LYNDEN ENERGY CORP

LYNDEN ENERGY CORP.

Monetary aMounts in this annual report are in Canadian dollars unless otherwise noted.

01 Overview

02 Letter to Shareholders

04 Permian Basin: A West Texas Resurgence

07 Wolfberry Project

08 Mitchell Ranch Project

10 Paradox Basin Project

12 Management Discussion and Analysis

26 Auditors’ Report

27 Consolidated Financial Statements

31 Notes to Consolidated Financial Statements

45 Corporate Information

Capital Structure

Shares Outstanding: 94,237,187

Warrants: 52,660,986

Options: 6,830,833

Fully Diluted: 153,729,006

*As of February 25, 2011

Corporate Overview

Lynden Energy Corp. is an oil and natural gas company engaged in the acquisition, development, and exploration of oil and natural gas properties. Operations are focused on our Wolfberry and Mitchell Ranch projects in the Permian Basin, West Texas, and our Paradox Basin Project, Utah.

We are committed to the ongoing pursuit of high potential targets and are positioned for growth.

TSXV: LVL

1

Permian Basin Oil

Wolfberry Project

• ~15,000grossacres

• ~300,000acreAMI

•43.75%workinginterest

• 8wells

• Targeting150-200MBOEperwellgross

(deeper areas)

• Targeting100-125MBOEperwellgross

(shallower areas)

Permian Basin Oil

Mitchell Ranch Project


• ~300,000acreAMI

• 50%workinginterest

• Targeting100-125MBOE

per well gross

Southeast Utah Gas

Paradox Basin Project


• ~1,525,000acreAMI

• 25%to55%workinginterest

• 9wells

• 25.5milesofpipeline

• TargetingGothicand

Hovenweep Shales

Operations Summary

At a Glance

» Established land position with drilling inventory in the oil-rich Permian Basin (Wolfberry Project)

» The Wolfberry ranks amongst the most economic plays in North America

» Strong working interest partner in CrownRock

» Experienced local operator in CrownQuest Operating

» Strong track record of Wolfberry success

» Successful execution will provide stable productionbaseandcashflow

» MitchellRanchProjectprovidessignificant upside potential

» Committed management team and experienced board of directors

Content in this annual report dated February 25, 2011 unless otherwise stated.

2

I am pleased to report to you on our progress during Fiscal 2010 and to date, a period of significant activity and success forourcompany.

Ourfocushasalwaysbeenonresource-playopportunities.Technology continues to revolutionize the approach to oil and gas exploration and development and exciting new opportunitiescontinuetopresentthemselvesforforward-thinkingcompanies.

Our decision to refocus the company toward oil production in the Permian Basin with the entry into the Wolfberry Project in 2009 and the Mitchell Ranch Project in 2010 has proventimely.NowhereistheapplicationoftechnologicaladvancementsmoreevidentthaninthePermianBasin.West Texas is now experiencing levels of leasing activity not seen for decades as several new development concepts are being tested in the Permian Basin, historically one of the largestoilproducingregionsintheUnitedStates.

wolfberry projectwe participated in the drilling of our first five wolfberry wells in Fiscal 2010, allowing us to begin quantifying the potential of the project. in october, we published an initial resource calculated by our independent engineer, Cawley Gillespie. they estimated our net proved plus probable (p2) reserves at June 30, 2010 to be 8.25 million barrels of oil and 22.0 billion cubic feet of gas. the net present Value of future revenue, discounted at 10%,

before income tax, of the proved plus probable reserves as of June 30, 2010 was estimated to be us$64.0 million.

in addition to the benefits of increasing oil prices since that time, we see significant potential to expand our wolfberry project by upgrading the reserves through successful development drilling and by continuing to seek out opportunities to acquire additional acreage.

since June 2010, we have participated in the drilling and completion of three new wolfberry wells, bringing our total number of producing wolfberry wells to eight. the wolfberry project covers in excess of 15,000 gross acres on which a significant inventory of development locations has been established. we expect that 2011 will be our busiest year yet on the project as we anticipate drilling, on average, in excess of one well per month.

Mitchell ranch project the acquisition of our Mitchell ranch project in June 2010 was perhaps the most significant development of the year. the Mitchell ranch project provides us with the opportunity to acquire a 50% working interest in a 101,495 gross acres contiguous block covering much of the historical spade ranch. the project, located in the eastern shelf of the permian basin, lies immediately west of the Jameson oil field and about 10 miles south-east of the iatan oil field.

to date, we have drilled two test wells on the Mitchell ranch project as part of an initial evaluation of several pay zones, all of which are shallower than 8,000 feet in drilling depth. the planning

TOOURFELLOWSHAREHOLDERS:

LyndEn EnERGy | AnnUAL REPORT 2010 » LET TER TO SHAREHOLdERS

3

Colin watt, president and Ceolynden enerGy Corp.February 25, 2011

“We see significant potential to expand our Wolfberry Project by upgrading the reserves through successful development drilling and by continuing to seek out opportunities to acquire additional acreage.”

ColinWatt,PresidentandCEO

and design of additional wells is underway as we anticipate drilling several new wells this year.

in addition, the unique large acreage position provides us leverage to many of the new concepts now being pursued in the permian basin.

paradox basin projectour paradox basin project is a gas-focused project located in southeastern utah where we undertook significant drilling and development activities from 2006 to 2008. we continue to believe that the paradox basin has the potential to be an economically viable producing shale basin, however given capital constraints in 2010 and continued low gas prices we elected not to spend significant new capital on the project and have elected to not renew expiring leases.

we will continue to seek ways to leverage our substantial lease holdings, as well as our knowledge and experience, in this area. our interest in the paradox basin project also provides us excellent exposure to potential increases in gas prices in the future and to positive development activities by other operators in the region.

Financingthe expansion and growth of our company has required considerable new capital. in october / november 2010 we successfully raised $10.1 million in equity to continue with the accelerated development of our wolfberry project and our initial test work on the Mitchell ranch project.

Going forward we anticipate strengthening our financial position further by raising additional equity, as well as considering a conservative amount of debt for the development of the wolfberry project.

summaryall three of our projects are operated by CrownQuest operating llC of Midland, texas, and our collaboration with CrownQuest has been one of the keys to our success.

we believe that we have positioned ourselves for significant growth through our focus on our oil-weighted projects in west texas, and anticipate an exciting year as we drill and bring many new wells on to production. i look forward to updating you on our progress throughout the year.

on behalf of the board of directors, i would like to thank our shareholders for their confidence and continued support of lynden energy.

LyndEn EnERGy | AnnUAL REPORT 2010 » LET TER TO SHAREHOLdERS

4 TEXAS

A focus on oil-weighted projects in West Texas.

“Advancements in drilling and completion methodshave made it possible to achieve robust economic results.”

5

PERMIANBASINAWESTTExASRESURGENCE

TEXAS

CROWNQUEST CrownQuest operating llC, the operator of our wolfberry and Mitchell ranch projects, has extensive local knowledge and experience operating in west texas. based in Midland, texas, the primary oil services centre for the permian basin, CrownQuest has been an important partner in our ongoing success.

Overview located principally in western texas, the permian basin is one of the most prolific oil-producing basins in north america. the largest accumulation of oil and gas reserves in the permian basin is found in the spraberry trend, which cover large parts of six counties and has a total area of approximately 2,500 square miles. the spraberry trend is ranked third in the united states by total proved reserves and seventh in total production.

the wolfcamp, stratigraphically below the spraberry, is itself a significant producer in the permian basin. it is equally well-known for its low permeability in most areas in the basin.

recently, advancements in drilling and completion methods have made it possible to achieve robust economic results in areas that were previously uneconomic, resulting in a resurgence in industry activity in the basin.

6

Permian Basin

Midland Basin

EasternShelf

Central Basin

Ozona Arch

Permian Basin

Palo Duro Basin

Northwest Shelf

New Mexico

Texas

Delaware Basin

Diablo Platform

Texas

Mexico

0 100 ml

Permian Basin

West Texas has experienced aresurgenceinoil-focusedexploration and development activity as a result of new completion methods being appliedtounconventionalrockpackagesfromthePermianBasin, historically one of the most proflic oil basins in NorthAmerica.

Marathon-Ouachita Fold Belt

Matador Arch

Val Verde Basin

Central Basin

Eastern Shelf


Midland Basin

Wolfberry Project

Ozona Arch

7

SANANDRES–DOLOMITE

SANANDRES–BASINALLIMESTONE

WOLFCAMP–SHALE/LIMESTONE

PENNSyLvANIAN–SHALE/REEF

STRAWNLIMESTONE

ATOkA–SHALE

MISSISSIPPIAN–LIMESTONE

SPRABERRy–SANDSTONE

SHALE/LIMESTONE

the wolfberry play is a major low-permeability oil play in the Midland basin, with targets generally located between 7,000 and 11,5000 feet drilling depth.

the primary objectives of the play are oil (and gas) production from the spraberry and wolfcamp formations, which are permian in age and are informally grouped to form the “wolfberry” interval or zone. over time, the play has evolved to include additional zones below the wolfcamp. Completions, which can include 8 to 12 fracture stimulations, are anticipated over a 2,500 to 3,000 foot gross interval.

we currently have 8 producing wolfberry wells, three of which were tied into production in early 2011. all of the wells were completed in the ‘typical’ wolfberry formations (spraberry and wolfcamp) and many were also completed in the deeper strawn, atoka and Mississippian limestone and shale formations.

our wolfberry acreage is located in three general prospect areas where we now have a significant inventory of drill locations.

we expect to be drilling, on average, in excess of one new wolfberry well per month in 2011. the extensive oil and gas infrastructure in the Midland basin will allow for low cost and timely tie-in of these wells to production.

our wolfberry project is operated by CrownQuest operating llC (“CrownQuest”) of Midland, texas, one of the early adopters and innovators of the completion practices now being used throughout the Midland basin.

Wolfberry ProjectMulti-zone Production in the Midland Basin

wolfberry completions are generally undertaken in a 2,500 to 3,000 foot gross interval located between 7,000 to 11,500 feet drilling depth typically.

Wolfberry ProjectWest TexasMidlandBasin–TypicalStratigraphicSection

Prospect Name

West MartinWind Farms

Tubb

County

MartinGlasscock

Howard

Gross Acres

5,2863,3506,857

Net Acres

4,8992,3736,409

Lynden’s Net Interest

43.75%43.75%43.75%

8

the Mitchell ranch project, situated in the eastern shelf of the permian basin, provides us with an option to acquire a 50% working interest in oil and gas leases covering 101,495 gross and net acres in Coke, Mitchell, and sterling counties of west texas.

all of the acreage is contained within a historical ranch that lies to the immediate west of the Jameson oil field and is approximately 10 miles south-east of the iatan oil field. our work began on the Mitchell ranch project in June, 2010 and we believe the opportunity to acquire an interest in such a large and contiguous land package in the permian basin is unique.

the project is focused on a thick package of permo-pennsylvanian-aged detrital targets where there are numerous opportunities across several pay zones, all of which are shallower than 8,000 feet drilling depth. there are also additional targets of interest above and below this thick interval.

significant industry activity in the region is resulting in many new concepts, such as horizontal drilling or commingling of previously uneconomic zones, currently being tested in the eastern shelf, and throughout the permian basin, that may have direct applicability to the Mitchell ranch project.

to date, the Company has drilled two wells on the Mitchell ranch project, which are currently testing. preliminary plans are underway for the drilling of several additional Mitchell ranch project wells in 2011.

Mitchell Ranch ProjectMulti-zone Potential in the Eastern Shelf

Permian Basin

Mitchell Ranch Project West TexasEasternShelf-TypicalStratigraphicSection

Eastern Shelf


Midland Basin

Wolfberry Project

numerous opportunities across several pay zones, all of which are shallower than 8,000 feet in drilling depth.

CLEARFORkSHELF

WOLFCAMP/WICHITAALBANy

WOLFCAMP–SAND/SHALE

PENNSyLvANIAN/MISSISSIPPIAN

A unique opportunity to acquire an interest in over 100,000 acres.

Experience: oil on the pits. drill cuttings and fluids are charted in detail through the drilling process to guide stimulation programs.

Science: extensive technical work-ups define unique opportunities in each well.

ScienceandExperience

Mitchell

nolan

SterlingCoke

the Mitchell ranch project covers much of the historical spade ranch.

10 UTAH

The Paradox BasinProject, Utah

THEPARADOxBASINPROJECT

the paradox basin, located primarily in southeast utah and southwest Colorado, is a significant petroleum and natural gas-producing basin in the continental united states. well-known large fields in the paradox basin include, among others, the Greater aneth, andy’s Mesa and lisbon.

the majority of historical exploration and production from the basin has involved oil production from algal mounds. new exploration models, based primarily on the commingling of multiple, previously bypassed, gas zones were applied to the basin on a larger scale beginning in 2004. More recently, exploitation of gas bearing zones through horizontal wells has been tested.

our paradox basin project includes two contiguous oil and gas prospect areas totaling 1,525,000 acres. the 900,000 acre northern prospect area includes leases covering in excess of 65,000 acres, where we have a 55% before payout working interest (41.25% after payout working interest) in an 80% net revenue interest. the contiguous 625,000 acre southern prospect area includes leases covering in excess of 20,000 acres, where we have a 25% before payout working interest (23.75% after payout working interest) in an 85% to 87% net revenue interest.

From 2006 to 2008, through numerous re-entry and new wells, we have tested the potential of both the Gothic and hovenweep shales and demonstrated the presence of producible shale gas from these zones. the shallow (5,500 to 6,500 feet) Gothic and hovenweep shales are believed to be widespread and present throughout much of our over 85,000 gross acre position. the widespread and shallow nature of these zones suggests the potential for a regionally extensive shale gas resource play where significant economies of scale can be realized.

the Gothic and hovenweep shales have the potential to be exploited either through horizontal wells or through the commingling of shale gas with other uphole conventional paradox Formation reservoirs in vertical wells.

after considering natural gas prices and the level of expenditures required for our west texas projects, we have elected to defer additional capital expenditures on the paradox basin project in the near term. the majority of our original lease position remains intact, and we continue to actively monitor developments in the region in order to enhance the value of the project.

PARADOxBASIN–UTAH TWODISTINCTSHALERESOURCEPLAySANDMULTIPLE CONvENTIONALOPPORTUNITIES

11

The Paradox Basin Project includes leases covering in excess of 85,000 acres.

LyndEn EnERGy | AnnUAL REPORT 2010 » MAnAGEMEnT diSCUSSiOn And AnALySiS12

the following discussion and analysis of the consolidated results of operations and financial condition (“MD&A”) for lynden energy Corp. (the “Company”) should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2010 and related notes thereto. the financial information in this Md&a is derived from the Company’s audited consolidated financial statements prepared in accordance with Canadian generally accepted accounting principles. references in this Md&a to the Company include its subsidiaries. the effective date of this Md&a is october 27, 2010.

For the purposes of this Md&a, the following terms are defined as follows:

Q1/2010 three months ended september 30, 2009Q2/2010 three months ended december 31, 2009Q3/2010 three months ended March 31, 2010Q4/2010 three months ended June 30, 2010

Q1/2009 three months ended september 30, 2008Q2/2009 three months ended december 31, 2008Q3/2009 three months ended March 31, 2009Q4/2009 three months ended June 30, 2009

Current Period year ended June 30, 2010Prior Period year ended June 30, 2009

this Md&a may contain forward looking statements based on assumptions and judgments of management regarding events or results that may prove to be inaccurate as a result of risk factors beyond its control. actual results may differ materially from the expected results.

all monetary transactions are expressed in Canadian dollars unless otherwise stated.

DESCRIPTIONOFBUSINESSthe Company is in the business of acquiring, exploring and developing petroleum and natural gas (“P&NG”) rights and properties. the Company has various working interests in the wolfberry project and Mitchell ranch project, located in the permian basin in west texas,

usa and in the paradox basin project, located in the state of utah, usa. there are no other operating segments.

the Company is a reporting issuer in british Columbia, ontario and alberta and its shares are listed on the tsX Venture exchange under the symbol lVl.

the Company’s general and administrative expenditures are related to the level of financing and exploration and development activities that are being conducted, which may in turn depend on the Company’s recent exploration and development activities and prospects, as well as general market conditions relating to the availability of funding for early stage exploration and development natural resource companies. thus, there may not be predictable or observable trends in the Company’s business activities and comparisons of financial operating results with prior years may not be meaningful.

RISkSANDUNCERTAINTIESthe Company’s principal activity of p&nG exploration and development is considered to be inherently risky. Companies in this industry are subject to many and varied kinds of risks, including but not limited to, environmental, commodity price, political and economic, with some of the most significant risks being:

1. substantial expenditures are required to explore for p&nG reserves and there is no assurance that the Company will discover economic reserves;

2. the junior resource market, where the Company raises funds, is extremely volatile and there is no guarantee that the Company will be able to raise funds as it requires them;

3. Future operations will be subject to all of the risks normally incident to the operation and development of p&nG properties and the drilling of p&nG wells, which could result in personal injuries, loss of life and damage to property of the Company and others. the marketability and price of p&nG that may be acquired or discovered by the Company will be affected by numerous factors beyond the control of the Company. the Company will be

Management discussion and AnalysisFOR THE yEAR EndEd JUnE 30, 2010

LyndEn EnERGy | AnnUAL REPORT 2010 » MAnAGEMEnT diSCUSSiOn And AnALySiS LyndEn EnERGy | AnnUAL REPORT 2010 » MAnAGEMEnT diSCUSSiOn And AnALySiS 13

subject to market fluctuations in the prices of p&nG, deliverability uncertainties relating to the proximity of its reserves to pipelines and processing facilities and extensive government regulations. the p&nG industry is intensely competitive and the Company must compete in all aspects of their operations with a number of other entities that may have greater technical ability and/or financial resources. title to p&nG interests is often not capable of conclusive determination, without incurring substantial expense; and

4. the Company is subject to the laws and regulations relating to environmental matters, including provisions relating to reclamation, discharge of hazardous material and other matters. the Company’s exploration and development activities are conducted by partners and/or operators who are in compliance with applicable environmental protection legislation. the Company is not aware of any existing environmental problems related to its properties that may cause material liability to the Company.

For a more detailed description of these risks, and others, see http://www.lyndenenergy.com/riskfactors.html.

BOECONvERSIONSbarrel of oil equivalent (“boe”) amounts have been calculated using a conversion ratio of six thousand cubic feet of natural gas to one barrel of oil (6:1) to express quantities of natural gas and crude oil in a common unit. the term “boe” may be misleading, particularly if used in isolation. the conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

P&NGPROJECTS

wolfberry project, west texason september 28, 2009, the Company reported that its subsidiary, lynden usa inc., had entered into a participation agreement to acquire interests ranging from 21.88% to 43.75% in p&nG leases in Glasscock, howard, Martin, Midland and sterling counties in west texas, usa.

the leases are contained within five prospect areas around which five areas of mutual interest (“aMi”) have been established. Collectively the aMis cover in excess of 300,000 acres.

the Company will receive 43.75% of the vendor’s interest in the leases relating to wells drilled after the date of the participation agreement on the vendor’s existing acreage and within the areas of mutual interest, by paying 50% of the drilling and completion costs attributable to the vendor’s interest. the Company will also pay for

the first us$2,000,000 spent in connection with any new leases or extensions of existing leases on lands located within the aMis, of which the Company will spend at least us$666,667 each year for the first three years.

west texas has experienced a resurgence in oil-focused exploration and development activity as a result of new completion methods being applied to an unconventional rock package from the permian basin, historically one of the most prolific oil basins in north america. the primary objectives target oil (and gas) production from the spraberry and wolfcamp formations, which are permian in age and are informally grouped to form the “wolfberry” interval or zone. Completions are anticipated over a 2,500 to 3,000 foot gross interval, generally located between 7,000 and 10,500 feet, drilling depth. in addition to this main objective, other conventional and unconventional productive zones occur both above and below the wolfberry assemblage.

CrownQuest operating llC (“CrownQuest”), the operator of the prospects, is based in Midland, texas and has extensive knowledge and experience in operating in the permian basin. the operator has drilled or participated in over 80 new wells where new completion techniques have been successfully applied in areas adjacent, or in proximity, to the aMis established under the participation agreement.

since entering into the participation agreement, the Company has participated in the drilling, completion, and tie-in of five wolfberry wells. the Company has a 43.75% working interest in four wells and a 33.85% working interest in one well. the Company continues to acquire additional acreage in its wolfberry project, which now covers approximately 18,000 gross (15,500 net) acres.

during the Current period, the Company incurred $5,656,751 of direct expenditures on the wolfberry project.

Cawley, Gillespie & associates, the Company’s independent petroleum engineer, estimates the Company’s net proved plus probable (p2) reserves at June 30, 2010 to be 8.25 million barrels of oil and 22.0 billion cubic feet of gas. of this amount, proved reserves were 1.28 million barrels of oil and 3.70 billion cubic feet of gas. the net present Value (10%) of future revenue, before income tax, of the proved plus probable reserves as of June 30, 2010 is estimated by Cawley, Gillespie & associates to be us$64.0 million. the Company has recently authorized and returned to the wolfberry project operator aFe’s for 6 new wolfberry wells, of which 5 are currently scheduled to be spudded before december 31, 2010.


Capital plans for the wolfberry project in calendar 2011 have not yet been finalized; however, the Company expects to maintain an aggressive pace in developing its wolfberry project.

Mitchell ranch project, west texason June 1, 2010, the Company entered into a participation agreement to acquire a 50% interest in an option to acquire oil and gas leases in Coke, Mitchell, and sterling counties of west texas. all acreage is contained within a historical ranch, whose lands were recently optioned by Crownrock lp (“Crownrock”), lynden’s partner in the wolfberry and paradox basin projects. the ranch lies to the immediate west of the Jameson oil field and is approximately 10 miles south-east of the iatan oil field. the project is focused on permo-pennsylvanian-aged detrital targets along the eastern shelf of the permian basin where there are numerous opportunities across several pay zones, all of which are shallower than 8,000 feet in drilling depth.

spade ranch 17 #1, the first Mitchell ranch project well, was completed in late July and a first phase of completions on the spade 14 #1, the second Mitchell ranch project well, was carried out in late august. both wells are currently flowing back. the spade 14 #1 is on the eastern side of the property, approximately 4 miles north-west of the Jameson field, and 14 miles east of the spade 17 #1.

during the Current period, the Company incurred $2,264,327 of direct expenditures on the Mitchell ranch project.

three Mitchell ranch project wells are expected to be spudded in the first half of calendar 2011.

paradox basin project, utah the paradox basin project includes two contiguous p&nG prospect areas totaling 1,525,000 acres. the 900,000 acre northern prospect area includes leases covering approximately 95,000 acres. the Company has a 55% before payout working interest (41.25% after payout working interest) in an 80% net revenue interest in the northern prospect area. the 625,000 acre southern prospect area includes leases covering approximately 10,000 acres. the Company has a 25% before payout working interest (23.75% after payout working interest) in an 85% to 87% net revenue interest in the southern prospect area.

the operator, CrownQuest, is targeting gas production from dark, organic shales (Gothic and hovenweep), as well as multiple conventional zones of the paradox Formation. the operator’s exploitation program to date has been based on commingling production from multiple zones, a practice successfully pursued by other operators in the basin.

the paradox basin, located primarily in southeast utah and southwest Colorado, is a significant p&nG producing basin in the continental united states. well-known large fields in the paradox basin include, among others, the Greater aneth, andy’s Mesa and lisbon. the majority of historical exploration and production from the basin has involved oil production from algal mounds. new exploration models, based primarily on the commingling of multiple, previously bypassed, gas zones were applied to the basin on a larger scale beginning in 2004. More recently, exploitation of gas bearing shale zones through horizontal wells has begun.

the Company’s interest in the paradox basin project is held through its wholly owned subsidiary, lynden usa, inc. the Company’s interest in the gas gathering system, including approximately 25 miles of pipeline, is held though its 47.99% interest in abajo Gas transmission Company, llC (“abajo”). through its interest in abajo, the Company is entitled to an effective 55% interest in the northern prospect area gathering system and a 25% effective interest in the southern prospect area gathering system.

in the northern prospect area there are five wells that are tied into sales as part of the evaluation of the productive potential of the northern prospect area. in the southern prospect area there are four wells that have been tied into sales as part of the evaluation of the productive potential of the southern prospect area.

during the Current period, the Company received $367,774 (prior period - $1,115,666) in p&nG sales, incurred royalties of $65,136 (prior period - $209,898), incurred transportation and marketing costs of $32,212 (prior period - $85,984), and incurred production taxes of $19,196 (prior period - $15,224). the transportation and marketing costs were paid to abajo at market rates. the majority of the p&nG sales were from the sale of natural gas.

based on an interpretation of the information available as at the date of the preparation of the financial statements for the Current period, management has determined that the paradox basin project is still in the pre-production stage. accordingly, the $251,230 (prior period - $804,560) of net p&nG revenues (revenues less royalties, transportation and marketing costs, and production taxes) received during the Current period were credited to property and equipment.

during the Current period, the Company incurred $330,481 of direct expenditures on the paradox basin project, of which $269,078 was spent in the northern prospect area and $61,403 was spent in the southern prospect area.


as a result of the dramatic decrease in the price of natural gas, during Q1/2010 the operator adopted a production program of periodically shutting-in and then producing many of the paradox basin project wells with the objective of reducing overall operating costs. several of the wells were shut-in during the winter of 2010 due to poor access conditions. these wells were turned on in late May / early June. subject to weather conditions, in general, the wells are shut-in for one week and then produced for a week, resulting in a decrease in the amount of natural gas produced and consequently in gross sales, which are directly related to the price of natural gas and the amount produced. this production program results in a decrease in the amount of labour required and in the amount of water produced per mcf, both significant operating costs.

the next stage of work on the paradox basin project has not yet been determined, however, based on encouraging results reported by bill barrett Corporation, a senior rocky Mountain producer operating nearby, it is anticipated that the next step in the evaluation of the Gothic and hovenweep shales, which are interpreted to be regionally extensive, is to test their productive potential in horizontal wells. the cost of this next stage of work on the shales has not been established; however, the operator, the Company and the other working interest partners are exploring the potential of seeking additional financial and / or technical partners to most effectively advance this opportunity.

RESULTSOFOPERATIONSthe Company reported a loss of $4,504,327 (prior period - $1,198,691) and a loss per share of $0.07 (prior period - $0.02) for the Current period.the increase in loss is primarily due to $3,374,638 of impairment of property (due to lease expiry) and equipment, stock-based compensation of $406,778, and a $644,586 equity loss on investment.

p&nG salesthe Company reported p&nG sales of $1,323,396 (prior period - $nil) for the Current period all from its wolfberry project wells. sales from the Company’s paradox basin project, which is in the pre-production phase, are not included in these figures (see paradox basin project discussion above). in conjunction with the sales, the Company reported royalties paid of $283,797 (prior period - $nil) and paid production and operating expenses of $118,693 (prior period - $nil) for the Current period. the Company also recognized $249,690 (prior period - $nil) of depletion for the Current period.

Net Revenuesthree months ended

June30,2010three months ended

June30,2009year ended


June30,2009

petroleum revenues $ 678,606 $ - $ 1,083,861 $ -

natural gas revenues $ 137,587 $ - $ 239,535 $ -

$ 816,193 $ - $ 1,323,396 $ -

royalty expenses $ (176,131) $ - $ (283,797) $ -

production & operating expenses $ (77,294) $ - $ (118,693) $ -

$ 562,768 $ - $ 920,906 $ -


General and administrativedifferences in general and administrative expenses during the Current period compared to the prior period included:

• InJanuary2009,theCompanymovedintonewofficepremiseswhere it started paying rent of $1,000 per month on a month-by-month basis.

• TheCompanyusesthefairvaluebasedmethodofaccounting for all stock-based awards. the Company recorded $406,778 (prior period - $nil) of non-cash compensation cost as a result of the grant, and partial vesting of 2,610,000 stock options (prior period – nil).

• TheCompanyincurredtravelcostsof$49,056(Priorperiod - $27,851) during the Current period principally due to management travelling to texas to investigate the wolfberry and Mitchell ranch projects and meet with the operator of the projects.

other items• the Company has earned interest income as a result of investing

cash on hand in guaranteed investment certificates and from cash deposits. the Company earned $16,059 (prior period - $169,274) of interest during the Current period. the Company reported less interest income because it had less cash on hand during the Current period and interest rates were lower.

• as at June 30, 2010, the Company has a 47.99% interest in abajo. the Company accounts for this investment using the equity method. the Company’s share of abajo’s loss was $644,586 (prior period - $438,623) for the Current period.

Production volumes and pricingthree months ended

June30,2010three months ended



June30,2009

Total volumes

petroleum production (bbl) 8,444 - 13,352 -

natural gas production (mcf) 18,324 - 30,315 -

Daily production averages

petroleum (bblpd) 93 - 74 -

natural gas (mcfpd) 201 - 167 -

Average prices

petroleum selling price ($/bbl) $ 80 $ - $ 81 $ -

natural gas selling price ($/mcf) $ 7.51 $ - $ 7.90 $ -

• Administrativefeesincreasedby$12,500intheCurrentperiod. the fees comprise accounting, secretarial and general administrative services.

• Ofthe$329,062(PriorPeriod-$423,902)inconsultingfeesincurred in the Current period, $261,846 (prior period - $384,513) was paid to the Chairman of the board of directors. the Chairman is currently paid usd $15,000 per month. Consulting fees in the Current period and prior period included a bonus in the amount of usd$70,000 paid to the Chairman.

• Foreigncurrencytranslationrelatestotheimpactoffluctuationsin the Canadian/us dollar exchange rates on usd denominated purchases as well as cash held in usd. exchange rates were less volatile during the Current period resulting in a foreign currency loss of $36,394. For the prior period, the majority of the $61,193 foreign currency loss relates to losses incurred on usd denominated purchases during a period where the us dollar was increasing in value against the Canadian dollar.

• Officeandmiscellaneousfeeshaveincreasedby$14,495inthe Current period. the Company has incurred higher printing costs related to promotional material and higher telephone and communications costs.

• Professionalfeesincludeauditandaccountingof$62,010(Priorperiod - $77,533) and legal of $30,033 (prior period - $14,933).


• the Company wrote off $3,374,638 (prior period - $nil) of deferred p&nG property interests during the Current period to reflect expired paradox basin project leases.

Fourth Quarter operationsduring Q4/2010, the Company incurred a loss of $3,404,172 (Q4/2009 - $331,971). larger income and expenses incurred and significant discrepancies between Q4/2010 and Q4/2009 are as follows:

• the Company reported $816,193 (Q4/2009 - $nil) of petroleum and natural gas sales during Q4/2010 from its proven and producing wolfberry wells.

• the Company reported $126,668 (Q4/2009 - $nil) of non-cash compensation cost as a result of the grant, and partial vesting, of 2,610,000 stock options (Q4/2009 – nil).

• the Company wrote off $2,818,227 (Q4/2009 - $nil) of deferred p&nG property interests during Q4/2010 to reflect expired paradox basin project leases.

• the Company’s share of abajo’s loss was $295,955 (Q4/2009 - $120,836) during Q4/2010. the Company has a 47.99% interest in abajo and accounts for this investment using the equity method.

FINANCIALCONDITION,LIQUIDITyANDCAPITALRESOURCESas at June 30, 2010, the Company had working capital of $1,422,984 compared to working capital of $4,744,001 as at June 30, 2009, a decrease in working capital of $3,321,017.

Major sources of cash during the Current period were 1) interest income of $16,059; 2) the receipt of p&nG sales of $1,172,136 net of royalties and production and operating costs; and 3) $4,461,767 of net proceeds from the completion of a private placement.

Major uses of cash during the Current period were 1) $7,880,156 of exploration, development and land acquisition costs; and 2) approximately $760,000 of operating costs.

the Company has recently authorized and returned to the wolfberry project operator aFe’s for 6 new wolfberry wells, of which 5 are currently scheduled to be spudded before december 31, 2010. Capital plans for the wolfberry project in calendar 2011 have not yet been finalized; however, the Company expects to maintain an aggressive pace in developing its wolfberry project.

three Mitchell ranch project wells are expected to be spudded in the first half of calendar 2011. the next phase of work on the paradox basin project has not been determined at this time (see discussion of paradox basin project above).

Given the pace of expenditures in prior years, the Company will need to seek additional funding in Fiscal 2011 to fund capital expenditures on its projects and to fund general and administrative expenses.

on october 27, 2010 the Company raised gross proceeds of $7,107,000 in an initial closing of a non-brokered private placement of up to $10,000,000. the funds were raised through the issuance of 14,214,000 units at a price of $0.50 per unit. each unit is comprised of one common share and one common share purchase warrant. each share purchase warrant will entitle the holder to purchase one additional common share at a price of $0.70 until october 27, 2013.

FINANCIALINSTRUMENTSas at June 30, 2010, the Company’s financial instruments are cash, receivables, and accounts payable and accrued liabilities. the fair value of cash is measured using level 1 of the fair value hierarchy. the amounts reflected in the balance sheet for receivables and accounts payable and accrued liabilities approximate their fair values due to the short-term nature and negligible credit losses. investment is stated at its fair value based on the Company’s equity interest.

these financial instruments are classified as follows:

• Cash – held-for-trading• receivables – loans and receivables• accounts payable and accrued liabilities – other financial liability

the Company considers its exposure to interest rate risk and credit risk is small. the Company is exposed to financial risk arising from fluctuations in foreign exchange rates and the degree of volatility of those rates. the Company does not use derivative instruments to reduce its exposure to foreign currency risks.

the Company has not hedged any of its p&nG sales.

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. the Company’s cash and receivables are exposed to credit risk. the credit risk on cash is small because the counterparties are highly rated banks. the majority of the Company’s receivables are with customers in the petroleum and natural gas industry and are subject to normal industry credit risks. the Company generally extends unsecured credit to these customers and therefore the collection of accounts receivable


may be affected by changes in economic or other conditions. the Company believes the risk is mitigated by the size and reputation of the companies to which they extend credit. the Company has not experienced any material credit loss in the collection of accounts receivable to date.

the aging of receivables are as follows:

2010 2009

Amounts receivable

0 to 60 days $ 342,994 $ 73,566

61 to 120 days $ 34,505 $ 18,897

>120 days $ - $ -

$ 377,499 $ 92,463

liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. the Company’s accounts payable and accrued liabilities are all current and due within 90 days of the balance sheet date. the Company ensures that it has sufficient capital to meet short term financial obligations after taking into account its exploration obligations and cash on hand.

Market risk is the risk of loss that may arise from changes in market factors such as interest rates, foreign exchange rates and commodity and equity prices.

i) interest rate riskinterest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. the Company’s cash is exposed to interest rate risk as the Company invests cash at floating rates of interest in highly liquid instruments. Fluctuations in interest rates impact interest income. as at June 30, 2010, if interest rates had been 0.25% lower, loss and comprehensive loss would have been $10,560 higher and conversely if interest rates had been 0.25% higher, loss and comprehensive loss would have been $10,560 lower.

ii) Currency risk Currency risk is the risk that fair value or future cash flows of a

financial instrument will fluctuate because of changes in foreign exchange rates. the Company is exposed to currency risk from its usa based p&nG projects where the costs incurred and revenues earned are in us dollars while the Company finances its operations in Canadian dollars. the Company does not use derivative instruments or hedges to manage currency risks.

as at June 30, 2010, cash includes $372,655 (us$350,042) of us denominated cash. as at June 30, 2010, if the Canadian dollar strengthened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $33,878 higher. Conversely, if the Canadian dollar weakened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $37,265 lower.

as at June 30, 2010, receivables include $374,891 (us$352,142) of us denominated receivables. as at June 30, 2010, if the Canadian dollar strengthened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $34,081 higher. Conversely, if the Canadian dollar weakened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $37,489 lower.

as at June 30, 2010, accounts payable and accrued liabilities include $646,021 (us$606,820) of us denominated payables. as at June 30, 2010, if the Canadian dollar strengthened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $58,729 lower. Conversely, if the Canadian dollar weakened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $64,602 higher.


SELECTEDANNUALINFORMATIONthe following selected financial data has been prepared in accordance with Canadian generally accepted accounting principles and should be read in conjunction with the Company’s audited financial statements. all dollar amounts are in Canadian dollars.

ii) price risk the Company’s p&nG production is marketed and sold on the

spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs. the Company’s cash flow from product sales will therefore be impacted by fluctuations in commodity prices. the Company does not use derivative financial instruments to manage this risk.

OFF-BALANCESHEETARRANGEMENTSthe Company has not engaged in any off-balance sheet arrangements such as obligations under guarantee contracts, a retained or contingent interest in assets transferred to an unconsolidated entity, any obligation under derivative instruments or any obligation under a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company or engages in leasing or hedging services with the Company.

FortheyearsEndedJune30 2010 2009 2008

Financial Results

p&nG revenues $ 1,323,396 $ - $ -

loss $ (4,504,327) $ (1,198,691) $ (3,052,556)

basic and diluted loss per common share $ (0.07) $ (0.02) $ (0.06)

Financial Position

working capital $ 1,422,984 $ 4,744,001 $ 8,297,561

total assets $ 37,923,318 $ 37,111,030 $ 38,725,603

shareholders’ equity $ 37,133,097 $ 36,758,879 $ 37,961,920

the Company reported p&nG revenues for the first time in 2010. these revenues were earned from its wolfberry project wells.

the most significant component of the losses reported for 2010 was the write-off of $3,374,638 of deferred p&nG property interests to reflect expired paradox basin project leases. the most significant component of the losses reported for 2009 were consulting fees of $423,902 and equity loss on investment in abajo of $438,623. the most significant components of the losses reported for 2008 were stock-based compensation of $2,327,727 and the write-off of its bittern lake property of $428,129.

the Company has incurred approximately $800,000, $800,000 and $500,000 in general and administrative expenditures in 2010, 2009 and 2008 respectively.

the Company’s working capital has decreased steadily over the past three fiscal years as the Company completed one equity financing in 2010 and 2009 totaling $4,500,000 while investing $10,547,122 in property and equipment in 2010 and 2009.


FiscalQuarterEnded P&NGSales Interest Income LossBasic & Diluted

Earnings/(Loss)/Share

June 30, 2010 $ 816,193 $ 2,166 $ (3,088,630) $ (0.05)

March 31, 2010 $ 507,203 $ 3,374 $ (656,984) $ (0.01)

december 31, 2009 $ - $ 4,733 $ (536,123) $ (0.01)

september 30, 2009 $ - $ 5,786 $ (222,590) $ -

June 30, 2009 $ - $ 30,895 $ (331,971) $ -

March 31, 2009 $ - $ 35,573 $ (261,126) $ -

december 31, 2008 $ - $ 44,262 $ (511,804) $ (0.01)

september 30, 2008 $ - $ 58,544 $ (93,790) $ -

SUMMARyOFQUARTERLyINFORMATIONthe following selected financial data has been prepared in accordance with Canadian generally accepted accounting principles and should be read in conjunction with the Company’s audited financial statements. all dollar amounts are in Canadian dollars.

the quarterly earnings/losses vary considerably mainly due to foreign currency fluctuations, granting of stock options and write-down of p&nG property interests and p&nG sales. the Company’s general and administrative expenditures generally fluctuate with the level of activity on its projects and/or financing activities that are being undertaken. the Company reported revenues from its wolfberry project during the March 31/10 and June 30/10 quarters. the Company wrote-off $556,411 and $2,818,227 of deferred p&nG costs due to expired leases during the March 31/10 and June 30/10 quarters respectively. the majority of the loss for the december 31/09 quarter relates to stock-based compensation of $250,953 pursuant to the granting of stock options and equity loss on investment of $117,381. the amount of interest has decreased over the last eight quarters as the Company expended funds on its p&nG projects and general and administrative expenditures and as a result of decreasing interest rates.

RELATEDPARTyTRANSACTIONS

during the Current period, administrative fees of $131,500 (prior period - $119,000) were paid or accrued to a company owned by Mr. Colin watt, the Company’s president, Ceo and a director. Mr. watt’s company provides the services of several employees that provide accounting, secretarial and administrative services to the Company.

during the Current period, legal fees of $23,963 (prior period - $14,318) were paid or accrued to a legal firm in which Mr. ron paton, a director of the Company, is an associate counsel. of this amount, $16,948 (prior period - $14,318) was charged to legal fees and $7,015 (prior period - $nil) was charged to share capital as share issuance costs.

during the Current period, consulting fees of $25,162 (prior period - $7,364) were paid or accrued to a company owned by Mr. bob bereskin, a director of the Company. of this amount, $4,281 (prior period – $4,390) was charged to consulting fees and $20,880 (prior period - $2,974) was charged to property and equipment as consulting fees.

during the Current period, consulting fees of $2,935 (prior period - $nil) were paid or accrued to a company owned by Mr. John Mclennan, a director of the Company. this amount was charged to consulting fees.

during the Current period, consulting fees of $261,846 (prior period - $384,513) were paid or accrued to Mr. richard andrews, a director and Chairman

of the board of directors of the Company.


OUTSTANDINGSHAREDATA

as at october 27, 2010, the Company had the following securities issued and outstanding:

Number ExercisePrice ExpiryDate

Common shares 87,493,094 n/a n/a

warrants 354,000 $0.30 February 10, 2011

warrants 6,237,500 $1.25 July 9, 2011

warrants1 3,260,976 $1.25 July 12, 2011

warrants 2,048,700 $1.50 september 21, 2011

warrants 224,050 $1.50 october 12, 2011

warrants 9,350,000 $0.50 February 10, 2012

warrants 6,004,000 $0.50 February 16, 2012

warrants 2,500,000 $1.25 april 15, 2012

warrants 2,775,000 $2.00 June 11, 2012

warrants 14,214,000 $0.70 october 27, 2013

stock options 1,532,500 $1.00 June 5, 2012

stock options 790,000 $1.30 June 22, 2012

stock options 640,000 $1.30 october 14, 2012

stock options 865,000 $1.40 april 27, 2013

stock options 200,000 $0.70 July 20, 2013

stock options 1,076,666 $0.30 october 7, 2014

stock options 1,500,000 $0.55 March 16, 2015

stock options 260,000 $0.60 July 20, 2015

Fully Diluted 141,325,486

CHANGESINACCOUNTINGPOLICIESeffective July 1, 2009, the Company adopted new accounting policies from the Canadian institute of Chartered accountants handbook (“hb”):

CiCa handbook section 3855 – “Financial instruments – recognition and Measurement.” this section was amended by the CiCa in august 2009 to align this section more closely with iFrs. the application of this amendment is to annual financial statements with fiscal years beginning on or after november 1, 2008.

1 if the daily trading price of the Company’s common shares is at least $2.50 on 20 consecutive days, the warrants will be deemed to be exercised on the 20th day, subject to receipt of required regulatory approvals, if any.


Changes include:• reclassification of financial assets out of assets held for trading

and assets held for sale categories into loans and receivables category is permitted under certain circumstances;

• the definition of the loans and receivables category has been updated so that debt securities that are not quoted in an active market are permitted to be classified in the loans and receivables category. impairment of loans and receivables is calculated using the incurred credit loss model of section 3025 –“impaired loans.” loans and receivables that an entity plans to sell in the near term must be classified as held for trading, and loans or receivables for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, must be classified as available for sale; and

• impairment losses relating to an available for sale debt instrument must be reversed if the fair value of the instrument increases due to an event occurring after the loss was recognized.

the application of these amendments did not have a material impact on the Company.

CiCa handbook section 3862 – “Financial instruments – disclosures.” this section was amended by the CiCa in June 2009 to enhance disclosures about fair value measurements and liquidity risk of financial instruments. the amendment is to be applied to annual financial statements with fiscal years ending after september 30, 2009. the purpose of this amendment is to provide further convergence with iFrs. Financial instruments recognized at fair value on the consolidated balance sheet must be classified in fair value hierarchy levels as follows:

• level 1 – valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;

• level 2 – valuation techniques based on inputs that are other than quoted prices included in level 1 that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices); and

• level 3 – valuation techniques with unobservable market inputs (involves assumptions and estimates by management of how market participants would price the assets or liabilities).

the application of this amendment did not have an impact on the Company’s disclosure since fair value of all instruments classified as held for trading approximates carrying value due to the immediate or short-term maturity of these financial instruments.

recent accounting pronouncements:in January 2009, the CiCa issued section 1582 “business Combinations”, section 1601 “Consolidated Financial statements” and section 1602 “non-controlling interests” which replace section 1581 “business Combinations” and section 1600 “Consolidated Financial statements”. section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under international Financial reporting standards (“iFrs”). section 1601 together with section 1602 establishes standards for the preparation of consolidated financial statements. these sections are applicable for the Company’s interim and annual consolidated financial statements for its fiscal year beginning on or after January 1, 2011. early adoption of these sections is permitted and all three sections must be adopted concurrently.

INTERNATIONALFINANCIALREPORTINGSTANDARDS

in 2008, Canadian accounting standards board announced that 2011 is the changeover date for publicly accountable companies to use international Financial reporting standards (“iFrs”), replacing Canada’s own Gaap. the changeover date applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. For the Company, the transition date of July 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended June 30, 2011. while the Company has begun assessing the adoption of iFrs for 2011, the financial reporting impact of the transition to iFrs cannot be reasonably estimated at this time.

the Company believes it will be able to manage the transition to iFrs from Canadian Gaap using internal resources with limited external assistance.

during 2010 and continuing into 2011, the Company has been and will be reviewing financial statement preparation, it infrastructure, control environment and accounting policy choices available under iFrs in regards to the current operations of the Company.

during the Company’s scoping of existing iFrs compared to Canadian Gaap, the following areas have been identified as having the highest potential impact on the Company’s financial reporting: initial adoption of iFrs under the policies set forth in IFRS 1 “First-Time Adoption of IFRS”, exploration and development expenditures, full cost method of accounting for oil and gas properties, asset retirement obligations, property plant and equipment, and impairment of assets.

this conversion project will consist of three phases: 1) general planning and scoping, 2) detailed assessment of accounting policy differences and detailed conversion planning, and 3) implementation,


parallel reporting and review. the Company is still completing phase 1 and phase 2 and 3 are not expected to start until Fiscal 2011.

the following is a discussion of some of the more significant issues facing the Company related to the accounting standards that may have a significant financial statement impact:

i) First time adoption: p&nG assetsin general, the Company may elect to report items of property and equipment in its transition date balance sheet (July 1, 2010) at a deemed cost instead of the actual cost that would be determined under iFrs. the deemed cost may be the fair value of the asset.

during Q1/2010, the international accounting standards board issued an additional exemption for first time adopters of iFrs whereby companies using the full cost method of accounting for oil and gas properties may carry forward the amount determined under Canadian Gaap as the deemed cost under iFrs. this exemption will reduce potential adjustments to the Company’s oil and gas properties upon adoption of iFrs.

if this optional exemption is elected, the Company is required to test the resulting deemed cost amounts for impairment and, if necessary, reduce the carrying values. see “impairment of assets” below.

ii) p&nG assets: exploration and evaluationbeyond the optional exemption at the transition date discussed above, iFrs permits a policy choice in the accounting for exploration and evaluation (“e&e”) assets. iFrs, particularly iFrs 6, provides little specific guidance on making this policy choice. thus, the Company could choose to continue the full cost method of accounting for p&nG assets (as disclosed in the Company’s significant accounting policies), or choose a different policy. however, the full cost method, if applied, would likely need to be modified such that it is not applied with one cost centre per country but rather would need to be applied at a lower level (ie: property, project, well) depending on the requirements for component depletion (see below) and impairment assessment.

after initial recognition, e&e assets may be accounted for using the cost model or the revaluation model. the revaluation model involves adjusting the assets to fair value on a regular basis in subsequent periods.

it is likely that the Company will choose to use the cost model instead of the revaluation model. however, at this time, the

Company has made no specific decisions regarding an accounting policy for e&e assets and has not yet determined the level at which e&e costs should be accumulated.

e&e assets must be assessed for impairment when facts and circumstances suggest that the carrying amount of an e&e asset may exceed its recoverable amount and also when e&e assets are to be reclassified because technical feasibility and commercial viability has been demonstrated.

iii) depletion and depreciationiFrs requires component accounting for depletion and depreciation, which is generally a more detailed level than is currently practiced under Canadian Gaap.

also, iFrs permits depletion to be computed using either proved reserves or proved plus probable reserves, as compared to Canadian Gaap, which only permits the use of proved reserves. the Company has not yet made an iFrs policy decision in this regard.

the Company has not yet fully assessed the impact of these differences between iFrs and Canadian Gaap on the Company’s financial statements.

iv) impairment of assetsunder Canadian Gaap for p&nG assets, a “ceiling test” is performed as an impairment test (see the Company’s significant accounting policies). Ceiling tests are normally applied for each country and the test involves, among other things, the use of undiscounted cash flows in determining whether to recognize an impairment. under iFrs, impairment of e&e assets, development assets and production assets is normally performed at a more detailed level (cash generating unit) than what is currently required under Canadian Gaap. this may potentially result in more impairment write downs under iFrs. as well, under iFrs, when there are impairment indicators for e&e assets or for development and production assets, the carrying value of the assets is compared to the recoverable amount of the assets, being the greater of fair value less cost to sell and value in use. Value in use is determined based on discounted, not undiscounted, cash flows.

under iFrs, any impairments recognized on the financial statements must be reversed, if circumstances warrant this. under Canadian Gaap, reversals of impairments of property, plant and equipment are prohibited.


the Company has not yet fully assessed the impact of these differences between iFrs and Canadian Gaap on the Company’s financial statements.

v) asset retirement obligationsunder Canadian Gaap for asset retirement obligations (“aro”), an aro is calculated using a current credit-adjusted, risk-free rate for upward revisions and the original credit-adjusted, risk-free rate for downward revisions. the original liability is not adjusted for changes in current discount rate.

under iFrs, aro is calculated using a current pre-tax discount rate (which reflects current market assessment of the time value of money and the risk specific to the liability) and is revised every reporting period to reflect changes in assumptions or discount rates.

the change in calculation of aro and the discounting process will likely generate some changes in the value or aro on transition.

DIRECTORSANDOFFICERS

Richard Andrews director, Chairman

Colin Watt director, president, Ceo and secretary

RobertBereskin director

Ron Paton director

JohnMcLennan director

Laurie Sadler CFo

ADDITIONAL INFORMATIONadditional information relating to the Company’s operations and activities can be found by visiting the Company’s website at www.lyndenenergy.com or by visiting sedar at www.sedar.com.

LyndEn EnERGy | AnnUAL REPORT 2010 » MAnAGEMEnT diSCUSSiOn And AnALySiS 25LyndEn EnERGy | AnnUAL REPORT 2010 » MAnAGEMEnT diSCUSSiOn And AnALySiS

26 LyndEn EnERGy | AnnUAL REPORT 2010 » AUdiTORS’ REPORT

we have audited the consolidated balance sheets of lynden energy Corp. as at June 30, 2010 and 2009 and the consolidatedstatements of operations, shareholders’ equity and cash flows for the years then ended. these financial statements are theresponsibility of the Company’s management. our responsibility is to express an opinion on these financial statements basedon our audits.

we conducted our audits in accordance with Canadian generally accepted auditing standards. those standards require thatwe plan and perform an audit to obtain reasonable assurance whether the financial statements are free of materialmisstatement. an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. an audit also includes assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation.

in our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of theCompany as at June 30, 2010 and 2009 and the results of its operations and its cash flows for the years then ended inaccordance with Canadian generally accepted accounting principles.

daVidson & CoMpany llpChartered accountants | Vancouver, Canadaoctober 27, 2010

Auditors’ ReportTO THE SHAREHOLdERS OF LyndEn EnERGy CORP.

LyndEn EnERGy | AnnUAL REPORT 2010 » AUdiTORS’ REPORT LyndEn EnERGy | AnnUAL REPORT 2010 » COnSOLidATEd FinAnCiAL STATEMEnTS 27

LyNDENENERGyCORP.

Consolidated Balance Sheets (CDN $)

Consolidated Financial StatementsFOR THE yEARS EndEd JUnE 30, 2010 And 2009

ASSETS June30,2010 June30,2009

Current assets

Cash $ 1,739,343 $ 4,974,440

receivables 377,499 92,463

prepaid expenses 6,000 -

2,122,842 5,066,903

Investment (note 4) 4,121,267 4,740,567

Property and equipment (note 5) 31,679,209 27,303,560

$ 37,923,318 $ 37,111,030

LIABILITIESANDSHAREHOLDERS'EQUITy

Current liabilities

accounts payable and accrued liabilities $ 699,858 $ 322,902

Asset retirement obligations (note 6) 90,363 29,249

790,221 352,151

Shareholders’ equity

share capital (note 7) 39,981,071 37,206,541

treasury shares held (note 7) - (19,975)

Contributed surplus 12,430,538 10,346,498

deficit (15,278,512) (10,774,185)

37,133,097 36,758,879

$ 37,923,318 $ 37,111,030

Nature of operations (note 1)

Subsequent events (note 15)

Approved by the Directors:

Colin watt ron paton

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

LyndEn EnERGy | AnnUAL REPORT 2010 » COnSOLidATEd FinAnCiAL STATEMEnTS28

LyNDENENERGyCORP.

Consolidated Statements of Operations (CDN $)

Consolidated Financial StatementsFOR THE yEARS EndEd JUnE -d 2009

year endedJune30,2010


REvENUE

petroleum and natural gas $ 1,323,396 $ -

royalties (283,797) -

1,039,599 -

ExPENSES

production and operating expenses 118,693 -

depletion, depreciation and accretion 254,765 2,746

administrative fees 131,500 119,000

Consulting fees 329,062 423,902

Filing, listing and transfer agent fees 21,767 25,130

Foreign currency translation 36,394 61,193

office and miscellaneous 59,392 44,897

professional fees 92,043 92,466

promotion 28,676 27,284

rent 12,635 5,500

stock-based compensation (note 8) 406,778 -

travel 49,056 27,851

(1,540,761) (829,969)

Loss before other items (501,162) (829,969)

OTHERITEMS

interest income 16,059 169,274

equity loss on investment (note 4) (644,586) (438,623)

impairment of property and equipment (note 5) (3,374,638) -

write-off of deferred financing costs - (99,373)

(4,003,165) (368,722)

Loss and comprehensive loss for the year $ (4,504,327) $ (1,198,691)

Basic and diluted loss per common share $ (0.07) $ (0.02)

Weighted average number of common shares outstanding 63,730,357 57,934,677


Common Shares

Number AmountTreasury

Shares HeldContributed

Surplus Deficit Total

BALANCEATJUNE30,2008 57,959,751 $ 37,187,034 $ - $ 10,350,380 $ (9,575,494) s 37,961,920

Common shares issued for cash: -

exercise of warrants 12,500 19,507 - (3,882) - 15,625

purchase of treasury shares (80,500) - - (19,975) - - (19,975) loss for the year - - - - (1,198,691) (1,198,691)

BALANCEATJUNE30,2009 57,972,251 37,206,541 (19,975) 10,346,498 (10,774,185) 36,758,879


private placements (note 7) 15,000,009 2,871,882 - 1,628,118 - 4,500,000

share issue costs on private placements - (138,741) - (5,692) - (144,433)

exercise of stock options 33,334 17,533 - (7,533) - 10,000

units issued to agent 354,000 67,777 - 38,423 - 106,200

treasury shares cancelled (80,500) (43,921) 19,975 23,946 - -

stock-based compensation (note 8) - - - 406,778 - 406,778

loss for the year - - - - (4,504,327) (4,504,327)

BALANCEATJUNE30,2010 73,279,094 $ 39,981,071 $ - $ 12,430,538 $ (15,278,512) $ 37,133,097

LyndEn EnERGy | AnnUAL REPORT 2010 » COnSOLidATEd FinAnCiAL STATEMEnTS LyndEn EnERGy | AnnUAL REPORT 2010 » COnSOLidATEd FinAnCiAL STATEMEnTS 29

LyNDENENERGyCORP.

ConsolidatedStatementsofShareholders’Equity(CDN$)


Common Shares

Number AmountTreasury

Shares HeldContributed

Surplus Deficit Total

BALANCEATJUNE30,2008 57,959,751 $ 37,187,034 $ - $ 10,350,380 $ (9,575,494) s 37,961,920


exercise of warrants 12,500 19,507 - (3,882) - 15,625

purchase of treasury shares (80,500) - - (19,975) - - (19,975) loss for the year - - - - (1,198,691) (1,198,691)

BALANCEATJUNE30,2009 57,972,251 37,206,541 (19,975) 10,346,498 (10,774,185) 36,758,879


private placements (note 7) 15,000,009 2,871,882 - 1,628,118 - 4,500,000

share issue costs on private placements - (138,741) - (5,692) - (144,433)

exercise of stock options 33,334 17,533 - (7,533) - 10,000

units issued to agent 354,000 67,777 - 38,423 - 106,200

treasury shares cancelled (80,500) (43,921) 19,975 23,946 - -

stock-based compensation (note 8) - - - 406,778 - 406,778

loss for the year - - - - (4,504,327) (4,504,327)

BALANCEATJUNE30,2010 73,279,094 $ 39,981,071 $ - $ 12,430,538 $ (15,278,512) $ 37,133,097


LyndEn EnERGy | AnnUAL REPORT 2010 » COnSOLidATEd FinAnCiAL STATEMEnTS30

LyNDENENERGyCORP.

Consolidated Statements of Cash Flows (CDN $)




CASHPROvIDEDBy(USEDFOR):

Operating activities

loss for the year $ (4,504,327) $ (1,198,691)

items not involving cash:

depletion, depreciation and accretion 254,765 2,746

stock-based compensation 406,778 -

equity loss on investment 644,586 438,623

impairment of property and equipment 3,374,638 -

write-off of deferred financing costs - 99,373

Changes in non-cash operating

working capital items:

receivables (327,151) 64,412

prepaid expenses (6,000) -

accounts payable and accrued liabilities 61,943 (51,625)

(94,768) (645,162)

Financing activities

Common shares and warrants issued for cash 4,510,000 15,625

share issue costs (38,233) -

purchase of treasury shares - (19,975)

4,471,767 (4,350)

Investing activities

purchase of property and equipment (7,880,156) (3,968,929)

recoveries of property and equipment 268,060 1,033,903

(7,612,096) (2,935,026)

Decrease in cash during the year (3,235,097) (3,584,538)

Cash, beginning of year 4,974,440 8,558,978

Cash, end of year $ 1,739,343 $ 4,974,440

supplemental cash flow information (note 13)


LyndEn EnERGy | AnnUAL REPORT 2010 » COnSOLidATEd FinAnCiAL STATEMEnTS LyndEn EnERGy | AnnUAL REPORT 2010 » nOTES TO COnSOLidATEd FinAnCiAL STATEMEnTS 31

1.NATUREOFOPERATIONSlynden energy Corp. (“the Company”) is a public company continued under the Business Corporations Act (british Columbia). the Company’s business is to acquire, explore and develop petroleum and natural gas properties. the Company’s common shares trade on the tsX Venture exchange (“tsX-V”) under the symbol lVl.

the Company is in the process of exploring and developing its petroleum and natural gas interests. the recoverability of the amounts shown for petroleum and natural gas interests and related deferred exploration costs are dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain necessary financing to complete the development of the reserves and upon future profitable production.

as at June 30, 2010, the Company had an accumulated deficit of $15,278,512 and working capital of $1,422,984. these financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Gaap”) with the assumption that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. the continuing operations of the Company are dependent upon its ability to continue to raise adequate financing and to commence profitable operations in the future. Management believes it will be successful in raising the necessary funding to continue operations in the normal course of operations through the issuance of share capital (note 15); however, there is no assurance that these funds will be available on terms acceptable to the Company or at all. these financial statements do not include adjustments that would be necessary should the Company be unable to continue as a going concern.

2.SIGNIFICANTACCOUNTINGPOLICIESthese consolidated financial statements have been prepared in accordance with Canadian Gaap.

a) principles of consolidationthe consolidated financial statements include the accounts of the

Company and its wholly owned subsidiaries, lynden exploration ltd. and lynden usa inc. all inter-company transactions are eliminated on consolidation. in accordance with Accounting Guideline 15 – Consolidation of Variable Interest Entities, all entities subject to control by the Company on a basis other than ownership of voting interests must be consolidated in the Company’s financial statements. the Company does not have any variable interest entities.

b) use of estimatesthe preparation of financial statements in accordance with Gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. significant estimates used herein include stock-based compensation, future income taxes, asset retirement obligations and the value of the oil and gas property interests. actual results could differ from these estimates.

c) Foreign currency translationthe monetary assets and liabilities of the Company that are denominated in foreign currencies are translated at the rate of exchange at the balance sheet date while non-monetary assets and liabilities are translated at historical rates. revenues and expenses are translated at the exchange rates approximating those in effect on the date of the transactions. exchange gains and losses arising on translation are included in the statement of operations.

d) Financial instrumentsall financial instruments are classified into one of five categories: held-for-trading financial instruments, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. all financial instruments and derivatives are measured and reported on the balance sheet at fair value except, for loans and receivables, held-to-maturity investments and other financial liabilities, which are measured

notes to Consolidated Financial StatementsJUnE 30, 2010 (Cdn $)

LyndEn EnERGy | AnnUAL REPORT 2010 » nOTES TO COnSOLidATEd FinAnCiAL STATEMEnTS32

and reported at amortized cost using the effective interest method. subsequent measurements and changes in fair value will depend on their initial classification. held-for-trading financial instruments are measured at their fair value and changes are recognized in net income (loss) in the period in which the change occurs. available-for-sale financial assets are measured at fair value and changes in fair value are recognized in other comprehensive income until the financial instrument is derecognized or impaired. transaction costs that are directly attributable to the acquisition or issue of financial instruments that are classified as other than held-for-trading are included in the initial carrying value of such instruments and amortized using the effective interest method. transaction costs that are directly attributable to the acquisition or issue of financial instruments that are classified as held-for-trading are expensed as incurred.

e) deferred financing costsCosts directly identifiable with the raising of capital will be charged against the related capital stock. Costs related to shares not yet issued are recorded as deferred financing costs. these costs will be deferred until the issuance of the shares to which the costs relate, at which time the costs will be charged against the related capital stock or charged to operations if the shares are not issued.

f) Valuation of equity units issued in private placementsthe Company allocates the proceeds received upon issue of equity units using a relative fair value method with respect to the measurement of shares and warrants issued as private placement units. the pro rata basis method requires each component to be valued at fair value and an allocation of the net proceeds received based on the pro rata relative values of the components.

g) investmentinvestments over which the Company exerts significant influence are accounted for using the equity method. under this method, the Company’s share of the earnings and losses is included in operations and its investment therein is adjusted by a like amount. the Company records a gain on deemed disposition of investment when its ownership interest is diluted as a result of share issuances by the investee company, and the Company’s proportionate share of the issuance is greater than the cost base of the investment. the Company does not receive any cash

proceeds (nor is required to make any payments) from these transactions. where in management’s opinion there has been a loss in value that is other than a temporary decline, the carrying value is reduced to estimated realizable value.

h) property and equipmentproperty and equipment is recorded at cost and amortized over the estimated useful lives of the assets on the following basis: Computer software 100% declining balance Computer hardware 30% declining balance per annum Petroleum and natural gas properties

the Company follows the full cost method of accounting for exploration and development expenditures whereby all costs relating to the acquisition of, exploration for and development of petroleum and natural gas (“p&nG”) reserves are capitalized. such costs include lease acquisitions, geological and geophysical, lease rentals on undeveloped properties, drilling both productive and non-productive wells, production equipment, and overhead charges directly related to acquisition, exploration and development activities. proceeds received from disposals of properties and equipment are credited against capitalized costs unless the disposal would alter the rate of depletion and amortization by more than 20 percent, in which case a gain or loss on disposal is recorded. upon commencement of commercial production all costs of acquisition, exploration and development of p&nG reserves, associated tangible plant and equipment costs, asset retirement obligations and estimated costs of future development of proved undeveloped reserves are depleted and/or amortized by the unit of production method based on estimated gross proved reserves before royalties as determined by independent evaluators. natural gas reserves are converted to equivalent units using their relative energy content of six thousand cubic feet of natural gas to one barrel of oil. the costs of acquiring and evaluating unproved properties are excluded from costs subject to depletion calculations. these properties are assessed annually to ascertain whether impairment has occurred. when proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to the costs subject to depletion. p&nG assets are evaluated annually to determine that the costs are recoverable and do not exceed the fair value of the

LyndEn EnERGy | AnnUAL REPORT 2010 » nOTES TO COnSOLidATEd FinAnCiAL STATEMEnTS LyndEn EnERGy | AnnUAL REPORT 2010 » nOTES TO COnSOLidATEd FinAnCiAL STATEMEnTS 33

properties. the costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves plus the lower of cost and market of unproved properties exceed the carrying value of the p&nG assets. if the carrying value of the p&nG assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. the cash flows are estimated using future product prices and costs and are discounted using the risk-free interest rate. Costs incurred for initial new p&nG property investigation where no acquisition occurs are expensed as incurred.

i) asset retirement obligations the Company recognizes the fair value of a liability for an asset retirement obligation in the year in which it is incurred when a reasonable estimate of fair value can be made. the carrying amount of the related long-lived asset is increased by the same amount of the liability. Changes in the liability for an asset retirement obligation due to the passage of time will be measured by applying an interest method of allocation. the amount will be recognized as an increase in the liability and an accretion expense in the statement of operations. Changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease to the carrying amount of the liability and the related long-lived asset.

j) loss per sharebasic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common shares. the treasury stock method is used to determine the dilutive effect of stock options, warrants and other dilutive instruments. For the years presented, this calculation proved to be anti-dilutive.

k) income taxes Future income taxes relate to the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Future tax assets, if any, are recognized only to the extent that, in the opinion of management,

it is more likely than not that the future income tax assets will be realized. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment or substantive enactment. to the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess.

l) stock-based compensationthe Company uses the fair value based method to account for stock-based transactions with employees, non-employees and directors. accordingly, the fair value of the stock options at the date of grant is amortized over the vesting period. the Company estimates the fair value of each stock option at the date of grant using the black-scholes option pricing model. any consideration paid on exercise of stock options together with the related portion of contributed surplus is credited to share capital.

m) revenue recognition revenues from the sale of petroleum and natural gas are recorded when title passes to the purchaser and collection of the sales proceeds is reasonably assured.

3.CHANGESINACCOUNTINGPOLICIESeffective July 1, 2009, the Company adopted new accounting policies from the Canadian institute of Chartered accountants handbook (“CiCa”) (“hb”):

a) CiCa handbook section 3855 – “Financial Instruments – Recognition and Measurement.” this section was amended by the CiCa in august 2009 to align this section more closely with iFrs. the application of this amendment is to annual financial statements with fiscal years beginning on or after november 1, 2008.

Changes include:• reclassification of financial assets out of assets held for trading

and assets held for sale categories into loans and receivables category is permitted under certain circumstances;

• the definition of the loans and receivables category has been updated so that debt securities that are not quoted in an active market are permitted to be classified in the loans and receivables category. impairment of loans and receivables is calculated using the incurred credit loss model of section 3025 –“Impaired loans.” loans and receivables that an entity plans to sell in the near term must be classified as held for trading, and loans or receivables for which the holder may not recover substantially all of its initial


investment, other than because of credit deterioration, must be classified as available for sale; and

• impairment losses relating to an available for sale debt instrument must be reversed if the fair value of the instrument increases due to an event occurring after the loss was recognized.

the application of these amendments did not have a material impact on the Company.

b) CiCa handbook section 3862 – “Financial Instruments – Disclosures.” this section was amended by the CiCa in June 2009 to enhance disclosures about fair value measurements and liquidity risk of financial instruments. the amendment is to be applied to annual financial statements with fiscal years ending after september 30, 2009. the purpose of this amendment is to provide further convergence with iFrs. Financial instruments recognized at fair value on the consolidated balance sheet must be classified in fair value hierarchy levels as follows:

• level 1 – valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;

• level 2 – valuation techniques based on inputs that are other than quoted prices included in level 1 that are observable for the asset or liability , either directly (prices) or indirectly (derived from prices); and

• level 3 – valuation techniques with unobservable market inputs (involves assumptions and estimates by management of how market participants would price the assets or liabilities).

the application of this amendment did not have an impact on the Company’s disclosure since fair value of all instruments classified as held for trading approximates carrying value due to the immediate or short-term maturity of these financial instruments. Recent accounting pronouncements:

a) in January 2009, the CiCa issued section 1582 “business Combinations”, section 1601 “Consolidated Financial statements” and section 1602 “non-controlling interests” which replace section 1581 “business Combinations” and section 1600 “Consolidated Financial statements”. section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under international Financial reporting standards (“iFrs”). section 1601 together with section 1602 establishes standards for the preparation of consolidated financial statements. these sections are applicable for the Company’s interim and annual

consolidated financial statements for its fiscal year beginning on or after January 1, 2011. early adoption of these sections is permitted and all three sections must be adopted concurrently.

b) in 2008, the Canadian accounting standards board announced that 2011 is the changeover date for publicly-listed companies to use iFrs, replacing Canada’s own Gaap. the date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. the transition date of July 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended June 30, 2011. while the Company has begun the process of assessing the adoption of iFrs for 2011, the financial reporting impact of the transition cannot be reasonably estimated at this time.

4.INvESTMENTon october 5, 2007, the Company participated, along with its paradox basin partners, in the formation of a utah, usa based natural gas transmission company, abajo Gas transmission Company, llC (“abajo”). the Company purchased a 47.99% interest in abajo through capital contributions of $2,879,822 (usd$2,935,000) and $2,264,900 (usd$2,200,000). abajo holds ownership of the gas gathering systems in the northern and southern prospect areas of the Company’s paradox basin project (note 5). through its interest in abajo, the Company is entitled to 55% of the revenues and expenses attributable to the construction, operation, maintenance and expansion of the gas gathering system in the northern prospect area and 25% in the southern prospect area.

the Company exerts significant influence over abajo, and as such, the investment in abajo is accounted for using the equity method. the Company’s share of abajo’s net loss was $644,586 (2009 - $438,623).


5.PROPERTyANDEQUIPMENT

Computer

Hardware &

Software

Petroleum &

NaturalGas

Properties Total

Costs

at as June 30, 2008 $ 3,434 $ 24,500,170 $ 24,503,604

additions - 3,606,778 3,606,778

recoveries - (804,560) (804,560)

at as June 30, 2009 3,434 27,302,388 27,305,822

additions - 8,251,559 8,251,559

recoveries - (251,230) (251,230)

impairment - (3,374,638) (3,374,638)

ASATJUNE30,2010 $ 3,434 $ 31,928,079 $ 31,931,513

Accumulated amortization and depletion

at as June 30, 2008 $ 1,760 $ - $ 1,760

depreciation and depletion 502 - 502

as at June 30, 2009 2,262 - 2,262

depreciation and depletion 352 249,690 250,042

ASATJUNE30,2010 $ 2,614 $ 249,690 $ 252,304

Netbookvalue

ASATJUNE30,2009 $ 1,172 $ 27,302,388 $ 27,303,560

ASATJUNE30,2010 $ 820 $ 31,678,389 $ 31,679,209


USA

a) paradox basinthe Company has a 55% before payout working interest (41.25% after payout) in an 80% net revenue interest in the paradox basin project – northern prospect area consisting of p&nG leases located in the paradox basin, utah. the Company has a 25% before payout working interest (23.75% after payout working interest) in an 85% to 87% net revenue interest in the paradox basin project – southern prospect area consisting of p&nG leases located in the paradox basin, utah. during the fiscal year ended June 30, 2010, the Company received $251,230 (2009 - $804,560) of net revenue from sales of p&nG from its paradox basin project. it has been determined that the paradox basin project is in the pre-production stage and as such, the net revenues have been credited to capitalized costs. the Company wrote off $3,374,637 of deferred costs during the fiscal year ended June 30, 2010 to reflect expired leases.

USA USA USA CANADAParadox Basin Wolfberry Mitchell Ranch BitternLake Total

ASATJUNE30,2008 $ 24,500,169 $ - $ - $ 1 $ 24,500,170

Acquisition and expenditures 3,606,778 - - - 3,606,778

Petroleum & natural gas sales (1,115,666) - - - (1,115,666)

Royalties 209,898 - - - 209,898

Transportation&marketingcosts 85,984 - - 85,984

Production taxes 15,224 - - 15,224

ASATJUNE30,2009 27,302,387 - - 1 27,302,388

Acquisition and expenditures 330,481 5,656,751 2,264,327 - 8,251,559

Petroleum & natural gas sales (367,774) - - - (367,774)

Royalties 65,136 - - - 65,136

Transportation&marketingcosts 32,212 - - - 32,212

Production taxes 19,196 - - - 19,196

Depletion - (249,690) - (249,690)

Write-offofP&NGpropertyinterests (3,374,637) - - (1) (3,374,638)

ASATJUNE30,2010 $ 24,007,001 $ 5,407,061 $ 2,264,327 $ - $ 31,678,389

petroleum and natural Gas properties

b) wolfberry during the fiscal year ended June 30, 2010, the Company entered into a participation agreement with Crownrock lp (“Crownrock”) to acquire interests ranging from 21.88% to 43.75% in p&nG leases located in the Glasscock, howard, Martin, Midland and sterling counties of west texas, usa. the Company will receive 43.75% of the vendor’s interest in the leases relating to wells drilled after the date of the participation agreement on the vendor’s existing acreage and within the areas of mutual interest (“aMis”), by paying 50% of the drilling and completion costs attributable to the vendor’s interest. the Company will also pay for the first us$2,000,000 spent in connection with any new leases or extensions of existing leases on lands located within the aMis, of which the Company will spend at least us$666,667 each year for the first three years. the leases are subject to royalties to the mineral rights owners.

c) Mitchell ranch during the fiscal year ended June 30, 2010, the Company


6.ASSETRETIREMENTOBLIGATIONSthe total asset retirement obligations were estimated by management based on the Company’s net ownership interest in all wells, estimated costs to reclaim and abandon the wells and the estimated timing of the costs to be incurred in future periods. the Company has estimated the total undiscounted value of asset retirement obligations to be $237,981 (usd$223,540) as at June 30, 2010 (June 30, 2009 - $70,919). these payments are expected to be made over the next 15 to 35 years. the Company used a weighted-average credit adjusted risk free rate of 8.01% and a weighted-average inflation rate of 3.78% to calculate the present value of the asset retirement obligations.

7.SHARECAPITAL

a) authorizedan unlimited number of common shares without par value. an unlimited number of preference shares without par value.

b) the Company completed the following private placements during the years ended June 30, 2010 and 2009:

i) in February 2010, the Company closed a non-brokered private placement for gross proceeds of $4,500,000. these funds were raised through the issuance of 15,000,000 units at a price of $0.30 per unit. each unit is comprised of one common share and one common share purchase warrant. the total proceeds were allocated to common shares in the amount of $2,871,882 and to warrants in the amount of $1,628,118, based on their relative fair values on the date of closing. the private placement closed in two stages and therefore 9,350,000 warrants expire on February 10, 2012 and

ASATJUNE30,2008 $ 27,006

accretion expense 2,243

ASATJUNE30,2009 29,249

liabilities settled (3,749)

accretion expense 4,724

revisions and new estimated cash flows 60,139

ASATJUNE30,2009 $ 90,363

entered into a participation agreement with Crownrock to acquire a 50% interest in an option to acquire p&nG leases in Coke, Mitchell, and sterling counties of west texas. pursuant to the participation agreement, lynden will acquire an undivided 50% interest in the option to acquire a 100% working interest in the p&nG leases, subject to a 22.5% royalty to the mineral rights owners. lynden can earn its interest in the option by paying 100% of the costs to drill and complete the first two wells (up to us$2,400,000) and by making additional payments to Crownrock totaling approximately us$3,000,000, of which the Company has paid approximately us$1,500,000 to date. the option can be converted into a lease(s) through additional payments to the mineral rights owners. the option has an initial term of 18 months, expiring in november 2011, with provisions to extend the option an additional 18 months.

CANADA

d) bittern lakethe Company had a 50% working interest in certain p&nG rights in the bittern lake area of central alberta. these rights expired during the year ended June 30, 2010. Ceiling Testin the year ended June 30, 2010, the Company performed a ceiling test on its p&nG interests and no impairment charge was recorded (other than the paradox basin impairment discussed above). the impairment test is based on information from the Company’s independent engineering consultant using future p&nG prices (expressed in usd) as follows:

yearWTl Cushing

Oil$/STB

Henry Hub

Gas$MMBTU

2010 77.13 4.839

2011 79.54 5.338

2012 81.16 5.678

2013 82.28 5.876

2014 83.37 6.088

thereafter Flat Flat

Cap 83.37 6.088


5,650,000 warrants expire on February 16, 2012. each warrant entitles the holder to purchase one additional common share at an exercise price of $0.50 per common share. the fair values of the warrants were determined to be $0.23 per warrant based on a calculation using the black-scholes option pricing model assuming no expected dividends, a risk-free interest rate of 1.32%, an expected stock price volatility of 120% and an expected life of two years. the Company incurred total issuance costs on the private placement of $217,395, which were allocated to common shares in the amount of $138,741 and to warrants in the amount of $78,654 based on their relative fair values. of these costs, $38,233 was incurred in cash, $106,200 was incurred through the issuance of 354,000 units with the same terms as those issued in the private placement and $72,962 was incurred through the issuance of 354,000 finders warrants.

c) warrants: Warrants Weighted-averageexercise price

Weighted-averageremaining life (years)

ASATJUNE30,2008 17,384,796 $ 1.36 1.3

exercised (12,500) 1.25

ASATJUNE30,2009 17,372,296 $ 1.40 2.3

issued 15,708,000 0.50

expired (326,070) 1.28

ASATJUNE30,2010 32,754,226 $0.97 1.5

warrants exercisable and outstanding are as follows:

ExpiryDate ExercisePrice 2010

February 10, 2011 $0.30 354,000

July 9, 2011 $1.25 6,237,500

July 12, 20111 $1.25 3,260,976

september 21, 2011 $1.50 2,048,700

october 12, 2011 $1.50 224,050

February 10, 2012 $0.50 9,350,000

February 16, 2012 $0.50 6,004,000

april 15, 2012 $1.25 2,500,000

June 11, 2012 $2.00 2,775,000

32,754,226

1 if the daily trading price of the Company’s common shares is at least $2.50 on 20 consecutive trading days, the warrants will be deemed to be exercised on the 20th day, subject to receipt of required regulatory approvals, if any.

d) treasury shares: in accordance with tsX-V approval and the provisions of a normal course issuer bid, the Company from time to time could acquire up to 2,898,613 of its common shares for cancellation. the normal course issuer bid was conducted through the facilities of the tsX-V for a period of one year commencing on december 12, 2008. as at June 30, 2009, the Company had acquired 80,500 common shares with a cost of $19,975 and these common shares were recorded as treasury shares held. in april 2010, the 80,500 common shares were cancelled and returned to treasury.


8.STOCkOPTIONS

a) stock options outstandingthe Company has a stock option plan whereby a maximum of 10% of the issued and outstanding common shares of the Company may be reserved for issuance pursuant to the exercise of stock options. the term of the stock options granted are fixed by the board of directors and are not to exceed five years. the exercise prices of the stock options are determined by the board of directors but shall not be less than the closing price of the Company’s common shares on the day preceding the day on which the directors grant the stock options, less any discount permitted by the tsX-V. subject to any vesting schedule imposed by the Company’s board of directors in respect of any specific stock option grants, the stock options vest immediately on the date of grant except for stock options granted to investor relations consultants which vest over a twelve month period.

Shares Weighted-averageexercise price

Weighted-averageremaining life (years)

ASATJUNE30,2008 4,709,000 $ 1.10 3.8

Cancelled (22,500) 1.18

ASATJUNE30,2009 4,686,500 1.10 2.8

Granted 2,610,000 0.44

exercised (33,334) 0.30

ASATJUNE30,2010 7,263,166 $ 0.87 2.8

ExERCISABLEASATJUNE30,2010 5,023,166 $1.05 2.0

stock options outstanding are as follows:

ExpiryDate ExercisePrice 2010

July 21, 2010 $0.51 400,000

august 7, 2010 $0.75 450,000

september 1, 2010 $0.75 9,000

June 5, 2012 $1.00 1,532,500

July 22, 2012 $1.30 790,000

october 14, 2012 $1.30 640,000

april 27, 2013 $1.40 865,000

october 7, 2014 $0.30 1,076,666

March 16, 2015 $0.55 1,500,000

7,263,166

b) stock-based compensation during the year ended June 30, 2010, the Company granted 2,610,000 stock options with a fair value of $887,432 or $0.34 per option. the Company recognized $406,778 of stock-based compensation. the Company calculated the fair value of options granted using the black-scholes option pricing model assuming a weighted average risk-free interest rate of 2.72%, a dividend yield of nil, an expected volatility of the Company’s share price of 105% and expected life of the stock options of five years. the Company did not grant or amend any stock options during the year ended June 30, 2009.


9.RELATEDPARTyTRANSACTIONSrelated party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. the following is a summary of the related party transactions that occurred throughout the year ended June 30, 2010:

a) paid or accrued $131,500 (2009 - $119,000) for administrative fees to a company controlled by the president and Ceo of the Company;

b) paid or accrued $16,948 (2009 - $14,318) for legal fees included in professional fees to a legal firm where a director of the Company is an associate counsel;

c) paid or accrued $7,015 (2009 - $nil) for share issue costs (legal fees) to a legal firm where a director of the Company is an associate counsel;

d) paid or accrued $20,880 (2009 - $2,974) for consulting fees, which are included in property and equipment, to companies controlled by directors of the Company;

e) paid or accrued $269,062 (2009 - $388,903) for consulting fees to a director and companies controlled by directors of the Company.

accounts payable and accrued liabilities include $18,920 (2009 - $828) owing to directors and companies controlled by directors as at June 30, 2010.

10.FINANCIALINSTRUMENTSas at June 30, 2010, the Company’s financial instruments are cash, receivables, and accounts payable and accrued liabilities. the fair value of cash is measured using level 1 of the fair value hierarchy. the amounts reflected in the balance sheet for receivables and accounts payable and accrued liabilities approximate their fair values due to the short-term nature and negligible credit losses. investment is stated at its fair value based on the Company’s equity interest.

these financial instruments are classified as follows:

Cash – held-for-tradingreceivables – loans and receivablesaccounts payable and accrued liabilities – other financial liability

the Company considers its exposure to interest rate risk and credit risk is small. the Company is exposed to financial risk arising from

fluctuations in foreign exchange rates and the degree of volatility of those rates. the Company does not use derivative instruments to reduce its exposure to foreign currency risks.

the Company has not hedged any of its p&nG sales.

a) Credit riskCredit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. the Company’s cash and receivables are exposed to credit risk. the credit risk on cash is small because the counterparties are highly rated banks. the majority of the Company’s receivables are with customers in the petroleum and natural gas industry and are subject to normal industry credit risks. the Company generally extends unsecured credit to these customers and therefore the collection of accounts receivable may be affected by changes in economic or other conditions. the Company believes the risk is mitigated by the size and reputation of the companies to which they extend credit. the Company has not experienced any material credit loss in the collection of accounts receivable to date. the aging of receivables are as follows:

b) liquidity riskliquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. the Company’s accounts payable and accrued liabilities are all current and due within 90 days of the balance sheet date. the Company ensures that it has sufficient capital to meet short term financial obligations after taking into account its exploration

obligations and cash on hand.

2010 2009

Amounts receivable

0 to 60 days $ 342,994 $ 73,566

61 to 120 days 34,505 18,897

> 120 days - -

$ 377,499 $ 92,463


c) Market riskMarket risk is the risk of loss that may arise from changes in market factors such as interest rates, foreign exchange rates and commodity and equity prices.

i) interest rate risk interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. the Company’s cash is exposed to interest rate risk as the Company invests cash at floating rates of interest in highly liquid instruments. Fluctuations in interest rates impact interest income. as at June 30, 2010, if interest rates had been 0.25% lower, loss and comprehensive loss would have been $10,560 higher and conversely if interest rates had been 0.25% higher, loss and comprehensive loss would have been $10,560 lower.

ii) Currency riskCurrency risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. the Company is exposed to currency risk from its usa based p&nG projects where the costs incurred and revenues earned are in us dollars while the Company finances its operations in Canadian dollars. the Company does not use derivative instruments or hedges to manage currency risks. as at June 30, 2010, cash includes $372,655 (us$350,042) of us denominated cash. as at June 30, 2010, if the Canadian dollar strengthened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $33,878 higher. Conversely, if the Canadian dollar weakened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $37,265 lower. as at June 30, 2010, receivables include $374,891 (us$352,142) of us denominated receivables. as at June 30, 2010, if the Canadian dollar strengthened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $34,081 higher. Conversely, if the Canadian dollar weakened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $37,489 lower.

as at June 30, 2010, accounts payable and accrued liabilities include $646,021 (us$606,820) of us denominated payables. as at June 30, 2010, if the Canadian dollar strengthened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $58,729 lower. Conversely, if the Canadian dollar weakened by 10% against the us dollar with all other variables remaining constant, loss and comprehensive loss would have been $64,602 higher.

iii) price risk the Company’s p&nG production is marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs. the Company’s cash flow from product sales will therefore be impacted by fluctuations in commodity prices. the Company does not use derivative financial instruments to manage this risk.

11.CAPITALMANAGEMENTthe Company’s objectives when managing capital are:

• to safeguard the Company’s ability to continue as a

going concern.

• to maintain appropriate cash reserves on hand to continue

the advancement of the Company’s p&nG projects and to

meet ongoing operating costs.

• to invest cash on hand in highly liquid and highly rated

financial instruments.

in the management of capital, the Company includes shareholders’ equity and debt in the definition of capital.

the Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets, especially in regards to results from its p&nG projects. in order to maintain or adjust the capital structure, the Company may issue common shares through private placements and/or issue debt. the Company is not exposed to externally imposed capital requirements.


2010 2009

potential income tax recovery based on reported loss $ 1,306,256 $ 362,604

effect of non-deductible expenses (657,403) 2,553

share issuance costs 150,338 149,837

unrecognized benefit of non-capital losses (799,191) (514,994)

$ - $ -

2010 2009

Future income tax assets

non-capital losses carried forward $ 2,175,000 $ 1,144,000

other assets 244,000 789,000

Valuation allowance for future income tax assets (2,419,000) (1,933,000)

$ - $ -

significant components of the Company’s future tax assets are as follows:

the Company has accumulated non-capital losses of approximately $7,445,000 which may be deducted in the calculation of taxable income in future years. the losses expire on various dates through to 2030.

due to the uncertainty surrounding the realization of income tax assets in future years, the Company has a 100% valuation allowance against its potential future income tax assets.

12.INCOMETAxESthe reported income tax recovery differs from the amount computed by applying the Canadian basic statutory rate to the loss before income taxes.

the reasons for this difference and the related tax effect are as follows:


2010 2009

Cash paid for interest $ - $ -

Cash paid for income taxes $ - $ -

Non-cashinvestingandfinancingactivities:

net revenues credited to property and equipment included in receivables $ 47,330 $ 89,445

purchases of property and equipment included in payables $ 591,791 $ 276,778

share issue costs paid in shares and units $ 106,200 $ -

share issue costs paid in finders warrants $ 72,962 $ -

stock-based compensation transferred to share capital on exercise of stock options

$ 7,533 $ -

stock-based compensation transferred to share capital on exercise of warrants

- $ 3,882

asset retirement obligations included in property and equipment $ 56,391 $ -

Cancellation of treasury stock - decrease of capital stock $ 43,921 $ -

Cancellation of treasure stock - increase of contributed surplus $ 23,946 $ -

13.SUPPLEMENTALCASHFLOWINFORMATION

14.SEGMENTEDINFORMATIONthe Company currently operates in one reportable operating segment, being the acquisition, exploration and development of petroleum and natural gas properties. the Company operates in two reportable geographic segments, being Canada and the united states of america. the Company’s revenues and capital assets in geographic locations are as follows:

Canada USAConsolidated

Total

Revenues $ - $ 1,323,396 $ 1,323,396

year ended June 30, 2010 - - -

year ended June 30, 2009 $ - $ - $ -

Capital Assets

as at June 30, 2010 $ 820 $ 31,678,389 $ 31,679,209

as at June 30, 2009 $ 1,172 $ 27,302,388 $ 27,303,560


15.SUBSEQUENTEvENTSsubsequent to June 30, 2010, the Company:

a) raised gross proceeds of $7,107,000 in an initial closing of a non-brokered private placement of up to $10,000,000. the funds were raised through the issuance of 14,214,000 units at a price of $0.50 per unit. each unit is comprised of one common share and one common share purchase warrant. each share purchase warrant will entitle the holder to purchase one additional common share at a price of $0.70 until october 27, 2013.

b) 859,000 stock options expired unexercised; and

c) granted 260,000 stock options exercisable at $0.60 per share for five years and granted 200,000 stock options exercisable at $0.70 per share for three years.

LyndEn EnERGy | AnnUAL REPORT 2010 » nOTES TO COnSOLidATEd FinAnCiAL STATEMEnTS 45LyndEn EnERGy | AnnUAL REPORT 2010 » CORPOR ATE inFORMATiOn

Officers and Directors

richard andrews: Chairman and directorColin watt: director, president, Ceo and secretaryrobert bereskin: directorJohn Mclennan: directorron paton: directorlaurie sadler: CFo

Office

lynden energy Corp.suite 2150, 885 west Georgia streetVancouver, bC V6C 3e8

phone: 604-629-2991Fax: 604-602-9311

e-mail: [email protected] website: www.lyndenenergy.com

Transfer Agent

Computershare trust Company of Canada510 burrard street, 2nd FloorVancouver, british ColumbiaV6C 3b9

Trading Symbol

TSxv:LvL

CORPORATE INFORMATION

this document contains forward-looking statements. the reader is cautioned that assumptions used in the preparation of such statements, although considered accurate at the time of preparation, may prove incorrect, and the actual results may vary materially from the statements made herein. the Company’s principal activity of oil and natural gas exploration and development is considered to be inherently risky. expected timelines relating to oil and gas operations are subject to the customary risks of the oil and gas industry. For a more detailed description of these risks, and others, see www.lyndenenergy.com/riskfactors.html.

W W W . L Y N D E N E N E R G Y . C O M

photograp

hy Cred

its: herb w

acker

LYNDEN ENERGY CORP

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