storage tank at the Nigg Terminal. This volume of oil is required to be in the storage tank when

the Beatrice Facilities are re-transferred. This volume of oil is valued at the price on the forward oil price

curve at the expected date of re-transfer and discounted. The disposal in 2009 relates to the Dyas Transaction

referred to in note 5. The liability is subject to revaluation at each financial period end. The expected date

of re-transfer is likely to be more than three years in the future.

7. ASSET RETIREMENT OBLIGATIONS

December 31, 2010 December 31, 2009

US$'000 US$'000

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

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

Balance, beginning of period 7,956 7,407

Additions 11,858 5,530

Accretion 533 808

Revision to estimates 521 (362)

Liabilities disposed of - (5,427)

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

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

Balance, end of period 20,868 7,956

The total future asset retirement obligation was calculated by management based on its net ownership interest

in all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated

timing of the costs to be incurred in future periods. The Corporation estimates its total undiscounted asset

retirement obligations to be $25.2 million as at December 31, 2010 (2009 $10.8 million). The Corporation uses a

credit adjusted risk free rates between 6 - 8 percent and an inflation rate of 2.5 percent over the varying

lives of the assets to calculate the present value of the asset retirement obligation. These costs are expected

to be incurred at various intervals over the next 8 years. The economic life and the timing of the obligations

are dependent on Government legislation, commodity price and the future production profiles of the respective

production and development facilities. Note that upon the acquisition of the Beatrice Field in November 2008,

the Corporation did not assume the decommissioning liabilities.

The addition to the obligation in 2010 was due to the liabilities assumed as part of the GDF acquisition above.

The liabilities disposed of in 2009 relate to the Dyas transaction.

8. SHARE CAPITAL

(a) Issued

The issued share capital is as follows:

Issued Number of Amount

common shares US$'000

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

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

Balance December 31, 2008 162,261,975 277,030

Issued for cash - options exercised 100,000 23

Transfer from Contributed Surplus on options

exercised 22

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

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

Balance December 31, 2009 162,361,975 277,075

Issued for cash - options exercised 765,205 305

Transfer from Contributed Surplus on options

exercised 273

Issued for cash - prospectus 92,662,284 153,248

Share issue costs (8,528)

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

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

Balance December 31, 2010 255,789,464 422,373

On July 28 2010, the Corporation successfully closed a Canadian bought deal and UK private placement. Gross

proceeds were $78.3 million (C$80.9 million) through the issue of 47.6 million shares at a price of C$1.70 per

share and $74.9 million (GBP 48.2 million) through the issue of 45.1 million shares at GBP 1.07 per common

share.

(b) Stock Options

In the quarter ended March 31, 2010, the Corporation's Board of Directors granted 4,550,000 options at a

weighted average exercise price of $1.50 (C$1.55). In the quarter ended September 30, 2010 360,000 options were

granted at an exercise price of $1.76 (C$1.85) to employees and directors pursuant to the terms of the

Corporation's stock-based compensation plan. In the quarter ended December 31, 2010, the Corporation granted

5,190,000 options at an exercise price of $2.22 (C$2.25).

On September 29, 2010, 310,000 options were reserved for issue for future employees. As at December 31, 2010,

210,000 of these options have not yet been granted, therefore they have not been included in the table below

and no expense has been incurred in relation to the options.

The Corporation's stock options and exercise prices are denominated in Canadian Dollars when granted. As at

December 31, 2010, 20,146,003 stock options to purchase common shares were outstanding, having an exercise

price range of $0.20 to $3.43 (C$0.25 to C$3.65) per share and a vesting period of up to 3 years in the future.

Changes to the Corporation's stock options are summarized as follows:

December 31, 2010 December 31, 2009

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

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

Number of Wt. Avg. Number of Wt. Avg.

Options Exercise Options Exercise

Price (i) Price (i)

US$ US$

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

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

Balance, beginning of period 11,042,875 $ 1.48 10,694,500 $ 1.92

Granted 10,100,000 $ 1.88 3,876,875 $ 0.83

Forfeited / expired (231,667) $ 1.28 (3,428,500) $ 2.18

Exercised (765,205) $ 0.33 (100,000) $ 0.24

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

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

Options outstanding, end of

period 20,146,003 $ 1.61 11,042,875 $ 1.48

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

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

(i) The weighted average exercise price has been converted into U.S. dollars

based on the foreign exchange rate in effect at the date of issuance.

The following is a summary of stock options as at December 31, 2010

Options Outstanding

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

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

Range of Number of Wt. Avg. Wt. Avg.

Exercise Options Life Exercise

Price (Years) Price (i)

US$

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

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

$3.65 (C$3.65) 2,435,000 1.14 $3.65

$2.22-$2.86

(C$2.25-C$3.00) 6,375,000 2.40 $2.25

$1.49-$1.76

(C$1.54-C$1.85) 5,345,000 3.01 $1.54

$0.20-$0.80

(C$0.25-C$0.87) 5,991,003 2.77 $0.55

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

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

20,146,003 2.50 $1.61

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

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

Options Exercisable

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

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

Range of Number of Wt. Avg. Wt. Avg.

Exercise Options Life Exercise

Price (Years) Price (i)

US$

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

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

$3.65 (C$3.65) 1,623,334 1.1 $3.65

$2.29-$2.86

(C$2.51-C$3.00) 1,285,000 0.3 $2.38

$1.49-$1.68

(C$1.54-C$1.80) 300,000 1.7 $1.68

$0.20-$0.81

(C$0.25-C$0.87) 2,591,084 2.8 $0.45

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

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

5,799,418 1.3 $1.44

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

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

The following is a summary of stock options as at December 31, 2009

Options Outstanding

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

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

Range of Number of Wt. Avg. Wt. Avg.

Exercise Options Life Exercise

Price (Years) Price (i)

US$

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

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

$3.36 (C$3.65) 2,435,000 2.21 $3.36

$2.14-$2.84

(C$2.32-C$3.00) 1,385,000 1.32 $2.35

$1.66 (C$1.80) 450,000 2.67 $1.42

$0.23 - $0.80

(C$0.25-C$0.87) 6,772,875 3.78 $0.52

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

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

11,042,875 3.06 $1.48

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

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

Options Exercisable

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

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

Range of Number of Wt. Avg. Wt. Avg.

Exercise Options Life Exercise

Price (Years) Price (i)

US$

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

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

$3.36 (C$3.65) 811,666 2.21 $3.36

$2.14-$2.84

(C$2.32-C$3.00) 956,668 1.24 $2.34

$1.66 (C$1.80) 149,999 2.67 $1.42

$0.23 (C$0.25) 1,032,001 3.94 $0.20

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

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

2,950,334 2.52 $1.91

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

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

(i) The exercise price and the weighted average exercise price have been

converted into U.S. dollars based on the foreign exchange rate in effect

at the date of issuance.

(c) Stock-Based Compensation

Options granted are accounted for using the fair value method. The compensation cost during the year ended

December 31, 2010 for total stock options granted was $4.0 million (2009: $2.7 million). The income statement

for the year ended December 31, 2010 shows a charge of $1.2 million for stock based compensation, being the

Corporation's share of stock based compensation chargeable through the income statement. The remainder of the

Corporation's share of stock based compensation has been capitalized. The fair value of each stock option

granted was estimated at the date of grant, using the Black-Scholes option pricing model with the following

assumptions:

For the year For the year

ended ended

December 31, December 31,

2010 2009

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

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

Risk free interest rate 1.2% 2.13%

Expected stock volatility 104% 94%

Expected life of options 3 years 4 years

Weighted Average Fair Value $1.14 $0.83

(d) Gemini Agreement

In September 2006 Gemini Oil & Gas Fund 11 L.P. ("Gemini") provided non-recourse funding of $6 million. Further

to a supplemental agreement entered into in August 2008, the loan was fully repaid. Under the supplemental

agreement Gemini retained rights, under certain circumstances relating to the Athena Field, to elect to receive

warrants to acquire up to 3,000,000 common shares at $3.00 per share and to receive payments connected to asset

sales of interests in Athena. On September 20, 2010, a further agreement was entered into with Gemini whereby

in exchange for and in consideration of Gemini's waiver of any right to proceeds from the disposal of equity

interest in the Athena discovery and in substitution for any previously awarded or agreed warrants, Ithaca

Energy Inc. granted Gemini warrants to acquire up to 2,500,000 common shares in Ithaca Energy Inc. The warrants

were exercised at C$2.25 per share on March 3, 2011. The agreement terminates all rights that Gemini has in

respect of the Corporation's interests. The total fair value attributed to warrants issued in the year was $0.3

million. The fair value of each warrant granted was estimated at the date of grant, using the Black-Scholes

option pricing model with the following assumptions:

For the year ended December 31, 2010

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

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

Risk free interest rate 0.26%

Expected stock volatility 58.39%

Expected life of options 0.50 years

Weighted Average Fair Value $0.12

9. CONTRIBUTED SURPLUS

December 31, December 31,

2010 2009

US$'000 US$'000

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

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

Balance, beginning of period 7,812 5,127

Stock based compensation cost 3,992 2,707

Transfer to share capital on exercise of

options (273) (22)

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

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

Balance, end of period 11,531 7,812

10. PER SHARE AMOUNTS

The following reflects the share data used in the basic and diluted net income per share computations:

2010 2009

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

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

Weighted average number of common shares

(basic) 202,695,321 162,270,468

Weighted average number of common shares

(diluted) 206,372,751 162,377,456

11. INCOME TAXES

The provision for income taxes reflects an effective tax rate which differs from the amount computed by

applying the combined statutory Canadian Federal and Provincial tax rates to earnings before taxes. The reasons

for these differences are as follows:

2010 2009

US$'000 US$'000

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

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

Net Income / (Loss) before taxes 38,043 7,937

Enacted tax rate 28% 29%

Computed income taxes at the enacted rate 10,652 2,302

Expenses not deductable for tax purposes (5,488) (3,022)

Difference in foreign tax rates 8,607 (99)

Change in tax rates (231) 80

Change in tax rates on opening temporary - 611

Change in valuation allowance (13,664) 1,088

Share issue costs - (862)

Adjustment in respect of previous period 1,495 (17)

Recognition of future tax asset (16,074) -

Other (1,291) -

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

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

Total (15,994) 81

At December 31, 2010, the Corporation had estimated future tax assets as

follows:

2010 2009

US$'000 US$'000

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

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

Future Tax Assets

Non-capital losses (114,245) 122,956

Share issue costs (2,394) 1,473

Foreign exchange (1,345) -

Fixed assets 93,933 (95,524)

General Provision (2,175) 4,107

Valuation Allowance 10,152 (33,012)

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

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

Total (16,074) -

There is no expiry date on the Corporation's Canadian and United Kingdom non-capital losses carried forward.

12. COMMITMENTS

As at December 31, 2010, the Corporation had the following financial commitments:

Year ended 2011 2012 2013 2014 Subsequent

to 2014

US$'000 US$'000 US$'000 US$'000 US$'000

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

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

Office lease 248 247 247 247 804

Exploration license fees 1,275 1,635 1,977 - -

Engineering 20,466 - - - -

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

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

Total 21,989 1,882 2,224 247 804

13. FINANCIAL INSTRUMENTS

To estimate fair value of financial instruments, the Corporation uses quoted market prices when available, or

industry accepted third-party models and valuation methodologies that utilize observable market data. In

addition to market information, the company incorporates transaction specific details that market participants

would utilize in a fair value measurement, including the impact of non-performance risk. The company

characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the

degree to which they are observable. However, these fair value estimates may not necessarily be indicative of

the amounts that could be realized or settled in a current market transaction. The three levels of the fair

value hierarchy are as follows:

- Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example,

exchange-traded commodity derivatives). Active markets are those in which transactions occur in sufficient

frequency and volume to provide pricing information on an ongoing basis.

- Level 2 - inputs other than quoted prices included within Level 1 that are observable, either directly or

indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices

for commodities, market interest rates, and volatility factors, which can be observed or corroborated in the

marketplace. The company obtains information from sources such as the New York Mercantile Exchange and

independent price publications.

- Level 3 - inputs that are less observable, unavailable or where the observable data does not support the

majority of the instrument's fair value.

In forming estimates, the company utilizes the most observable inputs available for valuation purposes. If a

fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorized

based upon the lowest level of input that is significant to the fair value measurement. The valuation of over-

the-counter financial swaps and collars is based on similar transactions observable in active markets or

industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions

for industry standard models are observable in active markets throughout the full term of the instrument. These

are categorized as Level 2.

The following table presents the Corporation's material financial instruments measured at fair value for each

hierarchy level as of December 31, 2010:

Level 1 Level 2 Level 3 Total Fair Value

US$'000 US$'000 US$'000 US$'000

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

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

Commodity hedge - 349 - 349

Long term liability on Beatrice

acquisition - - 2,872 2,872

Derivative financial instrument 4,378 4,378

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

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

The table below presents the total gain / (loss) on derivatives that has been disclosed through the statement

of net and comprehensive income / (loss):

Year ended Dec 31,

2010 2009

US$'000 US$'000

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

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

Unrealized (loss) / gain on foreign exchange

forward contracts (686) 686

Realized (loss) / gain on foreign exchange

forward contracts (1,319) 7,763

Realized (loss) on foreign exchange forward

contracts (equity raise) (3,095) -

Unrealized gain / (loss) on commodity hedges 48 (397)

Realized (loss) / gain on commodity hedges (62) 27

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

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

Total (loss) / gain on derivatives (5,114) 8,080

The Corporation has identified that it is exposed principally to these areas of market risk.

i) Commodity Risk

Commodity price risk related to crude oil prices is the Corporation's most significant market risk exposure.

Crude oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political

events and supply and demand fundamentals. The Corporation is also exposed to natural gas price movements on

uncontracted gas sales. Natural gas prices, in addition to the worldwide factors noted above, can also be

influenced by local market conditions. The Corporation's expenditures are subject to the effects of inflation,

and prices received for the product sold are not readily adjustable to cover any increase in expenses from

inflation. The Corporation may periodically use different types of derivative instruments to manage its

exposure to price volatility, thus mitigating fluctuations in commodity-related cash flows.

In Q4 2009 the Corporation entered into a forward swap for 51,000 barrels per month over November, December,

January and February 2010 production fixing the price at $77/barrel. In Q4 2010, the Corporation entered into

another forward swap for 108,668 and 80,600 barrels per month over December and January respectively to hedge a

proportion of November and December production. The combination of these forward swaps resulted in a realized

loss of $62k and an unrealized gain of $48k in the year ended December 31, 2010. If the oil price had been

lower by $1 per barrel in 2010 then the profit for the year to December 31, 2010 would have been lower by $1.4

million ($0.3 million loss mitigated due to the contracts noted above).

ii) Interest Risk

Calculation of interest payments for the Senior Secured Borrowing Base Facility agreement with the Bank of

Scotland that was signed on July 12, 2010 incorporates LIBOR. The Corporation will therefore be exposed to

interest rate risk to the extent that LIBOR may fluctuate. The Corporation will evaluate its annual forward

cash flow requirements on a rolling monthly basis. No funds are currently drawn down under the facility.

iii) Foreign Exchange Rate Risk

The Corporation is exposed to foreign exchange risks to the extent it transacts in various currencies, while

measuring and reporting its results in US Dollars. Since time passes between the recording of a receivable or

payable transaction and its collection or payment, the Corporation is exposed to gains or losses on non USD

amounts and on balance sheet translation of monetary accounts denominated in non USD amounts upon spot rate

fluctuations from quarter to quarter.

On July 7, 2010, in order to protect against the strengthening of the US Dollar and secure the net proceeds

from the equity raise of $150 million the Corporation entered into a foreign exchange forward contract to swap

the Canadian Dollars and Pounds Sterling proceeds of the Canadian bought deal and UK Private placement in

exchange for US Dollars when the proceeds were estimated to be received at contracted rates of $1.00 / C$1.0489

and $1.00 / GBP 0.6592. During the period the US Dollar weakened with the result that the forex instruments

prevented an exchange gain being realized. Forex losses of $3.1 million were recorded which offset the natural

gain reflected in equity.

On March 11, 2009, the Corporation entered into a "Window Forward Plus" contract with the Bank of Scotland to

hedge circa 90% of the Corporation's known, at that time, future US Dollar to British Pound Sterling exchange

rate exposure. The contract ensured that the Corporation, which incurs a substantial amount of its operating

expenditure in British Pounds Sterling ("GBP "), was able to lock in a rate of no worse than USD1.40/GBP 1.00

for a series of foreign exchange transactions throughout the year and yet continues to benefit from any

additional strengthening of the US Dollar down to USD1.29/GBP 1.00 (the "Trigger rate"). Any strengthening of

the USD/GBP rate beyond the Trigger rate during any of the periods or "windows" between the transaction dates

led to a rate of USD1.40/GBP 1.00 being applied to that individual transaction. The contract, which expired

December 31, 2009, covered $49 million equivalent of British Pounds Sterling expenditure.

On October 12, 2009, the Corporation entered in to a Window Forward Plus contract with the Bank of Scotland to

hedge its forecast British Pounds Sterling 2010 operating costs, including general and administrative expenses.

The hedge amounts to $4 million per month (total $48 million) at a US$/GBP rate of no worse than USD1.60/1.0

and a Trigger rate of USD1.4975/GBP 1.00. A realized loss of $1.3 million has been recognized on the contract

for the year ended December 31, 2010. This contract expired in December 2010, and the resulting unwinding of

unrealized gains and losses on the contracts resulted in an unrealized loss of $0.7 million for the year ended

December 31, 2010.

iv) Credit Risk

The Corporation's accounts receivable with customers in the oil and gas industry are subject to normal industry

credit risks and are unsecured. It should be noted that the Corporation has entered in to a five year marketing

agreement with BP Oil International Limited to sell all of its North Sea oil production. All gas production,

acquired through the purchase of the Anglia and Topaz fields from GDF SUEZ E&P UK Ltd, is sold through three

contracts on a monthly basis to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd.

The Corporation assesses partners' credit worthiness before entering into farm-in or joint venture agreements.

In the past, the Corporation has not experienced credit loss in the collection of accounts receivable. As the

Corporation's exploration, drilling and development activities expand with existing and new joint venture

partners, the Corporation will assess and continuously update its management of associated credit risk and

related procedures.

The Corporation regularly monitors all customer receivable balances outstanding in excess of 90 days. As at

December 31, 2010 over 99% of accounts receivables are current, being defined as less than 90 days. The

Corporation has no allowance for doubtful accounts as at December 31, 2010 (December 31, 2009 $0.4 million).

The Corporation may be exposed to certain losses in the event that counterparties to derivative financial

instruments are unable to meet the terms of the contracts. The company's exposure is limited to those

counterparties holding derivative contracts with positive fair values at the reporting date. At December 31,

2010, the Corporation has no exposure, due to the unrealized loss position (December 31, 2009: $0.7 million).

The Corporation also has credit risk arising from cash and cash equivalents held with banks and financial

institutions. The maximum credit exposure associated with financial assets is the carrying values.

v) Liquidity Risk

Liquidity risk includes the risk that as a result of its operational liquidity requirements the Corporation

will not have sufficient funds to settle a transaction on the due date. The Corporation manages liquidity risk

by maintaining adequate cash reserves, banking facilities, and by considering medium and future requirements by

continuously monitoring forecast and actual cash flows. The Corporation considers the maturity profiles of its

financial assets and liabilities. As at December 31, 2010, substantially all accounts payable are current.

The following table shows the timing of cash outflows relating to trade and other payables.

Within 1 year 1 to 5 years

US$'000 US$'000

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

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

Accounts payable and accrued liabilities 75,563 -

Commodity hedge 349 -

Long term liability - 3,522

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

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

Total 75,912 3,522

14. DERIVATIVE FINANCIAL INSTRUMENTS

December 31, December 31,

2010 2009

US$'000 US$'000

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

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

Embedded Derivative 4,378 -

The Corporation has acquired an embedded derivative within an Anglia gas sales contract. This is recognized at

its fair value in the financial statements at the year end. Fair value represents the difference between the

contract price and the year end market price for the contracted volumes.

15. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

Financial instruments of the Company consist mainly of cash and cash equivalents, receivables, payables, loans

and financial derivative contracts, all of which are included in these financial statements. At December 31,

2010, the classification of financial instruments and the carrying amounts reported on the balance sheet and

their estimated fair values are as follows:

December 31, 2010 December 31, 2009

US$'000 US$'000

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

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

Classification Carrying Carrying

Amount Fair Value Amount Fair Value

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

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

Cash and cash equivalents (Held for

trading) 195,581 195,581 29,886 29,886

Restricted cash 6,308 6,308 5,576 5,576

Foreign exchange forward contract

(Held for trading) - - 685 685

Accounts receivable - current (Loans

and Receivables) 93,434 93,434 67,166 67,166

Deposits 248 248 346 346

Loan fees - current 286 286 - -

Loan fees - non-current 521 521 - -

Commodity hedge (Held for trading) 349 349 397 397

Derivative financial instrument 4,378 4,378 - -

Long Term Liability 2,872 2,872 2,718 2,718

Accounts payable (Other financial

liabilities) 74,576 74,576 43,613 43,613

16. SUPPLEMENTAL INFORMATION

2010 2009

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

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

US$'000 US$'000

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

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

Interest paid during the period 8 3,076

Income taxes paid during the period 103 -

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

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

Total 111 3,076

17. CAPITAL DISCLOSURE

The Corporation's objectives when managing capital are:

-- to safeguard the Corporation's ability to continue as a going concern;

-- to maintain balance sheet strength and optimal capital structure, while

ensuring the Corporation's strategic objectives are met; and

-- to provide an appropriate return to shareholders relative to the risk of

the Corporation's underlying assets.

In the definition of capital, the Corporation includes shareholders' equity and working capital. Shareholders'

equity includes share capital, contributed surplus, warrants issued, retained earnings or deficit and other

comprehensive income.

December 31, December 31,

2010 2009

US$'000 US$'000

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

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

Share capital 422,373 277,075

Contributed surplus 11,531 7,812

Warrants issued 311 -

Retained earnings 23,606 (30,431)

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

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

Shareholders' equity 457,821 254,456

Working capital 224,923 59,303

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

The Corporation maintains and adjusts its capital structure based on changes in economic conditions and the

Corporation's planned requirements. The Board of Directors reviews the Corporation's capital structure and

monitors requirements. The Corporation may adjust its capital structure by issuing new equity and/or debt,

selling and/or acquiring assets, and controlling capital expenditure programs.

The Board sets guidelines for the management of the Corporation's capital. The Corporation monitors its capital

structure using the debt-to-equity ratio and other benchmark measures at the consolidated group level.

December 31, December 31,

2010 2009

US$'000 US$'000

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

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

Debt - -

Equity 457,821 254,456

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

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

Debt as a % of Equity N/A N/A

On July 12, 2010, the Corporation signed and completed a Senior Secured Borrowing Base Facility agreement (the

"Facility") for up to US$140 million with the Bank of Scotland Plc. The loan term is up to five years. The

Corporation is subject to financial and operating covenants related to the Facility. Failure to meet the terms

of one or more of these covenants may constitute an event of default as defined in the Facility agreement,

potentially resulting in accelerated repayment of the debt obligations. The company is in compliance with its

financial and operating covenants. No funds are currently drawn down under the Facility.

On July 28, 2010, the Corporation completed an equity raise by way of a Canadian bought deal and UK private

placement. This resulted in 47.6 million common shares of the Corporation being issued at a price of C$1.70 per

common share and 45.1 million common shares at a price of GBP 1.07 (approx C$1.70) per common share (the

"Private Placement").

There have been no significant changes from the previous year end to management's objectives, policies and

processes to manage capital or to the components defined as capital.

18. RELATED PARTY TRANSACTIONS

A Director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The

amount of fees paid to Burstall Winger LLP in the year ended December 31, 2010 was $0.6 million (December 31,

2009 - $0.2 million). The balance outstanding at December 31, 2010 was $Nil (December 31, 2009 - $Nil). These

amounts have been recorded at the exchange amount.

19. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform with the current year's financial statement

presentation.

20. SUBSEQUENT EVENTS

In March 2011 Gemini exercised all warrants granted to acquire 2,500,000 common shares of the Company at C$2.25

per share.

In March 2011, a 'put' option to sell 804,500 bbls of the Corporation's 2011 forecast production at $105 / bbl

was entered into. In April 2011 a further 'put' option to sell an additional 300,000 bbls of the Corporation's

forecast 2011 production at $115 / bbl was entered into.

In April 2011 the Corporation entered into an agreement to acquire a 28.46% non-operated interest in the Cook

oil field and a 7.41% non-operated interest in the Maclure oil field from Hess Limited ("Hess") for a

consideration of $74.5 million and the transfer from Ithaca to Hess of a 10% interest in each of exploration

Blocks 42/25b, 43/16a and 43/21c in the Southern North Sea (the "Cook & Maclure Acquisition"). The acquisition

of Maclure is subject to pre-emption within 30 days of notification to other parties in the Maclure field. The

transaction is expected to complete in Q3 2011 with an effective date of January 1, 2011.

FOR FURTHER INFORMATION PLEASE CONTACT:

Ithaca Energy

Iain McKendrick

CEO

+44 (0) 1224 650 261

imckendrick@ithacaenergy.com

OR

Ithaca Energy

Graham Forbes

CFO

+44 (0) 1224 652 151

gforbes@ithacaenergy.com

OR

Ithaca Energy

Nick Muir

CXO

+44 (0) 1224 650 267

nmuir@ithacaenergy.com

OR

Pelham Bell Pottinger Public Relations

Philip Dennis

+44 (0) 207 861 3919

pdennis@pelhambellpottinger.co.uk

OR

Pelham Bell Pottinger Public Relations

Elena Dobson

+44 (0) 207 861 3147

edobson@pelhambellpottinger.co.uk

OR

Cenkos Securities plc

Jon Fitzpatrick

+44 (0) 131 220 9773

jfitzpatrick@cenkos.com

OR

Cenkos Securities plc

Ken Fleming

+44 (0) 131 220 9772

kfleming@cenkos.com

Neither TSX Venture nor its Regulation Services Provider (as that term is defined in the policies of the TSX

Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Contact Information

  • Ithaca Energy Inc.