2011-04-20 Sea Dragon Annual Report

2010 ANNUAL REPORT

wORkiNg AREA . . . . . . . . . 1

FiNANCiAL AND OPERATiNg HigHLigHTS . . . . . . . . . 2

mESSAgE TO SHAREHOLDERS . . . . . . . . . 4

REviEw OF OPERATiONS . . . . . . . . . 7

mANAgEmENT’S DiSCUSSiON & ANALYSiS . . . . . . . . . 15

REPORT OF mANAgEmENT . . . . . . . . . 38

AUDiTOR’S REPORT . . . . . . . . . 39

CONSOLiDATED FiNANCiAL STATEmENTS . . . . . . . . . 40

NOTES TO THE CONSOLiDATED FiNANCiAL STATEmENTS . . . . . . . . . 43

CORPORATE iNFORmATiON . . . . . . . . . 56

HigHLigHTS: • IncreasedProvedplusProbablereserves

by382percentto8.2millionboefrom1.7

millionboein2009;

• Increasednetassetvalueby280percentto

$91.3millionfrom$24.0millionin2009;

• Replaced2010production10timeswith

Provedreservesand19timeswithProved

andProbablereserves;

• Achievedaverageproductionof1,001bopd

ascomparedto67bopdin2009;

• Increased2010operatingnetbackto$9.1

millionfrom$0.1millionin2009;

• Attainedtopquartilefindingand

developmentcost(“F&D”)of$3.79bblper

boeonaProvedplusProbablebasiswith

anetbackrecycleratioof6.6;

• Attainedanattractivefinding,developmentand

acquisition(“FD&A”)costsof$10.11perboeona

ProvedplusProbablebasiswithanetbackrecycle

ratioof2.5;

• Exitedtheyearwithcashandcashequivalentsof

$14.8millionandworkingcapitalof$15.7million

andnodebt;

• Closedtheacquisitionofafiftypercent(50%)

workinginterestintheKomOmboConcessionfor

approximately$44.5millioninlateApril2010;

• Closedyear-endwithsufficientcashtofundthe

2011CapitalProgramof$12.4million.

1

HIG

HLIG

HTS

SEA DRAgON ENERgY (SDX-TSX.V)

isprimarilyfocusedonNorth

AfricaandSub-SaharanAfrica.

Currentlyouractivitiesare

concentratedinEgypt,where

wehaveinterestsintwolarge

concessionswithshortand

long-termpotential.

Ourstrategycallsforgaining

entryintoothercountries

thatoffersignificantpotential

andopportunitiesthatwould

enhancetheCompany’sgrowth

withinareasonabletimeframe.

Nw gEmSA

AFRiCA

kOm OmBO

0

Mediterranean Sea

Red Sea

Gulf of Suez

NW GEMSA

KOM OMBO

EGYPT

Nile River

MatruhAlexandria Nile Delta

Sinai Dessert

Eastern Dessert

Western Dessert

Catara Depression

SallumPort Said

Cairo

Luxor

Aswan

Minya

Asyut

Suez

100 200 300 400 500 KM

NW Gemsa

Geyad

Al Amir

Aswan

Nile River

Kom Ombo

2 SeaDragonEnergyInc. |2010AnnualReport

FINANCIAL AND OPERATING HIGHLIGHTS

ThefollowingtableprovidesasummaryofSeaDragon’sfinancialandoperatingresultsforthethreeandtwelvemonth periods ended December 31, 2010 and 2009. Consolidated financial statements with Management’sDiscussionandAnalysis(“MD&A”)areavailableontheCompany’swebsiteatwww.seadragonenergy.comandonSEDARatwww.sedar.com.

THREE mONTHS ENDED DECEmBER 31

TwELvE mONTHS ENDED DECEmBER 31

$000’s except per unit amounts2010 2009

(restated) (8)2010 2009

(restated) (8)

Financial

Oil sales 7,535 365 27,400 365

Royalties (3,683) (186) (14,871) (186)

Operating costs (1,267) (37) (3,423) (37)

netback (1) 2,585 143 9,106 143

net loss (1,294) (1,717) (6,152) (14,080)

cash and cash equivalents 14,751 1,999 14,751 1,999

cash and cash equivalents plus working capital 15,670 3,267 15,670 3,267

Total assets 83,687 21,240 83,687 21,240Debt – – – –

Shareholders’ equity 78,412 20,226 78,412 20,226

capital expenditures 5,545 14,709 56,633 24,503

Weighted average outstanding shares 375,867 181,019 326,252 153,717

OpeRaTiOnal

Oil Sales (bbl/d) 995 67 1,001 67

Brent Oil price (US$/bbl) 87.34 75.54 80.33 75.54

Realized oil price (US$/bbl) 82.34 73.20 75.02 73.20

Royalties (US$/bbl) 40.23 37.02 40.70 37.02

Operating costs (US$/bbl) 13.85 7.43 9.37 7.43

netback (US$/bbl) 28.26 28.75 24.95 28.75

DRilling

gross wells (number of wells) – – 11 –

Success rate (%) – – 91 –

net wells (number of wells) – – 4.3 –

Success rate (%) – – 88 –

cOMpanY gROSS ReSeRVeS (2)

proved

Oil and liquids (mbbl) 3,804 999 3,804 999

natural gas (mmcf) 2,575 – 2,575 –

Total oil equivalent (mboe) (7) 4,233 999 4,233 999

proved plus probable

Oil and liquids (mbbl) 7,553 1,674 7,553 1,674


Total oil equivalent (mboe) 8,191 1,674 8,191 1,674

proved plus probable plus possible

Oil and liquids (mbbl) 9,960 1,674 9,960 1,674


Total oil equivalent (mboe) 10,598 1,674 10,598 1,674

3

neT pReSenT Value OF FuTuRe caSh FlOWS aFTeR TaX ($000’s) (3)

proved

5% discount rate 51,360 16,962 51,360 16,962

10% discount rate 41,822 15,055 41,822 15,055

15% discount rate 34,866 13,479 34,866 13,479

proved plus probable

5% discount rate 98,058 24,261 98,058 24,261

10% discount rate 75,650 20,774 75,650 20,774

15% discount rate 60,299 18,066 60,299 18,066

proved plus probable plus possible

5% discount rate 144,468 24,261 144,468 24,261

10% discount rate 105,270 20,774 105,270 20,774

15% discount rate 80,139 18,066 80,139 18,066

ReSeRVe liFe inDeX (years) (4)

proved 11.7 n/m 11.7 n/m

proved plus probable 22.6 n/m 22.6 n/m

FinDing anD DeVelOpMenT cOSTS (“F&D”) ($/boe) (5)



RecYcle RaTiO (6)



FinDing, DeVelOpMenT anD acquiSiTiOn cOSTS (“FD&a”) ($/boe)

proved 16.76 n/m 16.76 n/m


RecYcle RaTiO (6)



pRODucTiOn ReplaceMenT (%)

proved 986 n/m 986 n/m

proved plus probable 1,885 n/m 1,885 n/m

ReSeRVeS peR ThOuSanD ShaReS OuTSTanDing

proved 11 5 11 5

proved plus probable 22 8 22 8

HIG

HLIG

HTS

(1) Netback is a non-GAAP measure that represents sales net of all operating expenses and government royalties. Management believes that netback is a useful supplemental measure to analyze operating performance and provide an indication of the results generated by the Company’s principal business activities prior to the consideration of other income and expenses. Management considers netbacks an important measure as it demonstrates the Company’s profitability relative to current commodity prices. Netback may not be comparable to similar measures used by other companies.(2) Company gross reserves are gross working interest reserves before the deduction of royalties as determined by the Company’s independent reserves evaluators. (3) As determined by the Company’s independent reserves evaluators. Estimated values of future net revenue disclosed do not represent fair market values.(4) Calculated by dividing the Company’s gross reserves by the 2010 fourth quarter production rate (5) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs generally will not reflect total finding and development costs related to reserve additions for that year.(6) Recycle ratio is calculated by dividing netback by finding and development costs or netback by finding, development and acquisition costs. (7) Disclosure provided herein in respect of BOEs 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.(8) Effective July 1, 2010, the Company changed its reporting and functional currency from Canadian dollars (CDN$) to United States dollars (US$), as significant portions of the Company’s revenues, expenses and cash flows are denominated in US$. The change in reporting currency is to better reflect the Company’s business activities and to improve investors’ ability to compare the Company’s financial results with other publicly traded businesses in the international oil and gas industry. Prior to July 1, 2010, the Company reported its annual and quarterly consolidated balance sheets and the related consolidated statements of operations and cash flows in CDN$.n/m – not meaningful, acquired NW Gemsa at the end of 2009

4 SeaDragonEnergyInc. | 2010AnnualReport

Sea Dragon began 2010 with a focused strategy of populating the Company with the right management, additional producing assets and exploration prospects to enhance shareholder value. The transformational strategy has begun to show results:

• Significant increase in production with a 2010 average rate of 1,001 bopd compared to 67 bopd in 2009;

• Impressive drilling results in both of the Company’s concessions with an 88% success rate;

• Increased Proved plus Probable reserves by 382 percent to 8.2 million boe from 1.7 million boe in the prior year;

• Top quartile finding and development costs of only $3.79 per barrel of Proved and Probable reserves;

• Achieved FD&A costs of $10.11 per boe with a recycle ratio of 2.5;

• Increased net asset value by 280 percent to US$91.3 million from US$24.0 million in 2009.

Inlate2009,SeaDragonEnergyreshapeditsstrategytofocusonbuildingasolidreserveandproductionbaseinEgypt.Thestrategyculminatedwiththesuccessfulacquisitionofa10percent(10%)workinginterestintheonshoreGulfofSuezNorthWestGemsaConcession(“NWGemsa”),anda50percent(50%)workinginterestinthelargeKomOmboConcessioninSouthEgypt.Inadditiontothepropertyacquisition,theCompanyrecruitedthekeyexecutivesfromCenturionEnergy(CenturionsoldtoDanaGasin2006for$1.2billion)includingTonyAntonasPresidentandCOO(formerCOOofCenturion)andMikeZayat(formerVPExplorationofCenturion)withtheintentionofreplicatingthesuccessofCenturionandultimatelyincreasingshareholdervalue.

SeaDragonisdeterminedtobuildaportfolioofopportunitiestosustaingrowthandcreateshareholdervalue.TheCompanyhasdevelopedanaggressiveapproachtoexpanditsactivities,andpursueandcaptureopportunitieswithinEgyptaswellasoutsideofEgypt.In2010,theCompanyhaslaidthefoundationforanexciting2011andintendsongrowingtheCompanyintoapreeminentintermediateoilandgascompanywithoperationsinseveralcountries.In2011,theCompanybelievesshareholderswillbegintoseeanincreaseinproduction,cashflowandshareholdervalueastheCompanybeginstoexploitthelargereserveandresourcebaseitcapturedinjustoverayearsincethetransformationstrategybegan.

CEO’S MESSAGE TO SHAREHOLDERS

ELEVEN DEVELOPMENT WELLS WERE DRILLED IN TWO CONCESSIONS WITH AN IMPRESSIVE 88% OVERALL SUCCESS RATE.

5

MESSAG

ETO

SHA

REHO

LDERS

YEAR IN REVIEW:North west gemsa:IntheNWGemsathetwomainlightoilKareemFormations(ShagarandRahmi)weredelineatedandappraised,heavieroilfromtheshallowerreservoirwasputonlongtermtest,andapotentiallynewgasandcondensatereservoirwasdiscoveredinthedeeperLowerRudeisFormation.TheAlAmirSEfieldwasextendedtothesouthwithadiscoveryoflightoilintheKareemFormationintheAlOlaX-1well.ThepresenceofhydrocarbonsintheLowerRudeisFormationinbothAlAmirSE#6andAlOlaX-1bodeswellfordiscoveringadditionalreservesinthedeeperprolificNubiaFormation.During2011,theAlAmirSEfieldwillundergopressuremaintenancethroughwaterinjection,preservationofassociatedgasandstrippingofhydrocarbonliquids.TheCompany’s$5.0millioncapitalexpenditureprogramincludes,butisnotlimitedto,expandingtheproductionfacilities,buildinga20kmeightinchgasline,thedrillingofuptofourwaterinjectionwellsanduptotwodevelopmentwellsandthebuildingofgascompressionfacilities.

INCREASED PROVED PLUS PROBABLE RESERVES BY 382%


MESSAGE TO SHAREHOLDERS

kom Ombo:InKomOmbo,developmentoftheestablishedreservoirscontinuedintheAlBarakafield,additionalshallowanddeeperoilpayzoneswerediscoveredandplacedonproduction.Asaresultofthe2010drillingcampaignandinterpreta-tionofthenewlyacquiredseismic,severalnewprospectsandleadsweremappedandaddedtotheCompany’sprospectinventory.During2011,theCompany’s$7.4millioncapitalexpenditureprogramincludes,butisnotlimitedto,thedrillingoffiveadditionaldevelopmentwells,severalworkoversandfracs,anduptotwoexplorationwellsoutsideofthedevelopmentlease.

SaidArrata,ChairmanandChiefExecutiveOfficer

7

REVIEWOF

OPERATiONS

OPERATIONS REPORT


WATER FLOOD AND GAS CONSERVATION WILL BECOME THE FOCUS OF THE 2011 PROGRAM - RESULTING IN PRODUCTION GROWTH.

In August 2009, the Company entered into a share purchase agreement withPremierOilOverseasBVtoacquireallof the issuedandoutstandingsharesofPremierEgypt (NWGemsa)BV, theholderofa ten (10%)percentparticipatinginterestintheNWGemsaConcessionlocatedinEgypt’sEasternDesertonshoretheGulfofSuez.Thesharepurchase transactionwascompletedonDecember21,2009witha July1,2009effectivedate. Thepurchasepriceof the shareswasUS$12.5millionandwassubjecttoadjustmentsforworkingcapitalfromtheeffectivedatetothedateofclosing.OnJanuary12,2010,followingtheclosing,PremierEgyptchangeditsnametoSeaDragonEnergy(NWGemsa)B.V.

TheNWGemsaConcessionisa250squarekilometreonshoreconcessionlocatedapproximately300kilometres southeastofCairo in theEasternDeserton thesouthwesternpartoftheGulfofSuez.Thetermsoftheconcessionareasfollows:

Nw gEmSA

Basin GulfofSuez

YearAcquired 2009

Status Development/Exploration

ConcessionOperator VegasOilandGasLtd.

SeaDragonParticipatingInterest(%) 10%

Area(km2) 250

Area(acres) 61,776

ExpiryDateofCurrentExplorationPhase July2010(1)

DevelopmentLeaseTerms 20year+3x5yearextensions

Production sharing

Contractor’sShareofCostOil 30%

Contractor’sShareofProfitOil 16.1%

Contractor’sShareofExcessCostOil nil

Depreciation of Costs

Operating(asIncurred) 100%

Capital(Annual) 20%(1) The Company and its partners successfully drilled an exploration well south of the Al Amir SE oil field resulting in a field development lease extension being agreed in principle with Ganope. The Company and partners are awaiting Ministry of Petroleum’s ratification.

43

2

5

16

Al Ola X-1

Al Amir SE Field

NW Gemsa Concession

Al Amir -1X

Development Lease

Development Lease

Heavy OilOil Location

Location

7

1

2Geyad Field

NORTH wEST gEmSA

OPERATIO

NS

REVIEW

9

OPERATIO

NS

REVIEW

In Geyad, one well was side-tracked,completedandtiedinforproduction.

TheAlAmir1-Xoriginaldiscoverywellwasre-enteredandplacedonextendedproduction test,achiev-ing an initial daily productionrateof300bopdof18°APIoil.Plans are to hydraulically frac-ture the interval in 2011. Drillingresults indicate this same poolmay extend south to theAlAmirSE-6 and Al Amir SE-7 wells.Gas and condensate was alsodiscoveredintheunderlyingLowerRudeisformation,inAlAmirSE-6andAlOla-1Xwells.

North West Gemsa development leasesThree fields have been dis-covered in the NW GemsaConcession, Al Amir SE, AlAmir and Geyad. Develop-ment leaseswere issued foreachofthefields.

The Al Amir SE field islocated in the southeasternportion of the NW GemsaConcessionandliesapproxi-matelysixkilometreswestof theoilproducingGazwarinafield.ProductionfromtheAlAmirSEfieldcommencedinFebruary2009.TheGeyadfieldislocatedapproximatelytenkilometresnorthwestoftheAlAmirSEfield.

ThefieldsareoperatedbyPetroAmirCompany,aJointOperatingCompanybetween the partners and Ganoub El Wadi (Ganope a subsidiary of theEgyptianGovernmentPetroleumCorporation).

IntheAlAmirSEandGeyadfieldsthetwomainpayzonesareintheKareemsandscontaininglightoil(40-42°API).IntheAlAmirfieldtheheavieroilpay(17ºAPI)belongstotheyoungerSouthGharibFormation.

In 2010 development, appraisal and step out drillingresultedin3additionalwellsinAlAmirSE.TheAlOla-1Xsuccessfully extended Al Amir SE field Kareem reservesbeyond the current lease boundaries. Application wasmadetothegovernmentforextendingthedevelopmentlease,bothsouthandwestoftheexistingboundaries.

Technicalstudiesindicatethatsignificantpotentialexiststowater flood theAlAmir SEandGeyad fields.Up tosix injectors and one producer are planned for 2011whichwillenhancerecoveryandboostproductionrates.Potential exists to increase gross production to 15,000bbls/dandpushrecoveryfactorsto45%. BASEMENT

LOWER RUDEIS POTENTIALKAREEM PAY ZONES

SOUTH GHARIBPAY ZONE

Al Amir Field

NUBIA POTENTIAL

N:\Data Rooms\Projects\Egypt\NW Gemsa\Maps\NW Gemsa over 4X well.vsd

NW Gemsa Exploration TheNWGemsaconcessionoriginalexplo-ration phase expired in January 2011.Primaryexplorationwasmainlyfocusedonthecentralandsouthernpartoftheconces-sionresultedinthediscoveryoftheAlAmir,AlAmirSEandGeyadfields.

RecentLowerRudeisdiscoveryisindicativethat additional potential may exist in thedeeperprolificNubiareservoir.Horstblockandtiltedfaultprospectshavebeenidenti-fiedthatwillbecomethefocusoffutureex-plorationactivities.

OPERATIONS REPORT

TheCompanyholdsa50%workinginterestandisco-operatorintheKomOmboBlock2Concession.Thislargeundeveloped,11,466km²concessionissituatedintheKomOmboBasin,Egyptnewoilprovince,located1,000kmsouthofCairo.TheKomOmboConcessionhasexcellentproductionsharingtermsasnotedbelow.

kOm OmBO

Basin KomOmbo

YearAcquired 2010

Status Development/Exploration

ConcessionOperator DGE/SeaDragon

SeaDragonParticipatingInterest(%) 50%

Area (km2) 11,446

Area(acres) 2,828,368

ExpiryDateofCurrentExplorationPhase July2012

DevelopmentLeaseTerms 20year+3x5yearextensions

Production sharing

Contractor’sShareofCostOil 40%

Contractor’sShareofProfitOil 21%

Contractor’sShareofExcessCostOil 21%

Depreciation of Costs

Operating(asIncurred) 100%

Capital(Annual) 25%

TheKomOmboBasinispartoftheNEAfricariftsystemthatincludesknownAfricanprolificbasinssuchasMugladBasinofSudanandUganda,LakeAlbertBasinsandothers.

Extensive2Dand3Dseismichavebeenacquired,productionhas been established, discoveries made, and several highimpactpotentialprospectshavebeenidentified.

Al Baraka field TheAlBarakafieldwasdiscoveredin2007,adevelopmentleaseissued with production established from the two Cretaceousshallowpayzones,theAbuBallasandSixHillsF.In2010whenSeaDragonentered theconcession, thefieldwasproducingfromthreewells,andimmediatelyembarkedwiththeoperatoronanaggressiveappraisalandfielddevelopmentcampaignofninewellsthatestablishedthemultiplepaycharacteristicsofthefield.TwoadditionalpayzoneswerediscoveredincludingtheSixHillsEandthedeeperBasalKomOmbosands.TheBasalKomOmboconsistsoftworeservoirintervals;KomOmboAwhichdirectlyoverliesthebasement,andKomOmboCsandsseparatedbytheoilsourcebeds.TheAbuBallasandSixHillspayzonesareencounteredatshallowdepth,3,000-4,000feetwith theBasalKomOmbopayzoneatanaveragedepthof8,000feet.


kOm OmBO CONCESSiON

THE 2010 DRILLING CAMPAIGN RESULTED IN THE DISCOVERY OF ADDITIONAL SHALLOW RESERVOIRS IN AL BARAkA FIELD AND ESTABLISHED THE PROSPECTIVITY AND TREND FOR THE DEEPER BASAL kOM OMBO SANDS.

Kom OmboBasin

MugladBasin

Lake AlbertBasin

CONGOUGANDA

KENYA

ETHIOPIA

SUDAN

EGYPTSAUDI

ARABIA

Nile River

NW Basin

Nile R

iver

South Al Baraka

IsisAl Baraka

Field

Kilometers

5 10 15 200

Amun

Kom Ombo BasinUndiscovered Prospects and Leads West

Al Baraka

Memphis

FieldProspectLeadP&A

Development Lease

Nile River

Nile River

Althoughmostofthewellshavemorethanonepayzone,theyarecompletedinasinglezone,thereforeprovidingopportuni-ties to increaseproductionand recovery throughcominglingproductionandtwinningwellsinthefuture.Aswell,applicationofnewdrillingandcompletion techniquessuchashorizontaldrilling and fracture stimulation could result in increasedproductionand recovery rates.ThebasalKomOmbosandstrend is aerially extensiveand is themain focusof the2011appraisal and development program. Additional Abu Ballasupsideexists in thefield inuntested faultblocks,andon theeasternflankintherecentlydiscoveredSixHillsDreservoir.

Theoilis37°API,waxywithverylowGORopeninguppotentialfortheapplicationofwaterfloodtoenhanceoilrecoveryfromsomereservoirs.TheoiliscurrentlytruckedtotheAssuitrefinerylocated300kmnorth.

kom Ombo Concession Exploration The 2010 drilling campaign resulted in the discovery ofadditionalshallowreservoirsinAlBarakafieldandestablishedtheprospectivityand trend for thedeeperBasalKomOmbosands.Allreservoirsarechargedfromacommonsourcerock.TheMemphis#1well,drilled40kmnorthofAlBarakafieldwaspluggedandabandoned inearly2011.Newlyacquired2D seismic data indicate the NW Basin could have similarcharacteristicsandprospectivityasthemainbasin.

A 477 km 2D seismic program acquired in mid 2010was integratedwith thecurrentdatabaseandmappingto firm prospects and leads. For 2011 geochemical,stratigraphicandbasinmodellingandseismicreprocess-ingareplannedtorefinethegeologicalandgeophysicalinterpretationoftheblockandhi-gradetheprospects.

TheKomOmbobasinislightlyexplored.SeaDragonandpartners have identified and assembled an impressiveportfolio of eight (8) prospects and leads, targeting theAbuBallas,SixHillsandthebasalKomOmbosandsinstructuralandstratigraphictraps.

The 2011 plans include the drilling of twoexploratory wells, to test and extend theshallowanddeepprospectiveplaysoutsidethe development lease. The shallow AbuBallas – SixHills play include traps in fourway and three way fault closures on trendwith Al Baraka field and in closures alongthe Rift shoulder. The Basal Kom Ombosand play consists of a series of structuraland stratigraphic traps.TheKomOmboAis confined to structures within the deeper

partoftheacreage,whiletheKomOmboCdrapesoverpartofthestructure.TheKomOmboAandC sandsarealso trappedas theypinchout to thewestagainstthebasement.

OPERATIO

NS

REVIEW

11

OPERATIO

NS

REVIEW

AB-3

AB-1AB-6AB-7

AB-2

AB-5

AB-9

AB-15AB-10 K-1

K-2

ABSE-1

Meters

1,000 1,500 2,0005000

Oil WellProposed WellRepsol Drilled Well

AB-4

AB-13

AB-14

Abandoned Well

AB-12

AB-11

-2000

1500

1000

500

SIX HILLS

SABAYA

BASEMENT

KOM OMBOPINCHOUT PROSPECT

MAGHRABI

ABU BALLASSIX HILLS

KOM OMBO SANDSSTRUCTURAL PROSPECTS

SHALLOW STRUCTURAL PROSPECTS

RIFTSHOULDERPROSPECTS

2000

3000

4000

5000

6000

7000

8000

FT

Basement

SW

Abu BallasPay Zone

Six Hills FPay Zone

Kom Ombo A Pay Zone

Abu Ballas Shale

Kom Ombo Shale

Six Hills EPay ZoneSabaya

Six Hills DPay Zone

NE

RESERVES SUMMARY


Reserves / Resources ReserveandresourceestimateshavebeencalculatedincompliancewiththeStandardsofDisclosureforOilandGasActivities(“NI51-101”).

OfthenetpresentvalueoftheCompany’sreserves,100percentwereevaluatedbyindependentthirdpartyengineers,Gaffney,Cline&AssociatesLtd(“GCA”)andRyderScottCompanyCanada(“RyderScott”)intheirreportsdatedMarch11,2011andFebruary25,2011,respectively.

UnriskedUndiscoveredResourceswithintheKomOmboblockweredeterminedprobabilisticallybyRyderScottintheirreportdatedApril8,2011.TheindependentassessmentwascarriedoutinaccordancewithNI51-101StandardsofDisclosureforOilandGasactivities.TheeffectivedateofthereportisDecember31,2010.Usingtheavailablewelldata,seismicdataandinformationobtainedfromtheAlBarakafield,RyderScottdeterminedanoilinplacevolumesof156-642mmbblsfortheeightprospectsandleadsidentifiedontheblock.

RESERvES / RESOURCES SUmmARY

382%to 8.2 million boe from 1.7 million boe in 2009

increased Proved plus Probable reserves by

324%

Year-over-year increase in proved reserves

13

COmPANY gROSS RESERvE RECONCiLiATiON (mboe) PROvEDPROvED PLUS

PROBABLE

December31,2009Reserves 999 1,674

InfillDrilling&Extensions 1,380 3,622

ImprovedRecovery 2,093 3,205

TechnicalRevisions – (187)

Acquisitions 146 287

EconomicFactors (20) (45)

Production (365) (365)

December31,2010Reserves 4,233 8,191

Yearoveryearincreaseinreserves 324% 389%

Productionreplacement 986% 1885%

COmPANY gROSS RESERvES OiL LiqUiDS NATURAL gAS TOTAL

RESERvES CATEgORY (mbbls) (mbbls) (mmcf) (mboe)

Proved(1)

ProvedProducing 1,311 – – 1,311

Undeveloped(2) 2,282 211 2,575 2,922

TotalProved 3,593 211 2,575 4,233

Probable(3) 3,646 103 1,253 3,958

TotalProvedPlusProbable 7,239 314 3,828 8,191

Possible(4) 2,407 – – 2,407

TotalProvedPlusProbablePlusPossible 9,646 314 3,828 10,598

Reserve Definitions:(1) Proved reserves are those that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered

will exceed the estimated Proved reserves.(2) Proved Undeveloped reserves have been recognized in cases where plans are in place to bring the reserves on production within a short, well defined time

frame. Proved Undeveloped reserves often involve infill drilling into existing pools.(3) Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining

quantities recovered will be greater or less than the sum of estimated proved plus probable.(4) Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. It is unlikely that the actual remaining

quantities recovered will exceed the sum of the estimated proved plus probable plus possible reserves.

NET PRESENT vALUE AFTER iNCOmE TAx ($000’s) DiSCOUNT FACTOR

RESERvES CATEgORY 0% 5% 10% 15%

Proved:

ProvedProducing 29,491 26,008 23,247 21,018

ProvedUndeveloped 35,436 25,352 18,575 13,848

TotalProved 64,927 51,360 41,822 34,866

Probable 67,510 46,698 33,828 25,433

TotalProvedPlusProbable 132,437 98,058 75,650 60,299

Possible 77,080 46,410 29,620 19,840

TotalProvedPlusProbablePlusPossible 209,517 144,468 105,270 80,139

RESERVESSU

MM

ARY

RESERVES SUMMARY


FiNDiNg AND DEvELOPmENT COSTS (“F&D”)PROvED PROvED PLUS

PROBABLE

Capitalexpenditures,excludingacquisitioncosts($000’s) 12,132 12,132

Changeinfuturedevelopmentcosts($000’s) 3,653 12,893

Totalcosts($000’s) 15,785 25,025

Netadditions(mboe)excludingacquisitions 3,453 6,595

FindingandDevelopmentcosts($/bbl) 4.57 3.79

Recycle Ratio

2010Netback($/bbl) 24.95 24.95

FindingandDevelopmentcosts($/bbl) 4.57 3.79

RecycleRatio 5.5 6.6

FiNDiNg, DEvELOPmENT, AND ACqUiSiTiON COSTS (“FD&A”)PROvED PROvED PLUS

PROBABLE

Capitalexpenditures,includingacquisitioncosts($000’s) 56,633 56,633

Changeinfuturedevelopmentcosts($000’s) 3,653 12,893

Totalcosts($000’s) 60,286 69,526

Netadditions(mboe) 3,599 6,882

Finding,DevelopmentandAcquisitioncosts($/bbl) 16.76 10.11

Recycle Ratio

2010Netback($/bbl) 24.95 24.95

FD&Acostsincludingfuturedevelopmentcapital 16.76 10.11

RecycleRatio 1.5 2.5

NET ASSET vALUE 2010 2009

Netpresentvalueofoilandgasreservesafterincometax($000’s),discountedat10% 75,650 20,774

Workingcapital,endofyear 15,670 3,267

NetAssetValue 91,320 24,041

kOm OmBO BLOCk-2 AS AT 2010-12-31

UNRiSkED UNDiSCOvERED RESOURCES (1) (mmstb) LOw (P90) (2) BEST (P50) (3) HigH (P10) (4)

Prospects&Leads 156 339 642Resource Definitions:(1) Estimates are Gross (100%). Sea Dragon holds a 50% working interest at Kom Ombo.(2) This is considered to be conservative estimate of the Undiscovered Resources volumes. It is likely that the actual volumes of Undiscovered Resources will

exceed the Low estimate. If probabilistic methods are used, there should be a 90% chance that the volumes of Undiscovered Resources will equal or exceed the low estimate.

(3) This is considered to be the best estimate of the volumes of Undiscovered Resources. It is equally likely that the actual volumes of Undiscovered Resources will be greater or less than the best estimate. If probabilistic methods are used, there should be a 50% probability that the volumes of Undiscovered Resources will equal or exceed the best estimate.

(4) This is considered to be an optimistic estimate of the volumes of Undiscovered Resources. It is unlikely that the actual volumes of Undiscovered Resources will exceed the high estimate. If probabilistic methods are used, there should be a 10% probability that the volumes of Undiscovered Resources will equal or exceed the high estimate.

UndiscoveredResourceshavebothanassociatedchanceofdiscoveryandachanceofdevelopment.ThereisnocertaintythatanyportionoftheUndiscoveredResourceswillbediscovered.Ifdiscovered,thereisnocertaintythatitwillbecommerciallyviabletoproduceanyportionoftheresources.

ThedisclosuresrequiredinaccordancewithNationalInstrument51-101oftheCanadianSecuritiesAdministratorsisavailableintheCompany’sAnnualInformationFormfiledontheSEDARwebsiteatwww.sedar.com.

15

mANAgEmENT’SDiSCUSSiON & ANALYSiS

16 SeaDragonEnergyInc. | 2010AnnualReport |MANAGEMENT’SDISCUSSION&ANALYSIS(PREPAREDINUS$)

MANAGEMENT’S DISCUSSION & ANALYSIS FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2010

BASiS OF PRESENTATiONThefollowingmanagement’sdiscussionandanalysis(the“MD&A”)datedMarch29,2011isareviewofresultsofoperationsandtheliquidityandcapitalresourcesofSeaDragonEnergyInc.(the”Company”or“SeaDragon”)forthethreeandtwelvemonthsendedDecember31,2010.ThisMD&AshouldbereadinconjunctionwiththeaccompanyingauditedfinancialstatementsfortheyearsendedDecember31,2010and2009.Thecon-solidatedfinancialstatementsoftheCompanyarepreparedinaccordancewithCanadiangenerallyacceptedaccountingprinciples(“GAAP”).ThereportingandthefunctionalcurrencyoftheCompanyistheUnitedStatesdollar(US$).

Certaininformationcontainedhereinisforward-lookingandbaseduponassumptionsandanticipatedresultsthataresubjecttorisks,uncertaintiesandotherfactors.Shouldoneormoreoftheseuncertaintiesmaterializeorshouldtheunderlyingassumptionsproveincorrect,actualresultsmayvarymateriallyfromthoseexpected.See“ForwardLookingStatements”,below.

CHANgE iN REPORTiNg CURRENCY AND ACCUmULATED OTHER COmPREHENSivE iNCOmEEffective July 1, 2010, the Company changed its reporting and functional currency from Canadian dollars(CDN$)toUnitedStatesdollars(US$),assignificantportionsoftheCompany’srevenues,expensesandcashflowsaredenominated inUS$.Thechange in reportingcurrency is tobetter reflect theCompany’sbusinessactivitiesandtoimproveinvestors’abilitytocomparetheCompany’sfinancialresultswithotherpubliclytradedbusinessesintheinternationaloilandgasindustry.PriortoJuly1,2010,theCompanyreporteditsannualandquarterlyconsolidatedbalancesheetsand the relatedconsolidatedstatementsofoperationsandcashflowsinCDN$. Inmaking this change in reporting currency, theCompany followed the recommendationsof theEmergingIssuesCommittee(EIC)oftheCanadianInstituteofCharteredAccountants(CICA),setoutinEIC-130,TranslationMethodwhentheReportingCurrencyDiffersfromtheMeasurementCurrencyorthereisaChangeintheReportingCurrency.InaccordancewithEIC-130,thefinancialstatementsforallyearsandperiodspresentedhavebeen translated into thenewreportingcurrencyusing thecurrent ratemethod.Under thismethod, thestatementsofoperationsandcashflowstatementitemsforeachyearandperiodhavebeentranslatedintothereportingcurrencyusing theaverageexchange ratesprevailingduringeach reportingperiod.Allassetsandliabilities havebeen translatedusing theexchange rateprevailingat the consolidatedbalance sheetsdates.Shareholders’equitytransactionshavebeentranslatedusingtheratesofexchangeineffectasofthedatesofthevariouscapitaltransactions,whileshareholders’equitybalancesfromthetranslationareincludedasaseparatecomponentofothercomprehensiveincome.Allresultingexchangedifferencesarisingfromthetranslationareincludedasaseparatecomponentofothercomprehensiveincome.All comparative financial information has been restated to reflect the Company’s results as if they had been historically reported in US$ and the effect on the consolidated financial statements resulted in an accumulated and other comprehensive income adjustment of $8.3 million as at July 1, 2010.

AllfinancialreferencesinthisMD&AareinthousandsofUnitedStatesDollarsunlessotherwisenoted.

AdditionalinformationrelatedtotheCompanycanbefoundonSEDARatwww.sedar.com.

FORwARD-LOOkiNg STATEmENTSCertain statements included or incorporated by reference in this MD&A constitute forward-looking statements or forward-looking information under applicable securities legislation. Such forward-looking statements or information are for the purpose of providing information about Management’s current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes, such as making investment decisions. Forward-looking statements or information typically contain statements with words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “estimate”, “propose”, “project” or similar words suggesting future outcomes or statements regarding an outlook. Forward-looking statements or information in this MD&A include, but are not limited to, statements or information with respect to: business strategy and objectives; development plans; exploration plans; acquisition and disposition plans and the timing thereof; reserve quantities and the discounted present value of future net cash flows from such reserves; future production levels; capital expenditures; net revenue; operating and other costs; royalty rates and taxes.

MD

&A

17MANAGEMENT’SDISCUSSION&ANALYSIS(PREPAREDINUS$)

Forward-looking statements or information are based on a number of factors and assumptions that have been used to develop such statements and information but may prove to be incorrect. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions that may be identified in this MD&A, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which the Company operates; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost-efficient manner; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Company to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development or exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the countries in which the Company operates; and the ability of the Company to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions that may have been used.

Forward-looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the Company and described in the forward-looking statements or information. The risks and uncertainties that may cause actual results to differ materially from the forward-looking statements or information include, among other things: the ability of Management to execute its business plan; general economic and business conditions; the risk of war or instability affecting countries or states in which the Company operates; the risks of the oil and natural gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas; market demand; the possibility that government policies or laws may change or governmental approvals may be delayed or withheld; risks and uncertainties involving geology of oil and natural gas deposits; the uncertainty of reserves estimates and reserves life; the ability of the Company to add production and reserves through acquisition, development and exploration activities; the Company’s ability to enter into or renew production sharing concession; potential delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of estimates and projections relating to production (including decline rates), costs and expenses; fluctuations in oil and natural gas prices, foreign currency, exchange, and interest rates; risks inherent in the Company’s marketing operations, including credit risk; uncertainty in amounts and timing of oil revenue payments; health, safety and environmental risks; risks associated with existing and potential future law suits and regulatory actions against the Company; uncertainties as to the availability and cost of financing; and financial risks affecting the value of the Company’s investments. Readers are cautioned that the foregoing list is not exhaustive of all possible risks and uncertainties.

NON-GAAP MEASURESTheMD&Acontains the terms“funds fromoperations”,and“netbacks”whicharenotrecognizedmeasuresunderCanadianGAAP.TheCompanyusesthesemeasurestohelpevaluateitsperformance.

FUNDS FROm OPERATiONSFundsfromoperationsisanon-GAAPmeasurethatrepresentsfundsgeneratedfromoperatingactivitiesbeforechanges innon-cashworkingcapital.Funds fromoperationsshouldnotbeconsideredanalternative to,ormoremeaningfulthan,cashflowfromoperatingactivities.ManagementusesfundsfromoperationstoanalyzeperformanceandconsidersitanindicationoftheCompany’sabilitytogeneratethecashnecessarytofundfuturecapitalinvestmentsandtorepaydebt.SeaDragon’sdeterminationoffundsfromoperationsmaynotbecomparabletothatreportedbyothercompaniesnorshoulditbeviewedasanalternativetocashflowfromoperatingactivities,netearningsorothermeasuresoffinancialperformancecalculated inaccordancewithCanadianGAAP.



RECONCiLiATiON OF CASH FLOw FROm OPERATiONS AND FUNDS FLOw FROm OPERATiONSTHREE mONTHS ENDED

DECEmBER 31TwELvE mONTHS ENDED

DECEmBER 31

$000’s2010 2009

(restated)2010 2009

(restated)

Cashfrom/(usedin)operatingactivities 526 20 (4,484) (2,450)

Less:changesinnon-cashworkingcapital 399 1,621 (6,092) 2,130

Fundsfrom/(usedin)operations 127 (1,601) 1,608 (4,580)

NETBACkNetbackisanon-GAAPmeasurethatrepresentssalesnetofalloperatingexpensesandgovernmentroyalties.ManagementbelievesthatnetbackisausefulsupplementalmeasuretoanalyzeoperatingperformanceandprovideanindicationoftheresultsgeneratedbytheCompany’sprincipalbusinessactivitiespriortothecon-siderationofotherincomeandexpenses.Managementconsidersnetbacksanimportantmeasureasitdem-onstrates theCompany’sprofitability relative tocurrentcommodityprices.Netbackmaynotbecomparabletosimilarmeasuresusedbyothercompanies.Seenetbackreconciliationscheduleundertheoutlooksectionbelow.

SEA DRAGON’S BUSINESS, STRATEGY AND OUTLOOkSEA DRAgON’S BUSiNESSSeaDragonisengagedinexploring,developingandoperatingoilandgasproperties,focusingprimarilyonNorthAfrica,WestAfricaandtheMiddle-East.CurrentlytheCompany’sactivitiesareconcentratedinEgypt,wheretheCompanyhasinterestsintwoconcessionswithshortandlong-termpotential.TheCompany’sstrategycallsforgainingentryintoothercountriesthatoffersignificantpotentialandopportunitiesthatwouldenhancethe Company’s growth within a reasonable timeframe. The Company intends to create shareholder valuethroughsignificantandrapidgrowthinproductionvolumes,cashflowandearnings.

Asaresultof largedemonstrations inEgyptbeginning inJanuary2011, thecountry’sPresidentresignedonFebruary11,2011andturnedoverallpowertoatransitionalgovernmenttointroducethenecessarypoliticalreformstowardsdemocracyandciviliangovernmentwithtransparentelections.Inaddition,theprimeministerofEgyptwhowaspreviouslyappointedbythePresidentresignedonMarch3,2011.ThedemonstrationshadaminimaleffectontheoperationsoftheCompanywiththeexceptionofminordelaysinmaterialsandpermitting.

SeaDragonbelievesEgypthasalonghistoryofcreatinganenvironmenttoattractandretainforeigninvestmentanddoesnotanticipateanyadversechangestotheconcessionagreementsgoverningbothNWGemsaandKomOmboandwillcontinuetoattempttoexpanditsassetbaseinEgyptandabroad.

STRATEgYIncrease shareholder value through growth in production, reserves and cash flow in the Company’s twoexistingconcessions.Afast-trackeddevelopmentprogramisinplace.Inaddition,theCompany’stwocurrentconcessionsofferworld-class,long-termexplorationopportunitieswithsignificantoil-in-placeresourcepotential.SeaDragonisalsocontinuingtosearchfor,identifyandevaluatenewandeconomicallyattractiveinvestments.

Acquire interestswithsignificantupsidepotential indiscovered,butundevelopedoilandnaturalgasassets.The Company’s growth strategy is based on working with established companies and identifying andnegotiating theacquisitionofassetswithhighgrowthpotential.Todate,SeaDragonhasacquired interestsin twodevelopmentconcessions inEgypt: theNWGemsaConcession(“NWGemsa”)andtheKomOmboConcession(“KomOmbo”).Eachconcessionofferscurrentproduction,developmentdrilling,andlonger-termexplorationopportunitiescreatingupsideforsignificantreservesgrowth.

MD

&A


OUTLOOkTheCompany’sexpectedcapitalexpenditureprogramfor2011isapproximately$12.4million.

TheCompany’scapitalexpenditureprogramforKomOmboincludes,butisnotlimitedtothedrillingoftwoexplorationwells,fivedevelopmentwells,severalworkoversandafracturingprogram.

With respect toNWGemsa,during2011, theAlAmir SEfieldwill undergopressuremaintenance throughwaterinjectionandpreservationofassociatedgasandstrippingofhydrocarbonliquids.TheCompany’scapitalexpenditureprogramincludes,butisnotlimitedto,expandingtheproductionfacilities,buildinga20kmsixinchgasline,thedrillingofuptofourwaterinjectionwellsanduptotwodevelopmentwellsandthebuildingofgascompressionfacilities.

OPERATIONAL AND FINANCIAL HIGHLIGHTS:InaccordancewithCanadianindustrypractice,productionvolumesandrevenuesarereportedonaCompanyinterestbasis,beforedeductionofroyalties.

PRiOR qUARTER (1)




(restated)2010 2009

(restated)

Operational

Oilsales 7,886 7,535 365 27,400 365

Royalties (4,212) (3,683) (186) (14,871) (186)

Operating (828) (1,267) (37) (3,423) (37)

Netback 2,846 2,585 143 9,106 143

Oilsales (bbl/d) 1,190 995 67 1,001 67

Brentoilprice(US$/bbl) 76.92 87.34 75.54 80.33 75.54

Realizedoilprice(US$/bbl) 72.01 82.34 73.20 75.02 73.20

Royalties(US$/bbl) 38.47 40.23 37.02 40.70 37.02

Operatingcosts(US$/bbl) 7.56 13.85 7.43 9.37 7.43

Netback(US$/bbl) 25.98 28.26 28.75 24.95 28.75

Capitalexpenditures 3,982 5,545 14,709 56,633 38,603(1) Three months ended September 30, 2010

PRODUCTiONProductionforthethreeandtwelvemonthsendedDecember31,2010averaged995bbl/dand1,001bbl/dcomparedto67bbl/dinthecomparativeperiodsand1,190bbl/dinthethreemonthsendedSeptember30,2010(the“PriorQuarter”).Theincreaseinproductionin2010ascomparedto2009isduetotheCompany’sacquisitionofNWGemsainDecember2009,thecompany’sacquisitionofKomOmboinlateApril2010,andthedrillingof11wells,8weredrilledinKomOmbo(4net)and3weredrilledinNWGemsa(0.3net)duringthetwelvemonthsendedDecember31,2010.AtthetimeofacquisitionofNWGemsa,theconcessionwasproducing2,200bbl/dgross(220bbl/dnet),whereasduringthethreemonthsendedDecember31,2010(the“Quarter”),productionaveragedapproximately7,220bbl/dgross(722bbl/dnet)andisexpectedtoexit2011inexcessof10,000bbl/dgross(1,000bbl/dnet).



PRiCiNgTheCompany isexposed to the volatility in commoditypricemarkets forallof itsproductionvolumesandchangesinforeignexchangeratebetweentheCanadianandUSdollarforcertaingeneralandadministrativeexpenses.Theabove tableoutlines thechanges in thevariousbenchmarkcommoditypricesandeconomicparameterswhichaffectthepricesreceivedfortheCompany’sproduction.

For the threeand twelvemonthsendedDecember31,2010 theCompanyreceived$82.34perbarreland$75.02perbarrel compared to theBrentOil price (“Brent”)of$87.34perbarreland$80.33perbarrel.TheCompanyreceivesa$3-5/bbldiscounttoBrentduetothequalityoftheoilproducedandacontracteddiscountedpriceleviedbytherefineries.

Oilpricesended2010higherthanwheretheystartedwithincreasedvolatilitysubsequenttoyearend.BrentrangedfromalowUS$88.92perbarreltoahighofUS$94.59perbarrelduringthethreemonthsendedDecember31,2010andfromalowofUS$69.55perbarreltoahighofUS$94.59perbarrelduringthetwelvemonthsendedDecember31,2010.Duetostrongeconomicgrowthinbothdevelopedandmoreimportantlyemergingmarkets,oildemandhasincreasedprovidingpricesupportforoilprices.RecentturmoilintheMiddleEasthasincreasedBrentpricestooverUS$110perbarrelasatthedateofthisMD&A.SeaDragonexpectspricestoremainvolatilethrough2011.Atthistime,SeaDragondoesnothedgeanyofitsproduction.

CRUDE OiL SALESPRiOR

qUARTERTHREE mONTHS ENDED


DECEmBER 31


(restated)2010 2009

(restated)

Oilsales 7,886 7,535 365 27,400 365

Perbbl 72.01 82.34 73.20 75.02 73.20

Crudeoil sales for the twelvemonthsendedDecember31,2010 increaseddue to theCompany’saverageproductionincreasingfrom67bbls/din2009to1,001bbls/din2010.

CrudeoilsalesforthethreemonthsendedDecember31,2010was$7.5millioncomparedto$7.9millioninthepriorthreemonthperiodendingSeptember30,2010.ForthethreemonthsendedDecember31,2010theincreaseinrevenueisattributabletoa13percentincreaseinrealizedsalespriceoffsetbya20percentdecreaseinsalesvolumes.

(0000’s)

ThreemonthsendedSeptember30,2010oilsales 7,886

Pricevariance 945

Productionvariance (1,296)

ThreemonthsendedDecember31,2010oilsales 7,535

R O Y A L T i E S THREE mONTHS ENDED


DECEmBER 31

PRiOR qUARTER

2010 2009 (restated)


Royalties 4,212 3,683 186 14,871 186

Perbbl 38.47 40.23 37.02 40.70 37.02

Royaltiesasapercentofrevenue(%) 54 49 51 54 51

MD

&A


Royalties fluctuate in Egypt due to changes in the cost oil, whereby the Concession agreements allow forrecoveryofoperatingcostsandcapitalcosts throughareduction ingovernment takeashighlightedbelow:

CONCESSiONSEA DRAgON’S

wi (1)

COST OiL TO

CONTRACTOR (2)CAPiTAL COST RECOvERED (2)

OPERATiNg COST

RECOvERED (2)

ExCESS OiL TO

CONTRACTOR (3)

PROFiT OiL TO

CONTRACTOR (4)

NWGemsa 10% 30% 5years Immediate Nil 16.1%

KomOmbo 50% 40% 4years Immediate 21% 21%(1) WI denotes the Company’s Working interest

(2) Cost oil is the amount of oil revenue that is attributable to Sea Dragon and their joint venture partners (the “Contractor”) subject to the limitation of the cost recovery pool. Oil revenue, up to a specified percentage is available for recovery by the Contractor for costs incurred in exploring and developing the concession. Operating costs and capital costs are added to a cost recovery pool (the “Cost Pool”). Capital costs for exploration and development expenditures are amortized into the Cost Pool over a specified number of years with operating costs being added to the Cost Pool as incurred.

(3) If the available costs in the Cost Pool are less than the cost oil attributable to the Contractor, the shortfall, referred to as excess cost oil (“Excess Oil”), reverts 100% to the State in NW Gemsa and 21 percent to the Contractor in Kom Ombo.

(4) Profit oil is the amount of oil revenue that is attributable to Contractor

OPERATiNg COSTS



$000’s except per unit amountsPRiOR

qUARTER2010 2009

(restated)2010 2009

(restated)

Operatingcosts 828 1,267 37 3,423 37

Perbbl 7.56 13.85 7.43 9.37 7.43Operatingcostsforthethreeandtwelvemonthsendedwere$1.3million($13.85perbbl)and$3.4million($9.37perbbl)respectively.TheincreaseinoperatingcostsfromtheprioryearisduetotheacquisitionofKomOmbo.TheproducingfieldwithinKomOmbo,AlBaraka,hashigheroperatingcoststhantheproducingfiledwithinNWGemsaprimarilyduetohigherfixedcostsspreadoveralowerproductionbase.TheAlBarakafieldhasalargepercentageoffixedcostsandasproductionincreasesfromthefieldthecostperbarrelisexpectedtodecrease.Notwithstanding,theCompanycontinuestoworkwiththeoperatorofKomOmbotodecreasethecostofoperationsandmaximizeefficiencies.

CURRENT TAxES



$000’s except per unit amountsPRiOR

qUARTER2010 2009

(restated)2010 2009

(restated)

Currenttaxes 928 896 29 3,175 29

Taxesasapercentofrevenue(%) 12 12 8 12 8PursuanttothetermsofNWGemsaandKomOmboconcessionagreements,thecorporatetaxliabilityofthejointventurepartnersispaidbytheEgyptianGeneralPetroleumCorporation(the“EGPC”)forNWGemsaandbyGanoubElWadiPetroleumHoldingCompany(“Ganope”)forKomOmbo,outoftheprofitoilattributabletotheEGPCandGanope,andnotbytheCompany.ForaccountingpurposesthecorporatetaxespaidbytheEGPCandGanopearetreatedasabenefitearnedbytheCompany;theamountisincludedinnetoilrevenuesanddeductedasanincometaxexpense.



CAPiTAL ExPENDiTURES THREE mONTHS ENDED


DECEmBER 31

$000’s PRiOR qUARTER2010 2009

(restated)2010 2009

(restated)

Propertyandequipmentexpen-ditures 3,982 5,545 14,709 12,132 9,743

Propertyandequipmentacquisition – – – 44,501 14,760

During the twelvemonths endedDecember31,2010, theCompany closed theacquisitionof KomOmboforapproximately$44.5million,drilled3wells (0.3net) inNWGemsaand8wells (4net) inKomOmbo.Inaddition, theCompanycompleteda475kmseismicprogramoveraportionofKomOmbo.Thecapitalprogramresultedintheadditionof6.9millionboeofprovedplusprobablereserves.DuringthethreemonthsendedDecember31,2009theCompanycompletedtheacquisitionofNWGemsa.

Thefollowingtableis thecumulativecostsforpropertyandequipmentonallof theCompany’soilandgasproperties:

DECEmBER 31 2010

DECEmBER 31 2009

(restated)

Oilandgasproperties,atcost 99,175 44,344

Accumulateddepletion (6,710) (102)

Accumulatedimpairmentofoilandgasproperties (29,996) (29,996)

62,469 14,246

Furnitureandequipment,atcost 369 134

Accumulateddepreciation (96) (24)

273 110

62,742 14,356

Kom Ombo Concession

OnApril29,2010,theCompanyclosedtheacquisitionofafiftypercent(50%)workinginterestintheKomOmboconcessionlocatedapproximately1,000kmsouthofCairoontheWestBankoftheNileRiverforatotalpurchasepriceofapproximately$44.5million.TheKomOmboconcessionisalargeexplorationblock(ap-proximately11,500Sq.Km)whichcontainstheAl-BarakaDevelopmentLeaseandseveralprospectsandleadswithpotentiallysignificantundiscoveredresources.

NW Gemsa Concession

OnDecember21,2009SeaDragonacquiredallofthecommonsharesofPremierOilEgypt(NWGemsa)B.V.(“POE”)forcashconsiderationof$14.8million.POE’smainassetwasa10percentworkinginterestintheNorthWestGemsaoilandgasconcessionintheArabRepublicofEgypt.TheresultsofPOE’soperationshavebeenincludedintheconsolidatedfinancialstatementssincethatdate.Revenues,expensesandcapitalexpen-dituresarisingbetweentheeffectiveJuly1,2009dateandtheclosingDecember21,2009datehavebeenrecognizedasadjustmentstothepurchase.SeaDragonprimarilyfundedtheacquisitionwiththeproceedsoftheprivateplacementthatclosedonNovember6,2009.

EWA Concession

During 2009 Sea Dragon assessed its exploration efforts on the East Wadi Araba Concession (the “EWAConcession”)inEgypt.Althoughhydrocarbonswerefoundtheyweredeterminedtobeuneconomic.ManagementdecidedthatgiventhelackofevidenceofoilmigrationintheareaandthefactithadfulfilleditsobligationundertheEWAconcessionagreement,theCompanydecidedthatnofurtherexplorationontheblockwouldbeundertaken.Consequently,in2009theCompanywroteoffapproximately$8.9millionofthecostsexceptforunuseddrillingmaterials.NoadditionalcapitalexpenditureswereincurredduringthetwelvemonthsendedDecember31,2010ontheEWAproperty.

MD

&A


gENERAL AND ADmiNiSTRATivE COSTSTHREE mONTHS ENDED


DECEmBER 31

$000’sPRiOR

qUARTER2010 2009

(restated)2010 2009

(restated)

Wagesandemployeecosts 496 642 183 2,083 779

Consultants 296 312 556 1,304 1,450

Travel 24 69 57 664 311

Officeexpense 107 573 200 828 702

Foreignoffices 178 32 – 479 –

Finance/banking 3 (58) 336 (335) 485

Total 1,106 1,570 1,332 5,023 3,726

Generalandadministrative(“G&A”)costsforthethreeandtwelvemonthsendedDecember31,2010were$1.6 million and $5.0 million, respectively, compared to $1.3 million and $3.8 million in the comparativeperiodsintheprioryear.Overall,G&Acostsincreasedduetoadditionalemployees,increasedtravel,andtheopeningofaCairoandParisoffice.Thecostincreasesarecommensuratewithincreasedactivityandthehiringofadditionalpersonnel.DuringthetwelvemonthsendedDecember31,2010,theCompanyrecordedanon-recurringreductioninG&Aforapproximately$0.4relatingtoareceivablewhichpreviouslywaswrittenoffandcollectedinfullduringtheyear.

STOCk BASED COmPENSATiONStock-basedcompensationexpenseistheamortizationoverthevestingperiodofthefairvalueofstockoptionsgrantedtoemployees,directorsandkeyconsultantsoftheCompany.Thefairvalueofalloptionsgrantedisestimatedusing theBlack-Scholesoptionpricingmodel.Thenon-cashcompensationexpense for the threemonthsandtwelvemonthsendedDecember31,2010,was$0.5millionand$1.3millionrespectively,comparedto$0.1millionand$0.4millioninthecomparativeperiodsintheprioryear.

DuringtheyeartheCompanygranted2.8millionoptionsthatvestoverthreeyearstoemployeesandofficersataweightedaveragepriceof$0.32CDN.Inaddition,theCompanygranted1.3millionoptionsthatvestimmediatelytodirectorsataweightedaveragepriceof$0.27CDN.





Riskfreerate (%) 2.19 2.42 2.23 2.58

Expectedlife(years) 5 5 5 5

Expectedvolatility(%) 117 147 125 155

Dividendpershare(%) – – – –

Weightedaveragefairvalue(CDN$) 0.22 0.45 0.26 0.26



DEPLETiON & DEPRECiATiON (“D&D”)THREE mONTHS ENDED


DECEmBER 31

$000’s, except per unit amountPRiOR

qUARTER 20102009

(restated)2010 2009

(restated)

Depletion&depreciation 2,603 1,087 109 6,642 123

Perbbl 23.77 11.88 17.68 18.18 19.95

For the threeand twelvemonthsendedDecember31,2010,depletionanddepreciation (“D&D”)was$1.1millionand$6.6millionrespectively.TheincreaseinD&DonanabsolutebasisisduetoincreasedproductioninNWGemsaandthepurchaseofKomOmbo.ThesignificantdecreaseinD&Dfrompriorquarterisduetothesignificantprovenreserveadditionsin2010.Inthecomparativeperiods,theCompanyhadonly10daysofproduction.

NET LOSSForthethreeandtwelvemonthsendedDecember31,2010,theCompanyrecordedanetlossof$1.3millionand$6.2million respectively, compared toanet lossof$1.7millionand$14.1million in thecomparativeperiodsintheprioryear.

LIQUIDITY AND CAPITAL RESOURCESSHARE CAPiTALTheCompany’sauthorizedsharecapitalconsistsofanunlimitednumberofcommonsharesandanunlimitednumberofpreferredshares,issuableinoneormoreseries.ThecommonsharesofSeaDragontradeontheTSXVentureExchangeunderthesymbolSDX.



TRADiNg STATiSTiCSPRiOR

qUARTER 2010 2009 2010 2009

Low(CDN) $0.23 $ 0.23 $0.24 $ 0.23 $0.07

High(CDN) $0.32 $ 0.34 $0.56 $ 0.66 $0.56

Averagedailyvolume 1,208,179 1,179,394 1,038,076 1,207,256 595,359The following tablesummarizes theoutstandingcommonshares,warrantsandoptionsasatDecember31,2009,December31,2010andMarch25,2011.

OUTSTANDiNg AS ATmARCH 29

2011DECEmBER 31

2010DECEmBER 31

2009

Commonshares 376,459,358 376,459,358 206,131,405

Warrants 30,000,000 30,000,000 37,659,671

Options 13,250,000 13,250,000 9,816,666

AsatDecember31,2010theCompanyhad30.0millionwarrantswithanexercisepriceof$0.50CDNperwarrant.ThewarrantsexpireonNovember6,2012.

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ThefollowingtablesummarizestheoutstandingoptionsasatDecember31,2010:

OUTSTANDiNg OPTiONS vESTED OPTiONS

ExERCiSE PRiCE RANgENUmBER OF

OPTiONSREmAiNiNg

CONTRACTUAL LiFENUmBER OF

OPTiONSREmAiNiNg

CONTRACTUAL LiFE

$0.00to$0.19 3,000,000 3.6years 999,998 3.6years

$0.20to$0.39 4,000,000 4.6years 1,250,000 4.7years

$0.40to$0.59 1,750,000 2.0years 650,002 1.9years

$0.60to$0.79 4,500,000 2.6years 3,266,664 2.6years

13,250,000 3.4years 6,166,664 3.1years

CAPiTAL RESOURCESAsatDecember31,2010theCompanyhadworkingcapitalofapproximately$15.7millionincludingcashonhandof$14.8million.TheCompanyexpectstofundits2011capitalprogramfromfundsfromoperationsandcashonhand.Theuseofnewfinancing,eitherdebtorequity,mayalsobeutilizedtofinanceotheropportunitiestoexpandtheCompany’sassetbase.

AsatDecember31,2010,theCompanyhad$6.1millioninaccountsreceivableoutstandingcomparedto$2.3millionasatDecember31,2009.Approximately$5.6millionisduefromtwoseparateentitiesbothofwhicharegovernmentcontrolledagenciesinEgyptforoilsalesandisexpectedtobereceivedinthenormalcourseofoperations.

Asevidencedbelow,SeaDragoncontinuedtohaveaccesstoequitymarketsinlate2009andearly2010inspiteofthedifficulteconomicconditionsandfinancialmarketvolatility:

• OnApril13,2010theCompanyconverted22.7millionspecialwarrantsthatwereissuedonJanuary25,2010.Eachspecialwarrantentitledtheholderthereoftoreceiveonecommonshareontheexerciseofthespecialwarrantfornoadditionalconsideration,subjecttoanadjustmentwherebyiftheCompanywasnotqualifiedtoissuethecommonsharesundertheoriginalofferingbyApril1,2010,eachwarrantwouldbe exercisable for1.05 common shares (the “Additional Shares”) for noadditional consideration. TheCompanyqualifiedtoissuethecommonsharesonApril13,2010andasaresultonApril13,2010,23.9millioncommonshareswereissuedupontheexerciseofthespecialwarrants.TheCompanyrecognizedanexpenseof$0.5millionfortheestimatedfairvalueoftheAdditionalSharesontheexerciseofthespecialwarrants.ThenetproceedstotheCompanywere$11.0million.

• OnApril19,2010,SeaDragoncompletedanissuanceof142.5millioncommonsharesonaboughtdealbasispursuanttoashortformprospectusfornetproceedstotheCompanyof$53.5million.



ThefollowingtableoutlinestheCompany’ssourcesandusesofcashforthethreeandtwelvemonthsendedDecember31,2010and2009.



$000’sPRiOR

qUARTER2010 2009

(restated)2010 2009

(restated)

Sources:

Fundsfromoperations 766 127 – 1,608 –

Proceedsfromissuanceofshares 49 87 13,885 64,638 13,931

Depositandrestrictedcash – – – 2,168 –

Restrictedcash – 310 4,388 310 9,336

Demandloan – – 283 – –

Convertibledebenture – – – 287 –

Effectofforeignexchangeoncashandcashequivalents 550 176 – – –

Changesinnon-cashworkingcapital – 399 1,621 – 2,130

Changesinnon-cashinvestingworkingcapital 1,174 747 – 6,501 –

2,539 1,846 20,177 75,512 25,397

Uses:

Fundsusedinoperations – – (1,601) – (4,580)

Capitalacquisitions – – – (44,501) (14,760)

Capitalexpenditures (3,982) (5,544) (14,709) (12,132) (9,743)

Depositandrestrictedcash – – (1,987) – (1,987)

Demandloan – – – – –

Effectofforeignexchangeoncashandcashequivalents – – (449) (35) (203)

Changesinnon-cashinvestingworkingcapital – – (1,268) – (5,789)

Changesinnon-cashworkingcapital (1,037) – – (6,092) –

(5,019) (5,544) (20,014) (62,760) (37,062)

Increase/(decrease)incash (2,480) (3,698) 163 12,752 (11,665)

Cashandcashequivalentsatbeginningofperiod 20,929 18,449 1,836 1,999 13,664

Cashandcashequivalentsatendofperiod 18,449 14,751 1,999 14,751 1,999

FiNANCiAL iNSTRUmENTSTheCompanyisexposedtofinancialrisksduetothenatureofitsbusinessandthefinancialassetsandliabilitiesthatitholds.Thefollowingdiscussionreviewsmaterialfinancialrisks,quantifiestheassociatedexposures,andexplainshowtheserisks,andtheCompany’scapital,aremanaged.

Market Risk

Changes incommoditypricesand foreigncurrencyexchange ratescanhavean impacton theCompany’searningsandvalueoffinancialassetsandliabilities.

Commodity Price Risk – Commoditypriceriskistheriskthatthefairvalueorfuturecashflowswillfluctuateasaresultofchangesincommodityprices.TheCompanyisexposedtocommoditypriceriskduetothenatureofitsbusiness.Oilpricesareimpactedbyglobalsupplyanddemand,aswellaspoliticalandotherfactors.

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TheCompanyreceivesworldoilpricesfor itsoilproductionwhichissubject topricefluctuations.Thepricereceivedforcrudeoilcanbeveryvolatileandcanundergosignificantchangesinrelativelyshorttimeperiods.DuringtheyearendedDecember31,2010theCompanyreceivedanaveragepriceof$75.02perbblcomparedtoanaverageBrentoilpriceof$80.33.Duringtheyear,thepriceofoilfluctuatedfromahighof$94.59perbbltoalowof$69.55perbbl.AsatDecember31,2010theCompanydidnothaveanyderivativecommoditypricecontractsinplace.

Foreign Currency Exchange Rate Risk - Foreignexchangerateriskistheriskthatthefairvalueoffuturecashflowswillfluctuateasaresultofchangesinforeignexchangerates.AstheeffectsofforeignexchangefluctuationsareembeddedintheCompany’sresults,thetotaleffectofforeignexchangefluctuationsarenotseparatelyidentifiable.ThereportingcurrencyoftheCompanyisUnitedStatesdollars(US$).SubstantiallyalloftheCompany’soperationsareinforeignjurisdictionsandasaresult, theCompanyisexposedtoforeigncurrencyexchangerateriskonsomeofitsactivitiesprimarilyonexchangefluctuationsbetweentheCanadiandollar (CDN$)and theUS$.Themajorityofcapitalexpendituresare incurred inUS$andoil revenuesarereceivedinUS$thereforetheCompany’sexposuretoforeignexchangeisreduced.

ThetablebelowshowstheCompany’sexposuretoforeigncurrenciesforitsfinancialinstruments:

AS AT DECEmBER 31, 2010 US$ EgP EUR CAD

TOTAL PER FS (1) US$ Equivalent

Cashandcashequivalents 14,751 9,955 6 22 4,768

Accountsreceivable 6,082 6,040 – 4 38

Accountspayableandaccruedliabilities (5,275) (4,881) – (24) (370)

Balancesheetexposure 15,558 11,114 6 2 4,436(1) denotes Financial Statements

US$ EgP EUR CAD

AS AT DECEmBER 31, 2009 TOTAL PER FS (1) US$ Equivalent

Cashandcashequivalents 1,999 840 5 – 1,154

Accountsreceivable 2,266 2,217 – – 49

Accountspayableandaccruedliabilities (1,014) (20) – – (994)

Balancesheetexposure 3,251 3,037 5 – 209(1) denotes Financial StatementsAthreepercentstrengtheningoftheUS$wouldresultinachangeinearningsasfollows:

AS AT DECEmBER 31, 2010 EgP EUR CAD

US$ Equivalent

Decreaseinearnings – – 133

Credit Risk

CreditriskistheriskofafinanciallosstotheCompanyifacounterpartytoafinancialinstrumentfailstomeetitscontractualobligationandarisesprincipallyfromjointventurepartnersandoilmarketers.TheCompanyisexposedtocreditriskinrespecttoitscashandcashequivalentsandaccountsreceivable.

CashandcashequivalentsareheldinoperatingaccountswithmajorinternationalbanksinCanada,EgyptandtheUnitedKingdom,andthereforetheCompanyconsiderstheseassetstohavenegligiblecreditrisk.

ThecarryingamountofcashandcashequivalentsandaccountsreceivablerepresentstheCompany’smaximumcreditexposure.



AtDecember31,2010theCompanyhadaccountsreceivableof$6.0millionofwhich92percentwasduefromtwoseparateentities,bothofwhicharegovernmentcontrolledagenciesinEgypt.AtDecember31,2009theCompanyhadaccountsreceivableof$2.3millionofwhich98percentwasduefromoneentity,whichisagovernmentcontrolledagencyinEgypt.TheCompanyexpectstocollecttheoutstandingreceivablesinthenormalcourseofoperations.

Accountsreceivableareanalyzedinthetablebelow.Therearenoindicationsasofthereportingdatethatthedebtorswillnotmeettheirpaymentobligations.

ACCOUNTS RECEivABLE AT DECEmBER 31, 2010

Totalaccountsreceivable 6,082

Aging:

0-60days 3,398

61-90days 633

Over90days 2,050

Liquidity Risk

LiquidityriskistheriskthattheCompanywillnotbeabletomeetitsfinancialobligationsastheybecomedue.TheCompany’sapproachtomanagingliquidityriskistoensure,totheextentpossible,thatitwillhavesufficientcashresourcestomeetitsliabilitieswhentheybecomedue.TheCompanymanagesitsriskofnotmeetingitsfinancialobligationsthroughmanagementofitscapitalstructure,annualbudgetingofitsrevenues,expendituresandcashflows.Onamonthlybasis,internalreportingofactualresultsiscomparedtothebudgetinordertomodifybudgetassumptions,ifnecessary,toensureliquidityismaintained.

TheCompanybelievesthatthecurrentworkingcapitalbalanceandcashflowfromoperationswillbeadequatetosupporttheCompany’sfinancialliabilitiesandcommitments.

AsofDecember31,2010,theCompany’sfinancialliabilitiesareduewithinoneyear.

Capital Management

TheCompanydefinesandcomputesitscapitalasfollows:

DECEmBER 31 2010

DECEmBER 31 2009

(restated)

ShareholderEquity 78,412 20,226

Workingcapital(1) (15,670) (3,267)

Totalcapital 62,742 16,959 (1) Working capital is defined as current assets less current liabilities.

TheCompany’sobjectivewhenmanagingitscapitalistoensureithassufficientcapitaltomaintainitsongoingoperations,pursuetheacquisitionofinterestsinproducingorneartoproductionoilandgaspropertiesandtomaintainaflexiblecapitalstructurewhichoptimizesthecostofcapitalatanacceptablerisk.TheCompanymanagesitscapitalstructureandmakesadjustmentstoit,basedonthefundsavailabletotheCompany,inordertosupporttheexplorationanddevelopmentofitsinterestsinitsexistingpropertiesandtopursueotheropportunities.

WorkingcapitalasatDecember31,2010of$15.7millionhasincreasedfromtheDecember31,2009balanceof$3.3millionprimarilyasaresultoftheCompanyraising$11.0millionand$53.5millionnetofrelatedcostsintwoprivateplacementsduringtheyearendedDecember31,2010(Note8).TheCompanyisnotsubjecttoexternallyimposedcapitalrequirements.

Financial Instruments

TheCompany’sfinancialinstrumentsasatDecember31,2010and2009werecomprisedofcashandcashequivalents,accountsreceivableandaccountspayableandaccruedliabilities.Thefairvalueoffinancialassetsandfinancialliabilitiesthatareincludedonthebalancesheetapproximatetheircarryingamountsduetotheirshorttermnature.

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Level1–Quotedpricesareavailable inactivemarkets for identicalassetsor liabilitiesasof the reportingdate.Activemarketsarethoseinwhichtransactionsoccurinsufficientfrequencyandvolumetoprovidepricinginformationonanongoingbasis.

Level2–Pricing inputsareother thanquotedprices inactivemarkets included inLevel1.Pricesareeitherdirectlyor indirectlyobservableasof the reportingdate. Level2 valuationsarebasedon inputs, includingquotedforwardpricesforcommodities,timevalueandvolatilityfactorswhichcanbesubstantiallyobservedorcorroboratedinthemarketplace.

Level3–Valuationsinthislevelarethosewithinputsfortheassetorliabilitythatarenotbasedonobservablemarketdata.

TheCompanydoesnothaveanyfinancialderivativecontractsasatDecember31,2010.

Summary of Quarterly Results

FiSCAL YEAR 2010 2009

q4 q3 q2 q1 q4 q3 q2 q1

Financial $000’s (restated) (restated)

Cash,beginningofperiod 18,449 20,929 5,201 1,999 1,836 1,822 4,669 13,664

Cash,endofperiod 14,751 18,449 20,929 5,201 1,999 1,836 1,822 4,669

Workingcapital/(deficiency) 15,670 20,514 23,132 16,385 3,267 2,225 1,582 (7,447)

Fundsfrom/(usedin)operations 127 766 668 47 (1,601) (1,428) (917) (671)

pershare 0.00 0.00 0.00 0.00 (0.01) (0.01) (0.01) (0.00)

Netloss (1,294) (1,742) (1,352) (1,764) (1,717) (2,017) (977) (9,367)

pershare (0.00) (0.00) (0.00) (0.01) (0.01) (0.01) (0.01) (0.06)

Capitalexpenditures (5,545) (3,982) (140) (46,965) (14,709) (14,709) (531) (8,654)

Totalassets 83,687 83,210 83,011 35,089 21,240 8,023 9,152 21,347

Shareholders’Equity 78,412 79,108 83,049 31,513 20,226 7,644 8,806 8,956

Commonsharesoutstanding (000’s) 376,459 375,959 375,704 208,430 206,131 144,509 144,509 144,509

Warrantsoutstanding 30,000 30,000 30,255 32,185 37,660 9,088 9,282 9,282

Operational

Oilsales (bbl/d) 995 1,190 1,032 786 67 – – –

Brentoilprice($/bbl) 87.34 76.92 79.41 77.37 75.54 – – –

Realizedoilprice($/bbl) 82.34 72.01 75.83 68.68 73.20 – – –

Royalties($/bbl) 40.23 38.47 40.85 44.38 37.02 – – –

Operatingcosts ($/bbl) 13.85 7.56 10.37 5.02 7.43 – – –

Netback($/bbl) 28.26 25.98 24.62 19.28 28.75 – – –

Theincreaseinrevenueanddecreaseinnetlossfrom2008to2009isprimarilyduetotheacquisitionofNWGemsainDecember2009andadecreaseinwrite-offrelatingtotheEWAconcession.Theincreaseinrevenueanddecreaseinnetlossfrom2009to2010isprimarilyduetotheacquisitionofKomOmboinApril2010andinclusionoftheoperationsofNWGemsaforallof2010.



Thedecreaseintotalassetsfrom2008to2009isduetothewritedownoftheEWAproperty.Inaddition,during2009theCompanyusedproceedsofaprivateplacementtoacquiretheNWGemsaproperty.Theincreaseintotalassetsfrom2009to2010isaresultoftheCompanyraising$64.5millionthroughtwoshareissuancesandthesubsequentpurchaseoftheKomOmbopropertyinApril2010.

2010 2009 2008

Revenue 12,547 337 239

Netloss (6,152) (14,079) (17,934)

Netlosspershare (0.02) (0.09) (0.19)

Totalassets 83,687 21,240 24,346

Contractual obligations, commitments and contingenciesCONTRACTUAL OBLigATiON AND COmmiTmENTSPursuanttoconcessionagreementsinEgypt,theCompanyisrequiredtoperformcertainminimumexplorationactivities that include the drilling of explorationwells. These obligations have not been provided for in thefinancialstatements.

TheCompanyhasofficeleasecommitmentsinCalgary,ParisandCairo.

Thefollowingaretheanticipatedpaymentsunderthecontracts:

FiSCAL YEAR CONCESSiON

AgREEmENTS OFFiCE LEASES($000s)

TOTAL

2011 1,000 420 1,420

2012 – 397 397

2013 – 357 357

2014 – 357 357

2015 – 357 357

CONTiNgENCiESOnApril16,2010,astatementofclaim(the“Claim”)wasfiledintheprovinceofAlbertaagainsttheCompanyinwhichtheplaintiffsallege,amongotherthings,thattheactionsoftheCompanycontributedtotheplaintiffsnotbeingrecognizedfora25%interestintheEWAConcessionAgreement.Theplaintiffsseekinjunctionsanddamagesof$32.0millionascompensation.OnFebruary3,2011,theAlbertaCourtofQueen’sBenchgrantedanapplicationbytheCompanytostaytheCourtproceedingsinrespectofthisClaim,onthegroundsthattheClaimissubjecttoanarbitrationagreementandanarbitrationtribunalhaspreviouslybeenappointedtoadjudicatethesamesubjectmatterastheClaim.ThearbitrationhasitselfbeenstayedsinceApril2009,duetothefailurebytheplaintiffstopayadepositrequiredbythearbitrationtribunalforthearbitrators’feesandexpenses.

TheCompanybelievesthisClaimtobewithoutmeritandwillvigorouslydefenditselfagainsttheclaim.Asanassessmentofthelikelihoodoflossisindeterminableatthistime,noprovisionhasbeenmadeinthefinancialstatementsforthisclaim.Anysuchlosswillberecognizedintheperioditbecomeslikelytooccur.

CHANgES iN ACCOUNTiNg POLiCiES AND RECENT ACCOUNTiNg PRONOUNCEmENTS iNTERNATiONAL FiNANCiAL REPORTiNg STANDARDSOnJanuary1,2011InternationalFinancialReportingStandards (“IFRS”)willbecomethegenerallyacceptedaccounting principles in Canada. The adoption date of January 1, 2011 will require the restatement, forcomparativepurposes,ofamountsreportedbySeaDragonfortheyearendedDecember31,2010,includingtheopeningbalancesheetasatJanuary1,2010.TheprojecttoconverttoIFRSisbeingmanagedbyanin-houseteamofaccountingprofessionalswhohaveengagedinIFRSeducationalprogramsandcontinuetodeveloptheCompany’sadoptiontoIFRS.TheCompany’sauditorshavebeenandwillcontinuetobeinvolvedthroughouttheprocesstoensuretheCompany’spoliciesareinaccordancewiththesenewstandards.

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InJuly2009anamendmenttoIFRS1FirstTimeAdoptionofInternationalReportingStandardswasissuedthatappliestooilandgasassets.TheamendmentallowsanentitythatusedfullcostaccountingunderitspreviousGAAPtoelect,atitstimeofadoption,tomeasureexplorationandevaluationassetsattheamountdeterminedundertheentity’spreviousGAAPandtomeasureoilandgasassetsinthedevelopmentandproductionphasesbyallocatingtheamountdeterminedundertheentity’spreviousGAAPforthoseassetstotheunderlyingassetsproratausingreservevolumesorreservevaluesasofthatdate.IFRS1alsoprovidesanumberofotheroptionalexemptionsandmandatoryexceptionsincertainareastothegeneralrequirementforfullretrospectiveapplication.ManagementisanalyzingthevariousaccountingpolicychoicesavailableandwillimplementthosedeterminedtobethemostappropriatefortheCompanywhichotherthanthefullcostaccountingexemptionnotedaboveare:

BusinessCombinations–IFRS1wouldallowSeaDragontousetheIFRSrulesforbusinesscombinationsonaprospectivebasisratherthanre-statingallbusinesscombinations.

Share-basedpayments–IFRS1allowsSeaDragonanexemptiononIFRS2,“Share-BasedPayments”toequityinstrumentswhichvestedbeforeSeaDragon’transitiondatetoIFRS.

Cumulativetranslationdifferences–IFRS1allowsSeaDragontoresettheforeigncurrencytranslationreservetozeroatthetransitiondate.

SeaDragonanticipatesusingtheseexemptions.

The transition fromCanadianGAAP to IFRS issignificantandmaymateriallyaffect theCompany’s reportedfinancialpositionandresultsofoperations.Atthistime,SeaDragonhasidentifiedkeydifferencesthatwillimpactthefinancialstatementsandthecurrentstatusofthoseitems:

• ExplorationandEvaluation(“E&E”)expenditures–OntransitiontoIFRSSeaDragonwillre-classifyallE&EexpendituresthatarecurrentlyincludedinthePP&Ebalanceontheconsolidatedbalancesheet.Thiswillconsistofthebookvalueofundevelopedlandthatrelatestoexplorationproperties.E&Eassetswillnotbedepletedandmustbeassessedforimpairmentwhenindicatorsofimpairmentexist.

• Property,plantandequipment–TheCompanycurrentlycapitalizescostsofdevelopmentandproductionassetsthatmeetthedefinitionofanassetunderCanadianGAAPanddepletesthesecostsbycostcentre,whichisacountry,basedontotalprovedreserves.Under IFRS, theCompanyisanticipatingcalculatingthedepletionrateatthefieldlevel.OntransitiontoIFRSSeaDragonhastheoptiontobasethedepletioncalculation using either proved reserves or proved plus probable reserves. Sea Dragon is anticipatingcalculatingdepletionusingprovedplusprobablereserves.TheCompanycontinuestoassesstheimpactofthechanges.

• ImpairmentofPP&Eassets–UnderIFRS,impairmenttestsofPP&EmustbeperformedonspecificportionsofPP&E(“cashgeneratingunit”)asopposedtotheentirePP&EbalancewhichiscurrentlyrequiredundercurrentCanadianGAAPthroughthefullcostceilingtest.Impairmentcalculationswillbeperformedatthecashgeneratingunitlevelusingeithertotalprovedorprovedplusprobablereserves.SeaDragoniscurrentlydeterminingitscashgeneratingunitsforthepurposeofimpairmenttestingandanticipatesusingprovedplusprobablereservevaluesforimpairmenttests.

• Share based payments – The Company has determined the major differences from current CanadianGAAPthatwouldimpacttheCompanysuchastreatinggradedvestingawardsasmultipleseparateawardswithdifferentlivesandestimatingforfeitureratesinadvanceasopposedtorecognizingtheimpactwhenthe forfeiture occurs. The Company is currently performing the revised share-based payment expensecalculationsunderIFRS.

• DuetotherecentwithdrawaloftheexposuredraftonIAS12IncomeTaxesinNovember2009andtheissuanceoftheexposuredraftonIAS37Provisions,ContingentLiabilitiesandContingentAssetsinJanuary2010,ManagementisstilldeterminingtheimpactoftheserevisedstandardsonitsIFRStransition.

ThislistofareasimpactedbyIFRSshouldnotberegardedasacomprehensivelistofchangesthatwillresultfromthetransitiontoIFRS.TheCompanycontinuestomonitorthedevelopmentofstandards.



Inadditiontotheaccountingpolicydifferences,SeaDragon’stransitiontoIFRSwillimpacttheinternalcontrolsoverfinancialreporting,thedisclosurecontrolsandproceduresandinformationtechnology(“IT”)systemsasfollows:

Internalcontrolsoverfinancialreporting–BaseontheCompany’saccountingpoliciesunderIFRSSeaDragonhas assessed whether additional controls or changes in procedures are required. The Company does notconsiderthesechangestobesignificant.

ITSystems–SeaDragonhasassessedthereadinessofitsaccountingsoftwareandhasandcontinuestoassessothersystemrequirementsthatmaybeneededinordertoperformongoingcalculationsandanalysisunderIFRS.Thesechangesarenotconsideredtobesignificant.

Managementiscontinuingtofinalizeitsaccountingpoliciesandchoicesandiscontinuingwithitsdueprocessinregardstoinformationthatisdisclosed.Assuch,theCompanyiscurrentlyunabletoquantifythefullimpactonthefinancialstatementsofadoptingIFRShowever,theCompanyhasdisclosedcertainexpectationsabovebasedoninformationknowntodate.DuetoanticipatedchangestoIFRSandInternationalAccountingStandardspriortoSeaDragon’sadoptionof IFRS,certain itemsmaybesubject tochangebasedonnewfactsandcircum-stancesthatariseafterthedateofthisMD&A.

NEw ACCOUNTiNg PRONOUNCEmENTSAmendments to IFRS 7 – Financial Instruments: Disclosures – The amendments emphasize the interactionbetweenquantitativeandqualitativedisclosuresaboutthenatureandextentofrisksassociatedwithfinancialinstrumentsand is effective forannualperiodsbeginningonorafter July1,2011.SeaDragon is currentlyassessingtheimpactoftheseamendments.

IFRS9–FinancialInstruments–ThisisthefirststandardissuedaspartofawiderprojecttoreplaceIAS39–Financial Instruments: Recognition and Measurement. IFRS 9 simplifies the mixed measurement model andestablishestwoprimarymeasurementcategoriesforfinancialassets:amortizedcostandfairvalue.Thebasisofclassificationdependsontheentity’sbusinessmodelandcontractualcashflowcharacteristicsofthefinancialasset.TheguidanceinIAS39onimpairmentoffinancialassetsandhedgeaccountingcontinuestoapply.IFRS9alsoincludestherequirementsrelatedtotheclassificationandmeasurementoffinancialliabilities,andde-recognitionoffinancialassetsandliabilities.Guidanceonhowtomeasure thefairvalueandaccountingforderivativesembeddedinacontractthatcontainsahostthatisnotafinancialasset,remainthesameasIAS39.ThisstandardiseffectiveJanuary1,2013.

USE OF ESTimATESThepreparationofconsolidatedfinancialstatementsinconformitywithgenerallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptionsbasedoninformationavailableatthetime.Theseestimatesandassumptionsaffect the reportedamountsofassets,particularly the recoverabilityofaccountsreceivableandacquisitioncostsofpropertyandequipment.Estimatesandassumptionsalsoaffecttherecordingof liabilities and contingent liabilities at the date of the consolidated financial statements and the reportedamountsofrevenuesandexpensesduringthereportingperiod.Duetovariousfactorsaffectingfuturecostsandoperations,actualresultscoulddifferfrommanagement’sbestestimates.

PROPERTY AND EqUiPmENTInaccordancewithCICAAccountingGuideline16,theCompanyaccountsforexplorationanddevelopmentactivitiesunderthefull-costmethod.Allcostsassociatedwithoilandgaspropertyacquisition,explorationanddevelopmentarecapitalizedonacountry-by-countrycostcentrebasispendingdeterminationofthefeasibilityoftheproject.Costsincurredincludelicenseacquisitioncosts,materialsanddrillingcostsforbothproductiveand non-productive wells, geological and geophysical consulting fees and expenses related to explorationactivities.Ifanoilandgaspropertydevelopmentprojectissuccessful,therelatedexpenditureswillbedepletedandamortizedovertheestimatedlifeofthereservesonaunitofproductionbasis.Wherealicenseordeedofassignmentisrelinquished,aprojectisabandoned,orisconsideredtobeofnofurthercommercialvaluetotheCompany,therelatedcostswillbechargedtoearningsduringtheperiod.

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DEPRECiATiON, DEPLETiON AND imPAiRmENTCapitalizedcostswithineachcountrywillbedepletedanddepreciatedontheunit-of-productionmethodbaseduponestimatedprovedreserves,beforeroyalties,asdeterminedbyanindependentengineer.Forpurposesofthecalculation,oilandgasreservesandproductionwillbeconvertedtoequivalentvolumesofpetroleumbaseduponrelativeenergycontent.Depletionanddepreciation iscalculatedusing thecapitalizedcosts, includingestimatedassetretirementcosts,plustheestimatedfuturecoststobeincurredindevelopingprovedreserves,netofestimatedsalvagevalue.Costsofacquiringunprovedpropertiesareinitiallyexcludedfromthefullcostpoolandareassessedyearlytoascertainwhetherimpairmenthasoccurred.

Furnitureandfixturesaredepreciatedatdecliningbalanceratesof20to30percent.

TheCompanyappliesa“ceilingtest”annuallyandatinterimperiodswheneventsorcircumstancesmaycauseimpairmentsincetheendofthepreviousfiscalyeartoensurethatcapitalizedcostsdonotexceedtotalestimatedfuturenetrevenuesfromtheproductionofprovedreserveslesssiterestorationcostsandincometaxesdirectlyrelatedtofutureproduction.Anyreductioninvalueasaresultoftheceilingtestwillbechargedtooperationsasanimpairmentofoilandgasproperties.

Costcentresintheexplorationstageareassessedateachreportingdatetodeterminewhetheritislikelythatthenetcosts,inaggregate,mayberecoveredinthefuture.Costsconsideredunlikelytoberecoveredarechargedtoearningsduringtheperiod.

iNCOmE TAxESThedeterminationoftheCompany’sincomeandothertaxassetsorliabilitiesrequiresinterpretationofcomplexlawsandregulationsofteninvolvingmultiplejurisdictions.Alltaxfilingsaresubjecttoauditandpotentialreas-sessmentafterthelapseofconsiderabletime.Accordingly,theactualincometaxassetorliabilitymaydiffersignificantlyfromthatestimatedandrecorded.

BUSiNESS RiSk ASSESSmENTThereareanumberofinherentbusinessrisksassociatedwithoilandgasoperationsanddevelopment.Manyoftheserisksarebeyondthecontrolofmanagement.ThefollowingoutlinessomeoftheprincipalrisksandtheirpotentialimpacttotheCompany.

Political Risk

SeaDragonoperatesinEgyptwhichhasdifferentpolitical,economicandsocialsystemsthaninNorthAmericaandwhichsubject theCompanytoanumberofrisksnotwithin thecontrolof theCompany.Explorationordevelopmentactivitiesinsuchcountriesmayrequireprotractednegotiationswithhostgovernments,nationaloilcompaniesandthirdpartiesandarefrequentlysubjecttoeconomicandpoliticalconsiderationssuchastaxation,nationalization,expropriation,inflation,currencyfluctuations,increasedregulationandapprovalrequirements,corruption and the risk of actions by terrorist or insurgent groups, changes in laws andpolicies governingoperationsof foreign-basedcompanies,economicand legal sanctionsandotheruncertaintiesarising fromforeigngovernments,anyofwhichcouldadverselyaffecttheeconomicsofexplorationordevelopmentprojects.

Financial Resources

TheCompany’scashflowfromoperationsmaynotbesufficienttofunditsongoingactivitiesandimplementitsbusinessplans.FromtimetotimetheCompanymayenterintotransactionstoacquireassetsorthesharesofothercompanies.Dependingonthefutureexplorationanddevelopmentplans,theCompanymayrequireadditionalfinancing,whichmaynotbeavailableor, ifavailable,maynotbeavailableon favorable terms.Failure toobtain suchfinancingona timelybasis couldcause theCompany to forfeit its interest incertainproperties, miss certain acquisition opportunities and reduce or terminate operations. If the revenues fromtheCompany’sreservesdecreaseasaresultofloweroilpricesorotherwise,itwillimpactitsabilitytoexpendthenecessarycapitaltoreplaceitsreservesortomaintainitsproduction.Ifcashflowfromoperationsarenotsufficienttosatisfycapitalexpenditurerequirements,therecanbenoassurancethatadditionaldebt,equity,orassetdispositionswillbeavailabletomeettheserequirementsoravailableonacceptableterms.Inaddition,cashflowisinfluencedbyfactorswhichtheCompanycannotcontrol,suchascommodityprices,exchangerates,interestratesandchangestoexistinggovernmentregulationsandtaxandroyaltypolicies.



Exploration, Development and Production

The long-term success of Sea Dragon will depend on its ability to find, acquire, develop and commerciallyproduceoilandnaturalgasreserves.TheserisksaremitigatedbySeaDragonthroughtheuseofskilledstaff,focusingexplorationeffortsinareasinwhichtheCompanyhasexistingknowledgeandexpertiseoraccesstosuch expertise, using up-to-date technology to enhancemethods, and controlling costs tomaximize returns.Despitetheseefforts,oilandnaturalgasexplorationinvolvesahighdegreeofrisk,whichevenacombinationofexperience,knowledgeandcarefulevaluationmaynotbeabletoovercome.ThereisnoassurancethatSeaDragonwillbeabletolocatesatisfactorypropertiesforacquisitionorparticipationorthattheCompany’sexpen-dituresonfutureexplorationwillresultinnewdiscoveriesofoilornaturalgasincommercialquantities.Itisdifficulttoaccuratelyprojectthecostsofimplementinganexploratorydrillingprogramduetotheinherentuncertaintiesofdrillinginunknownformations,thecostsassociatedwithencounteringvariousdrillingconditionssuchasover-pressuredzones,toolslostintheholeandchangesindrillingplansandlocationsasaresultofpriorexploratorywellsoradditionalseismicdataandinterpretationsthereof.

Futureoilandgasexplorationmayinvolveunprofitableefforts,notonlyfromdrywells,butfromwellsthatareproductivebutdonotproducesufficientnetrevenuestoreturnaprofitafterdrilling,operatingandothercosts.Completionofawelldoesnotassureaprofitontheinvestmentorrecoveryofdrilling,completion,infrastructureandoperatingcosts.Inaddition,drillinghazardsand/orenvironmentaldamagecouldgreatlyincreasethecostsofoperationsandvariousfieldoperatingconditionsmayadverselyaffecttheproductionfromsuccessfulwells.Theseconditionsincludedelaysinobtaininggovernmentalapprovalsorconsents,shut-inofwellsresultingfromextremeweatherconditionsornaturaldisasters,insufficienttransportationcapacityorothergeologicalandmechanicalconditions.Aswell,approvedactivitiesmaybesubjecttolimitedaccesswindowsordeadlineswhichmaycausedelaysoradditionalcosts.Whilediligentwellsupervisionandeffectivemaintenanceoperationscancontributetomaximizingproductionratesovertime,productiondelaysanddeclinesfromnormalfieldoperatingconditionscannotbeeliminatedandcanbeexpectedtoadverselyaffectrevenueandcashflowlevelstovaryingdegrees.

The nature of oil and gas operations exposes SeaDragon to risks normally incident to the operation anddevelopmentofoilandnaturalgasproperties, includingencounteringunexpected formationsorpressures,blow-outs,andfires,allofwhichcouldresultinpersonalinjuries,lossoflifeanddamagetothepropertyoftheCompanyandothers.TheCompanyhasbothsafetyandenvironmentalpoliciesinplacetoprotectitsoperatorsandemployees,aswellastomeettheregulatoryrequirementsinthoseareaswhereitoperates.Inaddition,theCompanyhasliabilityinsurancepoliciesinplace,insuchamountsasitconsidersadequate.TheCompanywillnotbefullyinsuredagainstalloftheserisks,norareallsuchrisksinsurable.

Oil and Natural Gas Prices

ThepriceofoilandnaturalgaswillfluctuatebasedonfactorsbeyondtheCompany’scontrol.Thesefactorsincludedemandforoilandnaturalgas,marketfluctuations,thestabilityofregionalstate-ownedmonopoliestocontrolgasprices, theproximityandcapacityofoilandnaturalgaspipelinesandprocessingequipmentandgovernment regulations, including regulations relating to environmental protection, royalties, allowableproduction,pricing,importingandexportingofoilandnaturalgas.FluctuationsinpricewillhaveapositiveornegativeeffectontherevenuetobereceivedbytheCompany.

Reserve Estimates

Therearenumerousuncertainties inherent inestimatingquantitiesofoil,naturalgasandnaturalgasliquids,reservesandcashflows tobederived there from, includingmany factorsbeyond theCompany’scontrol. Ingeneral,estimatesofeconomicallyrecoverableoilandnaturalgasreservesandthefuturenetcashflowstherefromarebaseduponanumberof variable factorsandassumptions, suchashistoricalproduction from theproperties,productionrates,ultimatereserverecovery,timingandamountofcapitalexpenditures,marketabilityofoilandnaturalgas, royalty rates, theassumedeffectsof regulationbygovernmentalagenciesand futureoperatingcosts,allofwhichmayvaryfromactualresults.Allsuchestimatesaretosomedegreespeculative,andclassificationsofreservesareonlyattemptstodefinethedegreeofspeculationinvolved.Forthosereasons,estimatesoftheeconomicallyrecoverableoilandnaturalgasreservesattributabletoanyparticulargroupofproperties,classificationofsuchreservesbasedonriskofrecoveryandestimatesoffuturenetrevenuesexpectedtherefrompreparedbydifferentengineers,orbythesameengineersatdifferenttimes,mayvary.TheCompany’sactualproduction,revenuesanddevelopmentandoperatingexpenditureswithrespecttoitsreserveswillvaryfromestimatesthereofandsuchvariationscouldbematerial.

MD

&A


Estimatesofprovedreservesthatmaybedevelopedandproducedinthefutureareoftenbaseduponvolumetriccalculations and upon analogy to similar types of reserves rather than actual production history. Estimatesbasedonthesemethodsaregenerallylessreliablethanthosebasedonactualproductionhistory.Subsequentevaluationofthesamereservesbaseduponproductionhistoryandproductionpracticeswillresultinvariationsintheestimatedreservesandsuchvariationscouldbematerial.

TheCompany’sactual futurenet cashflowsasestimatedby independent reserveengineerswill beaffectedbymanyfactorswhichinclude,butarenotlimitedto:actualproductionlevels;supplyanddemandforoilandnaturalgas;curtailmentsorincreasesinconsumptionbyoilandnaturalgaspurchasers;changesingovernmentalregulation;taxationchanges;thevalueoftheCanadiandollarandUS$;andtheimpactofinflationoncosts.

Actualproductionandcashflowsderivedtherefromwillvaryfromtheestimatescontainedintheapplicableengineeringreports.ThereservereportsarebasedinpartontheassumedsuccessofactivitiestheCompanyintendstoundertakeinfutureyears.Thereservesandestimatedcashflowstobederivedtherefromcontainedintheengineeringreportswillbereducedtotheextentthatsuchactivitiesdonotachievethelevelofsuccessassumedinthecalculations.

Reliance on Operators and Key Employees

TotheextenttheCompanyisnottheoperatorofitsoilandnaturalgasproperties,theCompanywillbedependentonsuchoperators for the timingofactivitiesrelated tosuchpropertiesandwill largely isunable todirectorcontroltheactivitiesoftheoperators.Inaddition,thesuccessoftheCompanywillbelargelydependentupontheperformanceofitsmanagementandkeyemployees.TheCompanyhasnokey-maninsurancepolicies,andthereforethereisariskthatthedeathordepartureofanymemberofmanagementoranykeyemployeecouldhaveamaterialadverseeffectontheCompany.

Government Regulations

The Company may be subject to various laws, regulations, regulatory actions and court decisions that canhave negative effects on theCompany.Changes in the regulatory environment imposed upon SeaDragoncouldadverselyaffect theabilityof theCompany toattain its corporateobjectives. The current exploration,developmentandproductionactivitiesoftheCompanyrequirecertainpermitsandlicensesfromgovernmen-talagenciesandsuchoperationsare,andwillbe,governedby lawsand regulationsgoverningexploration,developmentandproduction,laborlaws,wastedisposal,landuse,safety,andothermatters.TherecanbenoassurancethatalllicensesandpermitsthattheCompanymayrequiretocarryoutexplorationanddevelopmentofitsprojectswillbeobtainableonreasonabletermsoronatimelybasis,orthatsuchlawsandregulationwouldnothaveanadverseeffectonanyprojectthattheCompanymayundertake.

Environmental Factors

All phases of the Company’s operations are subject to environmental regulation in Egypt. Environmentallegislation is evolving in amannerwhich requires stricter standards and enforcement, increased fines, andpenaltiesfornon-compliance,morestringentenvironmentalassessmentsofproposedprojectsandaheighteneddegreeofresponsibilityforcompaniesandtheirofficers,directorsandemployees.

Insurance

TheCompany’sinvolvementintheexplorationforanddevelopmentofoilandnaturalgaspropertiesmayresultintheCompanyoritssubsidiaries,asthecasemaybe,becomingsubjecttoliabilityforpollution,blow-outs,propertydamage,personalinjuryorotherhazards.Priortodrilling,theCompanyortheoperatorwillobtaininsuranceinaccordancewithindustrystandardstoaddresscertainoftheserisks.However,suchinsurancehaslimitationsonliabilitythatmaynotbesufficienttocoverthefullextentofsuchliabilities.Inaddition,suchrisksmaynotinallcircumstancesbeinsurableor,incertaincircumstances,theCompanyoritssubsidiaries,asthecasemaybe,mayelectnottoobtaininsurancetodealwithspecificrisksduetothehighpremiumsassociatedwithsuchinsuranceorotherreasons.TheoccurrenceofasignificanteventthattheCompanymaynotbefullyinsuredagainst,ortheinsolvencyoftheinsurerofsuchevent,couldhaveamaterialadverseeffectontheCompany’sfinancialposition.



Regulatory Matters

TheCompany’soperationswillbesubjecttoavarietyoffederalandprovincialorstatelawsandregulations,includingincometaxlawsandlawsandregulationsrelatingtotheprotectionoftheenvironment.TheCompany’soperationsmayrequirelicensesfromvariousgovernmentalauthoritiesandtherecanbenoassurancethattheCompanywillbeabletoobtainallnecessarylicensesandpermitsthatmayberequiredtocarryoutplannedexplorationanddevelopmentprojects.

Operating Hazards and Risks

Exploration for natural resources involvesmany risks,which even a combination of experience, knowledgeand careful evaluation may not be able to overcome. Operations in which the Company has a direct orindirectinterestwillbesubjecttoallthehazardsandrisksnormallyincidentaltoexploration,developmentandproductionofresources,anyofwhichcouldresult inworkstoppages,damages topersonsorpropertyandpossibleenvironmentaldamage.

AlthoughtheCompanyhasobtainedliabilityinsuranceinanamountitconsidersadequate,thenatureoftheserisksissuchthatliabilitiesmightexceedpolicylimits,theliabilitiesandhazardsmightnotbeinsurable,ortheCompanymightnotelecttoinsureitselfagainstsuchliabilitiesduetohighpremiumcostsorotherreasons,inwhichevent theCompanycould incursignificantcosts thatcouldhaveamaterialadverseeffectuponitsfinancialcondition.

Repatriation of earnings

CurrentlytherearenorestrictionsontherepatriationfromEgyptofearningstoforeignentities.However,therecanbenoassurancethoserestrictionsonrepatriationofearningsfromEgyptwillnotbeimposedinthefuture.

Disruptions in Production

Otherfactorsaffectingtheproductionandsaleofoilandgasthatcouldresultindecreasesinprofitabilityinclude:(i)expirationorterminationofpermitsorlicenses,orsalespriceredeterminationsorsuspensionofdeliveries;(ii)futurelitigation;(iii)thetimingandamountofinsurancerecoveries;(iv)workstoppagesorotherlabordifficulties;(v)changesinthemarketandgeneraleconomicconditions,equipmentreplacementorrepair,fires,civilunrestorotherunexpectedgeologicalconditionsthatcanhaveasignificantimpactonoperatingresults.

Foreign Investments

All of theCompany’s oil investments are located outside ofCanada. These investments are subject to therisksassociatedwithforeigninvestmentincludingtaxincreases,royaltyincreases,re-negotiationofcontracts,currencyexchangefluctuationsandpoliticaluncertainty.SeaDragonwillbepaidinUSdollarsonitsoilandgassales.

AsoperationsareprimarilycarriedoutinUSdollars,themainexposuretocurrencyexchangefluctuationsistheconversiontoequivalentCanadianfundsforreportingpurposes.

Competition

TheCompanyoperatesinthehighlycompetitiveareasofoilandgasexploration,developmentandacquisitionwithasubstantialnumberofothercompanies, includingU.S.-basedand foreigncompaniesdoingbusinessinEgypt.TheCompanyfacesintensecompetitionfromindependent,technology-drivencompaniesaswellasfrombothmajorandotherindependentoilandgascompaniesinseekingoilandgasexplorationlicencesandproductionlicencesinEgypt;andacquiringdesirableproducingpropertiesornewleasesforfutureexploration.

TheCompanybelievesithassignificantin-countryrelationshipswithinthebusinesscommunityandgovernmentauthoritiesneededtoobtaincooperationtoexecuteprojects.

DiSCLOSURE CONTROLS AND PROCEDURESAstheCompanyisclassifiedasaVentureIssuerunderapplicableCanadiansecuritieslegislation,itisrequiredtofilebasicChiefExecutiveOfficerandChiefFinancialOfficerCertificates,which ithasdone for theyearendedDecember31,2010.TheCompanymakesnoassessmentrelatingtoestablishmentandmaintenanceofdisclosurecontrolsandproceduresandinternalcontrolsoverfinancialreportingasdefinedunderMultilateralInstrument52-109asatDecember31,2010.

37

FiNANCiALSTATEmENTS


ManagementisresponsiblefortheConsolidatedFinancialStatements.

ManagementhaspreparedtheConsolidatedFinancialStatementsinaccordancewithaccountingprinciplesgenerallyacceptedinCanada.Ifalternativeaccountingmethodsexist,managementhaschosenthoseitdeemsmostappropriateinthecircumstances.Financialstatementsarenotprecisesincetheyincludecertainamountsbasedonestimatesandjudgments.ManagementhasensuredthattheConsolidatedFinancialStatementsarepresentedfairlyinallmaterialrespects.

TheBoardofDirectorsisresponsibleforreviewingandapprovingtheConsolidatedFinancialStatementsandManagement’sDiscussionandAnalysisand,primarilythroughitsAuditCommittee,ensuresthatmanagementfulfilsitsresponsibilitiesforfinancialreporting.

TheAuditCommitteeisappointedbytheBoardofDirectorsandiscomposedofindependentdirectors.ItreviewstheConsolidatedFinancialStatementsandtheexternalauditors’report.TheAuditCommitteealsoconsiders,forreviewbytheBoardofDirectorsandapprovalbytheshareholders,theengagementorreappointmentoftheexternalauditors.

PricewaterhouseCoopersLLP,theexternalauditors,haveauditedtheConsolidatedFinancialStatementsinaccordancewithauditingstandardsgenerallyacceptedinCanadaonbehalfoftheshareholders.

SaidArrata OlivierSerraChiefExecutiveOfficer ChiefFinancialOfficer

REPORT OF MANAGEMENT

39

FINA

NC

IAL

STATEMEN

TS

Independent Auditor’s Report To the Shareholders of Sea Dragon Energy Inc.:

WehaveauditedtheaccompanyingconsolidatedfinancialstatementsofSeaDragonEnergyInc.,whichcomprisethebalancesheetasatDecember31,2010andtheconsolidatedstatementsofoperationsanddeficit,comprehensivelossandcumulativeothercomprehensivelossandcashflowsfortheyearthenended,andtherelatednotesincludingasummaryofsignificantaccountingpolicies.

Management’s responsibility for the Consolidated Financial Statements

ManagementisresponsibleforthepreparationandfairpresentationoftheseconsolidatedfinancialstatementsinaccordancewithCanadiangenerallyacceptedaccountingprinciples,andforsuchinternalcontrolasmanagementdeterminesisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.

Auditor’s responsibility

Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudit.WeconductedourauditinaccordancewithCanadiangenerallyacceptedauditingstandards.Thosestandardsrequirethatwecomplywithethicalrequirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreefrommaterialmisstatement.

Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresintheconsolidatedfinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentoftherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudorerror.Inmakingthoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheentity’spreparationandfairpresentationoftheconsolidatedfinancialstatementsinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheentity’sinternalcontrol.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationoftheconsolidatedfinancialstatements.

Webelievethattheauditevidencewehaveobtainedinourauditsissufficientandappropriatetoprovideabasisforourauditopinion.

Opinion

Inouropinion,theconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofSeaDragonEnergyInc.asatDecember31,2010andtheresultsoftheiroperationsandtheircashflowsfortheyearthenendedinaccordancewithCanadiangenerallyacceptedaccountingprinciples.

Other matters

TheconsolidatedfinancialstatementsofSeaDragonEnergyInc.fortheyearendedDecember31,2009,wereauditedbyanotherauditorwhoexpressedanunmodifiedopiniononthosestatementsonApril29,2010.

Aspartofourauditofthe2010consolidatedfinancialstatements,wealsoauditedtheadjustmentsdescribedinNote4thatwereappliedtoretrospectivelychangethereportingcurrencyofthe2009consolidatedfinancialstatements.Inouropinion,suchadjustmentsareappropriateandhavebeenproperlyapplied.Wewerenotengagedtoaudit,review,orapplyanyprocedurestothe2009consolidatedfinancialstatementsofthecompanyotherthanwithrespecttotheadjustmentsand,accordingly,wedonotexpressanopinionoranyotherformofassuranceonthe2009consolidatedfinancialstatementstakenasawhole.

CharteredAccountantsCalgary,Alberta

March29,2011

AUDITOR’S REPORT

(THOUSANDSOFUNITEDSTATESDOLLARS)


DECEmBER 31 2010

DECEmBER 31 2009

(restated Note 4)

Assets

Current

Cashandcashequivalents 14,751 1,999

Accountsreceivable(Note 5) 6,082 2,266

Prepaidexpenses 112 16

20,945 4,281

Restrictedcash (Note 15) – 310

Acquisitiondeposit(Note 6) – 2,006

Investment (Note 7) – 287

Propertyandequipment(Note 8) 62,742 14,356

83,687 21,240

Liabilities and Shareholders’ Equity

Liabilities

Current

Accountspayableandaccruedliabilities 5,275 1,014

Shareholders’ Equity

Commonshares (Note 9) 120,036 53,804

Warrants(Note 9) 4,122 5,392

Contributedsurplus (Note 9) 2,239 386

Accumulatedothercomprehensiveloss(Note 4) (8,296) (5,819)

Deficit (39,689) (33,537)

78,412 20,226

83,687 21,240

Basisofpresentation(Note 2)

Significantaccountingpolicies(Note 3)

Commitments (Note 11)

Contingency (Note 12)

See accompanying notes to the consolidated financial statements.

CONSOLIDATED BALANCE SHEETS

41

YEAR ENDED DECEmBER 31

2010


2009

(restated Note 4)

Netlossfortheyear (6,152) (14,080)

Othercomprehensive(loss)/income

Foreignexchangeadjustment(loss)/gainonchangeinreportingcurrrency(Note 4) (2,477) 1,551

Comprehensivelossfortheyear (8,629) (12,529)

Cumulativeothercomprehensiveloss,beginningoftheyear (5,819) (7,370)

Othercomprehensive(loss)/income (2,477) 1,551

Cumulativeothercomprehensiveloss,endofyear (8,296) (5,819)



2010


2009

(restated Note 4)

Revenue

Oilsales,netofroyalties 12,529 180

Interestincomeandother 18 157

12, 547 337

Expenses

Operating 3,423 37

Generalandadministrative 5,023 3,827

Foreignexchange(gain)/loss (1,343) 1,097

Stock-basedcompensation 1,317 371

Additionalshares (Note 9) 462 –

Impairmentofoilandgasproperties(Note 8) – 8,933

Depletionanddepreciation (Note 8) 6,642 123

15,524 14,388

Loss before income taxes (2,977) (14,051)

Incometaxes-current (Note 10) (3,175) (29)

Net loss for the year (6,152) (14,080)

Deficit, beginning of year (33,537) (19,457)

Deficit, end of year (39,689) (33,537)

Basicanddilutedlosspershare (0.02) (0.09)

Weightedaveragecommonsharesoutstanding(000’s) 326,252 153,717

(THOUSANDSOFUNITEDSTATESDOLLARS,EXCEPTPERSHAREDATA)


CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS

FINA

NC

IAL

STATEMEN

TS



2010


2009

(restated Note 4)

Cash provided by (used in)

Operating activities

Netlossfortheyear (6,152) (14,080)

Noncashitems

Stock-basedcompensation 1,317 371

Depletionanddepreciation 6,642 123

Impairmentofoilandgasproperties – 8,933

Unrealizedexchange(gain)/loss (661) 73

Additionalshares 462 –

1,608 (4,580)

Netchangeinnon-cashworkingcapital (6,092) 2,130

(4,484) (2,450)

Financing activities

Proceedsfromissuanceofshares,netofcosts 64,638 13,931

64,638 13,931

Investing activities

Propertyandequipmentexpenditures (12,132) (9,743)

Propertyandequipmentacquisitions (44,501) (14,760)

Restrictedcash 310 9,336

Acquisitiondeposit 2,168 (1,987)

Investment–convertibledebenture 287 –

Changeinnon-cashworkingcapital 6,501 (5,789)

(47,367) (22,943)

Change in cash and cash equivalents 12,787 (11,462)

Effect of foreign exchange on cash and cash equivalents (35) (203)

Cash and cash equivalents, beginning of year 1,999 13,664

Cash and cash equivalents, end of year 14,751 1,999

Supplemental cash flow information

Interestpaid – 108



CONSOLIDATED STATEMENTS OF CASH FLOWS

NO

TES

43NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS(EXPRESSEDINTHOUSANDSOFUNITEDSTATESDOLLARS)

NOTE 1 – DESCRIPTION OF BUSINESS

SeaDragonEnergyInc.anditswhollyownedsubsidiarieshereafterreferredtoasthe“Company”or“SeaDragon”is headquartered inCalgary,Alberta. The consolidated financial statementsof theCompanyasat and for thetwelvemonthsendedDecember31,2010and2009comprisetheCompanyanditswhollyownedsubsidiaries.TheCompanyisengagedintheexplorationforanddevelopmentandproductionofoilandnaturalgas.TheCompanyconductsmanyofitsactivitiesjointlywithothers;thesefinancialstatementsreflectonlytheCompany’sproportionateinterestinsuchactivities.TheCompany’sprinciplepropertiesarelocatedintheArabRepublicofEgypt.

TheCompanyislistedontheTorontoVentureStockExchange(TSX-V)andtradesunderthesymbolSDX.

NOTE 2 – BASIS OF PRESENTATION

TheauditedconsolidatedfinancialstatementsofSeaDragonhavebeenpreparedbymanagementinaccordancewithCanadiangenerallyacceptedaccountingprinciples.ThepreparationoffinancialstatementsinaccordancewithCanadiangenerallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenueandexpensesduringthereportingperiod.Actualresultsmaydifferfromtheseestimates.Unlessotherwiseindicated,allfinancialamountsarereportedinthousandsofUnitedStatesdollars.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)Petroleumandnaturalgasproperties:

(i) Capitalizedcosts:

TheCompanyfollowsthefullcostmethodofaccountingforitspetroleumandnaturalgasproperties.Underthismethod,allcostsrelatedtotheexplorationfor,anddevelopmentof,oilandnaturalgasreservesarecapitalizedincostcentresonacountry-by-countrybasis.Costsincludeleaseacquisitioncosts,geologicalandgeophysicalexpenses,overheaddirectlyrelatedtoexplorationanddevelopmentactivities,andcostsofdrillingbothproductiveandnon-productivewells.Proceeds from thesaleofpropertiesareappliedagainstcapitalizedcosts,withoutanygainorlossbeingrealized,unlesssuchsalewouldsignificantlyaltertherateofdepletionanddepreciationby20percentormore.

(ii) Depletionanddepreciation:

Depletionofoilandnaturalgaspropertiesanddepreciationofproductionequipmentisprovidedbyusingtheunit-of-productionmethodbaseduponestimatedprovenoilandnaturalgasreserves,beforeroyalties,onacostcentrebasis.Thecostsofsignificantunevaluatedpropertiesandmajordevelopmentprojectsareexcludedfromcostssubjecttodepletion.Fordepletionanddepreciationpurposes,relativevolumes,beforeroyalties,ofoilandnaturalgasproductionandreservesareconvertedattheenergyequivalentconversionrateofsixthousandcubicfeetofnaturalgastoonebarrelofcrudeoil.

(iii)Assetretirementobligation(“ARO”):

Thefairvalueofthestatutory,contractualorlegalliabilityassociatedwiththeretirementandreclamationoftangiblelong-livedassetsisrecognizedwhenincurred.Theassetretirementcost,equaltotheestimatedfairvalueoftheARO,iscapitalizedaspartofthecostoftherelatedlong-livedasset.Assetretirementcostsforthecrudeoilassetsareamortizedusingtheunit-of-productionmethod.

(EXPRESSEDINTHOUSANDSOFUNITEDSTATESDOLLARS,EXCEPTPERSHAREAMOUNTSOROTHERWISENOTED)

FINA

NC

IAL

STATEMEN

TSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2010 AND 2009

44 SeaDragonEnergyInc. |NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS(EXPRESSEDINTHOUSANDSOFUNITEDSTATESDOLLARS)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2010 AND 2009

TheAROliabilitiesarecarriedontheConsolidatedBalanceSheetsattheirdiscountedpresentvalueandareaccretedovertimeforthechangeinpresentvalue,withtheaccretionchargeincludedindepreciation,depletionandaccretion.

Actualexpendituresincurredarechargedagainsttheaccumulatedobligation.

SeaDragondoesnothaveanyAROasthereisnolegalobligationfortheCompanyinEgypt.

(iv) Impairmenttests:

Infollowingthefullcostmethod,animpairmentlossisrecognizedwhenthecarryingamountofthepetroleumandnaturalgaspropertiesofacostcentreisnotrecoverableandexceedsitsfairvalue.Thecarryingamountsareassessedtobeunrecoverablewhenthesumoftheundiscountedcashflowsexpectedfromtheproductionofprovedreserves,thelowerofcostandmarketvalueofunprovedpropertiesandthecostofmajordevelopmentprojectsarelessthanthecarryingamountofthecostcentre.Indeterminingtheamountofimpairment,thecarryingamountofoilandgaspropertiescapitalizedinacostcentreiscomparedtothefairvalueoftheassociatedprovedandprobablereservesandthelowerofcostandmarketvalueofanyunprovedpropertieswhicharesubjecttoaseparatetestforimpairment.Indeterminingthefairvalueoftheprovedandprobablereserves,theCompanyusescashflowsbaseduponoilandgaspricesasquotedinthefuturesmarketwhereobtainable,adjustedforqualitydifferences,transportationandotherrelevantfactors.Thesecashflowsarethendiscountedusingarisk-freeinterestrate.Ifthecarryingvalueoftheoilandgaspropertiesisinexcessofitsfairvalue(the“ceilingtest”),theexcessischargedagainstearningsasadditionaldepletionanddepreciation.

(iv)Jointactivities:

TheCompanyconductssubstantiallyallofitsoilandgasexplorationandproductionactivitiesonajointbasis.ThesefinancialstatementsreflectonlytheCompany’sproportionateinterestinsuchactivities.

(b) Officefurnitureandequipment:

Depreciationofofficefurnitureandequipmentisbasedonestimatesofusefullivesandiscalculatedusingthedecliningbalancemethodatratesrangingfrom20percentto30percentperannum.

(c) Foreigncurrencytranslation:

TheCompanytranslatesforeigncurrencydenominatedmonetaryassetsandliabilitiesattheexchangerateineffectatthebalancesheetdateandnon-monetaryassetsandliabilitiesaretranslatedathistoricalexchangerates.Revenuesandexpensesaretranslatedattransactiondateexchangerates.Exchangegainsorlossesareincludedinthedeterminationofnetincomeasforeignexchangeloss/(gain).

(d) Revenuerecognition:

Revenuesassociatedwiththesaleofcrudeoilarerecordedwhentitlepassestothecustomer.RevenuesfromcrudeproductionfrompropertiesfromwhichtheCompanyhasaninterestwithotherproducersisrecognizedonthebasisoftheCompany’snetworkinginterest.

(e) Inventory:

Inventoriesofpetroleumproducts,comprisingofcrudeoilandcondensate,arevaluedatthelowerofcostandnetrealizablevalues.Costisdeterminedbaseduponactualoperating,transportationanddepletioncosts.

(f) Incometaxes:

TheCompanyusestheliabilitymethodtoaccountforincometaxes.Underthismethod,futureincometaxesarebasedonthedifferencebetweenassetsandliabilitiesreportedforfinancialaccountingpurposesfromthosereportedforincometax.Futureincometaxassetsandliabilitiesaremeasuredusingthesubstantivelyenactedtaxratesexpectedtoapply to taxable incomein theyears inwhichthetemporarydifferencesareexpectedtoberecoveredorsettled.TheCompany’scontractualarrangementsinforeignjurisdictionsstipulatethatincometaxesarepaidbytherespectivegovernmentoutofitsentitlementshareofproductionsharingoil.Suchamountsareincludedinincometaxexpenseatthestatutoryrateineffectatthetimeofproduction.

NO

TES


(g) Persharedata:

Basicpershareamountsarecomputedbydividingnetlossfromoperationsbytheweightedaveragenumberof common shares outstanding for the year. Diluted per share amounts reflect the potential dilution thatcouldoccurifsecuritiesorothercontractstoissuecommonshareswereexercisedorconvertedtocommonshares.Thetreasurystockmethodisusedtodeterminethedilutiveeffectofstockoptionsandotherdilutiveinstruments.Underthetreasurystockmethod,onlyoptionsforwhichtheexercisepriceislessthanthemarketvalueimpactthedilutioncalculations.

(h) Cashandcashequivalents:

Cashandcashequivalentsarecomprisedofcash,termdepositsandotherhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlessatthetimeofpurchase.

(j) Stock-basedcompensation:

TheCompanyuses the fairvaluemethod forvaluingstockoptionsgrantedasstock-basedcompensation.Under the fair valuemethod,a compensation cost ismeasuredat fair value for stockoptionsgrantedatthegrantdateandexpensedoverthevestingperiodwithacorrespondingincreasetocontributedsurplus.Upontheexerciseofthestockoptions,considerationpaidtogetherwiththeamountpreviouslyrecognizedascontributedsurplus,isrecordedasanincreasetosharecapital.

(j) Financialinstruments:

Allfinancialinstrumentsarerecordedinitiallyatestimatedfairvalueonthebalancesheetexceptforcertainrelatedpartytransactionsandclassifiedintooneoffivecategories:heldfortrading,heldtomaturity,availableforsale,loansandreceivablesandotherliabilities.Cashandcashequivalents,andinvestmentsareclassifiedasheld for tradingandmeasuredatestimated fair value.Accounts receivableareclassifiedas loansandreceivablesandmeasuredatamortizedcost.Accountspayableisclassifiedasotherliabilitiesandmeasuredatamortizedcost.

TheCompanymayenterintoderivativecontracts(commodityprice,interestrateorforeigncurrency)inordertomanagerisk.Derivativecontractsaremarked-to-marketateachreportingperiodwiththechangeinestimatedfairvaluerecordedasgainorlossinearnings.TheCompanydoesnotutilizederivativecontractsforspeculativepurposes,hasnotdesignatedanyderivativecontractsashedges,andhasnotrecordedanyassetsorliabilitiesasaresultofembeddedderivatives.

Theestimatedfairvalueofcashandcashequivalents,accountsreceivableandaccountspayableapproximatetheircarryingamountsduetotheirshorttermstomaturity.

NOTE 4 – CHANGES IN ACCOUNTING POLICIES

New Accounting Standards Adopted

OnJanuary1,2010,theCompanyadoptedthefollowingCanadianInstituteofCharteredAccountants(“CICA”)Handbooksections:

“Business Combinations”, Section 1582, which replaces the previous business combinations standard.The standard requires assets and liabilities acquired in a business combination, contingent consideration andcertainacquiredcontingenciestobemeasuredattheirfairvaluesasofthedateofacquisition.Inaddition,acquisi-tion-relatedandrestructuringcostsaretoberecognizedseparatelyfromthebusinesscombinationandincludedinthestatementofearnings.TheadoptionofthisstandardhashadnomaterialimpactontheaccountingtreatmentofbusinesscombinationsenteredintoafterJanuary1,2010.



“Non-ControllingInterests”,Section1602andConsolidatedFinancialStatements,Section1601wereissuedinDecember2008.Section1601establishes standards for thepreparationof consolidatedfinancial statements.Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidatedfinancialstatementssubsequenttoabusinesscombination.ThesestandardsareeffectiveonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterJanuary2011withearlierapplicationpermitted.ThesestandardscurrentlydonotimpacttheCompanyasithasfullcontrollinginterestofallofitssubsidiaries.

Change in reporting currency and accumulated other comprehensive income

EffectiveJuly1,2010,theCompanychangeditsreportingandfunctionalcurrencyfromCanadiandollars(CDN$)toUnitedStatesdollars (US$),assignificantportionsof theCompany’srevenues,expensesandcashflowsaredenominatedinUS$.ThechangeinreportingcurrencyistobetterreflecttheCompany’sbusinessactivitiesandtoimproveinvestors’abilitytocomparetheCompany’sfinancialresultswithotherpubliclytradedbusinessesintheinternationaloilandgasindustry.PriortoJuly1,2010,theCompanyreporteditsannualandquarterlyconsolidatedbalancesheetsandtherelatedconsolidatedstatementsofoperationsandcashflows inCDN$. Inmaking thischange in reportingcurrency, theCompany followed the recommendationsof theEmerging IssuesCommittee(EIC)of theCanadianInstituteofCharteredAccountants(CICA),setout inEIC-130,TranslationMethodwhentheReportingCurrencyDiffersfromtheMeasurementCurrencyorthereisaChangeintheReportingCurrency.InaccordancewithEIC-130, thefinancial statements forall yearsandperiodspresentedhavebeen translatedintothenewreportingcurrencyusingthecurrentratemethod.Underthismethod,thestatementsofoperationsandcashflowstatementitemsforeachyearandperiodhavebeentranslatedintothereportingcurrencyusingtheaverageexchangeratesprevailingduringeachreportingperiod.Allassetsandliabilitieshavebeentranslatedusing theexchange rateprevailingat theconsolidatedbalancesheetsdates.Shareholders’equity transactionshavebeentranslatedusingtheratesofexchangeineffectasofthedatesofthevariouscapitaltransactions,whileshareholders’equitybalancesfromthetranslationareincludedasaseparatecomponentofothercomprehensiveincome.Allresultingexchangedifferencesarisingfromthetranslationareincludedasaseparatecomponentofothercomprehensive income.Allcomparativefinancial informationhasbeenrestatedtoreflect theCompany’sresultsas if theyhadbeenhistorically reported inUS$and theeffecton theconsolidatedfinancial statementsresultedinanaccumulatedandothercomprehensiveincomeadjustmentof$8.3millionasatJuly1,2010.

NOTE 5 – FINANCIAL RISK MANAGEMENT

TheCompanyisexposedtofinancialrisksduetothenatureofitsbusinessandthefinancialassetsandliabilitiesthatitholds.Thefollowingdiscussionreviewsmaterialfinancialrisks,quantifiestheassociatedexposures,andexplainshowtheserisks,andtheCompany’scapital,aremanaged.

a. Market Risk

ChangesinforeigncurrencyexchangeratescanhaveanimpactontheCompany’searningsandvalueoffinancialassetsandliabilities.

Foreign Currency Exchange Rate Risk - Foreignexchangerateriskistheriskthatthefairvalueoffuturecashflowswillfluctuateasaresultofchangesinforeignexchangerates.AstheeffectsofforeignexchangefluctuationsareembeddedintheCompany’sresults,thetotaleffectofforeignexchangefluctuationsarenotseparatelyidentifiable.ThereportingcurrencyoftheCompanyisUnitedStatesdollars(US$).SubstantiallyalloftheCompany’soperationsareinforeignjurisdictionsandasaresult,theCompanyisexposedtoforeigncurrencyexchangerateriskonsomeofitsactivitiesprimarilyonexchangefluctuationsbetweentheCanadiandollar(CDN$)andtheUS$.ThemajorityofcapitalexpendituresareincurredinUS$andoilrevenuesarereceivedinUS$thereforetheCompany’sexposuretoforeignexchangeisreduced.

NO

TES


ThetablebelowshowstheCompany’sexposuretoforeigncurrenciesforitsfinancialinstruments:

AS AT DECEmBER 31, 2010 US$ EgP EUR CAD


Cashandcashequivalents 14,751 9,955 6 22 4,768

Accountsreceivable 6,082 6,040 – 4 38

Accountspayableandaccruedliabilities (5,275) (4,881) – (24) (370)

Balancesheetexposure 15,558 11,114 6 2 4,436(1) denotes Financial Statements

US$ EgP EUR CAD

AS AT DECEmBER 31, 2009 (restated - note 4)


Cashandcashequivalents 1,999 840 5 – 1,154

Accountsreceivable 2,266 2,217 – – 49

Accountspayableandaccruedliabilities (1,014) (20) – – (994)

Balancesheetexposure 3,251 3,037 5 – 209(1) denotes Financial StatementsAthreepercentstrengtheningoftheUS$wouldresultinachangeinearningsasfollows:

AS AT DECEmBER 31, 2010 EgP EUR CAD

US$ Equivalent

Decreaseinearnings – – 133

b. Credit Risk

CreditriskistheriskofafinanciallosstotheCompanyifacounterpartytoafinancialinstrumentfailstomeetitscontractualobligationandarisesprincipallyfromjointventurepartnersandoilmarketers.TheCompanyisexposedtocreditriskinrespecttoitscashandcashequivalentsandaccountsreceivable.

CashandcashequivalentsareheldinoperatingaccountswithmajorinternationalbanksinCanada,EgyptandtheUnitedKingdom,andthereforetheCompanyconsiderstheseassetstohavenegligiblecreditrisk.

The carrying amount of cash and cash equivalents and accounts receivable represents the Company’smaximumcreditexposure.

AtDecember31,2010theCompanyhadaccountsreceivableof$6.0millionofwhich92percentwasduefromtwoseparateentities,bothofwhicharegovernmentcontrolledagenciesinEgypt.AtDecember31,2009theCompanyhadaccountsreceivableof$2.3millionofwhich98percentwasduefromoneentity,whichisagovernmentcontrolledagencyinEgypt.TheCompanyexpectstocollecttheoutstandingreceivablesinthenormalcourseofoperations.

Accountsreceivableareanalyzedinthetablebelow.Therearenoindicationsasofthereportingdatethatthedebtorswillnotmeettheirpaymentobligations.



ACCOUNTS RECEivABLE AT DECEmBER 31, 2010

Totalaccountsreceivable 6,082

Aging:

0-60days 3,398

61-90days 633

Over90days 2,050

c. Liquidity Risk

LiquidityriskistheriskthattheCompanywillnotbeabletomeetitsfinancialobligationsastheybecomedue.TheCompany’sapproachtomanagingliquidityriskistoensure,totheextentpossible,thatitwillhavesufficientcashresourcestomeetitsliabilitieswhentheybecomedue.TheCompanymanagesitsriskofnotmeetingitsfinancialobligationsthroughmanagementofitscapitalstructure,annualbudgetingofitsrevenues,expendituresandcashflows.Onamonthlybasis,internalreportingofactualresultsiscomparedtothebudgetinordertomodifybudgetassumptions,ifnecessary,toensureliquidityismaintained.

TheCompanybelievesthatthecurrentworkingcapitalbalanceandcashflowfromoperationswillbeadequatetosupporttheCompany’sfinancialliabilitiesandcommitments.

AsofDecember31,2010,theCompany’sfinancialliabilitiesareduewithinoneyear.

d. Capital Management

TheCompanydefinesandcomputesitscapitalasfollows:

DECEmBER 31, 2010 DECEmBER 31, 2009 (restated - note 4)

ShareholderEquity 78,412 20,226

Workingcapital(1) (15,670) (3,267)

Totalcapital 62,742 16,959 (1) Working capital is defined as current assets less current liabilities.

TheCompany’sobjectivewhenmanagingitscapitalistoensureithassufficientcapitaltomaintainitsongoingoperations,pursuetheacquisitionofinterestsinproducingorneartoproductionoilandgaspropertiesandtomaintainaflexiblecapitalstructurewhichoptimizesthecostofcapitalatanacceptablerisk.TheCompanymanagesitscapitalstructureandmakesadjustmentstoit,basedonthefundsavailabletotheCompany,inordertosupporttheexplorationanddevelopmentofitsinterestsinitsexistingpropertiesandtopursueotheropportunities.

Working capital as at December 31, 2010 of $15.7 million has increased from the December 31, 2009balanceof$3.3millionprimarilyasaresultoftheCompanyraising$11.0millionand$53.5millionnetofrelatedcostsintwoprivateplacementsduringtheyearendedDecember31,2010(Note8).TheCompanyisnotsubjecttoexternallyimposedcapitalrequirements.

e. Financial Instruments

TheCompany’sfinancialinstrumentsasatDecember31,2010and2009werecomprisedofcashandcashequivalents,accountsreceivableandaccountspayableandaccruedliabilities.Thefairvalueoffinancialassetsandfinancialliabilitiesthatareincludedonthebalancesheetapproximatetheircarryingamountsduetotheirshorttermnature.

Level1–Quotedpricesareavailableinactivemarketsforidenticalassetsorliabilitiesasofthereportingdate.Activemarketsarethoseinwhichtransactionsoccurinsufficientfrequencyandvolumetoprovidepricinginformationonanongoingbasis.

NO

TES


Level2–PricinginputsareotherthanquotedpricesinactivemarketsincludedinLevel1.Pricesareeitherdirectlyor indirectlyobservableasofthereportingdate.Level2valuationsarebasedoninputs, includingquotedforwardpricesforcommodities,timevalueandvolatilityfactorswhichcanbesubstantiallyobservedorcorroboratedinthemarketplace.

Level3–Valuationsinthislevelarethosewithinputsfortheassetorliabilitythatarenotbasedonobservablemarketdata.

TheCompanydoesnothaveanyfinancialderivativecontractsasatDecember31,2010.

NOTE 6– ACQUISITIONS

Kom Ombo

OnDecember31,2009,theCorporation,throughitswholly-ownedsubsidiary,SeaDragonEnergy(KomOmbo)Ltd., entered into a farmout agreement (“Agreement”) with Dana Gas Egypt (“DGE”) for the acquisition of afifty (50%)percentparticipating interest in theKomOmboConcession (“KomOmbo”) inEgypt foraggregateconsiderationof$44.5million.TheeffectivedateoftheKomOmboAcquisitionwasJuly1,2009.OnDecember30,2009theCompanytransferred$2.0milliontoitslawyertobeheldintrustasadepositfortheAgreement.

OnApril29,2010,substantiallyallconsiderationfortheacquisitionofKomOmbowaspaidtoDGE.

Thefollowingtablepresentsthepreliminaryallocationofthepurchasepricetotheacquiredassetsandliabilitiesassumed,basedonestimatesoffairvalue:

Consideration:

Cash 44,501

Allocatedto:

PropertyandEquipment 44,501

Theabove amounts are estimates,whichweremadebymanagement at the timeof the preparationof thesefinancialstatementsbasedoninformationavailable.Amendmentsmaybemadetotheseamountsasvaluessubjecttoestimatearefinalized.

North West Gemsa

OnDecember21,2009SeaDragonacquiredallofthecommonsharesofPremierOilEgypt(NWGemsa)B.V.(“POE”)forcashconsiderationof$14.8million.POE’smainassetwasa10percentworkinginterestintheNorthWestGemsaoilandgasconcessionintheArabRepublicofEgypt.TheresultsofPOE’soperationshavebeenincluded in theconsolidatedfinancial statements since thatdate.Revenues,expensesandcapitalexpendituresarisingbetweentheeffectiveJuly1,2009dateandtheclosingDecember21,2009datehavebeenrecognizedasadjustments to thepurchase. SeaDragonprimarily funded theacquisitionwith theproceedsof theprivateplacementthatclosedonNovember6,2009.

TheacquisitionhasbeenaccountedforusingthepurchasemethodwithSeaDragonastheacquirer.Thefollowingtablepresentstheallocationofthepurchasepricetotheacquiredassetsandliabilitiesassumed,basedonestimatesoffairvalue:

Accountsreceivable 1,908

Propertyandequipment 13,149

Accountspayableandaccruedliabilities (297)

14,760



NOTE 7 – INVESTMENT

On December 12, 2008, the Company purchased a $0.3 million convertible debenture issued by a privateCanadiancorporationwithajointventureinterestinanoilandgasconcessioninTheRepublicoftheCongo.OnJanuary22,2010,theCompanyreceivedfullpaymentoftheprincipalandinterestearnedtoJanuary22,2010.

NOTE 8 – PROPERTY & EQUIPMENT

DECEmBER 31 2010

DECEmBER 31 2009

(restated - note 4)

Oilandgasproperties,atcost 99,175 44,344

Accumulateddepletion (6,710) (102)

Accumulatedimpairmentofoilandgasproperties (29,996) (29,996)

62,469 14,246

Furnitureandequipment,atcost 369 134

Accumulateddepreciation (96) (24)

273 110

62,742 14,356

DuringyearendedDecember31,2010,theCompanycapitalized$0.7millionofgeneralandadministrativecostsrelatedtodevelopmentandproductionactivitiesinEgypt(2009-$0.6million).

AtDecember31,2010,expendituresassociatedwiththeCompany’sunprovenpropertiestotaling$20.1million(December31,2009–Nil)havebeenexcludedfromdepletion.Estimatedfuturedevelopmentcostsof$6.6million(December31,2009-$3.0million)havebeenincludedincostssubjecttodepletion.

In2009theCompanywroteoffapproximately$8.9millionofcostsrelatedtoEWAConcession.NoadditionalcapitalexpenditureswereincurredduringthetwelvemonthsendedDecember31,2010ontheEWAproperty.

The Company performed a ceiling test calculation at December 31, 2010 to assess the recoverable value ofpropertyandequipment,whichindicatednowritedownwasrequired.Thefuturecommoditypricesusedintheceiling testwerebasedon theDecember31,2010commodityprice forecastsof theCompany’s independentreserveengineersadjustedfordifferentialsspecifictotheCompany’sreserves.ThefollowingtablesummarizesthefuturebenchmarkpricestheCompanyusedintheceilingtest.

BRENT REFERENCE PRiCE iNFLATiON RATES LPg PRiCE gAS PRiCE

YEAR (US$/Bbl) % Year (US$/Bbl) (US$/Mcf)

2011 90.15 2.0 54.15 1.00

2012 88.98 2.0 54.14 1.00

2013 88.49 2.0 54.15 1.00

2014 90.20 3.0 55.39 1.00

2015 92.04 2.0 56.52 1.00

Thereafter +2.0%/Year +2.0%/Year +2.0%/Year 1.00

NO

TES


NOTE 9 – SHARE CAPITAL

a. Authorized

TheCompany is authorized to issueunlimited common shareswith no-par valueandunlimitedpreferredshareswithno-parvalue.

b. Common shares

2010 2009

DECEmBER 31NUmBER OF SHARES

(000`s) AmOUNTNUmBER OF SHARES

(000`s)AmOUNT

(restated - note 4)

Balance, beginning of year 206,131 53,804 144,509 44,269

Warrantsexercised 3,461 908 – 430

Optionsexercised 500 88 – –

Conversionofspecialwarrants,netofshareissuancecosts 23,867 11,005 – –

Privateplacement,netofissuancecosts 142,500 53,497 60,000 8,923

Transferfromexerciseofwarrants – 657 1,622 183

Transferfromexerciseofoptions – 77 – –

Balance, end of year 376,459 120,036 206,131 53,804

DuringtheyearendedDecember31,2010theCompanyissued3.5millioncommonsharesupontheexerciseofwarrantsatanaveragepriceof$0.35CDNpercommonsharefortotalproceedsonexerciseof$0.9million.

DuringtheyearendedDecember31,2010theCompanyissued0.5millioncommonsharesupontheexerciseofstockoptionsatanaveragepriceof$0.18CDNpercommonsharefortotalproceedsonexerciseof$88.

OnApril13,2010theCompanyconverted22.7millionspecialwarrants thatwereissuedonJanuary25,2010.Eachspecialwarrantentitledtheholderthereoftoreceiveonecommonshareontheexerciseofthespecialwarrantfornoadditionalconsideration,subjecttoanadjustmentwherebyif theCompanywasnotqualifiedto issuethecommonsharesunder theoriginalofferingbyApril1,2010,eachwarrantwouldbeexercisablefor1.05commonshares(the“AdditionalShares”)fornoadditionalconsideration.TheCompanyqualified to issue the common sharesonApril 13,2010andasa result onApril 13,2010,23.8millioncommonshareswereissuedupontheexerciseofthespecialwarrants.TheCompanyrecognizedanexpenseof$0.5millionfortheestimatedfairvalueoftheAdditionalSharesontheexerciseofthespecialwarrants.ThenetproceedstotheCompanywere$11.0million.

OnApril19,2010theCompanycompletedanissuanceof142.5millioncommonsharesonaboughtdealbasispursuanttoashortformprospectusatapriceof$0.40CDNpercommonsharefornetproceedstotheCompanyof$53.5million.ProceedsofthisofferingwereusedtopaythebalanceoftheconsiderationduefortheacquisitionofafiftypercentparticipatinginterestintheKomOmboConcession(Note5).

ThroughouttheyearendedDecember31,2009theCompanyissued1.6millionsharesupontheexerciseof 1.6 million warrants at an average price of $0.29 CDN per share for total proceeds on exercise of$0.2million.



OnNovember6,2009theCompanycompletedaprivateplacementandissued60millionUnitsfor$0.25CDNperunit.Eachunitconsistedofonecommonshareandonehalfwarrant.OnefullwarrantisconvertibleintoonecommonshareofSeaDragonEnergyInc.atapriceof$0.50CDNpershareuntiltheexpirydateofNovember6,2012.Proceedsoftheplacementwere$13.3million,netofcosts.Thefairvalueofthewarrantswasestimatedtobe$4.4millionor$0.15CDNperfullwarrantbasedontherelativefairvalueofacommonshareandafullwarrantusingtheBlackScholespricingmodelwiththefollowingassumptions:averageriskfreerate–2%,expectedlife–3years,expectedvolatilityrate-159%andexpecteddividendyieldof0.00%.DirectorsandOfficersoftheCompanypurchased1.5millionunitsofthisoffering.

c. Stock option plan

2010 2009

STOCk OPTiONS

NUmBER OF OPTiONS

(000’s)

wEigHTED AvERAgE ExERCiSE PRiCE

(CDN)

NUmBER OF OPTiONS

(000’s)

wEigHTED AvERAgE ExERCiSE PRiCE

(CDN)

Outstanding,beginningofyear 9,817 $0.42 4,700 $0.60

Granted 4,000 $0.31 5,250 $0.29

Exercised (500) $0.18 – –

Forfeited (67) $0.60 (133) $0.60

Outstanding,endofyear 13,250 $0.40 9,817 $0.42

Exercisable,endofyear 6,167 $0.43 1,500 $0.43

ThefollowingsummarizesdetailsabouttheCompany’sstockoptionsasatDecember31,2010:

OUTSTANDiNg OPTiONS vESTED OPTiONS

ExERCiSE PRiCE RANgENUmBER OF

OPTiONS

REmAiNiNg CONTRACTUAL

LiFENUmBER OF

OPTiONSREmAiNiNg

CONTRACTUAL LiFE

$0.00to$0.19 3,000,000 3.6years 999,998 3.6years

$0.20to$0.39 4,000,000 4.6years 1,250,000 4.7years

$0.40to$0.59 1,750,000 2.0years 650,002 1.9years

$0.60to$0.79 4,500,000 2.6years 3,266,664 2.6years

13,250,000 3.4years 6,166,664 3.1years

DuringtheyeartheCompanygranted2.7millionoptionsthatvestoverthreeyearstoemployeesandofficersataweightedaveragepriceof$0.32CDN.Inaddition,theCompanygranted1.3millionoptionsthatvestimmediatelytodirectorsataweightedaveragepriceof$0.27CDN.

TheweightedaverageassumptionsandresultantfairvaluesforstockoptionsgrantedduringtheyearsendedDecember31,2010and2009wereasfollows:

2010 2009

RiskFreeRate(%) 2.23 2.58

ExpectedLife (years) 5 5

ExpectedVolatility(%) 125 155

DividendperShare(%) – –

WeightedAverageFairValue(CDN$) 0.26 0.26

NO

TES


d. Warrants ThefollowingsharepurchasewarrantswereoutstandingasatDecember31,2010:

2010 2009

NUmBER OF wARRANTS

(000s)ExERCiSE PRiCE

(CDN)

NUmBER OF wARRANTS

(000s)ExERCiSE PRiCE

(CDN)

Outstanding,beginningofyear 37,659 $0.49 9,281 $0.41

Issued – $0.34 30,000 $0.50

Exercised (3,461) (1,622) $0.29

Expired (4,198) $0.53 – –

Outstandingandexercisable,endofyear 30,000 $0.50 37,659 $0.49

DECEmBER 31 20102009

(restated - note 4)

Balance,beginningofyear 5,392 1,217

Fairvalueofwarrantsissued – 4,357

Transfertocommonsharesonexerciseofwarrants (657) (182)

Transfertocontributedsurplusonexpirationofwarrants (613) –

Balance,endofyear 4,122 5,392

OnMarch2,2010 theCompany informedholdersof certainoutstandingwarrants thatearly terminationprovisionswerebeingexercisedbytheCompanyandthewarrantswouldexpirewithin30daysofsuchnotice.OnApril1,2010,1.0millionunexercisedwarrantsexpired.

e. Contributed surplus

DECEmBER 312010 2009

(restated - note 4)

Balance,beginningofyear 386 15

Stock-basedcompensationexpense 1,317 371

Transferonexpirationofwarrants 613 –

Transferonexerciseofoptions (77) –

Balance,endofyear 2,239 386

NOTE 10 – FUTURE INCOME TAXES

ThefollowingincometaxassetsatDecember31,2010and2009arecomprisedofthetaxeffectoftemporarydifferencesasfollows:

2010 2009 (restated - note 4)

Differencesrelatedto:

Propertyandequipment 6,084 3,068

Non-capitallosses 4,830 5,422

Shareissueexpenses 1,359 692

Unrealizedforeignexchangelosses – 55

12,273 9,237

Valuationallowanceforfutureincometaxassets (12,273) (9,237)

Futureincometaxasset – –



TheCompanyhasnon-capitallossesof$19.3millionthatexpirebetween2026and2030.

Pursuant tothetermsofNWGemsaandKomOmboconcessionagreements, thecorporatetax liabilityof thejointventurepartnersispaidbytheEgyptianGeneralPetroleumCorporation(the“EGPC”)forNWGemsaandbyGanoubElWadiPetroleumHoldingCompany(“Ganope”)forKomOmbo,outoftheprofitoilattributabletotheEGPCandGanope,andnotbytheCompany.ForaccountingpurposesthecorporatetaxespaidbytheEGPCandGanopearetreatedasabenefitearnedbytheCompany;theamountisincludedinnetoilrevenuesanddeductedasanincometaxexpense.

IncometaxesvaryfromtheamountthatwouldbecomputedbyapplyingtheCanadianstatutoryincometaxrateof28.0%(2009–29.5%)toincomebeforetaxesasfollows:

2010 2009 (restated - note 4)

Lossbeforeincometaxes (2,977) (16,056)

Canadianstatutoryincometaxrate 28.0% 29.5%

Expectedincometaxes(recovery) (834) (4,737)

Adjustments:

Stockbasedcompensation 369 118

Changeinvaluationallowance,netofforeignexchange 2,017 4,061

Foreigntaxratedifferential 983 703

Expensesincurredwithnorecognizedtaxbenefit 1,492 –

Changeinincometaxratesandcertaintaxbalances (668) –

Other (184) (116)

Currentincometaxes 3,175 29

NOTE 11 – COMMITMENTS

Pursuant toconcessionagreements inEgypt, theCompany is required toperformcertainminimumexplorationactivitiesthatincludethedrillingofexplorationwells.Theseobligationshavenotbeenprovidedforinthefinancialstatements.

TheCompanyhasofficeleasecommitmentsinCalgary,ParisandCairo.Thefollowingaretheanticipatedpaymentsunderthecontracts:

FiSCAL YEAR CONCESSiON AgREEmENTS OFFiCE LEASES TOTAL

2011 1,000 420 1,420

2012 – 397 397

2013 – 357 357

2014 – 357 357

2015 – 357 357

SeaDragonmayberequiredtoprovideaLetterofGuarantee(“Letter”)notexceeding$4.5millionfortheKomOmboconcessionthatwillsecureitsshareoftheconcessionworkcommitment.TheLetterhasnotyetbeenissuedandhasnotbeenprovidedforinthefinancialstatements.

NO

TES


NOTE 12 – CONTINGENCY

OnApril16,2010,astatementofclaim(the“Claim”)wasfiledintheprovinceofAlbertaagainsttheCompanyinwhich theplaintiffsallege,amongother things, that theactionsof theCompanycontributed to theplaintiffsnotbeingrecognizedfora25%interest in theEWAConcessionAgreement.Theplaintiffsseekinjunctionsanddamagesof$32.0millionascompensation.OnFebruary3,2011,theAlbertaCourtofQueen’sBenchgrantedanapplicationbytheCompanytostaytheCourtproceedingsinrespectofthisClaim,onthegroundsthattheClaimissubjecttoanarbitrationagreementandanarbitrationtribunalhaspreviouslybeenappointedtoadjudicatethesamesubjectmatterastheClaim.ThearbitrationhasitselfbeenstayedsinceApril2009,duetothefailurebytheplaintiffstopayadepositrequiredbythearbitrationtribunalforthearbitrators’feesandexpenses.

TheCompanybelieves thisClaimtobewithoutmeritandwillvigorouslydefend itselfagainst theclaim.Asanassessmentof the likelihoodof loss is indeterminableat this time,noprovisionhasbeenmadein thefinancialstatementsforthisclaim.Anysuchlosswillberecognizedintheperioditbecomeslikelytooccur.

NOTE 13 – GEOGRAPHIC SEGMENTATION

TheCompanyhasacorporateofficeinCanadaandoperationsinEgypt.Setoutbelowissegmentedinformationonageographicbasis.

TwELvE mONTHS ENDED DECEmBER 31, 2010 TwELvE mONTHS ENDED DECEmBER 31, 2009

CANADA EgYPT TOTAL CANADA (restated)

EgYPT (restated)

TOTAL (restated)

Oilsales,netofroyalties – 12,529 12,529 – 180 180

Interestandotherincome 18 – 18 157 – 157

NetIncome/(Loss) (5,961) (191) (6,152) (4,707) (9,372) (14,080)

CapitalExpenditures (134) (56,499) (56,633) (183) (24,320) (24,503)

TotalAssets,endofyear 21,003 62,684 83,687 6,890 14,350 21,240

Sales toEGPCandGanopefor the twelvemonthsendedDecember31,2010account for70percentand30percentrespectively,oftotaloilsales,netofroyalties.ForthetwelvemonthsendedDecember31,2009,oilsaleswere100%toEGPC.

NOTE 14 – COMPARATIVE AMOUNTS

Certaincomparative informationhasbeen restated toconform to thepresentationof theDecember31,2010information.

NOTE 15 – RESTRICTED CASH

Restrictedcashconsistsofcashondepositthatsecurealetterofcredit,andaminimumcashbalancethatsecurescorporatecreditcards.

HEADER 1

56 Sea Dragon Energy Inc. | 2010 Annual Report

EXECUTIVE OFFICERS

Said Arrata P.Eng.

Chairman and Chief Executive Officer

Tony Anton P.Eng.

President and Chief Operating Officer

Olivier Serra

Chief Financial Officer

Mike Zayat

Senior Vice-President, Exploration

Ahmed Farid Moaaz

Country Manager and Director

STOCK EXCHANGE LISTING

TSX Venture Exchange

Symbol: SDX

REGISTRAR AND TRANSFER AGENT

Equity Financial Trust Company

200 University Avenue,

Suite 400

Toronto, ON

M5H 4H1 Canada

Telephone: +(416) 361-0152

Fax: +(416) 361-0470

INDEPENDENT ENGINEERS

Ryder Scott

Calgary, Alberta, Canada

Gaffney, Cline & Associates

Hampshire, United Kingdom

AUDITORS

PriceWaterhouseCoopers LLP

Calgary, Alberta, Canada

INVESTOR RELATIONS

Brisco Capital Partners Corp.

Suite 400, 505 - 8th Ave S.W.

Calgary, Alberta, T2P 1G2

Telephone: (403) 262-9888

Fax: (403) 263-1339

SEA DRAGON’S OFFICE LOCATIONS

CANADA

255 - 5th Avenue S.W.

Suite 2320

Calgary, Alberta

Canada T2P 3G6

Telephone: +(403) 457-5035

FAX: +(403) 457-5420

EGYPT

Apt #1,

Building #12, Al Nahda St.,

El-Maadi, Kornish El Nile

Cairo, Egypt

Telephone: +(20) 2 2358 2172

Fax: +(20) 2 2750 8534

FRANCE

17 square Edouard VII

75009 Paris, France

Tel: +331 5343 9442

Fax: +331 5343 9393EMAIL: [email protected]

www.seadragonenergy.com

CORPORATE INFORMATION

CO

RPORATE

INFO

RMATIO

N

aBBReViaTiOnS

bbls.........................................................barrels

bbls/d......................................... barrelsperday

mbbls........................................ thousandbarrels

mcf....................................... thousandcubicfeet

mcf/d........................ thousandcubicfeetperday

mmcf........................................millioncubicfeet

mmcf/d.........................millioncubicfeetperday

NGL....................................... naturalgasliquids

bcf.............................................billioncubicfeet

boe..............barrelsofoilequivalent(6mcf:1bbl)

boe/d..................barrelsofoilequivalentperday

mmboe................millionbarrelsofoilequivalent

Boes may be misleading, particularly if used in isolation. A boe conversion ration of 6:1 is based upon an energy equivalence conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

www.seadragonenergy.com

2011-04-20 Sea Dragon Annual Report

Documents

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