Legacy Oil + Gas

LEGACY Evolution vs. revolution: The anatomy of an acquisition

+ A Winning Strategy

In Action Annual Report 2010

Manufacturing organic growth: Taking assets to a new level

+

Unlocking the upside: How Legacy leverages technology

Introduction to our Annual Report Legacy Oil + Gas Inc. is a young company that is growing quickly and constantly evolving. In this annual report, we take you behind the scenes so you can learn more about our business model and success strategy and the actions we are taking to achieve our goals and build Legacy’s future.

CORPORATE Profile By putting our winning strategy into action, Legacy Oil + Gas Inc. has quickly evolved since its founding in 2009 from a micro-cap junior to an intermediate oil and natural gas company that in March 2011 became a constituent of the S&P/TSX Composite Index.

Legacy Oil + Gas Inc. (“Legacy” or the “Company”) is a uniquely positioned, well-capitalized intermediate oil and natural gas company with a proven management team committed to aggressive, cost-effective growth in highquality light oil reserves and production in large hydrocarbon-in-place assets and resource plays in western Canada.

Legacy’s core operations are concentrated in southwestern Alberta and the Williston Basin in Saskatchewan, Manitoba and North Dakota, including the prolific and fast-growing Bakken light oil resource play.

Our significant light oil resource play exposure, highnetback production base, concentrated assets, technical expertise, strong balance sheet, and successful consolidation strategy set Legacy apart from its peers. We continue to be opportunistic for further strategic acquisitions both within and beyond our core areas to augment our existing inventory of development drilling locations and undeveloped land. Legacy’s common shares trade on the TSX under the symbol LEG.

About the photos All the photos in this Annual Report are of Legacy operations in Alberta and Saskatchewan.

Photography: Brian Harder and Legacy archives.

Annual Report 2010 2010 Annual Report 27 Reserves Report 29 Management’s Discussion and Analysis 47 Management’s Report 48 Auditors’ Report 49 Consolidated Financial Statements 52 Notes to Consolidated Financial Statements 72 Corporate Information

Online legacyoilandgas.com

2011 News Releases Review the latest news at legacyoilandgas.com

Operations

2 To Our Shareholders

Get up-to-date information about our landholdings at legacyoilandgas.com/operations

8

Investor Presentations Legacy regularly meets with shareholders and participates in investor conferences. View our latest corporate presentation at legacyoilandgas.com/ presentations

Contact Us Legacy Oil + Gas Inc. 3900, Bow Valley Square II 205 – 5th Avenue SW Calgary, AB T2P 2V7 Phone: 403.441.2300 Fax: 403.441.2017

A Winning Strategy in Action Key Events in 2010 and Beyond

12 Evolution vs. Revolution The Anatomy of an Acquisition

16

Manufacturing Organic Growth Taking Assets to a New Level

20 Unlocking the Upside How Legacy Leverages Technology

22 Producing + Emerging Properties

info@legacyoilandgas.com Notice of Annual General Meeting Legacy Oil + Gas Inc.’s Annual General Meeting of Shareholders will be held at 10:30 a.m. (Mountain Time) on Friday, May 27, 2011, in the Devonian Room of The Petroleum Club, 319 – 5th Avenue S.W., Calgary, Alberta.

◄ Producer of the Year 2010

Named Oilweek magazine’s 2010 Producer of the Year, Legacy today is a company of more than 90 people with 2011 average production expected to exceed 14,000 barrels per day and a capital budget of over $250 million.

Legacy Oil+Gas Inc.

2010 Annual Report

1

To Our Shareholders

LEGACY’S WINNING STRATEGY OF TARGETING HIGH-QUALITY LIGHT OIL ASSETS COMPRISED OF LARGE ACCUMULATIONS OF HYDROCARBON INPLACE AND RESOURCE PLAYS DELIVERED STRONG OPERATIONAL AND FINANCIAL RESULTS IN 2010, ON BOTH AN ABSOLUTE AND a PER SHARE BASIS. In our first full year of operations, we have grown our proven plus probable reserves to 77.8 MMBoe (131 percent per share growth), exit production to 13,000 Boe per day (28 percent per share growth) and cash flow to $119.6 million (29 percent per share growth).

We achieved our disciplined per share growth while continuing to build value for both the near and longer term through our enviable inventory of work-overs, infill drilling, step-out drilling, secondary recovery projects and emerging light oil resource play development. A number of initiatives that came to fruition during the year received only partial or no inclusion in the Company’s 2010 results, but nevertheless provide the visibility of Legacy’s potential for sustainable future growth over the next three to five years.

that are not strictly reliant on drilling to unlock their value potential. This diversification of our light oil opportunity set is enabling Legacy to continue to grow even in the face of potentially increased demand for oil field services.

All this is underpinned by significant internally generated cash flow which is sufficient to fund capital expenditures that result in solid double-digit per share growth, while maintaining a strong balance sheet with surplus debt capacity.

Sustainability of our business model is an important goal.

Sustainability of our business model is an important goal, and we are working towards it by increasing the depth of our development drilling locations and expanding the breadth of our opportunity inventory into work-over, optimization and secondary recovery projects

2

Legacy Oil+Gas Inc.

2010 Annual Report

As our industry increasingly utilizes horizontal multistage fracture stimulation technology in an ever broader number of plays, corporate decline rates are bound to increase because the horizontal multistage frac wells are characterised by their strong flush production rates with steep initial declines. Legacy recognized this potential challenge from the beginning and moved decisively to mitigate the downside to an increasing corporate decline rate by acquiring the long-life, low-decline Turner Valley light oil pool in Alberta and aggressively pursuing waterflood development in a number of our key

“

In 2010, we expanded our operations into a number of emerging light oil plays. Success in any one of these could result in significant upside for the Company.

�

“

Legacy has established itself as a leader in light oil resource play development and as a result Legacy shareholders will continue to benefit from the Company’s significant light oil resource play exposure.

”

producing areas. These projects have the ability to grow Legacy’s reserves, production and cash flow through their associated upside opportunities, as well as capacity to moderate our corporate declines and provide a stable base of free cash flow that we can use to fund additional growth opportunities throughout the Company. This successful strategy is consistent through all of our transactions and assets and further de-risks our business model and bolsters sustainability.

The cost side of our business has also received our attention. In a rising commodity price cycle, service costs and operating costs can succumb to inflationary pressures and, while top-line revenues continue to grow, there is a great temptation to let the bottom line drift upwards, resulting in a higher cost structure, thereby reducing a company’s competitive advantage. This is especially impactful if commodity prices decline.

Legacy continues to reduce operating costs (20 percent decrease in 2010 compared with 2009) and when we combine this reduction with our highquality light oil production and favourable royalties, it results in top decile netbacks or margins. In addition, the Company implemented a number of initiatives in 2010 to control and reduce capital costs associated with its development drilling program and is progressing on two key initiatives for 2011 to secure access to frac and drilling services and improve the efficiencies in the delivery of these

services, resulting in potential cost savings.

We have not focused exclusively on downside mitigation, and chased all the material upside for our business.

Legacy has established itself as a leader in light oil resource play development and as a result Legacy shareholders will continue to benefit from the Company’s significant light oil resource play exposure. We have expanded our operations into a number of emerging light oil plays over the past year, including the Spearfish in North Dakota, the Alberta Bakken, the Cardium at Turner Valley, and the Chinkeh at Maxhamish, British Columbia. Each play involves a similar technical approach and is consistent with the core technical competencies that we have evolved at Legacy: exploitation of large hydrocarbon in-place resources with low recovery factors through the use of technology. Furthermore, Legacy’s exposure to each play is meaningful enough that success in any one could result in significant upside for the Company.

It is also important to note that no reserves have been attributed to any of these plays in our December 31, 2010, reserve report.

Our business success is directly linked to our reputation as a responsible corporate citizen. We truly care about the communities in which we live, work and operate. Our goal is to create economic and social wellbeing, and we conduct our business under strict guidelines that set forth

the performance standards we expect from our employees and contractors.

Respect for the environment is an important aspect of our day to day activity and we endeavor to incorporate these standards in executing each and every operation that we undertake. We are committed to maintaining high standards of ethical conduct and pursuing our business operations with integrity and respect for the various cultural environments with which we interact. Since our inception, Legacy has encouraged and supported local community involvement in all the areas in which we live and work. We are proud to have established the Legacy Community Foundation, which will use the proceeds from the sale of water rights to the Town of Okotoks as the core source of funding for donations in the Towns of Okotoks, Turner Valley and Black Diamond, the Village of Longview, and the Municipal District of Foothills regions.

Subsequent to the year end, Legacy acquired 800 Bbl/d (2010 exit rate) and 9.1 MMBbl of proved plus probable reserves of high-quality, high-netback light oil assets in an early-stage resource play focused in the Pierson area of southwest Manitoba. This acquisition represents the successful continuation of Legacy’s business plan to acquire high-quality light oil assets that can deliver significant development drilling and exploitation opportunities through the application of new technology, while simultaneously building a sustainable, predictable production base that provides

Legacy Oil+Gas Inc.

2010 Annual Report

5

2010 Operating Highlights

Average Production

8,765 Boe per day(1)

Reserve Life

17.9 years

Net Undeveloped Land

538,000 acres

2010 Exit Production

13,000 Boe per day(1)

(1) Boe means barrel of oil equivalent. All Boe conversions in this report are derived by converting natural gas to oil equivalent at a ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent. Boe may be misleading, particularly if used in isolation. A Boe conversion rate of 1 Boe: 6 Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

internally generated free cash flow to fund Legacy’s extensive light oil development drilling inventory. In this play, we have already identified 329 gross (234.0 net) horizontal development drilling locations targeting light oil, of which 239 gross (166.8 net) or 71 percent are unbooked, as well as 10 gross (7.5 net) standing horizontal wells awaiting completion.

OUTLOOK Legacy started the revolution of oil-weighted junior producers with our inception in July 2009. Others have followed our lead, while royalty trusts are transitioning to resource play E&P companies and natural gas-weighted producers are trying to re-invent themselves as oil companies.

As the original oil-weighted junior, Legacy started with and has remained committed to cost-effective per share growth through the build-out of highquality light oil assets comprised of large accumulations of hydrocarbon in-place and resource plays.

We have differentiated ourselves from our peers with our extensive, multidimensional light oil development inventory of work-overs, optimization, drilling and waterflood opportunities. Legacy’s lower-decline, highquality, high-netback production base provides a stable foundation of internally generated cash flow to fund our development opportunities and, when combined with our strong balance sheet and financial flexibility, further distinguishes us from the rest of the pack. Our successful execution of our business strategy has garnered Legacy being named 2010 Producer of the Year by Oilweek magazine, as well as the recent inclusion of the Company in the S&P/TSX Composite Index.

While the Canadian oilpatch revolution continues, Legacy’s evolution has only just begun. The Company’s quality core producing assets and participation in well-defined light oil resource plays has broadened and improved the visibility of the road to growth

in front of us. Our material exposure to a number of emerging light oil resource plays coupled with our low cost of entry adds exciting potential to materially change the development inventory, net asset value and growth trajectory of the Company without mortgaging our future. And as we have built Legacy’s assets from the ground up, we have also built a team of energetic, hard-working, experienced and innovative professionals dedicated to value creation.

I would like to thank our Board of Directors for their guidance, our employees and field staff for their dedication and hard work, and our shareholders for their support as we build our Legacy.

On behalf of the Board of Directors,

“signed” Trent Yanko, President + CEO March 14, 2011

Legacy Oil+Gas Inc.

2010 Annual Report

7

Highlights

A Winning Strategy in Action Key events in 2010 and beyond 2010 HIGHLIGHTS Closed three private company acquisitions; acquired high quality, high netback, light oil assets in the Company’s southeast Saskatchewan core area and established the dominant position in the 1.3 billion barrel original oil in-place low decline, light oil field at Turner Valley Increased average production from 1,881 Boe per day in 2009 to 8,765 Boe per day in 2010 (366 percent increase); exceeded 13,000 Boe per day 2010 exit production rate guidance 2010 equity financing totalled $271 million and credit facility increased to $340 million Subsequent to year end, Standard & Poors announced that Legacy would be added to the S&P/TSX Composite Index, effective March 21, 2011

Wells Drilled

97

As a result of Legacy’s increased capital budget, we were able to drill 97 gross (66.9 net) wells in 2010 with a 100 percent success rate.

Average Daily Production

8,765

BOE

Increased drilling resulted in average production of 8,765 Boe per day in 2010, up 366 percent from 1,881 Boe in 2009.

Reserves

77.8

MMBOE

Legacy’s gross proved plus probable reserves climbed 382 percent in 2010.

Net Undeveloped Land

538,000

ACRES

In its first full year of operations, Legacy’s proved plus probable reserves grew 131 percent per share, Boe per day increased 28 percent per share, and cash flow rose 29 percent per share.

The Company also reduced operating costs by 20 percent.

Legacy remains committed to cost-effective per share growth through the build-out of high-quality light oil assets comprised of large accumulations of hydrocarbon in-place and resource plays.

Legacy’s undeveloped land holdings rose 107 percent in 2010.

Reserves P+P (per basic share) Boe per day (per basic share) 700 600 500 400 300 200 100 0

Q3 Q4 Q1 Q2 Q3 Q4 2009 2010

Cash Flow (per basic share) $

0.10 0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0.00

Q3 Q4 Q1 Q2 Q3 Q4 2009 2010

G&A Expenses (per Boe) $

0.40

18.00

0.35

16.00

0.30

14.00 12.00

0.25

10.00

0.20

8.00

0.15

6.00

0.10

4.00

0.05

2.00

0.00

0.00

Q3 Q4 Q1 Q2 Q3 Q4 2009 2010

Q3 Q4 Q1 Q2 Q3 Q4 2009 2010

Legacy Oil+Gas Inc.

2010 Annual Report

9

A Winning Strategy in Action

We established Legacy Oil + Gas Inc. in 2009 in the midst of an economic downturn that we strongly believed offered exceptional opportunities for reduced cost structures, industry consolidation, and the leveraging of potential oil-price increases. We brought to the table an experienced management team with a proven track record of aggressively growing oil and natural gas companies. Equally important, we focused our business plan on cost-effective per share growth through the build out of high-quality light oil assets, primarily located in western Canada and concentrated in large hydrocarbon reservoirs and resource plays.

There are several compelling reasons why we focused on light oil. Light oil is always in demand by refiners because of its high quality. Moreover, demand for light oil is increasing worldwide while supply is becoming more challenging. Light oil also provides high operating netbacks, effectively making Legacy a low-cost/high-margin producer. High netbacks enable high recycle ratios and superior rates of return. In turn, high recycle ratios help to insulate Legacy’s business plan by providing free cash flow for reinvestment.

Concentrating our assets in large hydrocarbon reservoirs and resource plays supports our quest for sustainability.

Our assets have substantial original oil in place (“OOIP”) and provide us a sustainable reserve base featuring lower production declines that also produce robust, predictable, and repeatable multi-year returns. This allows Legacy to generate significant cash flow to fund capital expenditures while maintaining a strong balance sheet with surplus debt capacity. These assets also offer the potential for increased recoveries through secondary and tertiary methods.

Our marrying of significant high-quality light oil development inventories with significant internally generated cash flow continues to set us apart from our peers. Unlike a number of our competitors, Legacy has the financial strength to

10

Legacy Oil+Gas Inc.

2010 Annual Report

weather price volatility and fund aggressive organic and opportunistic growth.

We made great strides in 2010 in executing our business plan. We targeted hydrocarbon-in-place light oil reservoirs suitable for recovery-factor enhancement through the application of technology. At the same time, through $740 million in acquisitions during the year, we continued to build Legacy’s asset base with properties that are predominantly focused on light oil, operated with high working interests and offer an extensive multi-year development inventory.

Legacy began 2010 with a light oil development drilling inventory of 385 gross (268.9 net) locations, representing five years of development potential, and undeveloped land holdings of 259,787 net acres. By year end, we had grown our drilling inventory to 655 gross (462.5 net) locations representing over six years of development potential, while undeveloped land holdings rose 107 percent to approximately 538,000 net acres and gross proved plus probable reserves climbed 382 percent to 77.8 million Boe. We also almost doubled Legacy’s proved plus probable reserve life index to 17.9 years at December 31, 2010, based on fourth quarter average production, compared with 9.3 years at December 31, 2009.

In May 2010, we strengthened our position in southeast Saskatchewan by acquiring Villanova Resources Inc. (“Villanova”) with assets comprised of high-quality, high-netback light oil production, 4.5 million Boe of proved plus probable reserves and approximately 60,000 acres of undeveloped land.

Also in the second quarter of 2010, we broadened Legacy’s geographic focus when we purchased our portion of the farmor’s interest in the Legacy-operated Maxhamish area of northeastern British Columbia, covering 69,440 gross acres of land that is prospective for light oil.

Why Focus on Light Oil? • Demand for light oil is increasing worldwide • Supply of light oil is becoming more challenging • Light oil provides Legacy with high operating netbacks, effectively making the Company a low-cost producer • High netbacks enable strong recycle ratios and superior rates of return • Strong recycle ratios help to insulate Legacy’s business plan

Then, in July 2010, in order to further secure significant, predictable, long-life production and reserves – and substantial upside – Legacy acquired CanEra Resources Inc., (“CanEra”) taking over that company’s interests in a 1.3-billion-barrel OOIP field at Turner Valley, Alberta. The site of Alberta’s first commercial oil well, Turner Valley offers a large resource of light oil and natural gas that previously had been exploited with antiquated drilling, completion, and stimulation techniques and inconsistent reservoir management practices. As with the majority of our plays and assets, we will apply new technology to increase recovery factors in our Turner Valley holdings. We consistently look at optimization and secondary or tertiary recovery to add the next wedge of value creation, an important sustainability component that has also helped Legacy transition from a junior to an intermediate oil and natural gas company. In addition to increasing Legacy’s development drilling inventory and undeveloped land holdings, the CanEra acquisition reduced Legacy’s corporate decline rate by one-third, substantially increased its reserve life index, and significantly expanded its free cash flow base.

Lastly, in early November 2010, Legacy acquired the assets of Bronco Energy Ltd. (“Bronco”), a Calgary-based oil producer.

Due to our success in several core areas in 2010, we were able to accelerate the implementation of a number of capital projects and increase our capital expenditure budget to $165 million. Improved production run times, reduced operating costs, and increasing production contributed to the bottom line. As a result of the increased capital budget, Legacy was able to drill 97 gross (66.9 net) wells in 2010 with a 100 percent success rate. Increased drilling resulted in average production of 8,765 Boe per day in 2010, up 366 percent from 1,881 Boe in 2009. Late in the year, we also increased our exit guidance to 13,000 Boe per day, repre-

senting a 126 percent growth rate over the 2009 exit rate guidance.

As 2011 commenced, we continued our winning strategy by acquiring 800 Bbls per day (2010 exit rate) and 9.1 million Bbl (gross) of high-quality, high-netback proved plus probable light oil reserves in the Pierson area of southwest Manitoba, for a total consideration of $93 million in cash and 6.18 million Legacy common shares. Legacy financed the Pierson acquisition by completing a bought deal financing that raised $140 million. This acquisition gives Legacy an operated high working interest in 37,284 gross (32,217 net) acres and enhances our position in the Spearfish light oil resource play, where we hold 54,800 gross (43,840 net) acres of undeveloped land on the US side in Bottineau County, North Dakota.

Legacy’s credit lines now total $340 million and are expected to increase, and current oil prices have enabled us to accelerate our business plan. In a very short time, we have transformed Legacy from a modestly capitalized junior producer into a light oil focused, well capitalized intermediate producer with significant concentrated and operated resource assets.

While we have broadened our scope geographically, our organic growth activity focuses almost exclusively on horizontal drilling, with most completions involving multi-stage fracturing. Our knowledge of this completion technique is a critical competitive advantage for us and has been pivotal in establishing Legacy as a leader in light oil resource play development. We intend to leverage this expertise into the discovery, capture, commercialization, and ultimate development of additional light oil resource play opportunities. These efforts will bolster Legacy’s already impressive development growth opportunities, while solidifying the long-term sustainability of our business plan. ■

Legacy Oil+Gas Inc.

2010 Annual Report

11

Operations

eVOLUTION Vs. REVOLUTION The anatomy of an acquisition

Legacy’s ability to acquire assets is strategically important for our company because it facilitates the kind of aggressive, cost-efficient growth we want to achieve.

By completing 10 acquisitions in 18Â months, we have quickly assembled a robust portfolio of assets that generates free cash flow today and provides visible development drilling upside for the future. In other words, when we make an acquisition we are not only aggregating production, we are also buying the future opportunity that the drilling inventory provides.

We have successfully integrated all these acquisitions, as evidenced by a steady reduction in operating costs, which declined 20 percent in 2010 to $11.28 per Boe, compared with $14.14 in 2009.

In making an acquisition, our team is proactive and totally engaged.

Because we specialize in light oil resource plays, we are in a good position to assess the reserves and their upside potential. We also look at what we can add to the assets: better application of technology; the capital required to develop an asset more fully; or any other key that will unlock upside potential. While we are always on the look out for acquisition opportunities, we are also highly selective, turning down any potential deal that fails to meet our strict criteria.

Our acquisition in Turner Valley, Alberta in 2010 has added considerable depth to our portfolio while offering us strong potential to leverage our existing expertise.

Legacy Oil+Gas Inc.

2010 Annual Report

13

Our strategy is to turn our resource plays into repeatable operations that deliver predictable and optimal long-term performance.

The vendors who have sold their companies and assets to us have consistently demonstrated their confidence in both our strategy and their former assets. Every one of our transactions to date has involved the vendor taking back a portion of the purchase price in Legacy common shares. In aggregate, our transactions have been comprised of approximately 50 percent cash and 50 percent Legacy equity, and virtually all of our transactions have been one-off deals, so we have not had to go to auction or compete to acquire assets.

Price of entry is also an important acquisition criteria for us.

Legacy’s initial acquisitions were in southeast Saskatchewan in areas that included the Bakken light oil resource play where our team already had experience. The province’s royalty platform and business environment are favourable and conducive to aggressive-growth companies like Legacy.

In 2010, our acquisition of Villanova enhanced our position in southeast Saskatchewan, with complementary assets offering high-netback light oil production and significant reserves.

CanEra, which was comprised of the Turner Valley field, is a good example of an acquisition that adds considerable depth to our portfolio while also offering us strong potential from both a geological and engineering perspective to leverage our existing expertise.

Turner Valley is a giant oil field with 1.3 billion barrels of OOIP (ERCB estimate) in a single pool. It is also a very stable base of production. Historical oil declines have been less than one percent. All of this translates into a strong free cash flow base that we can use to both exploit this field over the long term and fund our other capital opportunities.

In addition, our Turner Valley assets have similarities to our Bakken properties in Saskatchewan: large oil-in-place reservoirs with potential to improve recovery factors. The skill sets required to develop both assets are similar, enabling us to transfer and apply our technological expertise to Turner Valley.

Turner Valley has been producing oil and natural gas from the Rundle formation for more than 85 years, and was originally developed with vertical wells. Some horizontal wells were drilled in the late 1990s to mid-2000s, but no new completion techniques, including multi-stage frac technology, had been applied to the wells. Our predecessors’ horizontal drilling results showed average initial production rates of about 80 barrels a day. However, a number of the more recent wells were achieving rates between 100 and 400 barrels a day – without applying any new completion technology. We are optimistic that with the application of multi-stage frac technology, we will increase the average initial production rates above the previous averages, possibly approaching the previous higher level results.

Since Legacy’s inception, we have targeted and chosen assets that deepen and broaden our drilling inventory. That inventory now has significant dimension, because several of our plays are potential secondary recovery candidates, which can add a whole new layer of growth, reserves, and cash flow for years to come. ■

How Legacy Plans to Achieve Sustainability • Invest in resource plays with large original oil in place • Build significant visible and repeatable development inventories • Pursue infill drilling opportunities • Use waterflood and tertiary recovery techniques to grow reserves and moderate corporate decline rate

Legacy Oil+Gas Inc.

2010 Annual Report

15

Operations

manufacturing Organic growth Taking assets to a new level Legacy combines a deep drilling inventory with strong internally generated cash flow.

This cash flow insulates us from the vagaries of capital markets and allows us to execute our capital program without relying heavily on external sources of capital. It also enables us to grow the Company aggressively and cost-effectively.

While Legacy is growing through acquisitions, we are also growing organically. Although organic growth doesn’t make headlines, it continues to be the powerhouse behind Legacy.

Our strategy is to turn our resource plays into repeatable operations that deliver predictable and optimal longterm performance. We believe that by doing our technical homework on our large oil-in-place reservoirs, we increase recovery factors and enjoy phenomenal benefits. The Stoughton/Heward play in southeast Saskatchewan is a good example.

16

Legacy Oil+Gas Inc.

2010 Annual Report

We went into Heward with the belief that the previous operator had been stimulating the wells such that the fracture stimulations extended beyond the oil-bearing formation into the adjacent water-bearing formation (fracing out of zone). We made changes to the fracs and are now containing them within the oilbearing zone. The wells are coming on with lower water cuts and higher oil rates, so we see potential for further performance uplift. Much the same thing is happening in Stoughton, where our drilling has produced much better results than the historical average.

Similarly, in the case of our Taylorton, Saskatchewan property, our acquisition valuation was based on achieving production results in line with the main Viewfield Bakken play, which has a solid six-year track record. However, rather than accept the status quo, we made

Legacy’s asset inventory now has significant dimension and potential to add a whole new layer of growth, reserves and cash flow for years to come.

Manufacturing Organic Growth

some proprietary changes to the way we design and execute our fracs and as a result the wells we have brought into production at Taylorton in 2010 are outperforming the Viewfield Bakken production type curve and continuing to improve over our initial results in the area. In fact, our best results have come from our most recent drilling in the play, demonstrating the success of our continuous improvement strategy.

Dakota. Given its size and scope, our Spearfish play has great potential to evolve into a “manufacturing” type operation where we achieve consistent results by: first, proving up a significant opportunity base on a few wells; second, applying the same techniques to our other wells in the play; and lastly, aiming for continual improvement.

We are able to see results quickly, not just in drilling and production, but also in financial results.

Even a slight increase in performance can have a huge impact on Legacy’s bottom line. Making a 10-barrel-per-day improvement to one well by refining a completion technique may seem minor. However, if we apply that same improvement to 100 locations on the play, we increase total production by 1,000 barrels per day. Equally important, we benefit from that increase at minimum incremental capital and operating cost. These barrels are the highest margin, greatest return barrels in our portfolio.

Another operating area that could significantly alter Legacy’s value through repeatable well results is the Spearfish light oil resource play, which runs from southern Manitoba into North

Why Resource Plays Deliver Predictable and Optimal Long-term Performance • Large areal extent • Geologically similar throughout play • Repeatable well results • Generally improving well results and lowering costs over time as understanding of the play improves and technological advances are applied • Evolves into a “manufacturing” type development of continual improvement and consistent results

18

Legacy Oil+Gas Inc.

2010 Annual Report

It is important to note that we do not factor unproven plays into our overall business plan. While they do appear in our capital budget, they are not included in our inventory or our guidance targets. This means we can go into an early-stage play and pilot it, and if it is not successful, it does not affect the Company’s business plan. However, this does not alter the fact that we have a large inventory that we can count on to grow Legacy consistently over the next three to five years. On the other hand, if we do have success in a new play like Spearfish, Maxhamish or the Alberta Bakken, and we can prove the commerciality of the results, we will supercharge Legacy’s growth trajectory. ■

We ARE committed to strong, long-term growth Many smaller companies run into trouble because either they exhaust their growth opportunities or they no longer can cost-effectively access capital. Legacy is addressing such risks by building a high-quality inventory through acquisition and organic growth and by generating our own free cash flow base to support growth.

We achieve this by focusing on light oil and on resource plays that provide the potential for repeatable well results. Consequently, Legacy has been able to grow rapidly. We do not have to wait several years to understand whether our wells are going to pay out.

As we put capital into the ground, we are able to see results quickly, not just in drilling and production, but also in financial results. High netbacks and strong cash flow allow us to keep our balance sheet in order and maintain a good debt to cash flow ratio.

We have a robust economic model going forward.

While our emphasis is on development and minimizing risk, the nature of our business and today’s economic climate dictates that we gravitate toward becoming a larger company. The plays and new technologies are becoming more capital intensive, land is costly, and the wells are expensive. Larger companies have the resources – in every sense of the word – to exploit opportunities fully, compete aggressively, and withstand setbacks and volatility. Legacy’s strategy thus far has enabled us to evolve from a junior to an intermediate player, and we are well positioned to continue to execute on our business plan.

Legacy has a solid foundation. We anticipate doubledigit organic production growth on a per share basis – in the 10 to 14 percent range, year over year – based on the inventory we have in place. It is important to note that Legacy is a company committed to the long term.

Everything we do, from our inventory to our technology, is geared to an enduring performance and steady returns for shareholders. ■

TECHNOLOGY

UNLOCKING THE UPSIDE How Legacy leverages Technology Recovery factors in oil reservoirs can be as low as five to 15 percent of OOIP, particularly in tight, unconventional resource-type plays.

reservoir engineers, and enhanced recovery is central to our resource play development plan, with an emphasis on horizontal drilling.

As the industry moves to increased levels of horizontal drilling and multistage fracing, average production declines are increasing.

Technology has the power to improve those numbers, and it is especially valuable when one is working with the large accumulations of oil that Legacy has targeted. A one percent change in recovery factor on a billion barrels of oil in place (such as at Turner Valley) can make a huge difference to recoverable reserves and ultimately to the bottom line.

When we launched Legacy in 2009, prevailing completion practices dictated a certain number of stages and a specific type of frac. Today, we are seeing variations on that protocol, and at Legacy, we are being proactive in advancing the technology. We design every one of our fracs in-house, so we do not rely solely on our service companies. We have our own internal reservoir model, and conduct a lookback assessment after each frac so we can continue to refine our techniques.

Legacy is proactive in addressing these higher declines. One way we are achieving this is by acquiring lower-decline assets, such as the Turner Valley field, but we are also exploring other means of improving recovery and boosting production such as by waterfloods, tertiary recovery and other reservoir management techniques, as well as optimizing production operations through new pump technologies and new facilities.

Legacy is technology driven. Our management team includes several

20

Legacy Oil+Gas Inc.

2010 Annual Report

We are already bringing along a significant number of waterflood projects that will add a new growth profile to Legacy. The Bakken, Turner Valley, and Spearfish plays are all excellent candidates – all areas with great multiyear inventory – thus enabling us to stabilize production, reduce declines, and grow our reserves without using a drilling rig. ■

How Horizontal Fracing Works Technology Hydraulic fracturing – also called fracing – is the process of pumping highly pressurized fluids to create cracks in hydrocarbon bearing rocks underground. Sand (referred to as proppant) or etching additives (hydrochloric acid for carbonate formations) are added to the pumping fluid to ensure that the cracks created by the frac remain open to flow. The purpose of fracing an oil reservoir is to enable the oil and gas to flow more easily from the formation to the wellbore, a process known as stimulation, thereby increasing the rate and ultimate recovery of oil. Almost all of the onshore North American reservoirs remaining today require some form of stimulation treatment to be able to bring production rates to economic levels.

Frac pumpers



STAGE

STAGE



STAGE



STAGE

Fluid tank Blender truck

Sand truck

Once the well has been drilled to total depth and cased to isolate all uphole zones, a special steel pipe liner is run into the wellbore to facilitate the multi-stage fracing process. The steel pipe liner allows the fracing fluids to be directed to specific and variably spaced intervals.

The fracing equipment including monitoring/data truck, fluid storage, pumping units, blending units to mix in sand or etchant and various surface piping is brought to the lease and all connected to a special high pressure wellhead.

The frac fluid and proppant/etching is pumped into the wellbore at high pressures and the fracs initiated in stepwise fashion from toe to heel in horizontal wells and bottom to top in vertical wells.

Once all the stages of the fracing process are complete, the well is flowed back to recover the fluid used to pump the fracs and initiate oil flow from the reservoir.

Fracturing fluid and proppant are pumped into well bore at high pressure

Producing formation

Fractures

A mixture of water and sand is injected into the rock formations causing “fractures” that release natural gas and oil trapped there.

Legacy Oil+Gas Inc.

2010 Annual Report

21

PROPERTIES

PRODUCING + EMERGING PROPERTIES Legacy’s assets are a combination of technology-driven resource plays and conventional opportunities.

Resource plays are typically lower risk and provide repeatable opportunities with predictable paybacks on capital, high investment returns and favourable risk/reward profiles. The cash flow generated from conventional assets helps finance our investment in resource plays, eliminating the need for additional external capital to fund the Company’s drilling program, thus reducing financial risk.

Legacy’s producing properties are predominately operated with high working interests, 3D seismic coverage and control of key producing infrastructure, and are associated with a large, light oil-prospective undeveloped land base. By being geographically focused, Legacy is able to maintain strict capital and operating cost control.

Alberta Rundle and Cretaceous Turner Valley • Site of Alberta’s first commercial oil well and a huge resource: 1.3 billion Bbl OOIP, 1.6 tcf OGIP (ERCB estimates). 40o API light oil, liquids-rich solution and nonassociated natural gas.

• Production stable at 5,000 Boe/d; low historical oil decline rates – less than 1%.

• 110 gross (86.0 net) locations; multiple uphole natural gas and oil zones.

• Current recovery factor 12%; typically 50% or more for similar vintage fields.

• Operated high working interests, with extensive infrastructure, batteries and natural gas plant.

Opportunities to optimize wells and facilities with new pump technology and NGL separation.

• Opportunities to increase recovery factor through vertical and horizontal multi-leg infill and stepout drilling, multi-stage fracturing, waterflood optimization and 3D seismic to place new wells.

22

Legacy Oil+Gas Inc.

2010 Annual Report

• Three vertical wells drilled Q4 2010 and Q1 2011; average IP 60 – 80 Bopd. Plan 5 – 6 new horizontal wells in 2011; all will be completed with multi-stage fracs.

• Multiple uphole zones, mostly sweet natural gas and oil, predominantly 100% working interest.

• Cardium potential untested over field area. A vertical oil well 3 km west of Unit 6 produced 19 MBbl oil before being shut-in. Log and drilling shows a long trend. One horizontal well and two recompletions budgeted for 2011.

• Blairmore and Jurassic zones have potential. 1+ Bcf produced from each of 21 wells; 230 MBbl produced from Home sand pool. Defined trends of natural gas sand zones above Unit 7. Considerable untapped potential over oil units. Numerous log and drilling shows. Four completions budgeted for 2011.

Legacy’s core operations are concentrated in southwestern Alberta and the Williston Basin in Saskatchewan, Manitoba and North Dakota, including the prolific and fast-growing Bakken light oil resource play.

A LBERT A

M A NITOB A Edmonton

S as k a t c h e wa n Calgary

Regina Winnipeg

Alberta Bakken

Multi-zone

Southern Alberta

Strathmore

• 100-mile+ fairway deep basin tight oil resource play including Banff/ Exshaw/Big Valley formations.

Since late 2009, 59 wells have been licensed and/or drilled. Nexen, Shell, Murphy and Crescent Point active in area. Shows in several zones. Key 1979 Big Valley producer (10 – 30) surrounded by joint venture lands.

• Multi-zone oil and natural gas area, sparsely drilled compared to offsetting lands.

• Joint venture with Bowood gives Legacy exposure to 183 sections (117,000 acres), paid $8 million cash for 50% working interest in 33,280 acres.

• Two horizontal well farm-in commitment on remaining lands including contiguous 90-section block on Blood First Nation Reserve; rolling option to earn all lands.

• Each horizontal well earns Legacy a 50% interest in eight sections.

• Additional prospective light oil targets: Second White Specks, Barons, Mannville, Nisku and Banff formations.

• 500 sections available through farm-in; access to 250 additional sections.

• Shot 81-square-mile 3D seismic program; own additional 580 square miles of trade 3D seismic on remainder of lands.

• Selected 48 sections initially; 18 conventional oil targets identified in Glauconitic, Ellerslie, Basal Quartz.

• Potential areally extensive (80+ sections) Viking light, sweet oil resource play.

• Two accumulations mapped in Viking; one 50 sections, one 35 sections. Targeting one accumulation with frac horizontal well in 2011.

• Recently drilled and cased vertical well, completing Basal Quartz and Viking. Drilling five commitment wells by year end 2011.

Legacy Oil+Gas Inc.

2010 Annual Report

23

Saskatchewan Bakken

Bakken

Torquay

Taylorton

Heward/Stoughton/Star Valley

Antler/Frys Torquay/Souris Valley

• Legacy holds dominant position in an emerging, operated, highworking interest (75%), highimpact Bakken light oil resource play with multi-year inventory.

• Significant position in the established light oil resource play at Viewfield. Approximately 40% of our Bakken locations are in this area. Working interests range from 12.5% to 100%, with majority comprising higher working interest plays.

• Significant light oil (40o API) resource play in the Torquay Formation, offering strong prospects for future delineation and development drilling.

• Canada: 28,116 gross (22,000 net) acres; average working interest 77.3%. US: 4,040 gross (1,010 net) acres; average working interest 25%.

• Large, light sweet crude (42 – 44o API) oil accumulation includes significant high-heatcontent, liquids-rich (120+ Bbl/MMcf) associated natural gas reserves.

• 40 wells drilled; refinements to completion techniques resulted in better production rates than historical averages. Long lateral horizontals with 16– to 24-stage fracs.

• 44-square-mile proprietary 3D seismic program.

• Central battery construction completed; tie-in to Enbridge and BP system under way.

• Pilot injection waterflood project approved.

24

Legacy Oil+Gas Inc.

2010 Annual Report

• Potential for 114 gross (64 net) development horizontal locations.

Development to four wells per section; step-out drilling.

• GLJ Consultants Ltd. estimate from mapping shows gross lease resource of 91.9 MMSTB of discovered PIIP.

• Significant upside: 125 gross (75 net) downspacing locations, re-fracs, waterflood, and expansion of play to west and north.

• Majority of adjacent Sinclair field currently being successfully waterflooded, with potential recoveries of 30% to 50% (based on public data). Detailed reservoir modelling study under way; pilot planned for Legacy lands in 2011.

• Completion refinements developed at Taylorton have improved initial oil rates and lowered initial water cuts. Recent success with downspacing wells.

• Waulsortian mounds in Souris Valley identified on 3D seismic; several successfully drilled (IP 60 – 180 Bopd); additional targets identified.

• Heward battery connected to Enbridge pipeline system, reducing production downtime and trucking costs.

• Approval process initiated for waterflooding; pilot planned for 2011.

Saskatchewan

Manitoba/North Dakota

British Columbia

Various Formations

Spearfish

Chinkeh

Conventional Mississippian Assets

Bottineua County, Pierson

Maxhamish

• Legacy’s resource plays are supplemented by conventional Mississippian light oil assets (35 – 40o API), providing an inventory of high-netback, low-cost, short-payout drilling opportunities.

• Spearfish fairway between Pierson and Waskada, Manitoba, and extended into Bottineau County, North Dakota. Large in-place pools in Manitoba. Marginal results with vertical wells; highly successful application of horizontal wells and stage frac techniques; typical IP of 150 – 200 Bopd. Waskada has been drilled at up to 24 wells per section by other operators.

• Operated 61.5% working interest in 69,440 acres of contiguous land; area prospective for 40o API light sweet oil found at a depth of 1,600 metres, 3 – 5 metres net pay.

• High investment return; cash flow helps fund investment in resource plays, as well as funding drilling of additional Mississippian locations.

• More than 250 gross development drilling locations.

• Key zones: Souris Valley, Tilston, Alida, Frobisher and Midale; all areas well defined by 3D seismic.

• Key areas: Alameda, Steelman, Edenvale, Nottingham, Manor and Parkman.

• Legacy owns/operates key producing infrastructure.

• 54,800 gross (43,840 net) undeveloped acres in Bottineau County, North Dakota. Sparsely drilled fairway: logs, cores and vertical well production support play continuation from Manitoba.

Five horizontal wells drilled to date; completions expected by early Q2 2011.

• Drilled two 1,400 metre long horizontal wells in 2010 offsetting five existing vertical producers; 11-stage multi-frac in each horizontal well; wells brought on production in Q2 2010 with encouraging results.

• Proximity to Liard Highway and area topography support yearround access.

• 2011 program under way, including all-season road construction; three to four wells and battery.

• 37,284 gross (33,217 net) undeveloped acres in Pierson, Manitoba acquired in early 2011.

329 (234.0 net) locations at eight wells per section, approximately 71% unbooked. 10 (7.5 net) wells waiting on completion.

• If all Legacy lands were prospective, would have 1,000+ potential drilling locations based on eight wells per section.

Legacy Oil+Gas Inc.

2010 Annual Report

25

Financials

We have transformed Legacy from a modestly capitalized junior producer into a light oil focused, well capitalized intermediate producer with significant concentrated and operated resource assets.

RESERVES

In accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (NI 51-101), Sproule Associates Ltd. (“Sproule”) evaluated, as at December 31, 2010, materially all of Legacy’s oil, natural gas liquids and natural gas reserves. Legacy’s annual information form for the year ended December 31, 2010 (the “AIF”) contains Legacy’s reserves data and other oil and gas information for the period ended December 31, 2010 as mandated by NI 51-101. A copy of the AIF can be obtained under Legacy’s profile at www.sedar.com or at www.legacyoilandgas.com. The summary information provided below should be read in conjunction with the detailed information in the AIF. As of December 31, 2010, Legacy’s total proved plus probable reserves base was 77.8 MMBoe. Proved plus probable reserves additions before divestitures were 64.9 MMBoe. These additions represent 2,094 percent of the 3.1 MMBoe produced during 2010. Oil and natural gas liquids accounted for 82 percent of the proved plus probable reserves base.

Legacy’s gross total proved reserves base was 48.1 MMBoe. Total proved reserves represent 62 percent of the total proved plus probable reserves. Proved producing reserves represent 67 percent of the total proved reserves base. Total proved reserves additions before divestitures were 41.5 MMBoe. These additions represent 1,339 percent of the 3.1 MMBoe produced during 2010. Oil and natural gas liquids accounted for 78 percent of the total proved reserves base.

The following tables are a summary, as at December 31, 2010, of Legacy’s petroleum and natural gas reserves as evaluated by Sproule. It is important to note that these estimates are subject to positive and negative revisions as additional reservoir and production information becomes available. The reserves attributed to Legacy are based on judgments regarding future events; therefore actual results will vary and the variations may be material. Reserves information may not add due to rounding.

Gross Company Reserves Summary(1) Using Sproule December 31, 2010 Forecast Prices and Costs

As at December 31, 2010

Light and Medium Oil Natural Gas NGLs (mbbl) (mmcf) (mbbl)

Total Oil Equivalent (mboe)

Proved Producing Proved Developed Non-Producing Proved Undeveloped Total Proved

20,276.6 481.0 10,204.9 30,962.4

44,755.7 113.6 19,222.7 64,092.1

4,628.5 13.6 1,773.7 6,415.8

32,364.4 513.5 15,182.4 48,060.2

Total Proved plus Probable

54,775.6

85,595.1

8,749.6

77,791.1

(1) Gross Company Reserves means the Company’s working interest reserves before calculations of royalties and before consideration of the Company’s royalty interest

Gross Company Reserves Reconciliation – Total Proved(1) Using Sproule December 31, 2010 Forecast Prices and Costs

As at December 31, 2010

Light and Medium Oil Natural Gas NGLs (mbbl) (mmcf) (mbbl)

Total Oil Equivalent (mboe)

Reserves at December 31, 2009 Discoveries Extensions & Improved Recovery Technical Revisions Acquisitions Dispositions Production

9,118.8 – 3,060.4 821.6 20,542.5 (81.6) (2,499.3)

2,926.0 – 1,611.0 106.0 62,104.0 (35.0) (2,620.0)

131.9 – 202.8 40.3 6,241.7 (2.9) (198.0)

9,738.4 – 3,531.7 879.6 37,134.8 (90.3) (3,134.0)

Reserves at December 31, 2010

30,962.4

64,092.0

6,415.8

48,060.2

(1) Gross Company Reserves means the Company’s working interest reserves before calculations of royalties and before consideration of the Company’s royalty interest

Legacy Oil+Gas Inc.

2010 Annual Report

27

RESERVES

Gross Company Reserves Reconciliation – Total Proved plus Probable(1) Using Sproule December 31, 2010 Forecast Prices and Costs

As at December 31, 2010

Light and Medium Oil Natural Gas NGLs (mbbl) (mmcf) (mbbl)

Total Oil Equivalent (mboe)

Reserves at December 31, 2009 Discoveries Extensions & Improved Recovery Technical Revisions Acquisitions Dispositions Production

15,246.4 – 6,152.5 (273.6) 36,257.8 (108.2) (2,499.3)

4,146.0 – 2,450.0 275.0 81,388.0 (44.0) (2,620.0)

201.4 – 300.3 72.1 8,377.8 (4.0) (198.0)

16,138.9 – 6,861.1 (155.7) 58,200.3 (119.5) (3,134.0)

Reserves at December 31, 2010

54,775.6

85,595.0

8,749.6

77,791.1

(1) Gross Company Reserves means the Company’s working interest reserves before calculations of royalties and before consideration of the Company’s royalty interest

Net Present Value of Reserves Legacy’s crude oil, natural gas and natural gas liquids reserves were evaluated using Sproule’s product price forecasts effective January 1, 2011, prior to the provision for income taxes, interest, debt service charges and general and administrative expenses.

Actual reserves and future production will be greater than or less than the estimates provided. Estimated future net revenue from the production of the disclosed reserves does not represent the fair market value of these reserves.

Net Present Value Summary Using Sproule December 31, 2010 Forecast Prices and Costs

Undiscounted As at December 31, 2010 ($M)

Discounted at 5% ($M)

Discounted at 10 % ($M)

Discounted at 15% ($M)

Proved Producing Proved Developed Non-Producing Proved Undeveloped Total Proved

1,348,691.3 25,893.6 686,716.6 2,061,301.5

871,705.9 22,680.9 375,719.8 1,270,106.6

671,739.9 20,341.9 243,366.3 935,448.1

561,044.9 18,557.8 171,127.2 750,729.8

Total Proved plus Probable

3,730,018.9

2,104,091.0

1,457,884.4

1,117,138.7

Sproule December 31, 2010 Price Forecast

West Texas Edmonton AECO-C Intermediate Light Natural Crude Oil Crude Oil Gas Year (US$/bbl) (Cdn$/bbl) (Cdn$/mmbtu)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

88.40 89.14 88.77 88.88 90.22 91.57 92.94 94.34 95.75 97.19 +1.5%/yr

Thereafter

93.08 93.85 93.43 93.54 94.95 96.38 97.84 99.32 100.81 102.34 +1.5%/yr

4.04 4.66 4.99 6.58 6.69 6.80 6.91 7.02 7.14 7.26 +1.5%/yr

Exchange Rate (US$/Cdn$)

0.932 0.932 0.932 0.932 0.932 0.932 0.932 0.932 0.932 0.932 0.932

Note on Use of Boe Boe means barrel of oil equivalent. Legacy has adopted the standard of 6 mcf:1 Boe when converting natural gas to barrels of oil equivalent. Boe units may be misleading, particularly if used in isolation. A Boe conversion ratio of 6 mcf:1 Boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

28

Legacy Oil+Gas Inc.

2010 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following management discussion and analysis (“MD&A”), as provided by the management of Legacy Oil + Gas Inc. (“Legacy” or the “Company”) as of March 14, 2011, is to be read in conjunction with the audited consolidated financial statements and related notes for the years ended December 31, 2010 and 2009 and Legacy’s MD&A for the three quarters ended March 31, 2010, June 30, 2010 and September 30, 2010.

Non-GAAP Measures – The MD&A contains the term funds generated by operations, which should not be considered an alternative to, or more meaningful than cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles (“GAAP”) as an indicator of the Company’s performance. Legacy’s determination of funds generated by operations may not be comparable to that reported by other companies. The Company also presents funds generated by operations per share whereby per share amounts are calculated using weighted average shares outstanding consistent with the calculation of earnings per share.

Funds generated by operations is calculated based on cash flow from operating activities before changes in non–cash working capital and asset retirement obligation expenditures. Funds generated by operations per share–diluted is calculated based on cash flow from operating activities before changes in non-cash working capital from operating activities and asset retirement obligation expenditures. Funds generated by operations as presented is not intended to represent cash flow from operating activities, net income or other measures of financial performance calculated in accordance with Canadian GAAP. The following table reconciles the cash flow from operating activities to funds generated by operations:

Three Months Ended Year Ended December 31 December 31 ($ thousands)

2010

2009

% change

Cash flow from operating activities Changes in non-cash working capital

39,620 (3,151)

12,468 4,900

Funds generated by operations

36,469

17,368

2010

218 (164) 110

2009

% change

112,966 6,645

18,239 4,774

519 39

119,611

23,013

420

Boe Presentation – Boe means barrel of oil equivalent. All Boe conversions in the report are derived by converting gas to oil at the ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent. Boe may be misleading, particularly if used in isolation. A Boe conversion rate of 1 Boe: 6 Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward-Looking Information – This MD&A and the accompanying President’s message contain forward-looking statements.

More particularly, they contain statements concerning the year end debt to forward cash flow ratio, planned drilling and development activities in 2011, the anticipated timing of the completion of tie-in of Taylorton to the Enbridge pipeline, the potential conduct and results of waterflood projects at Taylorton, Heward and Frys/Antler, the anticipated impact on operating and transportation costs of the construction of facilities at Taylorton and Edenvale, the means of funding planned capital expenditures in 2011 and anticipated cash flow in 2011.

The forward-looking statements are based on certain key expectations and assumptions made by the Company, including expectations and assumptions concerning the success of future drilling and development activities, the performance of existing wells, the performance of new wells, the viability of waterflood projects, the availability of services and prevailing commodity prices and economic conditions.

Although the Company believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, risks associated with the oil and gas industry in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), constraint in the availability of services, commodity price and exchange rate fluctuations and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Certain of these risks are set out in more detail herein and in the Company’s Annual Information Form which has been filed on SEDAR and can be accessed at www.sedar.com.

The forward-looking statements contained in this MD&A and accompanying President’s message are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

Legacy Oil+Gas Inc.

2010 Annual Report

29

MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS Description of the Company The Company was incorporated on October 15, 2005 by articles of incorporation under the Business Corporations Act (Alberta).

On July 15, 2009, the Company entered into a recapitalization transaction and investment agreement which resulted in a nonbrokered private placement of approximately $15 million as well as the appointment of a new management team and board of directors to the Company. On November 10, 2009, the Company changed its name from Glamis Resources Ltd. to Legacy Oil + Gas Inc. The current business of the Company includes the investment in all types of energy business-related assets, including, but not limited to, petroleum and natural gas-related assets, gathering, processing and transportation assets. The operations of the Company consist of the acquisition, development, exploration and exploitation of these assets.

During the fourth quarter of 2010, the Company closed the acquisition of Bronco Energy Ltd. (“Bronco”), an Alberta based listed company with oil and natural gas properties located in the Athabasca Oil Sands region of Alberta. The total consideration paid for all issued and outstanding shares of Bronco was $25.5 million in cash and 862,893 Legacy common shares and the assumption of approximately $2.1 million in net debt and working capital deficit. As the acquisition was closed on November 4, 2010, the fourth quarter results include approximately two months of production and operating expenses from the Bronco properties.

Production

Q4 2010

Q3 2010

Q2 2010

Q1 2010

Q4 2009

Q3 2009

Q2 2009

Q1 2009

Daily production Crude oil (Bbls per day) Heavy oil (Bbls per day) Natural gas (Mcf per day) Natural gas liquids (Bbls per day)

8,339 251 13,437 1,073

7,876 – 13,228 1,050

5,477 – 1,341 17

5,924 – 1,364 70

4,583 – 855 3

1,801 – 280 –

391 – – –

513 – – –

Total (Boe per day)

11,902

11,130

5,717

6,221

4,728

1,847

391

513

7%

95%

(8%)

32%

156%

372%

(24)%

% Increase/(Decrease) over prior Quarter

(2)%

For the three months ended December 31, 2010, Legacy increased production 152 percent to 11,902 Boe per day compared to 4,728 Boe per day for the same period in 2009 due to the corporate acquisitions of Connaught Energy Ltd. (“Connaught”), Villanova Resources Inc. (“Villanova”), CanEra Resources Inc. (“CanEra”) and Bronco and the asset acquisition from Athena Resources Ltd. (“Athena”) (collectively the “Acquisitions”). In addition, successful drilling and subsequent tie-in of wells in southeast Saskatchewan added to the increase in production reported in the fourth quarter of 2010 and for the 2010 year.

Crude oil production increased 82 percent to 8,339 Bbls per day from 4,583 Bbls per day for the same period in 2009 and natural gas production increased 14,716 percent to 13,437 Mcf per day during the three months ended December 31, 2010 compared to 855 Mcf per day for the same period in 2009. As well, the Company produced 1,073 Bbls per day of natural gas liquids and 251 Bbls per day of heavy oil for the three months ended December 31, 2010 compared to 3 Bbls per day and nil Bbls per day respectively in the equivalent period in the prior year.

For the fourth quarter of 2010, Legacy recorded slightly less than two months of production from the assets acquired in the Bronco transaction as this transaction closed on November 4, 2010. The Company’s heavy oil production relates to the heavy oil assets acquired as part of the Bronco acquisition.

For the year ended December 31, 2010, production averaged 8,765 Boe per day, consisting of 6,913 Boe per day of crude oil, 63 Boe per day of heavy oil, 7,392 Mcf per day of natural gas and 557 Boe per day of natural gas liquids production.

This represents a 277 percent increase from production for the 2009 year, which averaged 1,881 Boe per day, consisting of 1,833 Boe per day of crude oil, 286 Mcf per day of natural gas and 1 Bbl per day of natural gas liquids production.

During the fourth quarter of 2010, the Company drilled 31 (21.0 net) oil wells with a 100 percent drilling success rate.

For the 2010 year, the Company drilled 97 (66.9 net) oil wells with a 100 percent drilling success rate.

30

Legacy Oil+Gas Inc.

2010 Annual Report

Realized Commodity Prices Three Months Ended Year Ended December 31 December 31

2010

2009

% change

2010

2009

% change

Average benchmark prices Crude oil – WTI (US$ per Bbl) Crude oil – Edmonton Par ($ per Bbl) Heavy oil – Hardisty Heavy ($ per Bbl) Natural gas – AECO-C Spot ($ per Mcf) Exchange rate – (US/CAD)

85.18 80.68 62.15 3.61 0.988

76.17 76.73 64.23 4.36 0.947

12 5 (3) (17) 4

79.55 77.70 62.29 4.16 0.971

61.93 68.11 55.65 4.19 0.880

28 14 (12) (1) 10

Legacy’s average realized prices Crude oil ($ per Bbl) Heavy oil ($ per Bbl) Natural gas ($ per Mcf) Natural gas liquids ($ per Bbl)

78.99 66.24 4.02 50.96

74.13 – 2.84 68.85

7 n/a 42 (26)

76.35 66.24 3.89 52.71

70.50 – 2.61 67.94

8 n/a 49 (22)

Legacy’s realized price for its crude oil in the fourth quarter of 2010 was $78.99 per Bbl (2009 – $74.13 per Bbl) compared to the WTI price of CDN$86.26 per Bbl (2009 – CDN$80.42 per Bbl). Legacy’s oil production is primarily light sweet crude produced in both southeast Saskatchewan and southern Alberta. For the 2010 year, Legacy’s realized price for its crude oil was $76.35 per Bbl (2009 – $70.50) compared to the average WTI price of CDN$81.92 per Bbl (2009 – CDN$67.71).

For the fourth quarter of 2010, the Company’s realized price for its natural gas was $4.02 per Mcf (2009 – $2.82 per Mcf). For the first half of the 2009 year, the Company had shut-in all natural gas production due to the low price environment.

Revenues Three Months Ended Year Ended December 31 December 31 ($ thousands)

2010

2009

% change

2010

2009

% change

Revenues by product Crude oil Heavy oil Natural gas Natural gas liquids

60,599 1,527 4,969 5,030

31,256 – 224 18

94 n/a 2,118 27,844

192,647 1,527 10,503 10,708

47,166 – 272 19

308 n/a 3,761 56,258

Total revenues (excluding realized hedging gains or losses)

72,125

31,498

129

215,385

47,457

354

For the three months ended December 31, 2010, Legacy’s revenues increased 129 percent to $72.1 million from $31.5 million for the same period in 2009. For the year ended December 31, 2010, revenues increased 354 percent to $215.4 million from $47.5 million for the same period in 2009 due to higher production volumes as a result of the Acquisitions, successful drilling and completion activities and higher average commodity prices for crude oil and natural gas in the fourth quarter and the year compared to the same periods in the prior year.

Royalties Three Months Ended Year Ended December 31 December 31 ($ thousands) Royalty expenses % of revenue

2010

11,877 16.5

2009

5,202 16.5

% change

128 –

2010

36,274 16.8

2009

7,055 14.9

% change

414 13

Royalty expenses consist of royalties paid to provincial governments, freehold landowners, overriding royalty owners and the Saskatchewan resource surcharge. For the three months ended December 31, 2010, total royalties increased 128 percent to $11.9 million from $5.2 million for the same period in 2009 due to increased revenues. The Company’s average royalty rate for the three months ended December 31, 2010 and 2009 was 16.5 percent.

Legacy Oil+Gas Inc.

2010 Annual Report

31

MANAGEMENT’S DISCUSSION AND ANALYSIS

For the year ended December 31, 2010, total royalties increased 414 percent to $36.3 million from $7.1 million for the same period in 2009 due to increased revenues. The Company’s average royalty rate for the year ended December 31, 2010 was 16.8 percent compared to 14.9 percent from the same period in 2009. This increase is due to an overall greater ratio of production volumes coming from the acquired properties where a greater proportion of wells are no longer eligible for royalty incentives offered in Saskatchewan, additional freehold royalties on the wells brought in via the Acquisitions and higher overall royalties on the CanEra properties acquired during the third quarter.

Royalties are calculated and paid based on commodity revenue net of associated transportation costs and before any commodity hedging gains or losses.

Operating and Transportation Expenses Three Months Ended Year Ended December 31 December 31 ($ thousands)

2010

2009

% change

2010

2009

% change

Operating expenses Transportation expenses

12,943 3,430

5,527 926

134 270

36,095 6,710

9,708 1,038

272 546

Total operating costs $ per Boe

16,373 14.95

6,453 14.84

154 1

42,805 13.38

10,746 15.65

298 (15)

For the three months ended December 31, 2010, Legacy’s operating expenses were $12.9 million, a 134 percent increase compared to $5.5 million during the same period in 2009. The increase in operating expenses is attributable to the increased production volumes associated with the Acquisitions and successful drilling activities. On a per Boe basis, operating expenses for the three months ended December 31, 2010 decreased 7 percent to $11.82 from $12.71 in the same period in 2009. The decrease is due to successful drilling activities throughout the year ended December 31, 2010 leading to additional produced volumes to offset fixed operating costs as well as recognized synergies relating to the Acquisitions.

For the year ended December 31, 2010, operating expenses were $36.1 million, a 272 percent increase compared to $9.7 million during the same period in 2009. This increase is attributable to increased production volumes due to the Acquisitions and successful drilling activities. On a per Boe basis, operating expenses for the year ended December 31, 2010 period decreased 20 percent to $11.28 from $14.14 for the same period in 2009. This decrease is due to additional volumes from wells drilled offsetting fixed costs on a per Boe basis as well as continued recognition of synergies related to the acquisitions made in late 2009 and the Villanova and CanEra acquisitions made during 2010.

It is expected that additional production facilities being constructed in the Taylorton and Edenvale areas during the last quarter of 2010 should further decrease operating and transportation cost heading into the early part of 2011.

It should be noted that, in the first half of the prior year, transportation costs were included in operating expenses. Subsequently, these costs have been reported separately. When combined, the total operating and transportation costs on a Boe basis for the fourth quarter was $14.95, which compared to the cost of $14.84 for the fourth quarter of the prior year represents an increase of 1 percent on total operating and transportation expenses per Boe. This increase was due to higher operating cost on the properties acquired from Bronco as well as higher transportation cost due to pipeline constraints in Saskatchewan during the fourth quarter which necessitated the trucking of oil to points in Alberta for sale. Also, an increase in processing fees on natural gas volumes was recognized in the fourth quarter. For the year ended December 31, 2010, the total combined operating and transportation cost on a Boe basis was $13.38, a 15 percent decrease compared to the cost of $15.65 for the same period in 2009.

General and Administrative Expenses

Three Months Ended Year Ended December 31 December 31 ($ thousands)

2010

2009

% change

General and administrative expenses Recoveries Capitalized general and administrative expenses

4,953 (715) (873)

2,606 (332) (376)

Total net general and administrative expenses

3,365

1,898

2010

90 115 132

77

2009

13,189 (2,004) (2,617) 8,568

% change

6,080 (364) (752) 4,964

117 451 248 73

During the fourth quarter of 2010, net general and administrative expenses (“G&A”) increased 77 percent to $3.4 million compared to $1.9 million in the same period in 2009. On a per Boe basis, the expense decreased by 30 percent to $3.07 per Boe for the three months ended December 31, 2010 compared to $4.36 per Boe for the same period in the prior year.

This decrease is due primarily to adding additional volumes from the Acquisitions and successful drilling activities while

32

Legacy Oil+Gas Inc.

2010 Annual Report

adding a proportionately lesser amount of head office staff and other G&A costs. Net G&A for the quarter was comprised of $5.0 million (2009 – $2.6 million) in general and administrative expenses less $0.7 million (2009 – $0.3 million) in recoveries and $0.9 million (2009 – $0.4 million) in capitalized G&A. For the year ended December 31, 2010, net G&A increased to $8.6 million from $5.0 million for the year ended December 31, 2009. On a per Boe basis, the expense decreased by 69 percent to $2.68 per Boe for the 2010 year compared to $7.23 per Boe for the 2009 year as the Company has been able to add volumes via the Acquisitions and successful drilling while limiting expenditures on G&A activities. Net G&A for the year ended December 31, 2010 was comprised of $13.2 million (2009 – $6.1 million) in general and administrative expenses less $2 million (2009 – $0.4 million) in recoveries and $2.6 million (2009 – $0.8 million) in capitalized G&A. Stock Based Compensation For the three months ended December 31, 2010, the Company expensed $4.7 million in stock based compensation expense related to outstanding stock options compared to $0.9 million for the same period in the prior year. For the year ended December 31, 2010, the Company expensed $12.5 million in stock based compensation compared to $1.8 million for the prior year. This increase in stock based compensation is due to new stock options being issued to new Legacy directors, officers and employees late in 2009 and throughout 2010.

Interest and Financing Expenses Interest and financing expenses during the fourth quarter of 2010 increased 332 percent to $2.3 million compared to $0.5 million for the same period in 2009. The increase in interest and financing expenses during the quarter was due to the Company increasing debt to offset working capital deficits inherited in the corporate acquisitions and additional debt levels incurred to support growth via acquisitions as well as capital spending in the 2010 year. In addition, the Company’s borrowing capacity was increased early in the fourth quarter, in conjunction with the acquisition of Bronco, resulting in higher standby fees incurred in the fourth quarter of 2010 compared to the same period in the prior year.

For the year ended December 31, 2010, interest and financing expenses were $7.0 million, an increase of 336 percent compared to the $1.6 million in expenses recognized for the prior year. As stated above, this increase was due to the Company incurring higher debt levels in 2010 compared to the prior year to support corporate acquisitions and increased capital spending throughout the year.

Income Taxes Future income tax recovery for the quarter ended December 31, 2010 was $3.1 million, an effective tax recovery rate of 69 percent, compared to an income tax expense of $0.5 million recorded in the same period in the prior year resulting in an effective income tax expense rate of 11 percent. For the year ended December 31, 2010, future income tax recovery was $5.7 million, an effective income tax recovery rate of 25 percent, compared to the income tax recovery of $0.9 million recorded in 2009 resulting in an effective tax recovery rate of 8 percent.

Depletion, Depreciation and Accretion (“DD&A”) For the three month period ended December 31, 2010, DD&A expense was $35.3 million, an increase of 59 percent from $22.2 million recorded in the fourth quarter of 2009. This increase is due to higher production in 2010 due to the Acquisitions and successful drilling activities. On a Boe basis, DD&A for the fourth quarter of 2010 decreased to $32.25 from $51.15 per Boe in the same period in 2009. This decrease is due to the lower cost of proved reserve additions, particularly with the acquisition of CanEra in July 2010. For the year ended December 31, 2010, DD&A expense was $127.7 million, an increase of 286 percent from $33.1 million recorded in the prior year. On a Boe basis, DD&A for the year ended December 31, 2010 decreased to $39.90 per Boe from $48.16 per Boe in the prior year.

Gain (Loss) on Marketable Securities During the three months ended December 31, 2010, the Company recorded a gain of $0.7 million on the investment in units of a traded public company (each unit consisting of one common share and a warrant entitling the holder to purchase an additional common share) compared to a gain of $0.9 million in the same period in the prior year. The gain in the fourth quarter of 2010 is due to the sale of the common shares held and the revaluation of the remaining warrants, subsequently exercised during the quarter, to fair value. The investment in marketable securities is classified as financial instruments which are held-for-trading with changes in fair value for the securities recognized immediately in the consolidated statement of net operations of Legacy.

For the year ended December 31, 2010, the Company recorded a gain of $1.6 million on the investment in marketable securities compared to a gain of $0.9 million in the prior year.

Legacy Oil+Gas Inc.

2010 Annual Report

33

MANAGEMENT’S DISCUSSION AND ANALYSIS

Realized and Unrealized Gain (Loss) on Financial Derivative Contracts

Three Months Ended Year Ended December 31 December 31 ($ thousands)

2010

Realized gain (loss) Crude oil commodity contracts Natural gas commodity contracts

Interest rate swap contract

2009

% change

2010

–

–

731 (11)

– (42)

n/a 132

(42)

(1,814)

n/a

2009

% change

110

–

n/a

1,627 (107)

– (61)

n/a 248

1,630

(61)

(27,721)

Realized gain (loss)

720

Unrealized gain (loss) Crude oil commodity contracts Natural gas commodity contracts Interest rate swap contract

(3,187) (733) 39

– – 17

n/a n/a 129

(7,077) 1,075 72

– – 32

n/a n/a 248

Unrealized gain (loss)

(3,881)

17

(22,929)

(5,930)

32

(18,631)

The crude oil and natural gas derivative contracts were assumed in the CanEra corporate acquisition which closed during the third quarter of 2010 and the interest rate swap contract was assumed in the acquisition of Medora Resources Inc. which closed during the third quarter of 2009.

During the three months ended December 31, 2010, the Company recorded a realized gain of $0.7 million on financial derivative contracts compared to a realized loss of $42,000 in the same period in the prior year. The realized gain (loss) represents the financial derivative contracts settled during the period. For the year ended December 31, 2010, the Company recorded a realized gain of $1.6 million on these financial derivative contracts compared to a $61,000 realized loss in the prior year.

During the three months ended December 31, 2010, the Company recorded an unrealized loss of $3.9 million on financial derivative contracts compared to an unrealized loss of $17,000 in the same period in the prior year. The unrealized gain (loss) represents the fair value change of the underlying financial derivative contracts to be settled in the future.

The net financial derivative contracts asset (liability) consists of current and non-current assets and liabilities. The table below summarizes the fair value of the net financial derivative contracts as at December 31, 2010: Financial Derivative Contract Assets (Liabilities)

($ thousands) Crude Oil Natural Gas Interest Swap

December 31 2010

Current Financial derivative contract asset Financial derivative contract liability

– (112)

2,546 –

– (14)

2,546 (126)

Non-current Financial derivative contract asset Financial derivative contract liability

– (380)

1,990 –

– –

1,990 (380)

Net financial derivative contract asset (liability)

(492)

4,536

(14)

4,030

At December 31, 2010, the fair value of financial derivative contracts was a net asset of $4.0 million. The fair value of this asset represents the estimated amount required to settle the Company’s outstanding contracts at December 31, 2010 which could be materially different than what will eventually be realized.

34

Legacy Oil+Gas Inc.

2010 Annual Report

At December 31, 2010, the Company recorded a $0.5 million liability related to crude oil commodity contracts. The following is a summary of crude oil commodity contracts in place as at December 31, 2010: Crude Oil Commodity Contracts(1)

Term Contract Jan 2011 – Dec 2011 Option Jan 2011 – Dec 2012 Collar

Volume Bbl/d

1,300 1,275

Bought Put Sold Call $/Bbl $/Bbl

70.00 80.00

– 105.50

(1) NYMEX WTI Monthly average converted to Canadian dollars

The Company acquired the crude oil commodity contracts on the acquisition of CanEra Resources Inc. At December 31, 2010, the Company recorded a $4.5 million asset related to natural gas commodity contracts. The following is a summary of natural gas commodity contracts in place as at December 31, 2010: Natural Gas Commodity Contracts(2)

Volume Term Contract GJ/d Jan 2011 – Dec 2012 Jan 2011 – Dec 2012

Collar Collar

3,000 3,000

Bought Put Sold Call $/GJ $/GJ

4.75 5.00

8.35 8.02

(2) AECO 7A Monthly Index

The Company acquired the natural gas commodity contracts on the acquisition of CanEra Resources Inc. At December 31, 2010, the Company recorded a $14,000 liability related to the interest rate swap contract. The following is a summary of the interest rate swap contract in place as at December 31, 2010: Interest Rate Swap Contract(3)

Notional Term Contract Amount ($) Jan 2011 – Jun 2011

Fixed/Floating Swap

15,000,000

Fixed Rate (%)

1.46

(3) Interest rate swap contract floating rate is based on monthly BA-CDOR

The Company acquired the interest rate swap contract on the acquisition of Medora Resources Inc. Net Income (Loss) and Funds Generated by Operations For the quarter ended December 31, 2010, net income of $10.7 million was realized compared to a net loss of $5.4 million during the same period in 2009. This increase in net income is primarily due to the extraordinary gain of $12.1 million on the Bronco acquisition as a result of ascribing value to the Bronco income tax pools in excess of consideration given offset by higher royalty and stock based compensation expenses and losses on financial derivative contracts and marketable securities during the quarter compared to the same period in the prior year. Basic and diluted net income per share for the quarter was $0.08 respectively compared to basic and diluted loss per share of $0.09 during the fourth quarter of 2009. Funds generated by operations increased 110 percent to $36.5 million for the three months ended December 31, 2010 compared to $17.4 million during the same period in 2009 due primarily to additional production from the properties acquired in the Acquisitions and successful drilling activities. Basic and diluted funds generated by operations per share for the quarter were $0.29 per basic share and $0.28 per diluted share respectively, compared to $0.29 per basic share and $0.27 per diluted share during the fourth quarter of 2009.

For the year ended December 31, 2010, a net loss of $4.7 million was realized compared to a net loss of $10.1 million during the prior year. This decrease in the net loss is primarily due to the extraordinary gain of $12.1 million on the Bronco acquisition offset by higher royalty, DD&A and stock based compensation expenses and net losses on financial derivative contracts and marketable securities. Basic and diluted net loss per share for the year ended December 31, 2010 was $0.05 respectively compared to basic and diluted loss per share of $0.41 during the same period in the prior year. Funds generated by operations increased 420 percent to $119.6 million for the year ended December 31, 2010 compared to $23.0 million during the previous year due primarily to additional production from the properties acquired in the Acquisitions and successful drilling activities.

Basic and diluted funds generated by operations per share for the year ended December 31, 2010 were $1.19 per basic share and $1.17 per diluted share respectively, compared to $0.94 per basic share and $0.91 per diluted share respectively for the prior year.

Legacy Oil+Gas Inc.

2010 Annual Report

35

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table summarizes the netbacks on a per Boe basis for the three and twelve month periods ended December 31, 2010 and 2009:

Three Months Ended Year Ended December 31 December 31 ($ per BOE)

2010

Crude oil, natural gas and natural gas liquids revenues Royalties

2009

% change

2010

2009

% change

65.87 (10.85)

72.41 (11.96)

(9) (9)

67.33 (11.34)

69.11 (10.27)

(3) 10

55.02 (11.82) (3.13)

60.45 (12.71) (2.13)

(9) (7) 47

55.99 (11.28) (2.10)

58.84 (14.14) (1.51)

(5) (20) 39

Operating expenses Transportation expenses

Operating netback

40.07

45.61

Realized gain on financial derivative contracts Interest and financing expenses General and administrative expenses Other(1)

0.66 (2.11) (3.07) (2.25)

(0.10) (1.23) (4.36) –

Funds from operations

33.30

39.92

(12)

42.61

43.19

(1)

0.51 (2.20) (2.68) (0.85)

(0.09) (2.36) (7.23) –

(667) (7) (63) n/a

(17)

37.39

33.51

12

(760) 72 (30) n/a

(1) Includes realized foreign exchange and asset retirement obligations settled

Summary of Quarterly Results The table below shows Legacy’s fourth quarter 2010 results as well as comparisons to the quarterly results of the previous eight quarters:

($ thousands, except per share amounts)

Q4 2010

Q3 2010

Q2 2010

Q1 2010

Q4 2009

Q3 2009

Q2 2009

Q1 Q4 2009 2008

Petroleum, natural gas and natural gas liquids revenues, before royalties 72,125 63,699 37,018 42,543 31,498 11,625

2,281

2,054 2,391

4,549 0.17

674 0.12

422 1,087 0.08 0.22

0.16

0.12

0.08

0.22

Funds generated by operations 36,469 35,137 21,603 26,402 17,368 Per share basic 0.29 0.29 0.28 0.36 0.29 Per share diluted 0.28 0.29 0.27 0.34 0.27

(1,404) (0.01) (0.01)

(4,894) (0.04) (0.04)

(7,563) (0.10) (0.10)

(2,859) (0.04) (0.04)

(5,381) (0.09) (0.09)

(3,286) (0.13) (0.13)

(472) (0.08) (0.08)

(914) (0.16) (0.16)

(449) (0.09) (0.09)

Net Income (Loss) 10,660 Per share basic

0.08 Per share diluted

0.08

(4,894) (0.04) (0.04)

(7,563) (0.10) (0.10)

(2,859) (0.04) (0.04)

(5,381) (0.09) (0.09)

(3,286) (0.13) (0.13)

(472) (0.08) (0.08)

(914) (0.16) (0.16)

(449) (0.09) (0.09)

Net Income (Loss) before extraordinary item Per share basic

Per share diluted

Total Assets Working capital surplus (deficit)

36

Legacy Oil+Gas Inc.

,766,510 1,721,121 893,974 744,321 714,574 387,529 34,298 33,642 35,431 1 (20,995) (3,427) (14,164) (21,342) (29,370) (10,595) (8,199) (7,503) (563)

2010 Annual Report

Selected Annual Information ($ thousands, except per share amounts)

2010

Petroleum, natural gas and natural gas liquids revenues, before royalties

2009

2008

215,385

47,457

11,284

Net Income (Loss) before extraordinary item Per share basic Per share diluted

(16,720) (0.17) (0.17)

(10,053) (0.41) (0.41)

898 0.19 0.18

Net Income (Loss) Per share basic Per share diluted

(4,656) (0.05) (0.05)

(10,053) (0.41) (0.41)

898 0.19 0.18

Total Assets

1,766,510

714,574

35,431

Working capital surplus (deficit) Bank debt

(20,995) (234,561)

(29,370) (24,675)

(563) (6,619)

Total debt(1)

(255,556)

(54,045)

(7,182)

(1) Excludes $0.4 million long-term financial derivative contracts liability at December 31, 2010 (2009 and 2008 – $Nil)

CAPITAL EXPENDITURES During the three months ended December 31, 2010, the Company spent $95.1 million (2009 – $139.9 million) on capital expenditures, which included the cash portion of the acquisition cost of the Bronco acquisition. For the 2010 year, spending on capital expenditures totaled $468.4 million (2009 – $249 million) which included the cash portion of the acquisition cost of the Villanova, CanEra and Bronco acquisitions.

Three Months Ended Year Ended December 31 December 31 ($ thousands)

2010

2009

% change

2010

2009

% change

Land acquisitions and retention Geological and geophysical Drilling and completions Equipping and facilities Capitalized general and administrative expenses Other

1,037 167 34,236 15,660 874 (92)

390 6,343 19,728 3,575 377 200

166 (94) 74 338 132 (146)

16,976 1,649 112,682 35,530 2,618 1,378

874 6,322 24,368 4,595 752 307

1,842 (74) 362 673 248 349

Total capital expenditures

51,882

30,613

69

170,833

37,218

359

Corporate acquisitions (cash portion)

Net producing property acquisitions (cash portion)

25,913 17,275

61,111 48,168

58 (64)

280,224 17,314

64,082 147,749

337 (88)

95,070

139,892

(32)

468,371

249,049

88

Total capital expenditures including acquisitions

During the three months ended December 31, 2010, in addition to the cash portion on the Bronco acquisition, the Company issued a total of 862,893 common shares, valued at $9.6 million and assumed approximately $2.1 million of net debt and working capital deficit on closing of the acquisition on November 4, 2010.

For the 2010 year, the Company issued a total of 29.5 million shares valued at $354.5 million and assumed $119.5 million of net debt and working capital deficit on closing of the Bronco, CanEra and Villanova acquisitions.

Legacy Oil+Gas Inc.

2010 Annual Report

37

MANAGEMENT’S DISCUSSION AND ANALYSIS

CAPITALIZATION AND CAPITAL RESOURCES Share Capital

Three Months Ended Year Ended December 31 December 31

2010

2009

2010

2009

Outstanding common shares Weighted Average Outstanding Common Shares(1) Basic 126,915,530 Diluted 129,570,974

60,487,282 63,439,042

100,758,087 102,201,233

24,453,751 25,292,561

Outstanding securities at December 31, 2010

Common shares

Common share warrants

Common share options

127,234,425 4,101,412 11,647,335

(1) Per share information is calculated on the basis of the weighted average number of Common Shares outstanding during the fiscal period. Diluted per share information reflects the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted to Common Shares. Diluted per share information is calculated using the treasury stock method which assumes that any proceeds received by the Company upon exercise of in-the-money stock options or warrants plus the unamortized stock compensation expense would be used to buy back Common Shares at the average market price for the period.

Total Market Capitalization The Company’s market capitalization at December 31, 2010 was $2 billion.

December 31, 2010

Common Shares Outstanding Share Price(1) $ Total Market Capitalization

127,234,425 15.56

$ 1,979,767,653

(1) Represents the last price traded on the Toronto Stock Exchange (“TSX”) December 31, 2010

As at March 14, 2011, the Company had 142,852,424 common shares outstanding.

Capital Resources At December 31, 2010, the Company had a working capital deficit of $21.0 million. The Company had a credit facility of $340 million at December 31, 2010, of which $244.7 million was committed comprising $234.5 million of outstanding bank debt and $10.2 million in letters of credit issued to third parties.

The Company’s investing activities consisted primarily of expenditures on the capital program and acquisitions. The activities have been funded by cash generated from operations, cash on hand, equity issued and the credit facility.

Bank Facility As at December 31, 2010, the Company had available a $340 million secured credit facility. The facility is a borrowing base facility whose amount is determined on, among other things, the Company’s current reserve report, results of operations, current and forecasted commodity prices and the current economic environment. The facility is available on a revolving basis for a period of at least 364 days until April 29, 2011 and such initial term out date may be extended for further 364 day periods at the request of Legacy, subject to approval by the banks.

($ thousands)

As at December 31

2010

2009

Capital resources Bank debt available Working capital (deficit)

95,279 (20,995)

85,329 (29,370)

Total capital resources available

74,284

55,959

The Company believes it is well positioned to take advantage of its current opportunities funded through available credit facilities combined with anticipated cash flow from operations. Further, the present sources of capital are more than sufficient to satisfy the Board approved capital program for 2011.

38

Legacy Oil+Gas Inc.

2010 Annual Report

CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS New Accounting Policy Pursuant to the CanEra acquisition, the Company acquired an Abandonment, Reclamation and Remediation Trust.

The reclamation fund holds investments in cash and cash equivalents including Government of Canada Treasury Bills and Guaranteed Investment Certificates. Investments are categorized as assets held for trading which are measured at fair value with changes to those fair values recognized immediately in net income.

International Financial Reporting Standards (“IFRS”) IFRS will replace Canadian GAAP for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Company will be required to prepare financial statements in accordance with IFRS beginning January 1, 2011 which will require the restatement, for comparative purposes, of amounts reported by Legacy for the year ended December 31, 2010 including the opening balances sheet as at January 1, 2010.

The Company has dedicated internal accounting professionals to its IFRS conversion project and developed a changeover plan which includes the following: • Assessment of key IFRS differences from current accounting practices under Canadian GAAP • Evaluation of accounting policy choices and transitional exemptions available under IFRS • Formation and documentation of IFRS accounting policies • Determination of the impact of IFRS on information technology, internal controls over financial reporting, disclosure controls and procedures and any other business activities that rely on financial statement figures as an input • Implementation of IFRS accounting policies, modification of data gathering processes and reporting systems, redesign of internal controls and disclosure controls where appropriate • Preparation of transitional data and draft financials including associated disclosures • Participation in IFRS educational programs as well as the education of analysts and other external stakeholders regarding IFRS conversion impacts.

The Company’s auditors have been and will continue to be involved throughout the process to ensure the Company’s policies are in accordance with these new standards.

Upon transition, the Company is required to apply IFRS retrospectively except for a number of optional exemptions and mandatory exceptions. The Company will apply the following optional exemptions: • Deemed cost exemption: In July 2009, an amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards was issued that applies to oil and natural gas assets. The amendment allows an entity that used full cost accounting under its previous GAAP to elect, at its time of adoption, to measure exploration and evaluation assets at the amount determined under the entity’s previous GAAP and to measure oil and natural gas assets in the development and production phases by allocating the amount determined under the entity’s previous GAAP for those assets to the underlying assets pro rata using reserve volumes or reserve values as of that date.

• Business Combinations Exemption: IFRS 1 permits the Company to use the IFRS rules for business combinations on a prospective basis rather than re-stating all business combinations.

• Share Based Payment Transactions Exemption: IFRS 1 permits the Company an exemption on IFRS 2 Share-based Payment which will permit the Company relief from retrospective accounting for stock based compensation for options that vested prior to the date of transition to IFRS. The transition from Canadian GAAP to IFRS is significant and may materially affect the reported financial position and results of operations of the Company. At this time, the Company has identified key changes that will impact the financial statements and the current status of these items: • Property, Plant and Equipment (“PP&E”): The Company currently follows the Canadian Institute of Chartered Accountants’ guideline on full cost accounting; however, no equivalent IFRS guidance exists. The Company has drafted its own accounting policies for PP&E, particularly with respect to exploration and evaluation (“E&E”) expenditures, where standards permit an entity significant latitude in policy decisions. The Company’s capitalization guidance addresses the treatment of prelicense costs, E&E expenditures and developed and producing (“D&P”) costs, including the treatment of capitalized G&A expenses and borrowing costs. The Company expects more pre-license exploration costs such as initial seismic costs will be expensed under IFRS. It is also likely that more E&E costs will be expensed if technical feasibility and commercial viability cannot be established for certain E&E property groupings. Fewer G&A expenditures will likely meet capitalization criteria and only interest in respect of qualifying assets will be capitalized.

Legacy Oil+Gas Inc.

2010 Annual Report

39

MANAGEMENT’S DISCUSSION AND ANALYSIS

• Depletion expense: Depletion will be calculated at a lower unit of account than the current corporate level calculation and using proved plus probable reserves as opposed to proved reserves alone. This will result in a lower DD&A charge per barrel of production.

• Impairment testing: Impairment will also likely be assessed at a cash generating unit (“CGU”) level as opposed to the current corporate level full cost ceiling test. Impairment calculations are required to be performed using fair values of the PP&E assets and Legacy anticipates using discounted proved plus probable reserve values for impairment tests of PP&E. Legacy does not anticipate its PP&E assets to be impaired as at January 1, 2010 under IFRS. For goodwill impairment tests under IFRS, goodwill that arises from a business combination should be allocated to the specific CGUs that are expected to benefit from the business combination. The carrying value of the CGU, including goodwill, is compared to the fair value of the CGU and any excess of the carrying value over the fair value is considered an impairment. Legacy does not anticipate its goodwill to be impaired as at January 1, 2010 under IFRS. • Business Combinations: The Company will be required to expense transaction costs in respect of business combinations upon adoption of IFRS which represents a change from Canadian GAAP wherein business combination transaction costs are capitalized. Equity issued in conjunction with a business combination will be valued on the closing date of the transaction under IFRS as opposed to a reasonable period of time before and after the terms of the acquisition are agreed to and announced under Canadian GAAP. • Share-based payments: The major difference between the Company’s current Canadian GAAP treatment and IFRS that will impact the treatment of share based payments is the treating of graded vesting awards as multiple separate awards with different lives. Legacy does not expect this difference to be significant.

• Provisions: The major difference between the Company’s current Canadian GAAP treatment and IFRS that will impact provisions will be the discount rate used to measure the asset retirement obligation (“ARO”). Under current Canadian standards, a credit adjusted risk free rate is used, whereby IFRS allows the use of a risk free rate when the expected cash flows are risked. Based on positions within the industry, the Company believes a risk free rate is more appropriate. As a result, Legacy has measured its ARO liability on transition using a risk free rate of four percent resulting in an increase to the liability of approximately $4.2 million at January 1, 2010 with an offsetting charge to the opening retained earnings or deficit.

• Other financial statement accounting areas: The calculation of future income taxes and foreign exchange translation may be subject to change under IFRS. At the present time and based on current assets and transaction activity, the impact of these changes is expected to be relatively minimal.

• Pervasive increase in financial statement disclosures under IFRS: IFRS has extensive disclosure requirements which generally result in significantly more disclosure than Canadian GAAP. There is more flexibility with regards to accounting policy selection under IFRS and as a result additional disclosures are often required to enhance comparability and explain the accounting treatment employed.

The Company continues to analyze the impact of IFRS on information technology, internal controls over financial reporting, disclosure controls and procedures and any other business activities that rely on financial statement figures as an input.

Changes to the Company’s accounting system are necessary to support the requirements of IFRS. Amongst other changes, the Company will be required to track capital and other costs at a lower unit of account as well as be able to segregate and transfer capital at different stages of development between classification categories. There is also a need to ensure dual data capture in 2010 so as to be able to report under Canadian GAAP in 2010 and also prepare 2010 IFRS comparatives for 2011 IFRS reporting. The Company has worked with its accounting software provider to build the necessary functionality into its accounting system. To date, the Company has made the necessary modifications to its accounting system organizational structure, accounting system hierarchy, chart of accounts and capital accounting procedures to capture information required under IFRS. Changes to accounting policies and practices under IFRS require some modification of internal controls over financial reporting and disclosure controls and procedures. Changes include the addition of new controls to address new or transitional risks under IFRS as well as the revision of existing controls to reflect new policies and practices under IFRS. Modifications to the control environment are being made where necessary in conjunction with accounting policy implementation. The Company does not consider these changes to be significant.

The Company continues to examine the impact of IFRS on its business activities that rely on financial statement figures as an input. The cost of borrowing, in respect of the Company’s credit facility, is dependent upon the Company’s senior debt to annualized cash flow ratio. Cash flow will likely be affected by the transition to IFRS. Management may introduce a compensation plan in which financial statement figures are used as an input for a performance measure. The transition to IFRS may produce a different performance result than under Canadian GAAP. Management may choose to use an adjusted financial statement figure as an input in lieu. The Company plans to undertake future budgeting exercises considering expected IFRS accounting policies and practices. Future income tax filings may use IFRS as the starting point for the calculation of income for

40

Legacy Oil+Gas Inc.

2010 Annual Report

tax purposes as opposed to Canadian GAAP. This change is not expected to significantly impact taxable income as tax rules override accounting treatment in the calculation of taxable income. The Company will continue to consider the implications of the transition to IFRS on business activities but does not expect these implications to be considered significant.

The education of analysts and other external stakeholders regarding IFRS conversion impacts has also been deemed a priority for management. This MD&A disclosure is intended to provide summary changeover information. The Company will also endeavour to communicate IFRS conversion information to interested parties by other means such as inclusion in meeting dialogue and via inquiry response.

The Company continues to move forward with its changeover plan in preparation for IFRS adoption in 2011 and is continuing to finalize its accounting policies and choices. As such, the Company is currently unable to quantify the full impact on the financial statements of adopting IFRS; however, the Company has disclosed certain expectations above based on information known to date. Due to anticipated changes to IFRS and International Accounting Standards prior to Legacy’s adoption of IFRS, certain items may be subject to change based on new facts and circumstances that arise after the date of this MD&A.

2011 CAPITAL PROGRAM The production growth for 2011 will be derived from approximately $254 million of capital spending to facilitate the drilling of approximately 158 (112 net) wells and recompletions targeting high quality light oil, with the majority of the activity at Turner Valley, Taylorton, Spearfish (Manitoba and North Dakota), Frys/Antler and Heward/Stoughton areas. This program is expected to be funded by available cash, cash flow from operations and the Company’s credit facility. Note that the 2011 capital expenditure program is continually reviewed and actual capital spending in 2011 could be significantly different from the budgeted program in light of changes to the operational and economic environment.

2011 SENSITIVITIES The Company forecasts its cash flow from operations to be approximately $250 million in 2011 based on recent strip pricing and an average interest rate of 4.5 percent. Based on the above assumptions, the following sensitivities are provided to demonstrate the estimated impact on cash flow from operations due to changes in commodity prices, the USD/CAD foreign exchange and interest rates: ($ thousands)

Cash Flow from Operations

Impact on the 2011 fiscal year

Change in WTI oil price by US $1.00 per barrel

Change in AECO natural gas price by Cdn $1.00 per Mcf

Change in value of USD/CAD foreign exchange rate by Cdn $0.01

Change in interest rate by 1 percent

3,550 3,150 2,800 2,600

CRITICAL ACCOUNTING ESTIMATES Depletion and Depreciation Expense The Company uses the full cost method of accounting for exploration and development activities whereby all cost associated with these activities are capitalized, whether successful or not. The aggregate of capitalized cost, net of certain costs related to unproved properties and estimated future development costs is amortized using the unit-of-production method based on estimated proved reserves. Changes in estimated proven reserves or future development costs have a direct impact on depletion and depreciation expense. Certain costs related to unproved properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly to determine if proved reserves should be assigned, at which point they would be included in the depletion calculation, or for impairment, for which any write-down would be charged to depletion and depreciation expense.

Full Cost Accounting Ceiling Test Oil and natural gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and natural gas assets. If the carrying value of the oil and natural gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment would be charged as additional depletion and depreciation expense.

Legacy Oil+Gas Inc.

2010 Annual Report

41

MANAGEMENT’S DISCUSSION AND ANALYSIS

Asset Retirement Obligations The Company records a liability for the fair value of legal obligations associated with the retirement of long-lived tangible assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability there is a corresponding increase in the carrying amount of the related asset known as the asset retirement cost. The total future asset retirement obligation is an estimate based on the Company’s net ownership interest in all wells and facilities, the estimated cost to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows required to settle the asset retirement obligation is an estimate that is subject to measurement uncertainty and any change would impact the liability.

Income Taxes The determination of the Company’s income and other tax liabilities requires interpretation of complex laws and regulations involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ, perhaps materially, from that estimated and recorded.

RISK ASSESSMENT There are a number of risks facing participants in the Canadian oil and gas industry. Some of the risks are common to all businesses while others are specific to a sector. The following reviews the general and specific risks to which the Company is exposed. While the management of Legacy realizes that these risks cannot be eliminated, they are committed to monitoring and mitigating these risks.

Safety and Environmental Matters The oil and natural gas industry is subject to extensive regulation pursuant to various municipal, provincial, national and international conventions and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases and/or emissions of various substances produced in association with oil and natural gas operations. The Company is committed to meeting and exceeding its environmental and safety responsibilities. The Company has in place an environmental and safety policy that is designed, at minimum to comply with current government regulations set for the oil and natural gas industry. Changes to governmental regulations are closely monitored to ensure compliance.

Environmental reviews are completed and are part of the due diligence process when evaluating acquisitions. Although Legacy maintains adequate insurance commensurate with industry standards to cover reasonable risk and potential liabilities associated with its activities as well as insurance coverage for officers and directors executing their corporate duties, the nature of these risk is such that liabilities could exceed policy limits, in which event the Company could incur significant cost that could have an adverse effect upon its financial condition. Also, the occurrence of any such incident, particularly with respect to Legacy’s Turner Valley property, which is located in a populated area, could damage Legacy’s reputation in the surrounding communities and make it more difficult for Legacy to pursue its operations in those areas.

Operational Risks Oil and natural gas exploration operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, cratering and oil spills, each of which could result in substantial damage to oil and natural gas wells, producing facilities, other property and the environment or in personal injury. In accordance with industry practice, Legacy is not fully insured against all of these risks, nor are all such risks insurable. Although Legacy maintains liability insurance in an amount which it considers adequate, the nature of these risks is such that liabilities could exceed policy limits, in which event Legacy could incur significant costs that could have a materially adverse effect upon its financial condition. Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including premature decline of reservoirs and the invasion of water into producing formations.

Oil and natural gas exploration and development activities are dependent on the availability of drilling and related equipment in the particular areas where such activities will be conducted. Demand for such limited equipment or access restrictions may affect the availability of such equipment to Legacy and may delay exploration and development activities. To the extent Legacy will not be the operator of its oil and natural gas properties, the Company will be dependent on such operators for the timing of activities related to such properties and will be largely unable to direct or control the activities of the operators.

The Company attempts to mitigate this risk by developing strong relationships with suppliers and contractors.

Volatility of Oil and Natural Gas Prices and Markets Both oil and natural gas prices are volatile and are subject to fluctuation. Any material decline in prices could result in a reduction of the Company’s net production revenue. The economics of producing from some wells may change as a result of lower prices, which could result in a reduction in the volumes of Legacy’s reserves. Legacy might also elect not to produce from certain wells at lower prices. All of these factors could result in a material decrease in Legacy’s net production revenue causing a reduction in its oil and natural gas acquisition and development activities. In addition, bank borrowings available to Legacy will in part be determined by the Company’s borrowing base. A sustained material decline in prices from historical

42

Legacy Oil+Gas Inc.

2010 Annual Report

average prices could reduce such borrowing base, therefore reducing the bank credit available and could require that a portion of its bank debt be repaid.

From time to time Legacy may enter into agreements to receive fixed prices on its oil and natural gas production to offset the risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels set in such agreements, Legacy will not benefit from such increases.

Technology Risk The Company relies on information technology to manage its day to day operations and perform reporting obligations including the preparation of financial statements, reporting to joint partners and various governments in relation to payment of royalties and taxes.

Permits and Licenses Legacy’s operations may require licenses and permits from various governmental authorities. There can be no assurance that Legacy will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development at its projects.

Foreign Currency Exposure Legacy’s United States operations are directly exposed to fluctuations in the United States dollar on translation to our Canadian dollar denominated consolidated financial statements. As well, the Company has indirect exposure to fluctuations in foreign currency as crude oil sales and natural gas sales are based on United States dollar indices.

From time to time Legacy may enter into agreements to fix the exchange rate of Canadian to United States dollars in order to offset the risk of revenue losses if the Canadian dollar increases in value compared to the United States dollar or the risk of increased repayments on United States dollar denominated debt if the Canadian dollar declines in value compared to the United States dollar; however, if the Canadian dollar declines in value compared to the United States dollar, it will not benefit from the fluctuating exchange rate.

Title to Properties Although title reviews will be done according to industry standards prior to the purchase of most oil and natural gas producing properties or the commencement of drilling wells as determined appropriate by management, such reviews do not guarantee or certify that an unforeseen defect in the chain of title will not arise to defeat a claim of Legacy which could result in a reduction of the revenue received by the Company.

Reserve Estimates There are numerous uncertainties inherent in estimating economically recoverable quantities of oil and natural gas reserves (including natural gas liquids) and cash flows to be derived from these reserves, including many factors beyond the control of Legacy. These estimates include a number of assumptions relating to factors such as initial production rates, production decline rates, ultimate recovery of reserves, timing and amount of capital expenditures, marketability of production, future prices of oil and natural gas, operating costs and royalties and other government levies that may be imposed over the producing life of the reserves. These assumptions are based on price forecasts in use at the date the relevant evaluations were prepared and many of these assumptions are subject to change and are beyond the control of Legacy. Actual production and cash flows derived from reserves will vary from these evaluations and such variations could be material.

Reserve Replacement Legacy’s future oil and natural gas reserves, production and cash flows to be derived therefrom are highly dependent on successfully acquiring or discovering new reserves. Without the continual addition of new reserves, any existing reserves Legacy may have at any particular time and the production therefrom will decline over time as such existing reserves are exploited. A future increase in reserves will depend not only on Legacy’s ability to develop any properties it may have from time to time, but also on its ability to select and acquire suitable producing properties or prospects. There can be no assurance that Legacy’s future exploration and development efforts will result in the discovery and development of additional commercial accumulations of oil and natural gas.

To mitigate this risk, Legacy has assembled a team of experienced technical professionals who have expertise in operating and exploring areas which the Company has identified as being the most prospective for increasing Legacy’s reserves on an economic basis. To further mitigate reserve replacement risk, the Company has targeted a majority of its prospects in areas which have multi-zone potential and employs advanced geological and geophysical techniques to increase the likelihood of finding additional reserves.

Substantial Capital Requirements / Liquidity Legacy may have to make substantial capital expenditures for the acquisition, exploration, development and production of oil and natural gas reserves in the future. If revenues or reserves decline, Legacy may have limited ability to expend the capital necessary to undertake or complete future drilling programs. There can be no assurance that debt or equity financing or cash

Legacy Oil+Gas Inc.

2010 Annual Report

43

MANAGEMENT’S DISCUSSION AND ANALYSIS

generated by operations will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to the Company. Moreover, future activities may require Legacy to alter its capitalization significantly. The inability of the Company to access sufficient capital for its operations could have a material adverse effect on its financial condition, results of operations or prospects.

Issuance of Debt From time to time Legacy may enter into transactions to acquire assets or shares of other corporations. These transactions may be financed partially or wholly through debt, which may increase debt levels above industry standards. Legacy’s articles and by-laws do not limit the amount of indebtedness it may incur. The level of Legacy’s indebtedness from time to time could impair its ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise.

Kyoto Protocol In 1994, the United Nations’ Framework Convention on Climate Change came into force and three years later led to the Kyoto Protocol which will require nations to reduce their emissions of carbon dioxide and other greenhouse gases. In December 2002, the Government of Canada ratified and signed the Kyoto Protocol. The Kyoto Protocol has now come into effect. As a result of the ratification of the Kyoto Protocol and the adoption of legislation or other regulatory initiatives designed to implement its objectives by the federal or provincial governments, reductions in greenhouse gases from crude oil and natural gas producers may be required which could result in, among other things, increased operating and capital expenditures for those producers, including Legacy, which may make certain production of crude oil and natural gas by those producers uneconomic resulting in reductions in such production. Until such legislation or other regulatory initiatives are finalized, the impact of the Kyoto Protocol and any such legislation adopted as a result of its ratification remains uncertain.

The Corporation’s exploration and production facilities and other operations and activities will emit a small amount of greenhouse gases which may subject the Corporation to legislation regulating emissions of greenhouse gases. The Government of Canada has put forward a Climate Change Plan for Canada which suggests further legislation will set greenhouse gases emission reduction requirements for various industrial activities, including oil and natural gas exploration and production.

Future federal legislation, together with provincial emission reduction requirements, such as those proposed in Alberta’s Bill 32: Climate Change and Emissions Management, may require the reduction of emissions or emissions intensity with the Corporation’s operations and facilities. The direct or indirect costs of the above referenced legislation or regulatory initiatives may adversely affect the business of Legacy.

Corporate Matters To date, Legacy has not paid any dividends on its outstanding common shares. Certain of the directors and officers of Legacy are also directors and officers of other oil and natural gas companies involved in natural resource exploration and development and conflicts of interest may arise between their duties as officers and directors of Legacy, as the case may be, and as officers and directors of such other companies.

Reliance on Key Personnel The success of Legacy will be largely dependent upon the performance of its management and key employees. Legacy does not have any key man insurance policies and, therefore, there is a risk that the death or departure of any member of management or any key employee could have a material adverse affect on the Company. In addition, the competition for qualified personnel in the oil and natural gas industry is intense and there can be no assurance that the Company will be able to continue to attract and retain all personnel necessary for the development and operation of the business. Investors must rely upon the ability, expertise, judgment, discretion, integrity and good faith of Legacy’s management.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING In accordance with Multilateral Instrument 52-109 of the Canadian Securities Administrators (“CSA”), the Company is required to issue a Certification of Annual Filings (“Certification”). The Certification requires certifying officers to state that they are responsible for establishing and maintaining disclosure and procedures and internal control over financial reporting (“ICFR”).

The President and Chief Executive Officer and the Vice President, Finance and Chief Financial Officer are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Company’s Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation.

44

Legacy Oil+Gas Inc.

2010 Annual Report

The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework provides the basis for management’s design of internal controls over financial reporting. Management and the Board work to mitigate the risk of a material misstatement in financial reporting; however, a control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met and it should not be expected that the disclosure and internal control procedures will prevent all errors or fraud.

The Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures as at December 31, 2010. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as at December 1, 2010 to provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, would be made known to them.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the most recent three months ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

It should be noted that while the officers believe that the Company’s controls provide a reasonable level of assurance with regard to their effectiveness, they do not expect that the disclosure controls and procedures or internal controls over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable but not absolute assurance that the objectives of the control system are met.

OUTSTANDING SHARE DATA Common Shares Legacy is authorized to issue an unlimited number of common shares. Holders of common shares are entitled to one vote per share at meetings of shareholders of Legacy, to receive dividends if, as and when declared by the board of directors and to receive pro rata the remaining property and assets of Legacy upon its dissolution or winding-up, subject to the rights of shares having priority over other common shares.

As at December 31, 2010, a total of 127,234,425 common shares were issued and outstanding. In addition, a total of 11,647,335 options to acquire common shares and 4,101,412 warrants to acquire common shares were outstanding.

RELATED PARTY TRANSACTIONS The Company incurred fees of $1.3 million (2009 – $1.1 million) for legal services rendered by a law firm for the year ended December 31, 2010 of which $Nil (2009 – $Nil) was payable at December 31, 2010. A board member and the Corporate Secretary are partners of the firm. These fees were incurred in the normal course of business and have been measured at the exchange amount.

COMMITMENTS The following is a summary of the estimated costs required to fulfill the Company’s remaining contractual commitments at December 31, 2010: ($ thousands)

2011

2012

2013

2014

Reclamation trust fund Office leases(1) Bigstone Scholarship(2)

5,000

5,000

5,000

2,511 12

1,883 12

1,577 12

1,084 –

723 –

– –

Total commitments

7,523

6,895

6,589

1,084

723

–

–

2015

Thereafter

–

–

(1) The Company has sublet office space relating to office leases assumed on the CanEra and Bronco acquisitions and will receive rental income of $1.1 million in 2011, $1.1 million in 2012, $0.9 million in 2013, $0.7 million in 2014 and $0.5 million in 2015. The above commitment balances are before sublet revenues.

(2) Under the terms of a joint operating agreement between Bronco, Bigstone Cree Nation and Bigstone Oil & Gas Ltd, the Company has a $12,000 annual obligation to fund a scholarship program for the direct benefit of Bigstone students during the life of the joint venture.

Abandonment, Reclamation and Remediation Trust (“Reclamation Fund”) As a result of the CanEra acquisition, the Company acquired an Abandonment, Reclamation and Remediation Trust established pursuant to the Share Purchase and Sale Agreement between CanEra AcquisitionCo Inc. and a third party (the “Reclamation Agreement”) dated September 11, 2009, to fund asset retirement obligations for the period January 1, 2010 through December 31, 2014.

Legacy Oil+Gas Inc.

2010 Annual Report

45

MANAGEMENT’S DISCUSSION AND ANALYSIS

The Company is required to contribute on or before December 31 of each calendar year commencing December 1, 2010 and ending December 31, 2013 an amount equal to $5 million pursuant to the Reclamation Agreement. The total contribution to the fund will be $25 million of which $10 million has been contributed as at December 31, 2010.

In addition, the Company has delivered irrevocable letters of credit to the third party in the amount of $10 million. A $5 million letter of credit will be held until January 15, 2013 and a $5 million letter of credit will be held until January 15, 2014 as general and continuing collateral security for the performance and reclamation obligations as represented in the Reclamation Agreement.

SUBSEQUENT EVENTS On February 1, 2011, the Company announced the acquisition of certain petroleum and natural gas assets (“Molopo Assets”) consisting of Spearfish light oil assets in the Pierson area of southwest Manitoba from Molopo Energy Canada Ltd. in exchange for 6,180,000 Legacy common shares and $93 million in cash consideration.

On February 23, 2011, in connection with the acquisition of the Molopo Assets, the Company closed a bought deal equity financing pursuant to which the Company issued 9,355,000 Legacy common shares at a price of $14.95 per share for gross proceeds of $139.9 million.

On March 1, 2011, the Company announced the closing of the Molopo Assets acquisition.

ADDITIONAL INFORMATION Additional information can be obtained by contacting the Company at Legacy Oil + Gas Inc., Suite 3900, 205 – 5th Avenue, SW, Calgary, Alberta, Canada T2P 2V7 or by e-mail at info@legacyoilandgas.com.

46

Legacy Oil+Gas Inc.

2010 Annual Report

management’s report

Management is responsible for the integrity and objectivity of the information contained in this annual report and for the consistency between the consolidated financial statements and other financial operating data contained elsewhere in the report. The accompanying consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada using estimates and careful judgment, particularly in those circumstances where transactions affecting a current period are dependent upon future events. The accompanying consolidated financial statements have been prepared using policies and procedures established by management and reflect fairly the Company’s financial position, results of operations and cash flow, within reasonable limits of materiality and within the framework of the accounting policies as outlined in the notes to the consolidated financial statements.

Management has established and maintained a system of internal control which is designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and the financial information is reliable and accurate.

The Audit Committee of the Board of Directors has reviewed in detail the consolidated financial statements with management and the external auditors. The consolidated financial statements have been approved by the Board of Directors on the recommendation of the Audit Committee.

“signed”

“signed”

Trent J. Yanko, President + CEO

Matthew L. Janisch, VP Finance + CFO

March 14, 2011

Legacy Oil+Gas Inc.

2010 Annual Report

47

auditors’ report

PricewaterhouseCoopers LLP Chartered Accountants 111 5th Avenue SW, Suite 3100 Calgary, Alberta Canada T2P 5L3 Telephone +1 (403) 509 7500 Facsimile +1 (403) 781 1825

Independent Auditors’ Report To the Shareholders of Legacy Oil + Gas Inc. We have audited the accompanying consolidated financial statements of Legacy Oil + Gas Inc., which comprise the consolidated balance sheets as at December 31, 2010 and December 31, 2009 and the consolidated statement of operations, comprehensive loss and deficit, and the consolidated statement of cash flows for the years then ended, and the related notes including a summary of significant accounting policies.

Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors’ consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Legacy Oil + Gas Inc. and its subsidiaries as at December 31, 2010 and December 31, 2009 and the results of their operations and their cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants Calgary, Alberta March 14, 2011

48

Legacy Oil+Gas Inc.

2010 Annual Report

Consolidated Balance SheetS

As at December 31 ($ thousands)

2010

2009

Assets Current assets:

Cash and cash equivalents

Accounts receivable Prepaid expenses and deposits

Investment in marketable securities (note 4)

Reclamation fund (note 6)

Financial derivative contracts asset (note 12)

5,221 44,789 3,322 2,884 8,735 2,546

– 17,488 954 2,020 – –

67,497

20,462

Reclamation fund (note 6)

Financial derivative contracts asset (note 12) Property, plant and equipment (note 7) Goodwill (note 5)

1,292 1,990 1,555,150 140,581

– – 638,532 55,580

1,766,510

714,574

Liabilities Current liabilities:

Accounts payable and accrued liabilities

Financial derivative contracts liability (note 12)

88,366 126

49,746 86

88,492

49,832

Bank debt (note 8)

Financial derivative contracts liability (note 12)

Asset retirement obligations (note 9) Future income taxes (note 11)

234,561 380 63,410 202,250

24,675 – 6,478 87,977

Shareholders’ Equity Share capital and warrants (note 10) Contributed surplus (note 10) Deficit (note 10)

589,093

168,962

1,175,528 18,850 (16,961)

556,842 1,075 (12,305)

Commitments (note 15) Subsequent events (note 16)

1,177,417

545,612

1,766,510

714,574

See accompanying notes to the consolidated financial statements

Approved on behalf of the Board of Directors of Legacy Oil + Gas Inc. “signed”

“signed”

Randal Brockway, Director

Trent J. Yanko, Director

Legacy Oil+Gas Inc.

2010 Annual Report

49

Consolidated Statement of Operations, comprehensive loss and Deficit

Years ended December 31 ($ thousands, except per share amounts)

Revenues Petroleum and natural gas

Royalties

Realized gain (loss) on financial derivative contracts (note 12) Unrealized gain (loss) on financial derivative contracts (note 12)

Expenses Operating Transportation General and administrative

Stock based compensation (note 10)

Interest and financing

Foreign exchange loss Depletion, depreciation and accretion Gain on marketable securities (note 4)

2010

2009

215,385 (36,274) 1,630 (5,930)

47,457 (7,055) (61) 32

174,811

40,373

36,095 6,710 8,568 12,526 7,035 194 127,653 (1,574)

9,708 1,038 4,964 1,779 1,618 – 33,074 (920)

197,207

51,261

Loss before taxes and extraordinary item

(22,396)

(10,888)

Taxes

Future income tax recovery (note 11)

5,676

835

Net Loss before extraordinary item

(16,720)

(10,053)

Extraordinary item Extraordinary gain on acquisition (note 5)

12,064

–

Net Loss and Comprehensive Loss

(4,656)

(10,053)

Deficit, beginning of period

(12,305)

(2,252)

Deficit, end of period

(16,961)

(12,305)

Amounts Per Share, basic and diluted ($) (note 10) Net loss before extraordinary item Net loss

(0.17) (0.05)

(0.41) (0.41)

See accompanying notes to consolidated financial statements

50

Legacy Oil+Gas Inc.

2010 Annual Report

Consolidated STATEMENT OF CASH FLOWS

Years ended December 31 ($ thousands)

2010

2009

Cash provided by (used in): Operating Net loss

Items not affecting cash Depletion, depreciation and accretion Unrealized (gain) loss on financial derivative contracts (note 12) Gain on marketable securities (notes 4 and 12)

Stock based compensation (note 10)

Future income tax recovery (note 11) Unrealized foreign exchange loss Unrealized gain on reclamation fund (note 6) Extraordinary item (note 5)

Asset retirement obligations settled

(4,656)

(10,053)

127,653 5,930 (1,574) 12,526 (5,676) 213 (27) (12,064) (2,714)

33,074 (32) (920) 1,779 (835) – – – –

Changes in non-cash working capital (note 13)

119,611 (6,645)

23,013 (4,774)

112,966

18,239

Financing

Issue of shares and units Exercise of options Exercise of warrants

Share issue cost

Increase (Decrease) in bank debt

271,400 225 2,363 (14,248) 100,778

217,323 5,836 – (11,761) (15,674)

360,518

195,724

Investing Expenditures on corporate and asset acquisitions (note 5) Expenditures on property, plant and equipment Divestiture of property, plant and equipment Proceeds on disposal of investment (note 4)

Investment in marketable securities (note 4)

Reclamation fund contribution (note 6)

Changes in non-cash working capital (note 13)

(297,538) (170,833) – 2,176 (1,467) (5,000) 4,591

(211,831) (37,218) 3,813 – – – 31,273

(468,071)

(213,963)

Increase in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents, beginning of period

5,413 (192) –

– – –

Cash and cash equivalents, end of period

5,221

–

See accompanying notes to the consolidated financial statements

Legacy Oil+Gas Inc.

2010 Annual Report

51

Notes to Consolidated Financial statements

December 31, 2010 and 2009 (all tabular amounts in $ thousands, except per unit and volume amounts)

1. Nature of Business and Basis of Presentation The Company was incorporated on October 15, 2005 by articles of incorporation under the Business Corporations Act (Alberta). On July 15, 2009, the Company entered into a recapitalization transaction and investment agreement which resulted in a non-brokered private placement of approximately $15 million as well as the appointment of a new management team and board of directors to the Company. On November 11, 2009, the Company changed its name from Glamis Resources Ltd. to Legacy Oil + Gas Inc. (“Legacy”).

Legacy’s business includes the investment in all types of energy business-related assets, including, but not limited to, petroleum and natural gas-related assets, gathering, processing and transportation assets. The operations of the Company consist of the acquisition, development, exploration and exploitation of these assets. The consolidated financial statements are stated in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles.

2. Significant Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from these estimates.

Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Any reference to “the Company” throughout these consolidated financial statements refers to the Company and its subsidiaries. All inter-entity transactions have been eliminated.

Revenue Recognition Revenue associated with the sale of crude oil, natural gas and natural gas liquids (“NGLs”) are recognized when title passes from the Company to its customers.

Transportation Costs paid by the Company for the transportation of natural gas, crude oil and NGLs from the wellhead to the point of title transfer are recognized when the transportation is provided.

Jointly Controlled Assets Substantially all of the Company’s exploration, development and production activities are with others and, accordingly, the Company only reflects its proportionate interest in such activities.

Measurement Uncertainty The amounts recorded for depletion, depreciation and accretion of petroleum and natural gas property, plant and equipment are based on estimates. The cost recovery ceiling test is based on estimates of proved reserves, production rates, petroleum and natural gas prices, futures costs and other relevant assumptions. Accounts receivable are recorded at the net recoverable amount which involves estimates of uncollectable accounts. The goodwill impairment test involves estimates of the Company’s fair value. Asset retirement obligations are based on estimates of abandonment costs, timing of abandonment, inflation and interest rates. The provision for income taxes is based on judgements in applying income tax law and estimates on the timing, likelihood and reversal of temporary differences between the accounting and tax bases of assets and liabilities. The recognition of tax benefits, if any, are only recognized if it is more likely than not that they would be realized based on estimated future taxable income. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.

Amounts recorded from joint venture partners are based on the Company’s interpretation of underlying agreement and may be subject to joint approval. The Company has recorded balances due from its joint venture partners based on costs incurred and its interpretation of allowable expenditures. Any adjustment required as a result of joint venture audits are recorded in the period of settlement with joint venture partners.

Cash and Cash Equivalents Cash consists of cash in the bank, less outstanding cheques. Cash and cash equivalents include investments and deposits with a maturity of three months or less when purchased.

52

Legacy Oil+Gas Inc.

2010 Annual Report

Petroleum and Natural Gas Properties The Company follows the full cost method of accounting for petroleum and natural gas operations. All costs related to the acquisition of, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition costs, prospect investigation costs, geological and geophysical expenditures, carrying charges of non-producing properties, costs of drilling both productive and non-productive wells, petroleum and natural gas production equipment and overhead charges directly related to exploration and development activities.

Oil and natural gas assets are evaluated at least annually to determine whether the costs are recoverable and do not exceed the accounting fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of carrying value and market value of unproved properties exceeds the carrying value of the oil and natural gas assets. If the carrying value of the oil and natural gas assets is assessed to be non-recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from production of proved and probable reserves and the lower of costs and markets of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate.

The cost of unproved properties is excluded from the impairment test described above and subject to a separate impairment test. In the case of impairment, the book value of the impaired properties is moved to the petroleum and natural gas depletable base.

Proceeds from the disposition of oil and natural gas properties are credited to the capitalized costs except for dispositions that would change the rate of depletion and depreciation by 20 percent or more, in which case a gain or loss would be recorded.

Depletion, Depreciation and Amortization (“DD&A�)

Depletion of petroleum and natural gas properties is calculated using the unit-of-production method based on the estimated proven reserves before royalties calculated in accordance with National Instrument 51-101, as determined by independent engineers. Natural gas reserves and production are converted to barrels of oil equivalent at a rate of 6 Mcf:1 Boe, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not necessarily represent a value equivalency at the wellhead. The depletion base includes capitalized costs, plus future costs to be incurred in developing proven reserves and excludes the unimpaired cost of unproven land. Costs associated with unproven properties are not subject to depletion and are assessed periodically to ascertain whether impairment has occurred.

Corporate assets are recorded at cost and depreciated over their useful life on a declining balance basis using an annual rate of 20 percent.

Asset Retirement Obligations The Company records a liability for the fair value of legal obligations associated with the retirement of long-lived tangible assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related assets, which is depleted on a unit-ofproduction basis over the life of the reserves. The liability is adjusted each reporting year to reflect the passage of time, with the accretion charged to net income. Estimates used are evaluated on a periodic basis and any adjustments are applied prospectively. Actual costs incurred upon settlement of the obligations are charged against the liability.

Goodwill The Company must record goodwill relating to a corporate acquisition when the total purchase price exceeds the fair value for accounting purposes of the net identifiable assets and liabilities of the acquired company. The goodwill balance is assessed for impairment annually at year-end or as events occur that could result in impairment. Impairment is recognized based on the fair value of the reporting entity compared to the carrying value of the reporting entity. If the fair value of the consolidated Company is less than the carrying value, impairment is measured by allocating the fair value of the consolidated Company to the identifiable assets and liabilities as if the Company had been acquired in a business combination for a purchase price equal to its fair value. The excess of the fair value of the consolidated Company over the amounts assigned to the identifiable assets and liabilities is the fair value of the goodwill. Any excess of the carrying value of goodwill over this implied fair value of goodwill is the impairment amount. Impairment is charged to net income in the year in which it occurs.

Goodwill is stated at cost less impairment and is not amortized.

Hedging The Company may periodically enter into forward contracts to reduce its exposure to price fluctuations on a portion of its oil and natural gas production. The contracts are not used for speculative trading purposes. Payments or receipts on financial instruments that are designated and effective as hedges are recognized in income concurrently with the hedged transaction. Any derivative that does not constitute a hedge is recorded at fair value in the balance sheet with any gain

Legacy Oil+Gas Inc.

2010 Annual Report

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

or loss reflected in the statement of operations. Gains or losses on physical and qualifying hedge contracts are reported as adjustments to commodity revenues in the related production month.

Income Taxes The Company follows the liability method of accounting for income taxes. Temporary differences arising from differences between the tax basis of an asset or liability and its carrying amount on the balance sheet are used to calculate future income tax assets or liabilities. Future income tax assets or liabilities are calculated using substantively enacted tax rates anticipated to apply in the periods that the temporary differences are expected to reverse. The benefit of any uncertain tax assets, if any, are only recognized if it is more likely than not that they would be realized. A valuation allowance is recorded against any future income tax asset if the Company is not “more likely than not� to be able to utilize the tax deduction associated with the asset.

Stock Based Compensation Plan The Company follows the fair value method of valuing stock option grants. Under this method, compensation cost, attributable to share options granted to employees, officers and directors of Legacy is measured at fair value at the date of grant and expensed over the vesting period with a corresponding increase to contributed surplus. Upon the exercise of the stock options, consideration paid together with the amount previously recognized in contributed surplus is recorded as an increase to share capital. In determining the fair value of the share options and warrants granted, the Black-Scholes model is used and assumptions regarding interest rates, underlying volatility of the shares and expected life of the options and warrants are made.

The Company has not incorporated an estimated forfeiture rate for stock options and warrants that will not vest, rather, the Company accounts for actual forfeitures as they occur.

The Company’s contributions to the Employee Share Ownership Plan are expensed as incurred.

Investment in Marketable Securities Investment in marketable securities consists of investments with a quoted market price in an active market. These securities have been classified as held-for-trading and are reported at fair value, with changes in fair value recorded in the statement of net operations.

Foreign Currency Translation Monetary assets and liabilities denominated in a foreign currency are translated at the rate of exchange in effect at the consolidated balance sheet date. Revenues and expenses are translated at the period average rates of exchange.

Translation gains and losses are included in income in the period in which they arise.

Per Share Information Per share information is calculated on the basis of the weighted average number of Common Shares outstanding during the fiscal year. Diluted per share information reflects the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted to Common Shares. Diluted per share information is calculated using the treasury stock method which assumes that any proceeds received by the Company upon exercise of in-themoney stock options plus the unamortized stock compensation expense would be used to buy back Common Shares at the average market price for the period.

Financial Instruments The Company measures all financial instruments at fair value on initial recognition in the financial statements. Measurement in subsequent periods will be re-evaluated depending on whether the financial instrument has been classified as held-fortrading, available-for-sale, held-to maturity, loans and receivables, or other financial liabilities.

Held-for-trading Financial assets and liabilities designated as held-for-trading are subsequently measured at fair value with changes to those fair values recognized immediately in net income.

Available-for-sale Available-for-sale financial assets are subsequently measured at fair value with changes in fair value recognized in other comprehensive income, net of tax. Amounts recognized in other comprehensive income for available-for-sale financial assets are transferred to net income when realized through disposal or impairment.

54

Legacy Oil+Gas Inc.

2010 Annual Report

Held-to-maturity investments, loans and receivables and other financial liabilities Held-to-maturity investments, loans and receivables and other financial liabilities are subsequently measured at amortized cost using the effective interest rate method with foreign exchange gains and losses recognized immediately in net income.

Transaction costs relating to financial instruments are expensed when incurred by the Company and included in net income.

Reclamation Fund The reclamation fund holds investments in cash and cash equivalents including Government of Canada Treasury Bills and Guaranteed Investment Certificates. Investments are categorized as assets held for trading which are measured at fair value with changes to those fair values recognized immediately in net income.

3. Changes in Accounting Policies and Recent Accounting Pronouncements Adoption of International Financial Reporting Standards (“IFRS”) IFRS will replace Canadian GAAP for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Company will be required to prepare financial statements in accordance with IFRS beginning on January 1, 2011, including the reporting of 2010 IFRS comparatives.

On January 1, 2011, IFRS as issued by the International Accounting Standards Board (“IASB”) will become the generally accepted accounting principles in Canada. The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of amounts reported by the Company for the year ended December 31, 2010, including the opening balance sheet as at January 1, 2010.

The transition from Canadian GAAP to IFRS is significant with differences affecting the financial position and results of operations. The balances most affected by this change will be property, plant and equipment, depletion expense, share based payments and asset retirement obligations.

Legacy will release its first IFRS compliant interim financial statements for the first quarter of 2011.

4. Investment in Marketable Securities The investment in marketable securities on the balance sheet has been classified as a held for trading financial instrument and, as a result, is measured at fair market value each reporting period with any change in fair value recognized through the consolidated statement of operations for the year.

During the 2009 fiscal year, Legacy disposed of its non-core Alberta properties to Strategic Oil & Gas Ltd. (“Strategic”) for gross proceeds of $5.1 million. The amount received included $3.9 million of cash and 2,444,444 units of Strategic valued at $0.45 per unit. Each unit consisted of one Strategic common share and one warrant entitling the holder to purchase an additional Strategic common share within 12 months at a price of $0.60 per share.

During the 2010 fiscal year, Legacy disposed of its 2,444,444 Strategic common shares at a price of $0.89 per share for gross proceeds of $2.2 million. In addition, Legacy exercised its remaining 2,444,444 Strategic warrants at $0.60 per share and acquired 2,444,444 Strategic common shares for an additional investment of $1.5 million.

Based on Strategic’s closing trading price on December 31, 2010 of $1.18 per share (December 31, 2009 – $0.59 per share), the investment in the 2,444,444 Strategic common shares as at December 31, 2010 (December 31, 2009 – 2,444,444 Strategic units) has been revalued to $2.9 million (December 31, 2009 – $2 million). The Company recognized a gain of $1.6 million for the year ended December 31, 2010 (2009 – $0.9 million) which includes the gain on the disposal of the Strategic common shares obtained in 2009 and the revaluation of the Strategic common shares on December 31, 2010.

5. Acquisition Expenditures Bronco Energy Ltd. (“Bronco”) On November 4, 2010, the Company acquired all of the issued and outstanding shares and convertible debentures of Bronco Energy Ltd. pursuant to a Plan of Arrangement under the Business Corporations Act (Alberta) (the “Bronco Arrangement”).

The purchase price paid by Legacy for all of Bronco’s shares and convertible debentures pursuant to the Bronco Arrangement was a total of 862,893 common shares of Legacy (“Legacy Shares”) and $25.5 million in cash. Value was ascribed to the Bronco income tax pools in excess of the consideration given resulting in an extraordinary gain and no allocation of value to the acquired property, plant and equipment as required under Canadian GAAP.

Legacy Oil+Gas Inc.

2010 Annual Report

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Bronco Arrangement was accounted for as a business combination under the purchase method of accounting and the preliminary purchase price allocation is as follows: Net Assets Acquired(1) ($ thousands) Property, plant and equipment Future income taxes Working capital deficit Asset retirement obligation

– 53,729 (2,053) (4,138)

Total net assets acquired

47,538

Common shares issued Cash Transaction costs

9,578 25,546 350

Total consideration

35,474

12,064

Consideration(1) ($ thousands)

Extraordinary Gain(1) ($ thousands) Extraordinary gain on acquisition

(1) The allocations described above are preliminary and subject to changes upon final purchase price adjustments. These adjustments may include, but are not limited to, future income tax balance adjustments on the filing of respective returns for the Bronco acquisition, working capital adjustments on respective balances acquired and transaction cost adjustments for actual cost incurred.

CanEra Resources Inc. (“CanEra”) On July 7, 2010, the Company acquired all of the issued and outstanding shares of CanEra Resources Inc. pursuant to a Plan of Arrangement under the Business Corporations Act (Alberta) (the “CanEra Arrangement”).

The purchase price paid by Legacy for all of CanEra’s shares pursuant to the CanEra Arrangement was a total of 20,500,045 Legacy Shares and $233 million in cash.

The CanEra Arrangement was accounted for as a business combination under the purchase method of accounting and the preliminary purchase price allocation is as follows: Net Assets Acquired(2) ($ thousands) Property, plant and equipment Goodwill Financial derivative contracts (note 12) Reclamation fund (note 6) Working capital deficit Asset retirement obligation Future income taxes

713,823 67,516 10,047 5,000 (107,538) (50,791) (152,661)

Total net assets acquired

485,396

Common shares issued Cash Transaction costs

249,896 233,000 2,500

Total purchase price

485,396

Consideration(2) ($ thousands)

(2) The allocations described above are preliminary and subject to changes upon final purchase price adjustments. These adjustments may include, but are not limited to, future income tax balance adjustments on the filing of respective returns for the CanEra acquisition, working capital adjustments on respective balances acquired and transaction cost adjustments for actual cost incurred.

56

Legacy Oil+Gas Inc.

2010 Annual Report

Villanova Resources Inc. (“Villanova”) On May 25, 2010, the Company acquired all of the issued and outstanding shares of Villanova Resources Inc. pursuant to a Plan of Arrangement under the Business Corporations Act (Alberta) (the “Villanova Arrangement”).

The purchase price paid by Legacy for all of Villanova’s shares pursuant to the Villanova Arrangement was a total of 8,099,634 Legacy Shares and $18 million in cash.

The Villanova Arrangement was accounted for as a business combination under the purchase method of accounting and the preliminary purchase price allocation is as follows: Net Assets Acquired(3) ($ thousands) Property, plant and equipment Goodwill Working capital deficit Asset retirement obligation Future income taxes

130,438 18,496 (9,894) (1,161) (24,077)

Total net assets acquired

113,802

Common shares issued Cash Transaction costs

95,009 18,000 793

Total purchase price

113,802

Consideration(3) ($ thousands)

(3) The allocations described above are preliminary and subject to changes upon final purchase price adjustments. These adjustments may include, but are not limited to, future income tax balance adjustments on the filing of respective returns for the Villanova acquisition, working capital adjustments on respective balances acquired and transaction cost adjustments for actual cost incurred.

Athena Resources Ltd. (“Athena”) Assets On November 4, 2009, the Company acquired a partnership interest in certain petroleum and natural gas assets (“Athena Assets”) in southwest Saskatchewan from Athena Resources Ltd. The purchase price paid by Legacy for the Athena Assets, pursuant to the purchase and sale agreement, was a total of 5,000,000 pre-consolidation Class A common shares (833,333 post-consolidation common shares) and $47.3 million in cash.

The final allocation of the purchase price to the assets acquired is as follows: Net Assets Acquired ($ thousands)

Petroleum and natural gas properties Asset retirement obligation Future income taxes

Total net assets acquired

74,103 (1,650) (16,523) 55,930

Consideration ($ thousands) Common shares issued Cash Transaction costs

$

8,400 47,264 266

Total purchase price

$

55,930

Legacy Oil+Gas Inc.

2010 Annual Report

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Connaught Energy Ltd. (“Connaught”) On November 6, 2009, the Company acquired all of the issued and outstanding shares of Connaught Energy Ltd. pursuant to a Plan of Arrangement under the Business Corporations Act (Alberta) (the “Connaught Arrangement”).

The purchase price paid by Legacy for all of Connaught’s shares pursuant to the Connaught Arrangement was a total of 83,333,333 pre-consolidation Class A common shares (13,888,889 post-consolidation common shares) and $60 million in cash.

The Connaught Arrangement was accounted for as a business combination using the purchase price method of accounting and the final purchase price allocation is as follows: Net Assets Acquired ($ thousands) Property, plant and equipment Goodwill Working capital deficit Asset retirement obligation Future income taxes

200,000 47,541 (2,582) (284) (43,449)

Total net assets acquired

201,226

Common shares issued Cash Transaction costs

140,000 60,000 1,226

Total purchase price

201,226

Consideration ($ thousands)

Renegade Oil & Gas Ltd. (“Renegade”) On September 4, 2009, the Company acquired all of the issued and outstanding shares of Renegade Oil & Gas Ltd. pursuant to an amalgamation under the Business Corporation Act (Alberta) (the “Renegade Amalgamation”).

The purchase price paid by Legacy for all of Renegade’s shares, pursuant to the Renegade Amalgamation, was a total of 39,622,850 pre-consolidation Class A common shares (6,603,808 post-consolidation common shares).

The acquisition was accounted for as a business combination using the purchase method of accounting and the final purchase price allocation is as follows: Net Assets Acquired ($ thousands) Property, plant and equipment Goodwill Working capital deficit Asset retirement obligation Future income taxes

68,171 4,290 (10,175) (767) (9,198)

Total net assets acquired

52,321

Common shares issued Fair value of Renegade options acquired Fair value of Renegade warrants acquired Transaction costs

49,529 1,402 231 1,159

Total purchase price

52,321

Consideration ($ thousands)

58

Legacy Oil+Gas Inc.

2010 Annual Report

Bonavista Petroleum (“Bonavista”) Assets On August 31, 2009, the Company acquired certain petroleum and natural gas assets (“Bonavista Assets”) in southeast Saskatchewan from Bonavista Petroleum.

The purchase price paid by Legacy for the Bonavista Assets, pursuant to the purchase and sale agreement, was a total of 3,947,368 pre-consolidation Class A common shares (657,895 post-consolidation common shares) and $91.3 million in cash subject to a working capital adjustment of $6.1 million.

The final allocation of the purchase price to the assets acquired is as follows: Net Assets Acquired ($ thousands) Petroleum and natural gas properties Asset retirement obligation

105,160 (1,844)

Total net assets acquired

103,316

Common shares issued Cash Transaction costs

4,934 97,439 943

Total purchase price

103,316

Consideration ($ thousands)

Medora Resources Inc. (“Medora”) On August 18, 2009, the Company acquired all of the issued and outstanding shares of Medora Resources Inc. pursuant to a Plan of Arrangement under the Business Corporation Act (Alberta) (the “Medora Arrangement”).

The purchase price paid by Legacy for all of Medora’s Common Shares, pursuant to the Medora Arrangement, was a total of 90,742,963 pre-consolidation Class A common shares (15,123,827 post-consolidation common shares).

The Medora Arrangement was accounted for as a business combination using the purchase method of accounting and the final purchase price allocation is as follows: Net Assets Acquired ($ thousands) Property, plant and equipment Goodwill Working capital deficit Financial derivative contract (Note 10) Asset retirement obligation Future income taxes

156,933 2,738 (24,699) (119) (1,023) (18,494)

Total net assets acquired

115,336

Common shares issued Transaction costs

113,429 1,907

Total purchase price

115,336

Consideration ($ thousands)

Other property acquisitions Net cash consideration for other property, plant and equipment acquisitions during the year ended December 31, 2010 amounted to $17.3 million.

Legacy Oil+Gas Inc.

2010 Annual Report

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill As a result of the above mentioned acquisitions, the impact on goodwill for the year ended December 31, 2010 is as follows:

($ thousands)

December 31 2010

December 31 2009

Balance, beginning of period Acquisition of Medora Acquisition of Renegade Acquisition of Connaught Acquisition of Villanova Acquisition of CanEra Acquisition of Medora final purchase price allocation adjustment Acquisition of Renegade final purchase price allocation adjustment Acquisition of Connaught final purchase price allocation adjustment

55,580 – – – 18,496 67,516 173 207 (1,391)

– 2,565 4,083 48,932 – – – – –

Balance, end of period

140,581

55,580

December 31 2010

December 31 2009

6. Reclamation Fund

($ thousands) Balance, beginning of period Acquired (note 5) Contribution Gain included in interest and financing in net loss

– 5,000 5,000 27

– – – –

Balance, end of period Less: Current balance, end of period

10,027 8,735

– –

Long-term balance, end of period

1,292

–

As a result of the CanEra Arrangement, the Company acquired an Abandonment, Reclamation and Remediation Trust established pursuant to the Share Purchase and Sale Agreement between CanEra AcquisitionCo Inc. and a third party (the “Reclamation Agreement”) dated September 11, 2009, to fund asset retirement obligations for the period January 1, 2010 through December 31, 2014.

The Company is required to contribute $5 million annually, which contributions will be reimbursed to the Company annually as expenditures are incurred in satisfaction of the commitment. At closing of the CanEra Arrangement, CanEra had contributed $5 million to the fund. Required future contributions to the fund have been disclosed in note 15.

In addition, the Company has delivered irrevocable letters of credit to the third party in the amount of $10 million. A $5 million letter of credit will be held until January 15, 2013 and a $5 million letter of credit will be held until January 15, 2014 as general and continuing collateral security for the performance and reclamation obligations as represented in the Reclamation Agreement.

7. Property, Plant and Equipment

($ thousands)

December 31 2010

December 31 2009

Petroleum and natural gas properties Office equipment Accumulated depletion and depreciation

1,720,707 1,013 (166,570)

679,678 479 (41,625)

Net book value

1,555,150

638,532

At December 31, 2010, the calculation for depletion and depreciation included an estimated $268.6 million (December 31, 2009 – $72.1 million) for future development capital associated with proven undeveloped reserves and excluded $228.7 million (December 31, 2009 – $193.4 million) for the cost of unproved properties.

60

Legacy Oil+Gas Inc.

2010 Annual Report

During the year ended December 31, 2010, the Company capitalized $2.6 million (2009 – $0.8 million) of general and administrative costs and $6.0 million (2009 $Nil) of stock based compensation that were directly associated with the exploration and development of capital assets.

The Company performed a ceiling test calculation as at December 31, 2010 to assess the recoverable value of petroleum and natural gas properties and equipment. The table below summarizes the benchmark prices for the next ten years used by the independent reserve evaluators in preparing the Company’s reserve report. Based on the expected future commodity prices, no write-down was required for the year ended December 31, 2010.

Average Price Forecast

2011

2012

2013

2014

2015

2016

2017

Crude Oil West Texas Intermediate (US$/bbl) 88.40 Edmonton Light (Cdn$/bbl) 93.08

89.14 93.85

88.77 93.43

88.88 93.54

90.22 94.95

91.57 96.38

92.94 97.84

4.66

4.99

6.58

6.69

6.80

6.91

Natural Gas AECO Gas Price (Cdn$/mmbtu)

4.04

2018

2019

2020 2021+(1)

94.34 95.75 97.19 99.32 100.81 102.34

7.02

7.14

7.26

1.5% 1.5%

1.5%

(1) Percentage change represents the change in future prices each year after 2020 to the end of the reserve life.

8. Bank Debt As at December 31, 2010, the Company had a $340 million 364-day revolving credit facility with a syndicate of Canadian banks. The facility is available on a revolving basis for a period until April 29, 2011 and then for a further year under the term out provisions. Such initial term out date may be extended for further 364-day periods at the request of Legacy, subject to approval by the banks. The credit facility provides that advances may be made by way of direct advances, LIBOR advances, banker’s acceptances or standby letters of credit/guarantees. Direct advances bear interest at the bank’s prime lending rate plus an applicable margin for Canadian dollar advances and at the bank’s US base rate plus an applicable margin for US dollar advances. The applicable margin charged by the bank is dependent upon the Company’s senior debt to annualized most recent quarter’s cash flow ratio. The banker’s acceptances bear interest at the applicable banker’s acceptance rate plus an explicit stamping fee based upon the Company’s senior debt to annualized most recent quarter’s cash flow ratio. The credit facilities are secured by a fixed and floating charge debenture on the assets of the Company. The borrowing base is subject to a semi-annual review by the bank.

At December 31, 2010, the Company has $244.7 million committed against the credit facility which includes outstanding bank debt of $234.5 million and letters of credit in the amount of $10.2 million.

9. Asset Retirement Obligations The total future asset retirement obligation was estimated based on the Company’s net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows required to settle the asset retirement obligations is approximately $227.9 million (December 31, 2009 – $20.5 million) which will be incurred over the next 48 years with the majority of costs incurred between 2020 and 2040. A credit adjusted risk-free rate of eight percent and an inflation rate of two percent was used to calculate the fair value of the asset retirement obligations.

The following table reconciles the changes in the Company’s asset retirement obligations:

($ thousands)

December 31 2010

December 31 2009

Balance, beginning of period Acquisitions (note 5) Dispositions Liabilities incurred Liabilities settled Accretion expense

6,478 56,061 (28) 906 (2,714) 2,707

1,855 5,597 (1,602) 355 – 273

Balance, end of period

63,410

6,478

Legacy Oil+Gas Inc.

2010 Annual Report

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Shareholders’ Equity Authorized Unlimited number of common voting shares.

Issued and Outstanding On December 2, 2009, the Company consolidated its outstanding Class A shares on a 6 to 1 basis and redesignated these shares as common shares as approved by shareholders.

On October 5, 2009, Legacy exercised its right to convert all outstanding Class B convertible voting shares into Class A common shares resulting in the issue of 5,140,189 Class A shares and the cancellation of all outstanding Class B shares.

Year Ended Year Ended ($ thousands – except share number) December 31, 2010 December 31, 2009

Number Amount Number Amount

Common shares Balance, beginning of period Issued for cash Issued on the acquisition of Medora Resources Inc. (note 5) Issued on the acquisition of Renegade Oil & Gas Ltd. (note 5) Issued on the purchase of Bonavista Assets (note 5) Issued on the acquisition of Athena Partnership Assets (note 5) Issued on the acquisition of Connaught Energy Ltd. (note 5) Issued on the acquisition of Villanova Resources Inc. (note 5) Issued on the acquisition of CanEra Resources Inc. (note 5) Issued on the acquisition of Bronco Energy Ltd. (note 5) Tax effect on flow though shares renounced Issue on exercise of stock options and warrants Issued on conversion of Class B shares Share issue costs, net of tax Share consolidation

74,155,830 23,000,000 – – – – – 8,099,634 20,500,045 862,893 – 616,023 – – –

553,239 271,400 – – – – – 95,009 249,896 9,578 – 3,717 – (10,507) –

24,190,442 186,338,002 90,742,963 39,622,850 3,947,368 5,000,000 83,333,333 – – – – 6,619,898 5,140,189 – (370,779,215)

18,844 213,799 113,429 49,529 4,934 8,400 140,000 – – – (1,803) 8,742 6,038 (8,673) –

127,234,425

1,172,332

74,155,830

553,239

Warrants Balance, beginning of period Issued pursuant to private placement of Units Renegade broker warrants assumed on acquisition (note 5) Exercised Forfeited Share consolidation

4,635,249 – – (533,593) (244) –

3,603 – – (407) – –

– 27,138,255 913,236 (240,000) – (23,176,242)

– 3,524 231 (152) – –

Balance, end of period

4,101,412

3,196

4,635,249

3,603

Class B shares Balance, beginning and end of period Redeemed for Class A shares

– –

– –

922,500 (922,500)

6,038 (6,038)

Balance, end of period

–

–

–

–

Total share capital, end of period

–

1,175,528

–

556,842

Balance, end of period

62

Legacy Oil+Gas Inc.

2010 Annual Report

Shares Issued for Cash On August 6, 2010, the Company issued 3,000,000 common shares at a price of $11.80 per share for gross cash proceeds of $35.4 million as a result of the exercise of the over-allotment option.

On July 6, 2010, the Company issued 20,000,000 subscription receipts at a price of $11.80 per subscription receipt pursuant to a bought deal prospectus offering for gross cash proceeds of $236 million and granted the underwriters an option to subscribe for an additional 3,000,000 subscription receipts at a price of $11.80 per subscription receipt within 30 days of the close of the offering. The subscription receipts were exchanged for common shares on a one to one basis for no additional consideration upon completion of the acquisition of CanEra on July 7, 2010.

On November 2, 2009 the Company issued 34,375,000 units at a price of $3.20 per unit for gross proceeds of $110 million. Each unit was comprised of one subscription receipt for one Class A share at a price of $1.60 per subscription receipt and one special warrant entitling the holder to one Class A share at a price of $1.60 per special warrant. Each subscription receipt and each special warrant were converted to Legacy Class A shares for no additional consideration on November 30, 2009.

On September 8, 2009 the Company closed a Rights Offering. Pursuant to the Rights Offering, each holder of Class A Shares on August 13, 2009 received one transferable right (a “Right”) for every Class A Share held. Every four Rights entitled the holder to purchase one Class A Share at a price of $0.38 until the Rights expired on September 4, 2009. The Right Offering resulted in the issue of an additional 6,222,170 Class A shares for gross proceeds of $2.4 million.

On August 14, 2009, the Company issued 72,000,000 Class A shares at a price of $1.25 per share on a bought deal private placement for gross cash proceeds of $90 million.

On July 31, 2009, the Company issued an additional 4,342,969 units at a price of $0.38 per unit for gross proceeds of $1.7 million. As well, the Company issued 12,227,577 Class A shares at a price of $0.38 per share for gross proceeds of $4.6 million.

All of the units issued were acquired by contractors, employees, officers or directors of the Company (“service providers”).

For service providers, units acquired through the private placement are held under an escrow agreement in which onethird of the units are to be released equally each year following the date of issuance. No securities will be released from escrow after the date the holder ceases to be a service provider. Upon the holder ceasing to be a service provider, Legacy will repurchase for cancellation all of the securities of the holder then held in escrow at a price equal to the lesser of $2.28 per unit and the market price of the common shares of Legacy on the last day of trading immediately prior to the holder ceasing to be a service provider or direct the transfer of such securities to another service provider.

On July 20, 2009, the Company issued 22,795,286 units at a price of $0.38 per unit for gross cash proceeds of $8.7 million.

Each unit was comprised of one Class A Share and one Class A share purchase warrant exercisable for a price of $0.54 subject to certain share performance criteria being satisfied. As at December 31, 2009, all share performance criteria had been met.

Share Purchase and Broker Warrants Each share purchase warrant entitles the holder to purchase one Legacy common share at a price of $3.24 per share.

The share purchase warrants vest subject to certain share performance criteria being satisfied and are held in escrow and released equally over a three year period starting at the first anniversary date of issuance. As at December 31, 2010, all share performance criteria had been met and there were 4,101,412 share purchase warrants outstanding, all of which have vested and 1,086,047 of which have been released from escrow.

Pursuant to the acquisition of Renegade, Legacy assumed 570,773 fully vested broker warrants outstanding for Renegade shares which entitled each holder to purchase one Renegade common share at a price ranging from $1.00 to $2.50 per Renegade share. These broker warrants were then converted to fully vested Legacy broker warrants at an exchange ratio of 1:1.6 resulting in 152,206 broker warrants outstanding for Legacy common shares which entitle each holder to purchase a Legacy common share at a price ranging from $3.78 to $9.36 per share. These warrants expire on dates ranging from September 4, 2010 to March 4, 2011. As at December 31, 2010, there were no broker warrants outstanding.

Legacy Oil+Gas Inc.

2010 Annual Report

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options The following table sets forth a reconciliation of stock option plan activity through to December 31, 2010: Year Ended Year Ended December 31, 2010 December 31, 2009

Number

Weighted Average Exercise Price ($) Number

Weighted Average Exercise Price ($)

4,111,167 7,934,000 – (196,665) (201,167) –

9.66 11.55 – 9.66 9.65 –

2,496,750 24,660,000 4,129,981 (6,379,896) (239,833) (20,555,835)

0.81 1.61 0.94 0.89 0.90 –

End of period

11,647,335

10.95

4,111,167

9.66

Exercisable

1,106,668

9.66

1,167

8.40

Beginning of period Granted Stock options assumed on acquisition Exercised (1) Forfeited Share consolidation

(1) In accordance with the Company’s Stock Option Plan, participants can elect for the Company to settle any vested stock option obligations by issuing such number of Legacy common shares to the participant that is equal in value to the difference between the closing trading price on the Toronto Stock Exchange on the day prior to the options being exercised and the option exercise price. During the year ended December 31, 2010, the Company issued 59,097 common shares in respect of 173,332 stock options exercised through this election.

The fair value of each option granted or acquired is estimated on the date of grant or acquisition using the Black-Scholes option pricing model with the following weighted average assumptions: Year Ended December 31

Risk-free interest rate (%) Expected life (years) Expected volatility (%) Dividend yield (%)

2010

2.40 5.0 44 –

2009

2.35 5.0 37 –

Employee Share Ownership Plan During the year, Legacy implemented an Employee Share Ownership Plan (“ESOP”). The ESOP allows employees a means of acquiring shares of the Company through regular payroll deductions. Employees may contribute up to 5 percent of their base salaries in the ESOP and the Company matches 100 percent of employee contributions. Shares purchased with Company contributions to the ESOP by the Company will be issued to the employee contingent upon the employee remaining employed by the Company on December 31 of the year of contribution. These contributions are expensed as incurred. The ESOP is administered by a third party and ESOP shares are purchased on the open market.

As at December 31, 2010, the Company contributed $0.1 million into the plan.

Earnings Per Share The following table summarizes the Common Shares used in calculating the net loss before extraordinary item and the net loss per Common Share: Year Ended December 31 Weighted Average Common Shares Basic

Diluted

2010

100,758,087 102,201,233

2009

24,453,751 25,292,561

As the Company is in a net loss before extraordinary item and a net loss position for the years ended December 31, 2010 and 2009, the basic weighted average common shares number was used to calculate both the basic and diluted loss before extraordinary item and loss per Common Share. Comparative figures have been presented as if the share consolidation occurred on January 1, 2009.

64

Legacy Oil+Gas Inc.

2010 Annual Report

Contributed Surplus The following table reconciles the changes in the Company’s contributed surplus balance:

($ thousands) Balance, beginning of period Stock based compensation Renegade stock options assumed on acquisition (note 5) Exercise of stock options

Balance, end of period

December 31 2010

1,075 18,497 – (722)

18,850

December 31 2009

647 1,779 1,402 (2,753) 1,075

Management of Capital Structure Legacy’s objectives in managing capital have not changed in the year. The objectives remain to (i) manage financial flexibility in order to preserve the Company’s ability to meet financial obligations, including obligations arising from future acquisitions; and (ii) maintain a flexible capital structure which optimizes the cost of capital at an acceptable risk level and to provide an optimal return to equity holders.

In the management of capital, Legacy includes share capital and total net debt, which is made up of bank debt and working capital. Legacy manages its capital structure and makes adjustments in light of economic conditions and the risk characteristics of the underlying assets and capital program. In order to maintain or adjust the capital structure, Legacy may issue new common shares, increase or decrease bank borrowing capacity, adjust exploration and development capital expenditures and acquire or dispose of assets.

The key measures that the Company utilizes in evaluating its capital structure are total net debt to cash flow from operating activities (before changes in non-cash working capital) and the current credit available from its creditors in relation to the Company’s cash flow and budgeted capital program. Total net debt to cash flow from operating activities (before changes in non-cash working capital) is calculated as total net debt divided by cash flow from operating activities (before changes in non-cash working capital) and represents the time period it would take to repay the net debt if no further capital expenditures were incurred and if cash flow from operating activities (before changes in non-cash working capital) remained constant. At December 31, 2010 total net debt was $255.6 million and the annualized cash flow from operating activities (before changes in non-cash working capital) based on the three months ended December 31, 2010 was $145.9 million, resulting in a total net debt to cash flow from operating activities (before changes in non-cash working capital) ratio of 1.8.

11. Taxes Tax Expense The combined provision for taxes in the statement of net operations and deficit reflects an effective tax rate which differs from the expected statutory tax rate. Differences were accounted for as follows: Year Ended December 31 ($ thousands – except statutory income tax rate)

2010

2009

Loss before taxes Statutory income tax rate

(22,396) 28.8%

(10,888) 30.0%

Expected income tax recovery Add (deduct): Stock option compensation Reduction in income tax rates and certain tax balances Unrealized gains on marketable securities and financial derivative contracts Other

(6,450)

(3,266)

3,615 (2,843) (18) 20

541 2,002 (112) –

Future income tax recovery

(5,676)

(835)

Legacy Oil+Gas Inc.

2010 Annual Report

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Future income taxes Balance as at December 31 ($ thousands)

2010

2009

Property, plant and equipment Mark-to-market on marketable securities and financial instruments Non-capital losses Asset retirement cost Share issue cost

(274,677) 1,189 48,884 16,392 5,962

(98,567) (250) 5,857 1,701 3,282

Future income tax liability

(202,250)

(87,977)

As at December 31, 2010, the Company had non-capital losses of approximately $189.1 million (2009 – $21.2 million) available for deduction against future taxable income.

12. Financial Instruments The Company’s financial instruments recognized on the balance sheet consist of cash and cash equivalents, accounts receivable, investment in marketable securities (refer to note 4), reclamation fund (refer to notes 6 and 15), accounts payable and accrued liabilities, bank debt (refer to note 8) and natural gas commodity contracts, crude oil commodity contracts and an interest rate swap contract (“financial derivative contracts”).

Fair Value of Financial Instruments The fair value of Legacy’s financial instruments, excluding the investment in marketable securities, reclamation fund and financial derivative contracts, approximate their carrying amounts due to their short terms to maturity or the indexed rate of interest on the bank debt:

As at December 31

($ thousands)

2010

2009

Carrying Carrying Amount Fair Value Amount Financial Assets Held-for-Trading: Cash and cash equivalents Investment in marketable securities Reclamation fund(1) Financial derivative contracts asset(1) Loans and receivables: Accounts receivable Financial Liabilities Held-for-Trading: Financial derivative contracts liability(1) Other Financial Liabilities: Accounts payable and accrued liabilities Bank debt

Fair Value

5,221 2,884 10,027 4,536

5,221 2,884 10,027 4,536

– 2,020 – –

– 2,020 – –

44,789

44,789

17,488

17,488

(506)

(506)

86

–

88,366 234,561

88,366 234,561

49,746 24,675

49,746 24,675

(1) Includes current portion

The Company continues to monitor its accounts receivable and its allowance for doubtful accounts. As at December 31, 2010, there have been no impairment issues.

Legacy’s investments in marketable securities, reclamation fund and financial derivative contracts are transacted in active markets. Legacy classifies the fair value of these transactions according to the following hierarchy based on the amount of observable inputs used to value the instrument.

66

Legacy Oil+Gas Inc.

2010 Annual Report

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

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

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

Legacy’s investment in marketable securities, reclamation fund and financial derivative contracts have been assessed on the fair value hierarchy described above.

The reclamation fund and the investment in marketable securities are designated as Level 1. The financial derivative contracts are classified as Level 2. Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy level.

Risks associated with Financial Instruments Credit risk The Company may be exposed to certain losses in the event that counterparties to financial instruments fail to meet their obligations in accordance with agreed terms. The Company mitigates this risk by entering into transactions with highly rated major financial institutions and by routinely assessing the financial strength of its customers.

At December 31, 2010, financial assets on the balance sheet are comprised of cash and cash equivalents, accounts receivable, investment in marketable securities, reclamation fund and financial derivative contracts and the maximum credit risk associated with these financial instruments is the total carrying value.

Cash equivalents and the reclamation fund include high-grade, short-term securities placed primarily with governments and financial institutions with strong investment grade ratings. Financial derivative contracts are entered into with major financial institutions in Canada having investment grade credit ratings.

The Company’s accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to normal credit risks. Concentration of credit risk is mitigated by marketing production to numerous purchasers under normal industry sale and payment terms. As is common in the petroleum and natural gas industry in western Canada, receivables relating to the sale of petroleum and natural gas are received on or about the 25th day of the following month. Of the $44.8 million accounts receivable outstanding as at December 31, 2010, $27.0 million related to the sale of petroleum and natural gas and was received January 25, 2011. The accounts receivable balance includes $12.5 million from joint venture partners relating to the recovery of their interest in operating costs and capital spent. The largest amount owing from one partner was $5.8 million. As the operator of properties, Legacy has the ability to not allocate production to joint venture partners who are in default of amounts owing.

Currency risk The Company is exposed to currency risk in relation to its United States dollar denominated working capital balances or deficits held in Canada. From time to time, the Company may enter into agreements to fix the exchange rate of Canadian to United States dollars in order to offset the risk of fluctuating working capital balances if the Canadian dollar increases or decreases in value compared to the United States dollar. However, the Company has chosen not to enter into any foreign exchange contracts in 2010 as the United States working capital balances are not deemed significant to the consolidated Legacy entity.

Interest rate risk The Company is exposed to interest rate risk on its outstanding bank debt. The bank debt has a floating interest rate and consequently changes to interest rates would impact the Company’s future cash flows. To mitigate this risk, the Company has an interest rate swap contract in place at December 31, 2010. However, as the swap is less than the Company’s total debt, the Company is still exposed to changes in market interest rates which will result in fluctuations to the fair value of the debt.

Legacy Oil+Gas Inc.

2010 Annual Report

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liquidity risk Liquidity risk relates to the risk the Company will encounter difficulty in meeting obligations associated with its financial liabilities. The financial liabilities on its balance sheet consist of accounts payable and accrued liabilities, bank debt and financial derivative contracts. As described in note 8, the credit facility is available on a revolving basis for a period of at least 364-days until April 29, 2011 when it is subject to renewal and such initial term out date may be extended for further 364-day periods at the request of the Company, subject to approval by the banks. Following the term out date, the facilities will be available on a non-revolving basis for a one year term, at which time the facilities would be due and payable. The Company anticipates it will continue to have adequate liquidity to fund its financial liabilities through its future cash flows (see also “Management of Capital Structure” in note 10). The Company had no defaults or breaches on its bank debt or any of its financial liabilities.

The following are the contractual maturities of financial liabilities at December 31, 2010: ($ thousands)

< I Year

1–3 Years

3–5 Years

Thereafter

Total

Accounts payable and accrued liabilities Bank debt – Principal

88,366 –

– 234,561

– –

– –

88,366 234,561

Total commitments

88,366

234,561

–

–

322,927

Market risk Market risk is comprised of currency risk, interest rate risk and other price risks which consist primarily of fluctuations in petroleum and natural gas prices. The valuation of the financial assets and liabilities on the balance sheet at December 31, 2010 have not been significantly impacted by changes in currency rates. Currency rates influence petroleum and natural gas prices; however, this influence on commodity prices and the resulting impact on financial assets and liabilities cannot be accurately quantified.

Commodity price risk The Company is exposed to commodity price risk arising from the effect that fluctuations of future commodity prices may have on the fair value or future cash flows of financial assets and liabilities. From time to time, Legacy may enter into agreements to receive fixed prices on its oil and natural gas production to offset the risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels set in such agreements, Legacy will not benefit from such increases.

The Company acquired financial derivative contracts, as outlined below, that partially mitigate exposure to commodity price risk.

Financial Derivative Contracts The following is a summary of financial derivative contracts in place for the Company as at December 31, 2010: Crude Oil Commodity Contracts(1)

Term Contract Jan 2011 – Dec 2011 Option Jan 2011 – Dec 2012 Collar

Volume Bbl/d

Bought Put Sold Call $/Bbl $/Bbl

1,300

70.00

1,275

80.00

–

105.50

(1) NYMEX WTI Monthly average converted to Canadian dollars

The Company acquired the crude oil commodity contracts on the acquisition of CanEra Resources Inc. If crude oil prices had been 10 percent higher on December 31, 2010, with all other variables held constant, the change in the fair value of the crude oil commodity contracts would have resulted in net loss that was $5.1 million higher for the year then ended. If crude oil prices had been 10 percent lower on December 31, 2010, with all other variables held constant, the change in the fair value of the crude oil commodity contracts would have resulted in net loss that was $5.0 million lower for the year then ended.

68

Legacy Oil+Gas Inc.

2010 Annual Report

Natural Gas Commodity Contracts(2)

Volume Term Contract GJ/d Jan 2011 – Dec 2011 Jan 2011 – Dec 2012

Collar Collar

3,000 3,000

Bought Put Sold Call $/GJ $/GJ

4,75 5.00

8.35 8.02

(2) AECO 7A Monthly Index

The Company acquired the natural gas commodity contracts on the acquisition of CanEra Resources Inc. The following table summarizes the sensitivity of the fair value of the Company’s crude oil commodity contracts and the natural gas commodity contracts as at December 31, 2010 to fluctuations in commodity prices, with all other variables held constant. Fluctuations in commodity prices potentially could have resulted in unrealized gains (losses) impacting net income before tax as follows: Impact on Net Income (Loss) Before Tax

Year Ended December 31, 2010

($ thousands)

Increase 10%

Crude oil price Natural gas price

(5,080) (1,080)

Decrease 10%

4,970 1,330

Interest Rate Swap Contract(3)

Notional Term Contract Amount ($) Fixed Rate (%) Jan 2011 – Jun 2011

Fixed/Floating Swap

15,000,000

1.46

(3) Interest rate swap contract floating rate is based on monthly BA-CDOR

The Company acquired the interest rate swap contract on the acquisition of Medora Resources Inc. If interest rates had fluctuated 1 percent at December 31, 2010, there would be no significant change in fair value of the interest rate swap.

The net financial derivative contracts asset (liability) consists of current and non-current assets and liabilities. The table below summarizes the fair value of the net financial derivative contracts as at December 31, 2010: Financial Derivative Contract Assets (Liabilities)

($ thousands) Crude Oil Natural Gas Interest Swap Current Financial derivative contract asset Financial derivative contract liability

December 31 2010

– (112)

2,546 –

– (14)

2,546 (126)

–

1,990

–

1,990

Non-current Financial derivative contract asset

Financial derivative contract liability

(380)

Net financial derivative contract asset (liability)

(492)

–

4,536

–

(14)

Legacy Oil+Gas Inc.

(380)

4,030

2010 Annual Report

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below summarizes the gain (loss) on financial derivative contracts: Financial Derivative Contracts Year Ended December 31 ($ thousands)

2010

Realized gain (loss) Crude oil commodity contracts

Natural gas commodity contracts

Interest rate swap contract

110 1,627

1,630

(61)

Unrealized gain (loss) Crude oil commodity contracts

Natural gas commodity contracts

Interest rate swap contract

(7,077) 1,075

– –

72

32

(5,930)

Realized gain (loss) on financial derivative contracts

Unrealized gain (loss) on financial derivative contracts

(107)

2009

– – (61)

32

The realized gain (loss) represents the financial derivative contracts settled during the period. The unrealized gain (loss) represents the fair value change of the underlying financial derivative contracts to be settled in the future.

13. Supplemental Cash Flow Information Year Ended December 31

2010

Accounts receivable Prepaid expenses and deposits

Accounts payables and accrued liabilities

(6,840)

2009 (8,997)

(612) 5,398

(414) 35,910

Change in non-cash working capital

(2,054)

26,499

Relating to: Operating activities Financing activities Investing activities

(6,645) – 4,591

(4,774) – 31,273

Interest paid Income and other taxes paid

6,012 –

668 –

14. Related Party Transactions The Company incurred fees of $1.3 million (2009 – $1.1 million) for legal services rendered by a law firm for the year ended December 31, 2010 of which $Nil (2009 – $Nil) was payable at December 31, 2010. A board member and the Corporate Secretary are partners of the firm. These fees were incurred in the normal course of business and have been measured at the exchange amount.

70

Legacy Oil+Gas Inc.

2010 Annual Report

15. Commitments The following is a summary of the estimated costs required to fulfill the Company’s remaining contractual commitments at December 31, 2010: ($ thousands)

2011

2012

2013

2014

2015

Thereafter

Reclamation trust fund Office leases(1) Bigstone Scholarship(2)

5,000 2,511 12

5,000 1,883 12

5,000 1,577 12

– 1,084 –

– 723 –

– – –

7,523

6,895

6,589

1,084

723

–

Total commitments

(1) The Company has sublet office space relating to office leases assumed on the CanEra and Bronco acquisitions and will receive rental income of $1.1 million in 2011, $1.1 million in 2012, $0.9 million in 2013, $0.7 million in 2014 and $0.5 million in 2015. The above commitment balances are before sublet revenues.

(2) Under the terms of a joint operating agreement between Bronco, Bigstone Cree Nation and Bigstone Oil & Gas Ltd, the Company has a $12,000 annual obligation to fund a scholarship program for the direct benefit of Bigstone students during the life of the joint venture.

Abandonment, Reclamation and Remediation Trust (“Reclamation Fund”) The Company is required to contribute on or before December 31 of each calendar year commencing December 1, 2010 and ending December 31, 2013 an amount equal to $5 million pursuant to the Reclamation Agreement. The total contribution to the fund will be $25 million of which $10 million has been contributed as at December 31, 2010 (refer to note 6).

16. Subsequent Events On February 1, 2011, the Company announced the acquisition of certain petroleum and natural gas assets (“Molopo Assets”) consisting of Spearfish light oil assets in the Pierson area of southwest Manitoba from Molopo Energy Canada Ltd. in exchange for 6,180,000 Legacy common shares and $93 million in cash consideration.

On February 23, 2011, in connection with the acquisition of the Molopo Assets, the Company closed a bought deal equity financing pursuant to which the Company issued 9,355,000 Legacy common shares at a price of $14.95 per share for gross proceeds of $139.9 million.

On March 1, 2011, the Company announced the closing of the Molopo Assets acquisition.

Legacy Oil+Gas Inc.

2010 Annual Report

71

CORPORATE INFORMATION

oFFICERS

aUDITORS

HEAD OFFICE

Trent J. Yanko, P.Eng.

PricewaterhouseCoopers LLP

Legacy Oil + Gas Inc.

ENGINEERS

3900, Bow Valley Square II 205 – 5th Avenue, SW Calgary, AB T2P 2V7

President + Chief Executive Officer

Matt Janisch, P.Eng. Vice President, Finance + Chief Financial Officer

Sproule Associates Ltd.

Curtis Labelle, P.Eng. Vice President, Production

Dale Mennis

BANKERS

Vice President, Land

Mark Oliver, P.Geol.

Vice President, Exploration

Mark Franko Corporate Secretary

Bank of Montreal National Bank Scotia Bank ATB Financial Canadian Imperial Bank of Commerce Société Générale (Canada Branch)

directors LEGAL COUNSEL

Paul Colborne(3) Chairman

Heenan Blaikie LLP

James Bertram

(3)(4)

Randal Brockway(1)(2)

REGISTRAR + TRANSFER AGENT

Paul Charron(1)(3) Scott Dawson(1)(2)

Olympia Trust Company

Jim Nieuwenburg(3) James Pasieka(3)(4) Trent J. Yanko

STOCK EXCHANGE LISTING

Greg Johnson

TSX Exchange Trading Symbol: LEG

U.S. Director

Peter Mackechnie U.S. Director (1) Member of Audit Committee (2) Member of Reserves Committee (3) Member of Environmental, Health and Safety Committee (4) Member of Compensation Committee

72

Legacy Oil+Gas Inc.

Phone: 403.441.2300 Fax: 403.441.2017 E-mail: info@legacyoilandgas.com www.legacyoilandgas.com

2010 Annual Report

FIELD OFFICES Weyburn 1741 Railway Avenue Box 1449 Weyburn, SK S4H 3N8 Phone: 306.842.4726 Fax: 306.842.4737 Turner Valley Box 431 Turner Valley, AB T0L 2A0 Phone: 403.558.3757 Fax: 403.558.3985

Forward-Looking Statements This Annual Report contains forward-looking statements. More particularly, the sections entitled “To Our Shareholders”, “A Winning Strategy in Action”, “Operations” and “Properties” contain statements concerning planned exploration and development activities in 2011, potential drilling inventory, potential exploration, development and recovery prospects and opportunities, anticipated cash flow and means of funding capital expenditures. In addition, the Management’s Discussion and Analysis contains certain forward-looking statements that are identified and discussed under the heading “Forward-Looking Information” in the Management’s Discussion and Analysis. The forward-looking statements contained in this Annual Report are based on certain key expectations and assumptions made by Legacy, including expectations and assumptions concerning the success of future drilling, development and exploration activities, the performance of existing wells, the performance of new wells, the successful application of drilling, completion and recovery technology and techniques, the availability and cost of oilfield services, the demand for light oil, prevailing commodity prices, economic conditions and the retention of key employees.

Although Legacy believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Legacy can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, risks associated with the oil and natural gas industry in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), constraint in the availability of services, commodity price and exchange rate fluctuations, uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures, and the ability of Legacy to retain key employees. Certain of these risks are set out in more detail in Legacy’s Annual Information Form, which has been filed on SEDAR and can be accessed at www.sedar.com. The forward-looking statements contained in this Annual Report are made as of the date hereof and Legacy undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

Use of Boe Legacy uses the abbreviation Boe in this Annual Report. A Boe means a barrel of oil equivalent. MBoe means one thousand Boe. MMBoe means one million Boe. All Boe conversions in this Annual Report are derived by converting natural gas to oil at the ratio of six thousand cubic feet (Mcf) of natural gas to one barrel of oil equivalent. Boe may be misleading, particularly if used in isolation. A Boe conversion rate of 1 Boe:6 Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Printed in Canada

Organic growth also applies to human resources One of the reasons for Legacyâ&#x20AC;&#x2122;s success is that we hire organically, sourcing driven, technically oriented people who share our mindset. The Legacy team started with one employee in July 2009. Our team now exceeds 90 people, including consultants and field staff.

3900, Bow Valley Square II 205 â&#x20AC;&#x201C; 5th Avenue SW Calgary, AB T2P 2V7

www.legacyoilandgas.com