Winstar Resources Ltd.

Winstar Resources Ltd. | Annual Report 2010

TUNISIA Tapping Into

Douiret, Tunisia

Contents

Winstar Resources Ltd. is a publicly traded oil and gas company listed on the Toronto Stock Exchange (WIX), focused primarily on Tunisia. The Company is headquartered in Calgary, Alberta, Canada, with international headquarters in Breda, The Netherlands and offices in Geneva, Switzerland; Tunis, Tunisia; Szolnok, Hungary; and Bucharest, Romania.

1 Report to Shareholders 5 Review of Operations 12 Management’s Discussion and Analysis 34 Reports 36 Financial Statements 39

Notes to the Financial Statements

53 Corporate Information

Winstar is holding its Annual and Special General Meeting at 3:00 p.m.on May 18, 2011 in the Viking Room at the Calgary Petroleum Club 319 - 5 Avenue SW, Calgary, AB

Winstar tapped into new reserves in Tunisia during 2010 through a successful drilling program, socially responsible initiatives and increasing production throughout a period of political change.

The Company entered 2011 with an even stronger

dramatically improving drilling operations. This

foundation of expertise and opportunities in both

enhanced drilling platform gives Winstar confidence

Tunisia and Romania, and even more ambitious plans

in its ability to successfully execute a multi-well

for what could be a transforming year.

drilling program targeting, in particular, potentially

Drilling

high-impact Silurian exploration wells in the future.

During the fourth quarter of 2010, Winstar drilled

Winstar completed four major drilling operations

its first Silurian exploration well, CS Sil #1. The well

on its 100% owned and operated Chouech Essaida

was a success. The positive results were significant

concession in Southern Tunisia in 2010. In the second

in that they demonstrated that commercial

half of the year, the Company significantly expanded

quantities of crude oil, condensate and natural gas

and improved its drilling operations by setting up a

are possible within the Silurian age sandstones on

new drilling office in Sfax. The new office places

both of Winstar’s Southern Tunisia two adjacent

Winstar in closer and direct communication with

concessions, Chouech Essaida and Ech Chouech.

the major oil industry service providers of Tunisia,

Report to Shareholders

Winstar Achieves Momentum through Drilling

Winstar expanded its drilling operations in Tunisia in 2010

Winstar | Annual Report 2010 | 1

Report to Shareholders

Reserves & Net Asset Value

Production

In 2010, Winstar achieved Proved plus Probable

Winstar’s production from Tunisia averaged 1,780

reserves of 11.6 million barrels of oil equivalent (boe).

barrels of oil equivalent per day (boepd) in 2010,

This does not include the interim reserve report issued

an increase of 17% over 1,513 boepd in 2009. The

on March 1, 2011 by RPS Energy, which incorporates

Company’s production is weighted 88% to crude oil.

the results from the CS Sil #1 well completed on

Current production is approximately 2,000 boepd,

December 22, 2010. On its own, CS Sil #1 added

including production from one zone of the Silurian

reserves of 1.173 million boe (mboe) and net present

well mentioned above, which was put immediately on

value of $44.5 million.

production after the rig was moved off the location.

The year-end 2010 reserve report (using forecast commodity prices) suggests a value of $212.3 million for Winstar’s Proved plus Probable Reserves (net present value discounted at 10%, after tax). Winstar’s net present value is calculated at $6.22 per fully diluted share. The interim reserve report indicated that CS Sil #1 added $1.26 per fully diluted share.

FUNDS FROM FUNDS FROM CONTINUTING OPERATIONS

Financial In 2010, Winstar generated funds from continuing operations of $30.5 million ($0.88 per share) with net income of $2.1 million ($0.06 per share). Funds from continuing operations and net income from continuing operations during Q4 were $10.1 million ($0.29 per share) and $0.9 million ($0.03 per share) respectively.

CONTINUTING OPERATIONS ($Millions)

The Company achieved a field operating netback in Tunisia of $59.13 per boe, which is significantly higher

$30.5

than most of its peers. Winstar is able to generate such significant value per boe due to the favorable fiscal terms in Tunisia, cost control, increasing world oil prices and favorable gas prices in Tunisia. The Company

09

2 | Annual Report 2010 | Winstar

$20.3

Q4-10.1

Q4-7.8

Q3-8.6

Q3-6.7

Q2- 5.9

Q2-3.5 Q1-2.3

Q1- 5.9

incurred no debt during 2010 and maintains an unused $10 million line of credit as at December 31, 2010.

Growth Strategy The success of the CS Sil #1 was a significant achievement for more than one reason. In addition to significantly increasing Winstar’s reserves and net

10

asset value, the well reduces the risk associated with the other 10 Silurian prospects and leads identified

by 3D seismic on Winstar’s two contiguous Southern

This capital program is expected to be funded primarily

Tunisia concessions. With this exploration concept

through existing working capital and funds from

now proven productive on Winstar’s 100% owned

operations generated from its existing production base

acreage in Southern Tunisia, plans are progressing

and incremental production from the long term test

and the Company is currently sourcing equipment

of CS Sil #1. As at December 31, 2010, the Company

and services for the next drilling campaign expected

reported $7.3 million of working capital and also has an

to commence late in the second quarter of 2011. The

undrawn $10 million line of credit which is available to

company is currently considering the following capital

provide financial flexibility in the event of unforeseen

program:

events which could negatively affect drilling operations

• Re-drilling the Chouech Essaida #8 (“CS #8”)

Report to Shareholders

Camels grazing in the Sahara: Chouech Essaida

or internally generated cash flow from operations.

Triassic well to access the 1,000 - 2,000 boepd (rates due to varying choke sizes) that were tested in this well during the first quarter of 2010 (of which about 700 -1,600 bbl/d was oil). This production was subsequently lost due to downhole mechanical failures; • Drilling a second Triassic development well on one of several prospective locations with the capability of adding incremental oil production;

FIELD OPERATING NETBACK PER BOE

FIELD OPERATING (U.S. $000s, except NETBACK as noted) PER BOE

• Reviewing the prospect of drilling a follow up Silurian exploration well on either Chouech Essaida or Ech Chouech. As a result of the significant gas

73.29

with condensate that was tested in the CS Sil #1,

65.00

the Company is currently reviewing the remaining 10 Silurian anomalies to identify those which could have a greater chance of discovering oil

55.39

bearing reservoirs; • On the Satu Mare Concession in Northwest

32.76

79.08 58.72

80.30

79.43

55.36

53.65

Q1-10

Q2-10

81.88

86.73

58.59

59.13

Q3-10

Q4-10

47.51 37.68

Romania, Winstar will commence drilling operations as part of its farm-in agreement with its partner Rompetrol, a local Romanian oil company.

The well is expected to be drilled during the second or third quarter of 2011 as a part of the Company’s long-term growth strategy.

Q1-09

Q2-09

Q3-09

Netback Tunisia

Q4-09

Oil Price

Winstar | Annual Report 2010 | 3

Report to Shareholders

Winstar’s Chouech Essaida Central Production Facility

Tunisian Political Change

Outlook

On January 14, 2011, following weeks of

Thank you to Winstar’s Directors, talented professionals

demonstrations throughout Tunisia, the former

and loyal shareholders for making this journey from

president of Tunisia left the country after 23 years in

exploration to production possible. The Company is well

power. He was replaced by an interim government that

positioned for growth through high-impact exploration

intends to lead the country until elections can be held

opportunities in the Silurian formation in Southern

later this year.

Tunisia, low-risk development opportunities in the

“ Winstar has potential to add significant value for shareholders.”

Winstar is proud to report that its production was not materially affected during these trying times. Its offices remained open at all times and the Company was able to complete all of the operations associated with drilling and evaluating the CS Sil #1 exploration well.

It should also be noted that Winstar’s long standing policy to employ only local staff, in its various countries of operations, was a distinct advantage in these times of political changes.

Triassic formation and the potential associated with the exploration block in Romania. The Company has no debt, only 35.3 million shares outstanding, excellent fiscal terms associated with its concessions and strong technical expertise. These characteristics provide Winstar with the ability to execute a capital program in 2011, and beyond, that has the potential to add significant value for shareholders.

The Company recognizes, in particular the professionalism, dedication and performance of its Tunisian colleagues, who successfully and with enthusiasm, maintained and enhanced their operations, during a time of significant political instability.

Charles de Mestral Chief Executive Officer

David A. Monachello President March 17, 2011

4 | Annual Report 2010 | Winstar

Winstar had an active year in 2010, drilling three new wells and one re-entry well, all in the Chouech Essaida concession in Southern Tunisia.

The last well of the year, a Silurian exploration well

Operational capability was also improved with the

spud in early November 2010, was the Company’s

addition of key equipment and facilities that helped

deepest to date, which has added the most

to improve field response time for well workovers

significant number of new reserves since the

and facility upgrades. Winstar is especially grateful

Company’s inception in 2005.

to its field staff at all of its locations in Tunisia who

The Company experienced improved predictability in drilling times and costs in 2010 thanks to its active drilling program, the addition of key staff and the

assured the orderly continuation of production and field operations during Tunisia’s Jasmine Revolution in early 2011.

decision to contract a high performance rig and crew

As 2011 begins, Winstar is planning for its next drilling

experienced in the Tunisian desert.

campaign in Southern Tunisia to follow-up on the

Winstar added an Environmental, Health & Safety (EH&S) manager to the operations team in Tunisia mid-way through the year, making an immediate impact on the quality, depth and breadth of the Loss Control Program in Tunisia. Production continued to grow thanks to the new wells brought on during

exciting test results of the deep Silurian exploration well, CS Sil #1, as well as additional Triassic development wells in the Chouech Essaida field. In the second or third quarter of 2011, Winstar expects to drill its first exploration well in Romania with the potential for an additional well later in the year.

Review Of Operations

Delivering in Tunisia

the year and improved gas sales from the Chouech Essaida concession during the fourth quarter.

H + P rig #242 at CS Sil #1 in Southern Tunisia

Winstar | Annual Report 2010 | 5

Review of Operations

Solution gas compressors awaiting shipment to Tunisia

Winstar produced an average of 1,791 boepd in 2010 from its operations in Tunisia and Hungary.

2.

1.

1. Tunisia High netback production base with significant development and exploration opportunities.

2. Romania Exploration program commencing in 2011.

6 | Annual Report 2010 | Winstar

Production Winstar produced an average of 1,791 boepd in 2010 from its operations in Tunisia and Hungary, compared to

Review of Operations

Winstar employees at the Chouech Essaida concession

1,545 boepd in 2009. Production from Tunisia averaged 1,780 boepd in 2010 compared to 1,513 boepd in 2009.

The following events enhanced production: • The new Chouech Essaida #11 (CS #11) well began producing in May; • The Chouech Essaida #1 (CS #1) well experienced improved performance due to the installation of a bottom hole pump; and, • Gas sales marginally improved from Chouech Essaida despite having more than three months of marginal or zero gas sales due to mechanical problems with the national utility and gas buyer, STEG. In the fourth quarter of 2010 Winstar produced an average of 1,938 boepd, compared to 1,816 boepd in the fourth quarter of 2009.

Net Asset Value (NAV) Winstar’s net asset value was slightly lower at the end of 2010 than at the end of 2009. This was due to an increased valuation at Chouech Essaida with an offsetting decrease in valuation at Sabria.

At year end 2010, and as of March 1, 2011,the Company’s NAV (at a 10% discount rate, as independently evaluated

by RPS Engineering) compared to year end 2009 is illustrated below: Proved Reserves (1P) After Tax

Total ($MM) $ per fully diluted share

Proved plus Probable Reserves (2P) After Tax

2010

2009

2010

2009

$88.80

$92.60

$219.30

$240.30

$2.51

$2.71

$6.22

$7.02

Events affecting NAV and reserves: • There was increased value associated with the Tunisian Chouech Essaida and Ech Chouech concessions related to oil production; • A significant reduction in gas reserves due to new well results at CS #11 and CS #13; • There was a drop in Sabria concession reserves due to the cancellation of an anticipated well stimulation operation and well performance issues at the Sabria #11 and Sabria N3H wells; and, • The RPS Energy Price forecast for Brent crude at 2010 year end was essentially unchanged from 2009 year end.

Winstar | Annual Report 2010 | 7

Review of Operations

Proved Reserves (1P)*

2010

Tunisia

Proved plus Probable Reserves (2P)

% Change

2009

2010

% Change

3,584

4,253

(668)

11,641

14,874

0

36

(36)

0

51

(51)

3,584

4,288

(704)

11,641

14,925

(3,284)

Hungary Total (mboe)

2009

(3,233)

* Net Company working interest before royalty.

Operational Highlights First Deep Exploration Well for Winstar at Chouech Essaida a Success One of Winstar’s most ambitious and successful projects to date is the exploration program targeting the potential of the Silurian aged reservoirs in the Company’s southernmost concessions, Chouech Essaida and Ech Chouech.

Following the acquisition and interpretation of an extensive 3D seismic program covering both concessions, the Company high-graded the resulting inventory of 11 drilling prospects and selected Chouech Essaida Sil #1 (CS Sil #1) as the first deep exploration well. The results exceeded expectations, and a total of five cased hole tests proceeded to evaluate the flow potential of 10 individual sand intervals. Combined test rates for all zones was 3,379 boepd (9.52 million standard cubic feet per

Tozeur

Gabes

R IA

day (bbl/d) of condensate and oil). With this play now

A L GE

day (mmscf/d) of natural gas and 1,792 barrels per proven productive on Winstar’s 100% owned acreage

SABRI A &

AS

in Southern Tunisia, plans are progressing for the next second quarter of 2011.

Remada SANRHAR

In addition to the success in the Silurian aged reservoirs, El Borma

YA

hydrocarbons were also discovered in the Triassic (TAGI)

LI B

reservoir, which was particularly exciting, as it proves a northern extension of the TAGI reservoir system, six

CHOUECH ESSAIDA ECH CHOUECH

kilometres north of the main Chouech Essaida TAGI degree API oil to date).

IN

drilling campaign, expected to commence late in the

(a field that has produced over 4 million barrels of 41

GH AD AM ES CE B SO LL E UR N CE T R RO ES CK ERV S O IR S

EX

150 KM Borj El Khadra

Improved Drilling Performance in Tunisia The Company executed four drilling projects in 2010, all in Chouech Essaida. Steady progress was attained, improving both drilling times and costs compared to budget, with the last three wells drilled on budget and faster than forecasted. This significant improvement in the Company’s operational capability is attributed to: • the hiring of a full time drilling manager with more than 25 years of drilling experience in Tunisia; • improving communication with the service companies by opening a drilling operations office located in the city of Sfax, the oilfield service centre of Tunisia; • drilling wells back-to-back with the same drilling teams in the field; and, • contracting the H&P rig #242 that has been drilling Silurian wells continuously now in Southern Tunisia for over four years, posting some of the fastest drilling times and best safety records in the country. This new confidence in forecasting performance enables Winstar to better plan future drilling campaigns and associated capital requirements.

8 | Annual Report 2010 | Winstar

Mixed Results from New Triassic Wells at Chouech Essaida Three of the four new wells drilled in 2010 were development wells targeting the Triassic aged reservoirs in the established Chouech Essaida oilfield.

The first well drilled was a re-entry and sidetrack of the existing Chouech Essaida #8 (CS #8) well that had been suspended due to an irreparable down-hole pump. In the sidetrack well, TAGI sands were encountered that produced better than expected oil rates from reservoirs that were thicker and better structurally located than

Gas Sales from Chouech Essaida The national Tunisian utility, STEG, that buys the gas production from Chouech Essaida, had frequent and prolonged mechanical problems totaling 160 days in 2010, which in turn significantly limited the gas sales from the Chouech Essaida field to an average of less than 1 mmscf/d. The situation improved significantly late in the year with gas sales averaging 2.6 mmscf/d for the last two months of 2010, and this welcome trend has continued into 2011.

operation also encountered significant down-hole

Environment, Health & Safety (EH&S)

mechanical problems that eventually rendered the well

Winstar continued to make progress on its EH&S

the original CS #8 well. Unfortunately, the re-entry

unusable. A new well is planned to twin the re-entry well to regain access to this production and these reserves.

The second Triassic well drilled was the Chouech Essaida #11 (CS #11), which encountered oil in two TAGI intervals and also in an upper TG Triassic reservoir.

This well has been on production since May 2010, and had already produced almost 100,000 barrels of oil by the end of the year.

The third and final Triassic well in 2010 was drilled on

program in Tunisia during 2010. Mid-way through the year an experienced EH&S manager was hired for the Company’s Tunisian operations, which had the desired effect of both improving and accelerating the implementation of Winstar’s formal EH&S policies in the Tunis office and all field locations.

Events affecting EH&S: • The implementation of various safe work procedures for both drilling and production operations;

the eastern flank of the main structure, and although

• Improved integration of the Company’s EH&S

reservoir quality sands were found at the prognosed

program with its various service providers;

depths, all were found to be water bearing only and the well was subsequently suspended.

Review of Operations

Coiled tubing operations at Ech Chouech concession

• Capital investments to better protect the Company’s wells, facilities and pipelines; and, • Capital investments to provide Company owned workover servicing capabilities to improve response time for well workover operations.

Winstar | Annual Report 2010 | 9

Review of Operations

Country Updates & Outlook Tunisia

PRODUCTION PRODUCTIONFROM FROM CONTINUTING CONTINUTING OPERATIONS OPERATIONS

This past year in Tunisia can be characterized as

129

a tipping point for the Company. The successful drilling and testing operation at the CS Sil#1 well had tremendous strategic importance, as the resulting success has validated the play on Winstar lands and added significant credence to the great potential of the southern concessions. There are 10 additional Silurian anomalies identified on the Chouech Essaida

230

357

1,586 1,432

73 1,142

198 169

385

1,856

1,552

1,518

1,303

202 1,014

and Ech Chouech Concessions, many of them directly comparable to the CS Sil #1 structure.

For the CS Sil #1 well, the individual zones will now be put on a long term test to provide better confidence in reserves size, determine the long term productive capacity and to start to monetize the resulting production. One of the zones has already been on

Q1-09

Q2-09

Q3-09

Q4-09

GAS (boepd)

Q1-10

Q2-10

Q3-10

Q4-10

OIL (bbl/d)

production since February 21, 2011, at an average rate of 270 boepd. Maximum efforts are underway to provide the necessary equipment on site to place the

The Company has also identified an additional 2.5

well’s most prolific gas/condensate zone (tested 1,400

metres of potential oil pay within the untested Triassic

bbl/d condensate and 7.7 mmscf/d gas on production

TAGI formation, with similar reservoir characteristics

by mid – 2011).

to the producing wells in the Chouech Essaida Triassic

A major Southern Tunisian pipeline project is currently underway by an industry consortium which includes ETAP (the Tunisian state oil and gas company), and this project is expected to be completed in 2014. Although sustained maximum gas sales from CS Sil #1 may be delayed until additional infrastructure is developed, the

10 | Annual Report 2010

field six kilometres south of this well. This result is significant, as it establishes the extension of this play and adds to the growing inventory of drilling opportunities. The Company is currently reviewing the options for producing this formation, which entails further technical work.

discovery of commercial natural gas with condensate

The outlook for 2011 is to have a healthy and

represents significant value to the Company as natural

sustainable capital program focusing on the two

gas prices in Tunisia are tied to the market price of low-

concessions in Southern Tunisia. The Company is

sulphur heating oil, and averaged $10.93 per mcf during

assessing the local Tunisian market for a suitable

the fourth quarter of 2010.

drilling rig that can be available starting in the second

the operational means to carry out its remaining 2011

Hungary

capital program.

Winstar was successful in farming-out its working

Romania

Hungarian exploration company Pelsolaj Kft for modest

Winstar completed its technical review of the Satu

well abandonment obligations. Pelsolaj Kft has

Mare exploration block, which was earned through a farm-in with its Romanian partner, Rompetrol.

Two exploration prospects have been identified that offset previously drilled, but not exploited, oil and

interest in the IGAL II exploration permit to the net profit interest and the transfer of any remaining completed a 2D seismic acquisition program and is in the process of interpreting the data with the objective of identifying a drilling prospect in 2011.

gas discoveries. Both locations have been approved

At the Torokkoppany field, gas production was re-

with the Company’s partner and applications for the

established twice during 2010, but the reservoir

various required drilling approvals have been granted

pressure declined sufficiently to render any remaining

by Romanian government authorities for the first well.

gas reserves uneconomic. The Company is searching

The Company will drill its first well during the second

for a partner with the necessary technical and financial

or third quarter of 2011, with an expected total depth of

capabilities to convert the reservoir and surface

1,900 metres targeting a Miocene aged oil reservoir. All

facilities into a gas storage reservoir.

Review of Operations

quarter of 2011. This rig will provide the Company with

necessary services and materials are currently being sourced and contracted.

Applications have been submitted for the drilling of the second exploration well with an anticipated spud date in the fourth quarter of 2011. This well will target Pliocene aged gas reservoirs at depths of 600 to 800 metres.

Roger McMechan Executive Vice-President March 17, 2011

Chouech Essaida Central Production Facility

Annual Report 2010 | 11

MD&A

Management’s Discussion & Analysis This Management’s Discussion and Analysis

in Breda, The Netherlands, with offices in Tunisia,

(MD&A), dated March 17, 2011, of the consolidated

Hungary, Romania and Switzerland. Winstar’s

financial position and results of operations of Winstar

operations in 2010 were conducted in two

Resources Ltd. (the “Company” or “Winstar”) is

geographic segments: Tunisia and Romania. The

for the three month and 12 month periods ended

Tunisian operations were the primary focus of the

December 31, 2010 and 2009. This MD&A should

Company’s operations and development during

be read in conjunction with the audited consolidated

2010 and prior year. The Company’s asset base is

financial statements for the year ended December

comprised of both low-risk development and high

31, 2010 and documents filed on SEDAR, including

impact exploration opportunities, which are evaluated

press releases and the Annual Information Forms

and developed through existing working capital,

(AIF).These documents and additional information

internally generated funds or the possible use of

about the Company are available on SEDAR

its available line of credit, equity markets, and joint

at www.sedar.com.

venture relationships.

The financial information contained herein was prepared in accordance with Canadian generally accepted accounting principles (GAAP). All comparative percentages are between the three and 12 month periods ended December 31, 2010 and 2009, and all amounts are expressed in thousands of Canadian dollars except per share and per unit amounts, unless otherwise noted.

Statements throughout this report, that are not historical facts, may be considered “forward-looking statements” and should be read in conjunction with the Company’s forward-looking statements section.

Overview & Highlights Winstar is a publicly traded oil and gas exploration and development Company traded on the Toronto Stock Exchange, focused primarily on Tunisia. The Company is headquartered in Calgary, Alberta, Canada. The international head office is located 12 | MD&A | Winstar

Operational Highlights In December of 2010 Winstar successfully completed drilling of the Chouech Essaida Silurian #1 well (CS Sil #1) to a total depth of 4,390 metres.

Testing of this well was completed in February 2011, which demonstrated commercial quantities of crude oil, condensate and natural gas with a consolidated test rate of 3,379 barrels of oil equivalent per day (boepd) of total hydrocarbons. This positive result at CS Sil #1 well confirms the extension of the prolific Silurian oil and gas play from other nearby industry successes onto the Company’s two adjacent concessions. There are approximately 10 additional Silurian prospects identified on the Chouech Essaida and Ech Chouech concessions, several of which are directly comparable to the CS Sil #1 well structure.

During October 2010, drilling of the Chouech Essaida Triassic development well 13 (CS #13) was

of water and uneconomic traces of oil; therefore the well was suspended.

On September 14, 2010, the Company announced the sale of the IGAL II permit in Hungary, in exchange for a 4% net profit in future production from the permit. Pursuant to this sale, the Company plans to focus resources on exploration and development in Tunisia and Romania. As a result, the Hungarian segment has been classified as

MD&A

completed, and testing occurred throughout November of 2010. Testing resulted in relatively low production rates

discontinued operations along with the Canadian assets, which were sold during 2009.

Financial Highlights As at December 31, 2010, Winstar’s working capital was $7.3 million and it had no current or long-term bank debt.

During the fourth quarter of 2010, the Company generated $10.1 million of funds from continuing operations (as defined in the Funds from Operations section of this MD&A), which is an increase of $2.2 million compared to $7.9 million generated in Q4 2009. For the year ended December 31, 2010, funds from continuing operations increased 50% to $30.5 million compared to the $20.3 million generated in 2009.

Tunisian field operating netback (as defined in the field operating netback section of this MD&A) was $59.13 per boe for Q4 2010. For the year ended 2010, field operating netback increased by 25% to $57.06 per boe, compared with $45.81 for 2009.

Net income from continuing operations was $895,000 during the fourth quarter of 2010 and $2.1 million for the year ended 2010, compared to a net income from continuing operations of $1.9 million for both the quarter and year ended December 31, 2009.

The Company’s $10 million line of credit remains undrawn and available as at December 31, 2010.

Financial & Operating Results From Continuing Operations:

($ thousands)

Three months ended December 31, 2010

2009

% change

Year ended December 31, 2010

2009

% change

1,912

1,504

27

1,579

1,275

24

Natural gas sales (mcf/d)

2,311

1,382

67

1,326

1,301

2

Average daily boe sales 6:1 (boepd)

2,298

1,735

32

1,800

1,492

21

Average oil and liquid price ($/bbl)

86.73

79.08

10

82.52

69.37

19

Average natural gas price ($/mcf) Financial ($ thousands except for unit amounts)

10.93

8.81

24

10.68

9.04

18

Sales and Prices Oil and liquid sales (bopd)

Oil and gas revenue

17,585

12,066

46

52,734

36,584

44

Funds from operations

10,139

7,878

29

30,493

20,336

50

Per share - basic & diluted

0.29

0.23

26

0.88

0.59

49

Net income

895

1,920

(53)

2,061

1,909

8

Per share - basic & diluted

0.03

0.06

(50)

0.06

0.06

-

59.13

58.72

1

57.06

45.81

25

14,991

4,343

245

38,311

18,150

111

7,333

8,135

(10)

7,333

8,135

(10)

Field operating netback ($/boe) Capital expenditures Working capital at period end

Weighted average during period - basic

35,143

34,233

3

34,646

34,233

1

- diluted

35,325

34,233

3

34,784

34,233

2

Outstanding at period end

35,280

34,223

3

35,280

34,223

3

Common Shares (thousands)

Winstar | MD&A | 13

MD&A

Reserves Barrels of oil equivalent (boe) amounts have been calculated using the energy equivalent conversion method, using a conversion rate of 6,000 cubic feet of natural gas (mcf) to one barrel of oil or natural gas liquids (6 mcf = 1 bbl). Boe may be misleading, particularly if used in isolation. A boe conversion rate of 6 mcf = 1 bbl is based on an energy equivalent conversion method primarily applicable at the burner tip and does not necessarily represent a valid selling price equivalence at the wellhead.

Reserves as at December 31, 2010 decreased due to: • A significant reduction in gas reserves due to new well results at CS #11 and CS #13.

• Well performance issues at wells Sabria #11, Sabria N3H and Sanrhar SNN 1.

• The cancellation of a high impact well stimulation at Sabria N2 location.

2009

2010

Proved

Proved + Probable

Reserves

Reserves

NPV

(1)

Proved Reserves

Proved + Probable NPV

(1)

Reserves

NPV(1)

($MM)

(mboe)

($MM)

(mboe)

($MM)

(mboe)

($MM)

(mboe)

Sabria

1,118

19.2

6,116

78.6

1,387

25.6

7,699

98.5

Chouech Essaida

2,123

53.5

4,646

117.2

2,408

49.0

5,849

112.6

Ech Chouech

120

4.3

273

8.2

117

4.0

285

8.1

Sanhrar

145

3.4

210

4.5

265

6.5

672

8.6

78

(0.7)

396

3.8

76

(0.6)

369

3.2

11,641

212.3

4,253

84.5

14,874

231.0

Zinnia Tunisia Hungary & Canada (discontinued)

3,584

79.7

-

-

-

-

36

(0.7)

51

(0.7)

Consolidated

3,584

79.7

11,641

212.3

4,289

83.8

14,925

230.3

(1) Net present value after tax discounted at 10%.

Net Asset Value The Company’s net asset value was essentially unchanged from 2009 due to an increased valuation at Chouech Essaida with an offsetting decrease in valuation at Sabria and the sale of Canadian assets.

As at December 31, 2010 ($ millions except per share values)

Proved

Proved + Probable

Before Tax

After Tax

Before Tax

After Tax

(1)

114.6

81.5

346.0

212.5

Working capital Net asset value

7.3 121.9

7.3 88.8

7.3 353.3

7.3 219.3

NAV10/share (basic)

3.47

2.53

10.05

6.25

NAV10/share (diluted)

3.45

2.51

10.00

6.22

Reserve value

(1) As evaluated by RPS Energy discounted at 10% using RPS Energy forecast prices as presented below, for the next five years.

14 | MD&A | Winstar

Brent Crude Oil (US $/bbl)

US$/Cdn Exchange Rate ($ US/$Cdn)

2011

90.00

0.98

2012

89.50

0.98

2013

89.10

0.98

2014

89.25

0.98

2015

91.00

0.98

Following the completion of drilling CS Sil #1 on December 22, 2010 and the subsequent test results reported on February 22, 2011, the Company obtained an interim independent reserve report for the Chouech Essaida concession, which includes the results of the CS Sil #1 well to assist in quantifying the significant impact of the discovery on the future value of the Company. The interim reserve report assesses the reserves of the Silurian

MD&A

Interim Reserve Evaluation

only and does not include resource potential for either the Devonian or Triassic.

Based on this interim reserve evaluation, completed by RPS Energy Canada Ltd, the CS Sil #1 well is forecast to add 2,280 mboe of incremental Proved plus Probable total field reserves (“P+P”), yielding an incremental 1,750 mboe to Winstar’s working interest gross P+P reserves and 1,488 mboe to Winstar’s working interest net P+P reserves. The incremental NPV, after tax and discounted at 10% of Winstar’s share of the net reserves (including the impact of the ETAP back in) is $44.5 million CAD or $1.26 per basic share outstanding as at December 31, 2010.

Proved (Mboe)

Proved + Probable (Mboe)

CS Sil #1 incremental 100% working interest gross reserves (before ETAP back in on existing Triassic reserves and ETAP working interest following back in)

751

2,280

CS Sil #1 incremental Winstar working interest gross reserves (before ETAP back in on existing Triassic reserves)

751

1,750

-

(577)

751

1,173

$23.5 $0.67/share

$44.5 $1.26/share

CS Sil #1 Incremental Reserves Summary

Impact of ETAP back-in on existing Triassic Winstar interest gross reserves Incremental Chouech Essaida Winstar working interest gross reserves attributable to CS Sil #1 Incremental Chouech Essaida Net Present Value after tax, after royalty (NPVAT, 10% discount rate, million $CAD) Per share

As noted above, the incremental gross reserves related to Winstar’s working interest attributable to the CS Sil #1 well are constrained by various economic factors which include but are not limited to the following: 1)

The Company’s ability to sell gas is currently constrained by STEG and therefore economic value is limited to Company forecasts of gas sales until 2014 or earlier if greater capacity is secured from STEG.

2)

The Tunisian state oil and gas company, ETAP, has the right to earn up to a 50% working interest in the Chouech Essaida concession if and when the cumulative liquid hydrocarbon (oil and condensate) sales net of royalties and shrinkage from the concession exceeds 6.5 million barrels. As at December 31, 2010, cumulative oil and condensate sales net of royalties and shrinkage was 3.9 million barrels. The incremental oil and condensate production from CS Sil #1 is expected to accelerate this back-in by 5 years from 2024 to 2017. This acceleration under the Company’s P+P reserve evaluation had a negative impact of 577 mboe on Winstar’s existing working interest Chouech Essaida gross reserves which is netted against the incremental impact of the well on the Chouech Essaida Concession.

The interim reserve evaluation is a preliminary estimate of reserves and net present value based on the results of the short term testing conducted during the completion of the well. Longer term testing which is currently underway along with detailed fluid analysis for the various zones will provide important information that will be taken into consideration when the Company again reviews its reserves during the annual year-end evaluation process.

Winstar | MD&A | 15

MD&A

Results of Operations Funds From Operations Funds from operations are a non-GAAP measure, defined by the Company as cash flow from operating activities excluding: • The change in non-cash working capital related to continuing and discontinued operations, which is eliminated to show the net cash effect on income; • Geological and geophysical expenses from continuing and discontinued operations (as detailed in Capital Expenditures and Exploration Expenses from Continuing Operations), which are costs incurred for the purpose of generating future investment opportunities and are therefore not indicative of operational performance; and, • Expenditures on asset retirement obligations and reclamation, which are also not indicative of operational performance.

The Company also presents: • Funds from operations per share, whereby amounts per share are calculated using weighted average common shares outstanding.

Management uses funds from operations to analyze performance and considers it to be a key measure as they demonstrate the Company’s ability to generate the cash necessary to fund future capital investments. Winstar’s determination of funds from operations may not be comparable to that reported by other companies nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with Canadian GAAP. The following table reconciles the cash flow from operating activities to total funds from operations and funds from operations from continuing operations:

($ thousands)

Year ended December 31,

2010

2009

2010

2009

Cash flow from operating activities

13,535

7,999

33,967

23,526

Change in non-cash working capital

(3,594)

(4,234)

(3,865)

Geological and geophysical expenses (exploration expense less dry hole costs) Funds from continuing operations

198 10,139

247 7,878

760 30,493

675 20,336

93

(899)

(705)

(23)

(183)

501

368

(58)

Cash flow used in discontinued operations Change in non-cash working capital from discontinued operations Geological and geophysical expense from discontinued operations Funds from discontinued operations Total funds from operations

16 | MD&A | Winstar

Three months ended December 31,

(16) (106) 10,033

(368)

228 (170) 7,708

188 (149) 30,344

312 231 20,567

MD&A

Three Months Ended December 31, 2010 vs. 2009 Funds from continuing operations increased by $2.2 million to $10.1 million Q4 2010, compared to $7.9 million in Q4 2009. Primarily, the increase is a result of the following: • 31,000 barrels (bbls) of crude inventory on hand at September 30, 2010 was sold in Q4 2010 generating approximately $2.5 million incremental funds from operations; • Production volumes increased by 7% from increased gas sale at Chouech Essaida; • Realized commodity prices increased by approximately 10% during Q4 2010 compared to Q4 2009; and, • These increases were partially offset by the absence of a current tax recovery that added $1.0 million to funds from operations in Q4 2009.

Year Ended December 31, 2010 vs. 2009 During 2010, funds from continuing operations increased $10.2 million to $30.5 million compared to 2009. The increase is primarily a result of Tunisian production, which increased by 18% and realized commodity prices, which increased by 19% for the 12 months of 2010 compared to 2009.

Production 2009

2010

Three months ended December 31,

Oil and Liquid

Natural Gas

(bbl/d)

(mcf/d)

Total

Oil and Liquid

Natural Gas

Total

(boepd)

(bbl/d)

(mcf/d)

(boepd)

1,344

1,965

1,672

1,250

865

1,394

157

346

215

227

517

313

51

-

51

109

-

109

Tunisia total (continuing operations)

1,552

2,311

1,938

1,586

1,382

1,816

Hungary & Canada (discontinued operations) Total production

1,552

2,311

1,938

1,586

1,382

1,816

Tunisia Chouech Essaida/Ech Chouech Sabria Sanhrar

Three Months Ended December 31, 2010 vs. 2009 Production increased 7% during Q4 2010, compared to Q4 2009, as a result of: • Incremental oil production from the Chouech Essaida #11 well, which averaged 287 barrels of oil per day (bopd) through Q4 2010 despite being shut-in during December 2010; • The installation of an electrical submersible pump (ESP) at the CS #1 well significantly increased flow rates and provided approximately 150 bopd of incremental production; and, • Gas sales from Chouech Essaida during the quarter averaged 1,965 thousand cubic feet per day (mcfd) an increase of 1,100 mcfd during Q4 2010 compared to Q4 2009. Gas sales have remained consistent throughout Q1 2011 averaging greater than 2,500 mcfd. However, there remains no assurance that sales will continue at a stable rate.

Winstar | MD&A | 17

MD&A

2009

2010

Year ended December 31, Tunisia

Oil and Liquid

Natural Gas

(bbl/d)

(mcf/d)

Chouech Essaida/Ech Chouech

Total

Oil and Liquid

Natural Gas

Total

(boepd)

(bbl/d)

(mcf/d)

(boepd)

1,300

935

1,456

972

830

1,110

178

391

243

223

470

301

81

-

81

102

-

102

Tunisia total (continuing operations)

1,559

1,326

1,780

1,297

1,300

1,513

Hungary & Canada (discontinued operations) Total production

1,559

66 1,392

11 1,791

76 1,373

895 2,195

225 1,738

Sabria Sanhrar

Year Ended December 31, 2010 vs. 2009 Production in the 12 months of 2010 from Tunisia increased by 18% over the comparable period of 2009 primarily resulting from incremental production at the CS #11 well.

Production Versus Sales From Continuing Operations Three months ended December 31,

Total production - boepd Total sales - boepd

Year ended December 31,

2010

2009

% Change

2010

2009

% Change

178,279

167,035

7

649,643

552,064

18

1,938

1,816

1,780

1,513

211,379

159,606

32

657,072

544,635

21

2,298

1,735

1,800

1,492

In Tunisia, oil sales are recognized when oil is loaded onto tankers. As a result of this, from time to time, the Company’s sales and production volumes may not be equal. During Q4 2010, Winstar sold 33,100 bbls of inventoried crude oil produced in Q3 2010. At December 31, 2010 the Company overlifted 37,338 bbls of crude, which is valued at its contracted price of US$93.87/bbl resulting in $3.5 million of deferred revenue.

Field Operating Netbacks Field operating netbacks are non-GAAP measures defined by the Company as presented below. Management considers field operating netbacks to be important measures as they demonstrate the Company’s profitability from field operations, before general and administrative costs, relative to current commodity prices. Field operating netback includes sale of commodities and international royalty income less royalties, operating expenses and current tax expenses. Because taxes in Tunisia are generated on a concession by concession basis and relate directly to operations, management considers these expenses to be applicable in the calculation of field operating netback.

Pottery market at Tatouine, Southern Tunisia

18 | MD&A | Winstar

and 2009:

Field Operating Netback From Tunisia

Three months ended December 31,

Year ended December 31,

2009

2010

2009

2010

Oil sales (bbls)

175,941

138,410

576,402

465,518

Gas sales (mcf)

212,628

127,174

484,020

474,703

Total sales (boe)

211,379

159,606

657,072

544,635

- boepd Netback

$

2,298 $/unit

$

1,735 $/unit

$

1,800 $/unit

$

1,492 $/unit

Oil sales

15,260

86.73

10,946

79.08

47,564

82.52

32,294

69.37

Gas sales

2,325

10.93

1,120

8.81

5,170

10.68

4,290

9.04

$

$/boe

$

$/boe

$

$/boe

$

$/boe

17,585

83.19

12,066

75.60

52,734

80.26

36,584

67.17

204

0.97

357

2.24

1,103

1.68

1,272

2.34

Realized International royalty income

Sales volumes

Royalties

(2,082)

(9.85)

(1,675)

(10.49)

(7,133)

(10.86)

(5,119)

(9.40)

Operating expense

(3,144)

(14.87)

(2,373)

(14.87)

(9,148)

(13.12)

(7,786)

(14.30)

(65)

(0.31)

(65)

(0.10)

Current tax expense Operating netback

12,498

59.13

996

6.24

9,371

58.72

37,491

57.06

MD&A

The following tables outline the netbacks in Tunisia for the three and 12 months ended December 31, 2010

-

-

24,951

45.81

Three Months Ended December 31, 2010 vs. 2009 Field operating netback per boe from Tunisia during Q4 2010 was $59.13, which was consistent with Q4 2009.

The consistency is explained as follows: • A 10% increase in realized commodity prices during Q4 2010 compared to Q4 2009; • Royalties per boe were lower due to the sale of opening inventory in which royalties were paid in Q3 2010; and, • Operating expenses include work-over costs, which are one time repairs projects performed on wells and facilities.

The following table highlights significant work over activity during the respective periods and calculates the recurring operating expenses required to sustain existing production:

Operating Expenses Three months ended December 31,

2010 $ Total operating expenses Work-over expenditures Recurring operating expenses

(3,144) 383 (2,761)

$/bbl (14.87)

$ (2,373)

1.81 (13.06)

Year ended December 31,

2010

2009

241 (2,132)

$/bbl (14.87) 1.51 (13.36)

$

$/bbl

(9,148)

(13.92)

1,723

2.62

(7,425)

(11.30)

2009

$ (7,786) 984 (6,802)

$/bbl (14.30) 1.81 (12.49)

• These increases were offset by the absence of a $1.0 million current tax recovery present in Q4 2010; and, • The Company also recognized lower international royalty income, which arises pursuant to a requirement for ETAP, the government-owned oil and gas Company of Tunisia, to pay Winstar a pre-determined total amount related to its 55% interest in the Sabria concession. During Q4 2010 the remaining balance of this amount was collected and no further income is expected.

Winstar | MD&A | 19

MD&A

Year Ended December 31, 2010 vs. 2009 Field operating netback per boe from Tunisia increased 25% for the year ended December 31, 2010 compared to the same period in 2009. The increase is primarily explained by a 19% increase in realized commodity prices during the year.

General & Administrative (G&A) Expenses From Continuing Operations Three months ended December 31,

 ($ thousands except per unit amounts) General and administrative (G&A) Per sales boe Non-cash stock-based compensation Per sales boe Total Per sales boe

Year ended December 31,

2010

2009

% Change

2010

2009

% Change

1,980

1,465

35

6,191

5,493

13

9.37

9.18

2

9.42

10.09

(7)

119

86

38

860

463

86

0.56

0.54

4

1.31

0.85

54

2,099

1,551

35

7,051

5,956

18

9.93

9.72

2

10.73

10.94

(2)

G&A expenses increased by 35% in Q4 2010, compared to Q4 2009 and 13% for the year of 2010 compared to the year of 2009. The increase is due primarily to increased operating and drilling activities, which required greater administrative support and higher staffing and office costs.

Year Ended December 31, 2010 vs. 2009 G&A expenses increased by 13% in 2010 compared to 2009. This increase was primarily due to increased operating and drilling activities, which required greater administrative support.

Current & Future Income Tax From Continuing Operations Three months ended December 31,

 ($ thousands)

2010

Current

Year ended December 31,

2009

2009

2010

65

(996)

65

-

Future

3,458

2,158

9,822

519

Total

3,523

1,162

9,887

519

Winstar recorded $65,000 in current taxes for the year ended December 31, 2010, all of which were generated in the Ech Chouech concession. Since Tunisian tax legislation allows for intangible drilling costs to be expensed as incurred for tax purposes, the Company did not incur taxes in its other Tunisian concessions despite positive net income and operating netbacks for accounting purposes.

Future income tax was related only to the Tunisian assets as Winstar recorded a valuation allowance for the unused tax pools in Canada, Hungary and Romania. Future tax expense generated during the three and 12 month periods was primarily the result of capital expenditures in Chouech Essaida that were for the most part depreciated as incurred for tax purposes, generating temporary differences. Additionally, significant non-capital loss carry forwards were used to shelter taxable income generated in the Sanhrar and Sabria concessions.

Depletion, Depreciation & Accretion (DD&A) From Tunisia Three months ended December 31,

 ($ thousands except per unit amounts)

20 | MD&A | Winstar

Year ended December 31,

2010

2009

% change

2010

2009

Total

5,469

3,486

57

16,990

16,770

% change

1

Per sales boe

25.87

21.84

18

25.86

30.79

(16)

depletable assets due to a significant drilling program which was conducted throughout 2010 in Chouech Essaida.

For the year-ended 2010 compared to the year-end 2009 DD&A per boe decreased by 16%. This was primarily due to increases in the estimated proved developed reserves over which oil and gas assets are depleted.

MD&A

DD&A per boe increased to $25.87 during Q4 2010, from $21.84 in Q4 2009, primarily from a significant increase in

Capital Expenditures & Exploration Expenses From Continuing Operations Three months ended December 31,

($ thousands)

2010

2009

Year ended December 31, 2009

2010

Tunisia

Chouech Essaida

Drilling activities

14,062

2,416

34,867

5,370

Work-over activities

710

3

1,514

631

Pipeline and facilities

30

100

662

3,347

190

1,222

402

1,381

69

446

5,994

Other Sabria Drilling activities

(131)

Work-over activities

5

170

37

199

Other

-

315

12

444

Zinnia/Sanhrar/Other Total Tunisia Corporate Total

100

48

270

761

14,966

4,343

38,210

18,127

25

-

101

23

14,991

4,343

38,311

18,150

Capital activity was focused exclusively on Tunisia in 2010. In Q4 2010, capital spending related primarily to the drilling programs at CS #13 ($4.5 million) and CS Sil #1 ($9.8 million), which were consistent with management’s drilling program and capital budgets. Winstar’s capital expenditures in Tunisia for 2010 were $38.2 million related to the following projects: • $10.1 million (26% of total capital expenditures) of drilling and work-over activities related to the re-entry project at CS #8; • $7.8 million (20% of total capital expenditures) related to the drilling and testing of CS #11, which was put on production in June and averaged production of 435 bopd for the remaining seven months of 2010; • $6.6 million (17% of total capital expenditures) represents the total drillings costs for CS #13; and, • $10.9 million (28% of total capital expenditures) represents the entire drilling costs for CS Sil #1, which was completed at the end of December 2010. Testing of this well was completed in February of 2011, with a consolidated test rate of 3,379 boepd of total hydrocarbons including 1,792 bopd oil and condensate.

Under the successful efforts method of accounting, the costs of drilling exploratory wells are initially capitalized.

If these wells are subsequently determined to be unsuccessful, they are charged to exploration expense as dry hole costs. All other exploration costs, geological, geophysical, and annual lease rentals, including seismic purchases, but excluding 3D seismic acquisitions covering proved reserves, are charged to geological and geophysical expense as incurred (collectively “G&G expense”). Exploration expense, as reported on the consolidated statement of operations and deficit, represents the summation of G&G expenses and dry hole costs on exploration wells.

Winstar | MD&A | 21

MD&A

Chenini, Tunisia

Exploration Expenses From Continuing Operations Three months ended December 31,

 ($ thousands) Tunisia

2010

2009

%Change

2010

2009

101

143

(29)

560

571

(2)

97

96

1

200

104

92

198

239

(17)

760

675

13

Romania Total

Year ended December 31, %Change

In 2010, G&G expenditures related primarily to evaluating Silurian and Triassic opportunities in Winstar’s Chouech Essaida and Ech Chouech concessions of Tunisia as well as mapping and processing existing seismic data over the Satu Mare concession in Romania.

Contractual & Fiscal Terms Tunisia Chouech Essaida Ech Chouech

Working interest Work commitment Term Royalty structure Current effective royalty

Sabria

Zinnia

Romania Sanhrar

Satu Mare

100%

45%

100%

100%

Pay 100% for 60%

Nil

Nil

Nil

Nil

Nil

$6.5 million

12/2027

06/2022

11/2028

12/2020

12/2021

05/2012

Fixed

Fixed

R-Factor

R-Factor

Fixed

(3-13.5%)

100%(2)

15%

15%

6.5%

2%

12.5%

N/A

Tax structure

Fixed

Fixed

R-Factor

R-Factor

R-Factor

Fixed

Tax rate

35%

35%

50%-75%

50%-75%

55%-80%

16%

0%

6%

0%

0%

0%

0%

Estimated 2010 effective tax rate

(1) Discoveries on exploration permits in Romania convert to production concessions.

(2) The Tunisian state oil and gas company, ETAP, has the right to earn up to a 50% working interest in the Chouech Essaida concession if and when the cumulative liquid hydrocarbon sales net of royalties and shrinkage from the concession exceed 6.5 million bbls. As at December 31, 2010, cumulatively 3.9 million bbls, net of royalty and shrinkage have been sold. Management is of the opinion that there are sufficient exploration and development opportunities which, if successful, could result in this provision being exercised within the next 10 years.

22 | MD&A | Winstar

Three month period ended December 31, Tunisian Operations

($ thousands) Revenues Oil and liquids Natural gas Petroleum and natural gas sales International royalty income

2010

2009

European Operations (1) 2010

2009

Corporate (2) 2010

2009

Total 2010

2009

15,259

10,946

-

-

-

-

15,259

10,946

2,325

1,120

-

-

-

-

2,325

1,120

17,584

12,066

-

-

-

-

17,584

12,066

204

357

-

-

-

-

204

-

-

-

-

(2,082)

(1,675)

357

Royalties

(2,082)

(1,675)

15,706

10,748

-

-

-

-

15,706

10,748

3,144

2,374

-

-

-

3,144

2,374

862

354

197

(23)

1,040

1,210

2,099

1,541

Segmented expenses Operating General and administrative Exploration expense DD&A Interest expense

-

101

143

97

96

-

-

198

239

5,448

3,430

-

20

21

36

5,469

3,486

7

17

-

-

-

(19)

Foreign exchange loss/(gain)

219

21

-

-

-

(4)

219

Other expense

152

9

-

-

-

-

152

9

9,933

6,348

294

93

1,061

1,223

11,288

7,664

Earnings/(loss) before tax

5,773

4,400

(294)

(93)

(1,061)

(1,223)

4,418

3,084

Current tax expense/(recovery)

65

(996)

Future income tax expense

3,458

2,158

Net earnings/(loss) from continuing operations

2,250

3,238

Net loss from discontinued operations Net earnings/(loss) Capital expenditures

7

(2) 17

-

-

-

-

65

-

-

-

-

3,458

2,158

895

1,922

(294)

(93)

(1,061)

(1,223)

-

-

(53)

(337)

(53)

(70)

2,250

3,238

(347)

(430)

(1,114)

(1,293)

(106) 789

(996)

(407) 1,515

14,950

4,343

-

-

-

-

14,950

4,343

16

-

-

-

25

-

41

-

-

-

-

-

-

-

-

-

Total capital expenditure

14,966

4,343

-

-

25

-

14,991

4,343

Total assets

88,990

96,014

1,092

1,419

32,679

208

122,761

97,641

Development & exploration Other Discontinued operations

MD&A

Fourth Quarter Segmented Results (Unaudited)

(1) The European segment consists of Winstar Satu Mare SRL operating in Romania as well as Hungarian operations which are classified as discontinued operations.

(2) The corporate segment includes Canadian operations, which are classified as discontinued.

Winstar | MD&A | 23

MD&A

Selected Quarterly and Annual Information ($ thousands except per unit amounts)

Q4/10

Q3/10

Q2/10

Q1/10

Q4/09

Q3/09

Q2/09

Q1/09

Average daily production volumes (boepd) (1)

1,938

1,998

1,716

1,505

1,816

2,000

1,553

1,581

Average daily sales volume (boepd) (1)

2,298

1,888

1,536

1,515

1,735

2,000

1,553

1,581

17,585

13,985

10,830

10,529

12,053

11,908

8,221

7,661

83.19

80.50

77.48

77.24

75.52

64.73

58.18

53.83

Petroleum and natural gas sales Realized sales price ($/boe) Field operating netback ($/boe) (2)

59.13

57.77

53.24

53.72

58.79

40.21

31.26

18.19

10,033

8,535

5,795

5,970

7,708

6,689

3,588

2,577

Per share - basic & diluted

0.29

0.24

0.17

0.17

0.23

0.20

0.10

0.08

Earnings/(Loss)

789

789

(473)

543

1,502

791

(7,855)

(1,035)

Per share - basic & diluted

0.02

0.02

(0.01)

0.02

0.04

0.02

(0.23)

(0.11)

Earnings/(loss) from continuing operations

895

789

(473)

543

1,502

791

(7,855)

(1,035)

Funds from operations (2)

Per share - basic & diluted Total assets

0.03

0.02

(0.01)

0.02

0.04

0.02

(0.23)

(0.11)

122,761

110,264

109,197

98,395

97,191

96,455

115,196

133,102

-

-

-

-

-

-

7,851

5,343

Bank Debt Â

Â

($ thousands except per unit amounts) Average daily production volumes (boepd) (1) Average daily sales volume (boepd) (1)

Year ended December 31, 2010

2009

2008

1,791

1,738

1,724

1,800

1,719

1,712

52,928

39,843

56,376

Realized sales price ($/boe)

80.06

63.50

89.99

Field operating netback ($/boe) (2)

45.62

21.11

75.82

30,344

20,567

35,038

Petroleum and natural gas sales

Funds from operations (2) Per share - basic Earnings/(Loss) Per share - basic & diluted Earnings/(loss) from continuing operations Per share - basic & diluted Total assets

0.88

0.60

1.02

1,648

(6,596)

(13,645)

0.05

(0.19)

(0.40)

2,061

1,909

(67)

0.06

0.04

-

122,761

97,641

138,486

(1) From time to time, the Company will hold significant quantities of crude inventory at quarter ends, which are sold in the subsequent period and recognized as revenue at that time.

(2) Funds from operations, funds from operations per share and field operating netbacks are non-GAAP measures that represent cash generated from operating activities and continuing operating activities as defined in their respective sections.

Funds from operations have increased throughout the year, primarily due to increases in commodity prices, and total revenues have also increased due to increased commodity prices as well as production and sales volumes.

24 | MD&A | Winstar

MD&A

Outstanding Share Data Authorized: • Unlimited number of voting common shares with no par value; and, • Unlimited number of first and second preferred shares.

Weighted average number of commons shares - basic Dilutive securities issued under stock-based compensation plan Weighted average number of common shares – fully diluted

Three Months ended December 31,

Year ended December 31,

2010

2009

2010

2009

35,143

34,223

34,646

34,223

182

5

138

-

35,325

34,228

34,784

34,223

35,280

34,223

Common shares outstanding at December 31,

At December 31, 2010, and at March 17, 2011, the Company had 35.3 million shares and 2.0 million options outstanding.

Business Environment Analysis Risk Factors Associated With Oil & Gas Activities Winstar is exposed to certain risks and uncertainties inherent in exploring for, developing and producing crude oil and natural gas, which include, but are not limited to the following:

Commodity Prices Winstar produces 41o API, Zarzaitine grade crude from its Chouech Essaida, Ech Chouech, Sanrhar and Sabria concessions. Zarzaitine crude is generally sold at a small premium to Brent 38.5° API oil. The price paid for oil in Tunisia is based on the average price for Brent oil sold in the Mediterranean during the three days after loading onto tankers. The Company is required to sell 20% of its annual oil production from Sabria into the local market, which is sold at an approximate 10% discount to Zarzaitine crude oil. Benchmark oil prices are determined by international supply and demand as well as other factors that are largely out of Winstar’s control.

Realized gas prices in Tunisia are tied to the nine month trailing average of low sulphur heating oil as quoted in Italy.

While hedging activities may have opportunity costs when hedged pricing is lower than otherwise realized pricing, such transactions are not meant to be speculative and are considered within the broader framework of financial stability and flexibility. Management continuously reviews the need to utilize such financing techniques; however there is currently no such activity. Winstar continuously monitors its exposure to commodity prices and is conservative in its outlook for capital budgeting purposes to ensure the sustainability of exploration and development projects.

Exploration & Development Activities Oil and gas exploration and development involves a high degree of risk and there is no assurance that expenditures made on future exploration and development activities by the Company will result in new discoveries of oil or gas that are commercially viable. The completion of projects depends upon numerous external factors, including the availability of processing capacity, availability of drilling and other equipment, government approvals and permits and other regulatory matters. Winstar mitigates the effect of project delays to the entity through its conservative capital structure and by financing exploration and development primarily through internally generated cash flows, available line of credit, and equity offerings.

Winstar | MD&A | 25

MD&A

Production The production of oil and gas involves risks such as environmental and physical disruptions that may temporarily or permanently impede reservoir deliverability. The majority of the Company’s crude

can be no assurance that this will occur. The majority of oil sales are marketed by way of large single party tanker sales, for which the Company considers the counterparty credit risk and will request letters of credit where it is deemed necessary.

oil is marketed directly to third parties, and is subject

The Company attempts to mitigate its business

to market demand and storage and transportation

and operational risk exposures by: maintaining

capacity. Winstar seeks to address this risk through

comprehensive insurance coverage on its assets

the diversification of its capital deployment throughout

and operations; employing or contracting competent

various concessions and geological formations

technicians and professionals; instituting and

within Tunisia.

maintaining high operational health, safety and environmental standards and procedures; and

Environment & Safety Environmental regulations impose, among other things, restrictions, liabilities and obligations in connection with hazardous substances and waste, as well as requirements regarding the operations, maintenance, abandonment and restoration of pipelines, wells, facilities and other properties associated with Winstar’s operations. Winstar expects to incur site restoration costs over a prolonged period as fields are depleted and provides for asset retirement obligations in its annual Consolidated Financial Statements in accordance with Canadian GAAP. Management conducts ongoing environmental assessments and reviews applicable changes in governing legislation.

maintaining a prudent approach to exploration and development activities. The Company also addresses and regularly reports to its shareholders on the impact of risks, writing down the carrying values of assets that may not be recoverable, all or in part.

Risk Factors Associated With International Operations As a result of its international operations, Winstar is exposed to various risks and uncertainties which include, but are not limited to the following:

Political Risk Winstar’s operations may be adversely affected

Reserve Replacement Winstar’s operations are dependent on the availability of existing and incremental oil and gas reserves.

Hydrocarbons are a limited resource and successful acquisition requires an assessment of recoverable reserves, exploration potential, future oil and gas prices and associated costs among other factors.

The Company, along with the exploration and development of its existing opportunities, continues to cultivate its inventory of future opportunities through industry relationships and a focus on areas that are complementary to its existing technical expertise.

Credit Risk The Company is and may in the future be exposed to third-party credit risk through its contractual arrangements with its current and future joint venture partners, marketers of its production and other parties.

While Winstar has no reason to believe that it will be unable to collect on all its accounts receivable, there 26 | MD&A | Winstar

by political and economic developments or social instability. The Company’s internal security and safety programs assist in mitigating security risks and aid in the recruitment and retention of qualified personnel.

For all the countries in which Winstar operates, the social, political and civil environments are continuously monitored to ensure that any changes can be appropriately addressed. The Company is committed to operating as a good corporate citizen in a responsible manner.

During January 2011, as a result of demonstrations throughout Tunisia precipitated by, among other things, in Winstar’s view, high unemployment, increasing food prices, and corruption, the president of Tunisia left the country after 23 years in power. He was replaced by an interim government that intends to lead the country until elections can be held later this year.

To date, Winstar has not been negatively affected by these events and political changes. The Company was able to maintain drilling and day to day operations

MD&A

throughout the political change. Following the political change in Tunisia, demonstrations and political unrest have spread throughout several North African and Middle East countries. While it is not expected that these events will have a direct impact on Winstar’s operations and ability to finance future capital programs, the Company will continue to monitor the events within Tunisia and surrounding countries. Although early indications are that the new regime will support the current economic structure and a history exists within Tunisia of honoring contractual rights, the risk exists that it may adopt new policies, laws or regulations that may be more hostile toward foreign investment.

Sensitivities Winstar’s financial performance is affected by factors such as changes in commodity prices and exchange rates.

The estimated impact of these factors on the Company’s financial performance for the three months and year ended December 31, 2010, is summarized in the following table, based on an approximate WTI oil price of Cdn $86.16 and $79.94/bbl for the three months and year respectively.

Three months ended December 31,

($ thousands) Price changes Oil increased $1.00/bbl Exchange rate changes US $/Cdn $ decreased by $ US $0.01

Year ended December 31,

2010

2009

2010

2009

Funds Net From Income Operations

Funds Net From Income Operations

Funds Net From Income Operations

Funds Net From Income Operations

159

159

122

122

531

531

417

417

58

152

15

77

78

378

24

189

Liquidity And Capital Resources Although the Company presently has sufficient financial resources and has been historically successful in obtaining equity financing to undertake exploration and development projects, there is no assurance that it will be able to obtain adequate financing in the future or that such financing will be on terms advantageous to Winstar. The ability of the Company to arrange such financing in the future will depend in part upon the prevailing capital market conditions, as well as the business performance of Winstar.

As at December 31, 2010, the Company had $7.3 million of working capital and no debt, resulting from positive operating cash flows and prudent investment into development and exploration opportunities. Winstar’s working capital includes $8.4 million of cash and cash equivalents, $1.4 million of which is restricted to secure the outstanding letter of credit relating to Sturgeon Lake obligations. The Company’s $10 million undrawn line of credit, is available to meet potential short term financing requirements. If and when Winstar draws on its line of credit, it will be governed by the following financial covenants: (a) current asset to current liability ratio of greater than 1.1 to 1.0, where current liabilities exclude the outstanding balance drawn on the line of credit; and (b) funded debt to EBITA ratio of less than 1.5 to 1, where funded debt is the outstanding balance drawn on the line of credit and EBITA is financial statement net income plus financial statement interest, tax, depreciation/depletion, exploration and accretion expenses.

Under normal industry conditions, Winstar has a bias toward conservatively financing operations, by utilizing equity financing and internally generated cash flow to offset the inherent risks of domestic and international oil and gas activities. From time to time, the Company may access the capital markets for new equity to supplement internally generated cash flow to finance its growth plans. Periodically, these markets may not be receptive to offerings of new equity from treasury, whether by way of private placement or public offerings. This may be further complicated by the limited market liquidity for shares of smaller companies, restricting access to some institutional investors. In response to market uncertainty and volatility in commodity prices, Winstar has been, and Winstar | MD&A | 27

MD&A

will continue to be prudent in its capital spending. The Company’s existing capital commitments are limited to the $6.6 million Satu Mare work program in Romania to be completed by 2012, which is expected to be financed through internally generated cash flows.

Rent

Capital spending in 2011, which is uncommitted, will be focused in Southern Tunisia and is expected to be financed through operating cashflows. The Company is actively seeking and evaluating potential joint venture partners interested in participating in the 100%-owned Ech Chouech concession in Tunisia, which if successfully executed, may result in additional fully financed capital development. Winstar has assessed its current accounts receivable balance with its counter parties. As at March 17, 2011, approximately 66% of the $10.3 million reported at December 31, 2010 has been subsequently received. The remaining receivables are expected to be received within the pre-existing terms and are primarily related to various entities of the Tunisian state, being the Tunisian state oil company, ETAP; the Tunisian national utility company, STEG; and

Application of Critical Accounting Estimates

the Tunisian taxation authorities.

skill set and knowledge to make reasonable estimates

The Company has a six-year lease for office space in Calgary expiring in 2012. Winstar’s Tunisian operations have a one-year lease in Tunis, Tunisia expiring in 2011.

Winstar’s financial statements were prepared in accordance with Canadian generally accepted accounting principles (GAAP). Certain accounting policies require management to make decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Winstar’s management reviews its estimates frequently; however, the emergence of new information and changed circumstances may result in actual results or changes to estimate amounts that differ materially from current estimates. Winstar attempts to mitigate this risk by employing individuals with the appropriate developing internal reporting systems, and comparing

Commitments

past estimates to actual results. The Company’s

Romania Joint Venture Agreement

of the following:

During Q2 2009, the Company entered into a joint venture agreement whereby Winstar would fulfill certain commitments to earn a 60% interest in the onshore Satu Mare concession in Northwestern Romania. Under the terms of the joint venture, the Company has committed to a work program, which is estimated to cost US $6.6 million by 2012. The remaining work program consists of the acquisition of 300 kilometres of new 2D seismic, and the drilling of one exploration well.

Chouech Essaida Concession The Tunisian state oil and gas company, ETAP, has the right to earn up to a 50% working interest in the Chouech Essaida concession if and when the cumulative liquid hydrocarbon sales net of royalties and shrinkage from the concession exceeds 6.5 million bbl. As at December 31, 2010, cumulative liquid hydrocarbon sales net of royalties and shrinkage was 3.9 million bbl. Management is of the opinion that, there are sufficient exploration and development opportunities which, if successful, could result in this provision being exercised within the next 10 years.

28 | MD&A | Winstar

financial and operating results include estimates

Reserve Recognition Winstar’s reserves and revisions to those reserves, though not reported on the Company’s balance sheet or income statement, impact the carrying value of its assets as well as the reported net income through DD&A, ARO and impairment testing. The process of estimating oil and gas reserves, which is performed by independent reserve engineers and reviewed by the Reserve Committee of the Company’s Board of Directors, is inherently uncertain. Technical reserve estimates use available geological and reservoir data, as well as production performance data, and as new data becomes available, estimates may change.

Additionally, reserve recognition may be impacted by economic considerations regarding the commercial viability of the associated reserves. As economic conditions change, such as commodity prices, capital and operating costs, the viability of reserves may impact the volume and value of reserves.

The majority of Winstar’s property, plant and equipment is amortized based on the unit of production or straight line method over the total of proved developed reserves, or evenly over the proved reserve life respectively.

Therefore the changes to estimates of reserves and reserve life have a material impact on the Company’s DD&A. As outlined in Winstar’s DD&A accounting policy, rates are updated annually unless there is a material change in

MD&A

Depreciation, Depletion & Amortization Expense (DD&A)

circumstances. Changes in year-end reserves are reflected in the fourth quarter rates.

Asset Impairment As outlined in the Company’s PP&E accounting policy, impairment testing is performed annually unless there is a material change in circumstances. Impairment testing uses reserves estimates in order to determine expected future cashflows for oil and gas assets. Therefore the changes to estimates of reserves and reserve life may have a material impact on the estimated future cash flows from the Company’s assets.

Asset Retirement Obligations (ARO) On retirement of its oil and gas assets, Winstar expects substantial costs associated with abandonment and reclamation activities. Estimates of costs are subject to uncertainty requiring estimates associated with the method, inflation rates, timing and extent of future retirement activities. The ARO is estimated based on existing laws, contracts or other policies. The fair value of the obligation is based on estimated future costs, discounted at a credit-adjusted risk-free rate.

Successful Efforts Accounting Winstar uses the successful efforts method to account for its oil and gas exploration and development costs.

Acquisition and development costs are capitalized and depleted using the unit of production method over proved developed reserves. Costs of drilling unsuccessful exploration wells (dry hole costs) and all other exploration costs, including geological and geophysical costs, are expensed. The differences between the successful efforts method and the alternative method of accounting for oil and gas expenditures (full cost method) make it difficult to compare net income between companies that use different methods of accounting.

Joint Venture Audits The Company is subject to joint venture audits and has the opportunity to review and respond to audit findings and request binding arbitration with an independent mediator where a settlement cannot be reached. As audit findings are received, management analyzes the claims and estimates the expected settlement, if any, relating to the joint venture audit. Estimates are subject to uncertainty regarding the final settlement.

Troglodyte homes - Chenini, Southern Tunisia

Winstar | MD&A | 29

MD&A

Conversion to International Financial Reporting Standards The Company’s IFRS conversion project began in 2009. A formal project plan and a project team have been established. The project philosophy is to align with current accounting practices and policies, where possible, to minimize the impact of any changes to the business. Regular reporting updates are provided to senior management and the Audit Committee of the Board of Directors.

Activity

Key Milestones

Status

Diagnostic: high level review of major differences between Canadian GAAP and IFRS, to identify high risk and complex areas.

Senior management to review completed diagnostic report.

Completed diagnostic analysis and identified accounting for PP&E, exploration expenses, evaluation of mineral resources, and the effects of foreign currency translation as high risk and complex areas.

Development: detailed analysis and comparison of Canadian GAAP to IFRS, identify the impact of differences and resolve key accounting issues, and the selection of IFRS accounting policies.

Senior management’s review of completed IFRS impact analysis and IFRS accounting policy manual occurred in Q4 2010.

Management has completed its detailed review and comparison between Canadian GAAP and IFRS, and IFRS accounting policies have been selected.

Implementation: processing the identified differences and applying accounting policies to generate IFRS financial results and ensuring disclosure is updated to meet IFRS requirements.

Senior management’s and audit Draft IFRS accounting adjustments committee’s review of draft have been finalized.

IFRS financial statements in Q4 2010.

Training: defining and inducing the appropriate level of IFRS expertise to stakeholders

Delivery of Training to affected employees, senior management and continuous updates to the Audit Committee

Targeting training of financial staff completed throughout 2010. Senior management training was completed during Q4 2010.

Audit Committee updated quarterly on status of IFRS project

Infrastructure: confirming that business processes and systems are IFRS compliant.

Ensure dual GAAP reporting capability throughout 2010 and ensure systems support IFRS compliant financial reporting effective January 1, 2011

Completed a review of information gathering and processing systems and determined that existing systems and processes will provide required capabilities to manage the transition to IFRS.

Control Environment: all identified changes are evaluated and where necessary control procedures are updated to address associated control risks.

Key control and design effectiveness implications addressed as part of accounting policy manual.

The Company’s control environment has been assessed and are considered to be effective

Management has determined that the adoption of IFRS does not impact the underlying economics of Winstar’s operations or its cash flows. The most significant impacts are anticipated to arise from the application of new accounting policies which impact the Company’s balance sheet on conversion to IFRS and financial statement presentation changes. Based on the work performed to date, management has identified potential adjustments that remain subject to change: • The carrying value of PP&E; • Long-term provisions; • Future income taxes; and, • Retained earnings.

As a result of these potential accounting policy changes, the Company’s previously recorded quarterly net income during 2010 will be revised. Winstar does not expect a change to the previously reported cash flows as a result of the adoption of IFRS.

30 | MD&A | Winstar

The general principle that should be applied on first-time adoption of IFRS is that standards in force at the first reporting date should be applied retrospectively. However, IFRS 1: “First-time adoption of International Financial Reporting Standards” contains a number of exemptions which entities are permitted to apply on conversion to IFRS. Since the Company currently accounts for its oil and gas assets using the successful efforts method, certain

MD&A

IFRS 1 Exemptions

exemptions applicable to entities using full cost accounting are not available. Specifically, those exemptions not available to Winstar include the retroactive application of changes to oil and gas related assets. The company expects to apply the following exemptions: • Not to restate prior business combinations that occurred before January 1, 2010; • To reset cumulative translation adjustment to nil at January 1, 2010; and, • To apply a modified approach described in IFRS 1 to calculating the retrospective cost component of PP&E relating to the Company’s asset retirement obligations (‘ARO’).

Based on the IFRS policies selected by management, the following table estimates the impact on Winstar’s consolidated balance sheet as at January 1, 2010, assuming IFRS adjustment fall between the ranges outlined below. Note that the Company expects to use US dollars as its reporting currency commencing in 2011, while Canadian dollars will remain as the functional currency. This change reflects the fact that a significant majority of its revenues and expenditures are transacted in US dollars and that its continued focus is on Tunisian and other international opportunities where US dollars represent the most relevant benchmark currency.

As at January 1, 2010

($ thousand) Property and equipment Future income tax liability Asset retirement obligation Total assets Total liabilities Retained earnings

December 31, 2009 Canadian GAAP

IFRS Adjustments (median of adjustment ranges)

Closing

A

B

C

D

Other

IFRS

$CDN

$US

$US

$US

$US

$US

$US

$US

77,789

74,326

19,000

3,200

300

-

-

96,826

7,511

7,177

-

-

-

(200)

10,800

17,777

6,300 97,641 23,933 (24,323)

6,019 93,295 22,865 (19,377)

19,000 19,000

3,200 3,200

800 300 811 (500)

10,500 (10,500)

(100) (100) 1,100

6,819 115,695 34,076 (7,077)

Depreciation of Property, Plant & Equipment (Adjustment A) IFRS does not provide any specific requirements governing the depreciation of oil and gas related tangible and intangible assets, contrary to Canadian GAAP which requires that these assets are depleted on a unit of production basis over proved developed reserves. Following a thorough evaluation of its oil and gas assets, management has determined their expected lives are best estimated based on the proved and probable (“2P”) reserves associated with those assets. These 2P reserves are based on the commercial production more likely than not to occur based on currently available information. Included in the estimation of 2P reserves are expected future development costs, which will be added to the depreciation base in order to accurately reflect the expected depreciation associated with 2P reserves. This change in estimate has been retroactively applied and is expected to increase the net book value of the Company’s PP&E by US $17.1 to US $20.9 million, with an offset to retained earnings.

Winstar | MD&A | 31

MD&A

Reversal Of Impairments (Adjustment B)

Exploration Expenses

International accounting standard (“IAS”) 36 requires

IFRS 6 allows for the capitalization of all expenditures

that a historically reported impairment be reversed

classified as exploration and evaluation (“E&E”);

where there is any indication that an impairment

however Winstar is unable to adopt this standard

loss recognized in prior periods for an asset other

since its current successful efforts accounting policies

than goodwill may no longer exist. Management has

are more in line with the IFRS framework than the

reviewed historical impairments, and identified up

exception provided in IFRS 6. Because Winstar’s

to $5.5 million of impairments that are subject to

current accounting policies are in line with the IFRS

reversal on conversion to IFRS. The net effect of these

framework, the Company must continue to apply these

reversals, after deducting associated depreciation is

policies which allow for the capitalization of exploration

an increase to the net book value of the Company’s

wells until the economic feasibility can be determined

PP&E by US $2.9 to US $3.5 million, with an offset to

at which point the assets are depreciated or expensed.

retained earnings.

All other E&E costs will continue to be expensed as

Measurement Of Asset Retirement Obligations (Adjustment C) IAS 37 – Provisions, Contingent Liabilities and Contingent Assets requires that an entity evaluate

incurred. The result is that Winstar’s net income and operating cashflows will be decreased by the effect of E&E costs that may be capitalized by comparable entities that are eligible to apply IFRS 6.

its assumptions for the measurement of provisions

Internal Controls & Procedures

including abandonment and site restoration

The Chief Executive Officer (CEO) and Chief Financial

costs during each reporting period. The specific interpretation of these measurement requirements resulted in a change in the discount rate used to value the obligation liability, which generated a US$680,000 TO US $840,000 increase to the Company’s asset

Officer (CFO) are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) for the Company.

retirement obligation liability and a US $315,000 to US

Management recognizes that all internal control

$380,000 increase to PP&E, with the remaining offset

systems, no matter how well designed, have inherent

to retained earnings.

limitations. Therefore, management has concluded that these systems provide reasonable, but not absolute,

Measurement Of Future Income Taxes (Adjustment D) Canadian GAAP offers a specific exemption to the recognition of future income taxes on exchange gains and losses that arise from the difference between

complete in all material respects. Any 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.

the historical exchange rate and the current exchange

In accordance with the requirements of National

rate translation of the cost of non-monetary assets or

Instrument 52-109 “Certification of Disclosure in

liabilities. This exemption does not exist under IFRS,

Issuers’ Annual and Interim Filings,” the Company’s

therefore the measurement of future taxes will be

control environment has been assessed and an

revised for IFRS and future income tax liabilities on

evaluation of the effectiveness of DC&P and ICFR was

transition are expected to decrease by US $220,000

carried out under the supervision of the CEO and CFO

to US $270,000. Fluctuations are also expected in

at the financial year end. Based on this evaluation, the

previously reported 2010 quarterly future income tax

CEO and CFO have concluded that the Company’s

expenses depending on the fluctuation in exchange

DC&P and ICFR are effectively designed and operating

rates between Tunisian Dinar and US dollars. Additional

as intended.

future tax implications related to capital adjustment are expected to increase future tax liabilities by US $9.7 million to US $11.9 million with an offset to retained earnings.

32 | MD&A | Winstar

assurance that financial information is accurate and

MD&A Spice market in Central Tunisia

Other Information

Liquidity and capital resources The Company’s existing capital commitments are

Forward-Looking Statements Statements throughout this report that are not historical facts may be considered “forward-looking statements.” These forward-looking statements may include words to the effect that management believes or expects a stated condition or result. Since forward-looking statements address future events and conditions, by their nature, they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to any number of factors, including such variables as new

limited to the $6.6 million Satu Mare work program in Romania to be completed by 2012, which is expected to be financed through internally generated cash flows.

Capital spending in 2011, which is uncommitted, will be focused in Southern Tunisia and is expected to be financed through operating cash flows. Winstar is actively seeking and evaluating potential joint venture partners interested in participating in the 100%-owned Ech Chouech concession in Tunisia, which if successfully executed, may result in additional fully financed capital development.

information regarding recoverable reserves, changes

Conversion to International Financial

in demand for, and commodity prices of, crude oil,

Reporting Standards

condensate and natural gas, legislative, environmental and other regulatory or political changes, competition in areas where the Company operates, and other

Related Party Transactions

factors discussed in this interim report. Forward-

The Company did not enter into any related-party

looking statements are based on the estimates and

transactions during 2010.

opinions of the Company’s management at the time the statements are made. The Company assumes no obligation beyond that which is required by law, to update the forward-looking statements should circumstances, management’s estimate, or opinions change.

Statements and information related to “reserves” or “resources” are by their nature forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions regarding future condition, that the reserves or resources described can be profitably produced in the future.

Examples of forward-looking information in this

Off Balance Sheet Arrangements The Company did not enter into any off balance sheet arrangements during 2010.

Financial Instruments The Company’s financial instruments include cash and cash equivalents, restricted cash, bank debt, accounts receivable and payable, for which the amounts recorded on the balance sheet are reasonable estimates of their fair values due to the relatively short periods to maturity and the commercial terms of these instruments.

document include but are not limited to, the following: Winstar | MD&A | 33

Reports

Management’s Report Management is responsible for the information contained in this annual report. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, and include amounts based on management’s informed judgments and estimates. Where alternative accounting methods exist, management has chosen those it deems to be the most appropriate based on Winstar’s operations. The financial and operating information included in this annual report is consistent with that contained in the consolidated financial statements in all material respects.

To assist management in fulfilling its responsibilities, systems of accounting, internal controls, and disclosure controls are maintained to provide reasonable, but not absolute, assurance that financial information is reliable and accurate and that assets are adequately safeguarded.

PricewaterhouseCoopers LLP, Chartered Accountants, appointed annually by the shareholders to serve as Winstar’s external auditors, have audited the consolidated financial statements. They have performed such tests as they deemed necessary to enable them to express an opinion on these consolidated financial statements. The external auditors have unrestricted access to the Management of Winstar, the Audit Committee and the Board of Directors.

The Board of Directors has appointed a three-person Audit Committee, consisting of directors who are neither employees nor officers of Winstar and all of whom are independent. It meets regularly with management and external auditors to discuss controls over the financial reporting process, auditing and other financial reporting matters. In addition, the Audit Committee recommends the appointment of Winstar’s external auditors. The Audit Committee meets at least quarterly with management and the external auditors to review and approve interim consolidated financial statements prior to their release and recommends the unaudited interim consolidated financial statements to the Board of Directors for their approval. Annually, the Board of Directors reviews and approves Winstar’s annual audited consolidated financial statements, Management’s Discussion and Analysis, Annual Information Form and Management Information Circular. The Board of Directors has approved the consolidated financial statements and the Management’s Discussion and Analysis based on the recommendations of the Audit Committee.

Charles de Mestral

Brad Giblin

Chief Executive Officer

Chief Financial Officer

March 17, 2011

March 17, 2011

34 | Management’s Report | Winstar

Reports

Independent Auditor’s Report March 17, 2011

To the Shareholders of Winstar Resources Ltd. We have audited the accompanying consolidated financial statements of Winstar Resources Ltd and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2010 and 2009 and the consolidated statements of operations and deficit, comprehensive loss and accumulated other comprehensive loss and cash flows for the years then ended, and the related notes including a summary of significant accounting policies.

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

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

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

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

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

Chartered Accountants Calgary, Alberta, Canada

Winstar | Independent Auditor’s Report | 35

Financial Statements

Consolidated Financial Statements Consolidated Balance Sheets

As at December 31,

(CDN $ thousands)

2010

2009

ASSETS

Current

Cash and cash equivalents

8,439

8,753

Restricted cash (note 7)

1,411

1,383

10,370

5,504

Accounts receivable (note 8) Prepaids

476

719

Inventory (note 9)

1,151

1,284

Future income tax asset (note 16)

4,040

121

Discontinued operations (note 6)

136

213

26,023

17,977

95,529

76,691

Other assets (note 11)

267

1,875

Discontinued operations (note 6)

942

1,098

122,761

97,641

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current

13,571

8,850

Property and equipment (note 10)

Accounts payable and accrued liabilities Deferred revenue (note 12)

3,486

-

Discontinued operations (note 6)

1,633

992

18,690

9,842

Future income tax liability (note 16)

20,569

7,511

7,846

5,417

Asset retirement obligation and other provisions (note 13) Discontinued operations (note 6) Total Liabilities

-

1,163

47,105

23,933

Shareholders' equity

Share capital (note 14)

113,089

108,490

Contributed surplus (note 14)

3,237

3,740

Accumulated other comprehensive loss

(17,995)

(14,199)

Deficit

(22,675)

(24,323)

75,656

73,708

122,761

97,641

See accompanying notes

36 | Consolidated Financial Statements | Winstar

On behalf of the Board,

Bruce Libin

Charles de Mestral

David A. Monachello

Director

Director

Director

Years ended December 31,

(CDN $ thousands) REVENUE Petroleum and natural gas sales

2010

2009

52,734

36,584

International royalty income

1,103

1,272

Royalties

(7,133)

(5,119)

EXPENSES

46,704

32,737

Operating

9,148

7,786

General and administration

7,051

5,956

Exploration expense Depletion, depreciation and accretion Interest expense Foreign exchange loss/(gain) Other expenses

760

675

16,990

16,770

13

147

541

(1,034)

253

9

34,756

30,309

Earnings before tax

11,948

2,428

Current income tax expense (note 16)

65

-

Future income tax expense (note 16)

9,822

519

9,887

519

Net income from continuing operations

2,061

1,909

Net loss from discontinued operations (note 6) Net earnings/(loss)

(413) 1,648

(8,505) (6,596)

Deficit, beginning of year

(24,323)

(17,727)

Deficit, end of year

(22,675)

(24,323)

Net earnings/(loss) per share (note 14)

Basic and diluted from continuing operations

0.06

0.06

Basic and diluted from discontinued operations

(0.01)

(0.25)

Basic and diluted

0.05

(0.19)

See accompanying notes

Financial Statements

Consolidated Statements of Operations and Deficit

Consolidated Statement of Comprehensive Loss & Accumulated Other Comprehensive Loss Years ended December 31,

(CDN $ thousands) Net earnings/(loss) Other comprehensive loss

2010

1,648

2009

(6,596)

Unrealized exchange loss on translation of self-sustaining foreign operations

(3,796)

Other comprehensive loss

(3,796)

(12,381)

Comprehensive loss

(2,148)

(18,977)

Accumulated other comprehensive loss beginning of year Other comprehensive loss Accumulated other comprehensive loss, end of year See accompanying notes

(12,381)

(14,199)

(1,818)

(3,796)

(12,381)

(17,995)

(14,199)

Winstar | Consolidated Financial Statements | 37

Consolidated Statements of Cash Flow Years ended December 31,

(CDN $ thousands) OPERATING ACTIVITIES Net income from continuing operations Add non-cash items: Stock-based compensation Depletion, depreciation and accretion Future income tax expense

Change in non-cash working capital Cash flow from continuing operating activities

2010

2009

2,061

1,909

860

463

16,990

16,770

9,822

519

29,733

19,661

4,234

3,865

33,967

23,526

Cash flow from discontinued operations before change in non- cash working capital

(337)

(81)

Change in non-cash working capital from discontinued operations Cash flow used in discontinued operations

(368)

58

(705)

(23)

33,262

23,503

FINANCING ACTIVITIES

Cash flow from operating activities

Issuance of shares

3,205

Cash flow from financing activities

3,205

-

INVESTING ACTIVITIES

Additions to property and equipment Change in non-cash working capital Investing activities from continuing operations

(38,311)

(18,150)

1,944

(15,458)

(36,367)

(33,608)

Disposal of property and equipment from discontinued operations

-

9,447

Change in non-cash working capital from discontinued operations Investing activities from discontinued operations

-

(55)

Cash used in investing activities

(36,367)

9,392 (24,216)

Effect of translation on foreign currency cash

(386)

(426)

Decrease in cash and cash equivalents

(286)

(1,139)

Cash and cash equivalents, beginning of year

10,136

11,275

9,850

10,136

See accompanying notes

Supplementary cash flow information:

40

154

-

-

Cash and cash equivalents, end of year

Cash interest paid Cash taxes paid

38 | Consolidated Financial Statements | Winstar

For the Years Ended December 31, 2010 & 2009

1. Description of Business Winstar Resources Ltd. (the “Company” or “Winstar”) is a publicly traded international oil and gas exploration and development Company.

The Company is headquartered in Calgary, Alberta, Canada. The International head office is located in Breda, The Netherlands, with offices located in Tunisia, Hungary, Romania and Switzerland. Winstar is focused on Tunisia with additional operations and opportunities in Hungary and Romania. The Company’s multinational asset base includes both low-risk developments and high impact exploration opportunities.

2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in Canada, have in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below.

Reclassification

Measurement Uncertainty The preparation of the 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 dates of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The Company uses estimates to calculate depreciation, depletion and accretion expense, to assess impairment of oil and gas properties, goodwill and inventory, to estimate asset retirement obligations, to determine the fair value of stock options to be recorded as stock based compensation expense, to determine the likelihood and amount of contingent losses and to estimate

Notes to Financials

Notes to Consolidated Financial Statements

tax expense. These estimates are reviewed by management on an on-going basis. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates.

For oil and gas properties, the Company calculates depreciation, depletion and accretion expense and assesses impairment using management estimates of oil and gas reserves remaining in properties, commodity prices and capital costs required to develop those reserves. By their nature, estimates of volumes and the related future cash flows are subject to measurement uncertainty,

Certain information provided for the prior period has

and the impact of differences between actual and

been reclassified to conform to the presentation

estimated amounts on the consolidated financial

adopted in the current period.

statements of future periods could be material.

Such reserve estimates, which have been estimated by independent engineering firms, are subject to change as additional information becomes available.

Winstar | Notes to Consolidated Financial Statements | 39

Financial Statements

Chouech Essaida gas sales metre located at El Barma, Tunisia

Numerous assumptions and judgments are required

in a separate component of shareholders’ equity

in the fair value calculation of the asset retirement

described as accumulated other comprehensive loss.

obligation (ARO) including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments.

To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the petroleum and natural gas properties balance.

Consolidation The consolidated financial statements of the Company include the financial statements of the Company and those of its wholly owned subsidiaries Winstar B.V., Winstar Tunisia B.V., Athanor Management Services S.A., Winstar Hungary Ltd. and Winstar Satu Mare SRL. All intercompany accounts and transactions were

Cash & Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of three months or less. Cash and cash equivalents are stated at cost, which approximates market value. Short-term investments pledged as collateral for an irrevocable standby letter of credit are classified as restricted cash.

Inventory Inventory of oil products is valued at the lower of cost (determined weighted average method) or market.

The cost of production inventoried is determined on a property-by-property basis, consisting of lifting and transportation costs, depletion and depreciation.

eliminated on consolidation.

Inventory of materials includes spare parts for

A substantial portion of the Company’s activities is

less any allowance for obsolete items or impairment.

operation in the field, and is stated as acquisition cost

conducted jointly with others and the consolidated financial statements reflect only the Company’s proportionate interest in such activities.

Foreign Currency Translation

Property & Equipment The Company uses the successful efforts method of accounting for oil and gas activities. Costs to acquire mineral interest in oil and gas properties, to drill and

The reporting currency of the Company is the Canadian

equip exploratory wells that find proved reserves and

dollar. The Company’s self-sustaining foreign operations

to drill and equip development wells are capitalized.

are translated into Canadian dollars using the current

Costs to drill exploratory wells that do not find

rate method, whereby assets and liabilities are

proved reserves are expensed at the moment that

translated at period-end exchange rates while revenues

the exploratory drilling proves to be unsuccessful.

and expenses are converted using average rates for

Geological and geophysical costs and costs of carrying

the period. The Company’s share capital amounts are

and retaining unproved properties are expensed as

translated at rates in effect at the time of issuance.

they are incurred.

Translation gains and losses are deferred and included 40 | Notes to Consolidated Financial Statements | Winstar

Unproved oil and gas properties are periodically assessed for impairment after considering the remaining term of the lease, drilling results, the evaluation of geological data and other information.

A loss is recognized at the time of impairment by providing an impairment allowance. Capitalized costs of producing oil and gas properties, after considering estimated salvage values, are depreciated and depleted over proved developed reserves using the unit of production method; while acquired resource properties, with proved reserves, are depleted over proved reserves using the unit of production method. Pipelines and associated facilities are depreciated on a straight line basis over their expected useful lives. Acquisition costs of probable reserves are not depleted or amortized while under active evaluation for commercial reserves. Costs are transferred to depletable costs as proved reserves are recognized.

Expenditures for maintenance, repairs and minor renewals necessary to maintain properties in operating condition are expensed as incurred. Costs associated with major replacement and renewals are capitalized when the service potential of the reserves have been enhanced.

Impairment of Long-Lived Assets Long-lived assets, such as property and equipment, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. Cash flows are calculated based on third party quoted forward prices, adjusted for the Company’s contract prices and quality differences. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized, measured by the amount by which the carrying amount exceeds the fair value of the asset.

Other Assets Other assets include acquired seismic data and other long-term receivables. Other assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Other property and equipment, primarily furniture and

Asset Retirement Obligations

equipment, is carried at cost less accumulated

The Company recognizes the fair value of an ARO in

depreciation. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, which range from three to 10 years.

Additions to and major improvements of property and equipment are capitalized.

Financial Statements

Kairouan, Tunisia

the period in which it is incurred when a reasonable estimate of the fair value can be made. On a periodic basis, management will review these estimates, and changes, if any, to the estimate will be applied on a prospective basis. The fair value of the estimated ARO is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related assets.

The capitalized amount is amortized to earnings on a basis consistent with depreciation and depletion Winstar | Notes to Consolidated Financial Statements | 41

Financial Statements

of the underlying assets. Subsequent to the initial measurement of the ARO, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the amount or timing of estimated future cash flows underlying the obligation. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost would also result in an increase or decrease to the ARO. Any difference between the actual costs incurred and the recorded liability is recorded as a gain or loss in the statements of operations in the period in which the settlement occurs.

Financial Instruments The Company establishes the classification of financial instruments at their initial recognition. Financial assets are classified as held for trading, available for sale, held to maturity or loans and receivables. Financial liabilities are classified as held for trading or other liabilities.

Financial instruments classified as held for trading, other than derivative instruments that are effective hedging instruments, are measured at fair value with changes in fair value recognized in earnings. Derivatives that are designated as, and continue to be, effective

Revenue Recognition The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Sales in excess of production that result in an overlift position are accounted for using the entitlements method; revenue is recognized based on the quantity of product delivered. The net overlift position is recorded as a liability valued at the lower of (1) the price in effect at the time of production, (2) market value, or (3) contracted price.

The Company recognizes international royalty revenue at the time the related oil production occurs and, under the relevant concession agreement, collection of the relevant receivable is probable and the sales price is

cash flow hedging instruments have gains and losses in fair values recognized through other comprehensive income. Derivatives that are designated as fair value hedging instruments have gains and losses recognized in earnings.

Financial instruments classified as available for sale are measured at fair value using quoted prices in an active market. Changes in fair value are recognized in other comprehensive income until the item is derecognized or determined to be impaired, at which time the cumulative gain or loss previously reported in other comprehensive income is recognized in earnings.

When actively quoted prices are not available, fair value is determined using other valuation techniques. If fair value cannot be reliably estimated, the item is carried at cost.

fixed and reasonably determinable.

Financial instruments classified as held to maturity, loans and receivables or other liabilities are measured at fair value upon initial recognition but are subsequently

Corporate Income Taxes

measured at their amortized cost using the effective

The Company uses the liability method to account for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and the operating loss and tax credit carry forwards. Future tax assets and liabilities are measured using substantively enacted tax rates that are expected to be in effect when the differences are expected to reverse. The effect on future tax assets and liabilities of a change in tax rate is recognized into income in the period that includes the substantial enactment. Future income tax assets are recorded in the financial statements if realization is considered more likely than not.

42 | Notes to Consolidated Financial Statements | Winstar

interest method.

Basic & Diluted Per Share Calculations Net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per share is calculated giving effect to the potential dilution that could occur if the stock options were exercised in exchange for common shares.

The Company uses the treasury stock method to determine the dilutive impact of options. This method assumes that any proceeds from the exercise of options would be used to purchase common shares at

proceeds purchase a greater number of shares than were issued, the impact is considered to be antidilutive and dilutive net income per share is considered equal to basic net income per share.

Stock-Based Compensation

subsidiary to be classified as a separate component of equity. In addition, net earnings and components of other comprehensive income are attributed to both the parent and non-controlling interest. The adoption of this standard has had no material impact on the Company’s Consolidated Financial Statements.

The Company’s stock options, which are described

The above CICA Handbook sections are converged with IFRS. The Company will be required to report its results

in Note 14, are accounted for under the fair value

in accordance with IFRS beginning in 2011.

method. Under this method, compensation expense is measured at fair value at the grant date using the Black-Scholes option pricing model and recognized over the vesting period with a corresponding credit to

4. Financial Instruments & Financial Risk Factors

contributed surplus. Upon the exercise of stock options, consideration paid by the option holder together with the amount previously recognized in contributed surplus

Financial Instruments

On January 1, 2010, The Company adopted the

The Company’s financial instruments include cash and cash equivalents, restricted cash, bank debt, accounts receivable and payable, for which the amounts recorded on the balance sheet are reasonable estimates of their fair values due to the relatively short periods to maturity and the commercial terms of

following Canadian Institute of Chartered Accountants

these instruments.

is recorded as an increase to share capital.

3. Accounting Changes

Financial Statements

the average price during the period. When the assumed

(CICA) Handbook sections: “Business Combinations,” Section 1582, which

Financial Risk Factors

replaces the previous business combinations standard.

The Company is exposed to a number of different

The standard requires assets and liabilities acquired in

financial risks arising from normal course business

a business combination, contingent consideration and

exposures, as well as the Company’s use of financial

certain acquired contingencies to be measured at their

instruments. These risk factors include market risk

fair values as of the date of acquisition. In addition,

relating to commodity prices, foreign currency risk and

acquisition-related and restructuring costs are to be

interest rate risk, as well as liquidity risk and credit risk.

recognized separately from the business combination and included in the statement of earnings. The adoption of this standard has had no material impact on the Company’s Consolidated Financial Statements.

(a) Market risk Market risk is the risk or uncertainty arising from possible market price movements and their impact on the future performance of the business. The

“Consolidated Financial Statements,” Section 1601,

market price movements that could adversely

which, together with Section 1602 below, replace the

affect the value of the Company’s financial assets,

former consolidated financial statements standard.

liabilities and expected future cash flows include

Section 1601 establishes the requirements for the

commodity price risk (crude oil and natural gas),

preparation of consolidated financial statements. The

foreign currency exchange risk and interest rate risk.

adoption of this standard has had no material impact on

Refer to the sensitivity section of Management’s

the Company’s Consolidated Financial Statements.

Discussion and Analysis for a sensitivity analysis

“Non-controlling Interests,” Section 1602, which establishes the accounting for a non-controlling interest in a subsidiary in the consolidated financial

relating to commodity price and foreign exchange fluctuations. (i) Commodity price risk

statements subsequent to a business combination.

The Company’s financial performance is closely

The standard requires a non-controlling interest in a

linked to crude oil and natural gas prices. The

Winstar | Notes to Consolidated Financial Statements | 43

Financial Statements

Company may use derivative instruments from

customer or counter-parties along with the financial

time to time to hedge its exposure to commodity

position of the customer or counter party. Of the

prices. As at December 31, 2010, Winstar has no

$10.4 million accounts receivable balance, $5.3

such derivative instruments in effect.

million and $2.0 million are due from two customers

(ii) Foreign currency exchange risk The Company is exposed to fluctuations of foreign exchange rates in its international subsidiaries as revenues, expenses, capital expenditures, or financial instruments may fluctuate due to change in rates. As crude oil, the Company’s primary product, is priced in U.S. dollars, fluctuations in US $/Cdn $ exchange rates may impact revenues. The Company’s exposure is partially offset by sourcing capital projects in US dollars. (iii) Interest rate risk The Company is exposed to interest rate risk as changes in interest rates may affect future cash flows and the fair values of its financial instruments. The primary exposure is related to short term Bankers’ Acceptance notes and interest on its short term credit facility.

related to December oil and gas sales respectively and have been subsequently received. An additional $2.2 million relate to tax credits expected to offset 2011 taxes payable.

5. Capital Disclosures The Company’s capital structure consists of shareholders’ equity excluding accumulated other comprehensive loss and cash and cash equivalents.

The Company’s primary capital management objectives are to maintain a flexible capital structure which optimizes the costs of capital at acceptable risk while providing an appropriate return to its shareholders and to maintain a strong capital base so as to maintain investor confidence and sustain ongoing development.

The Company has the ability to adjust its capital structure by issuing new equity, and modifying its capital expenditures program to the extent the capital expenditures are not committed and conducting capital

(b) Liquidity risk Liquidity risk is the risk that the entity will encounter difficulties in meeting obligations associated with financial liabilities. The Company believes that it has access to sufficient capital through internally generated cashflows, external sources and committed borrowing facilities to meet current spending forecasts.

Surplus cash is invested into a range of short-term Bankers’ Acceptance notes and the Company seeks to ensure security and liquidity of those investments.

The Company has no long term debt instruments; therefore financial liabilities consist of trade and other payables, all of which are classified as current.

The Company has an available line of credit up to $10 million, which is undrawn as of December 31, 2010. Refer to Note 15 of the consolidated financial statements for a schedule of current and long term obligations. (c) Credit risk

projects through joint ventures. In response to market uncertainty and volatility in commodity prices, the Company has been, and will continue to be conservative in its capital spending. The Company’s short-term capital commitments are limited to seismic acquisition and drilling required to extend its Igal II permit in Hungary.

This activity is expected to be financed through joint venture partnerships, for which management is currently pursuing and evaluating prospects.

At December 31, 2010, the Company had $7.3 million of working capital, no long-term debt and a $10.0 million available line of credit. The working capital surplus is anticipated to be invested primarily into Winstar’s Tunisian operations. If and when the Company was to draw on its line of credit, it will be governed by the following financial covenants: (a) current asset to current liability ratio greater than 1.1 to 1.0, where current liabilities exclude the outstanding balance drawn on the line of credit; and (b) funded debt to EBITA ratio less than 1.5 to 1.0, where funded debt is the outstanding balance drawn on the line of credit and

Credit risk is the risk that a customer or counter

EBITA is financial statement net income less financial

party will fail to perform an obligation or fail to pay

statement interest, tax, depreciation/depletion,

amounts due causing a financial loss. The Company

exploration and accretion expenses.

constantly monitors the exposure to any single 44 | Notes to Consolidated Financial Statements | Winstar

As at December 31,

(CDN $ thousands)

2010

2009

ASSETS - DISCONTINUED OPERATIONS

Current

43

81

93

132

136

213

Accounts receivable Prepaids

Property and equipment

942

1,098

942

1,098

LIABILITIES- DISCONTINUED OPERATIONS

Current

314

743

Asset retirement obligations

1,319

249

1,633

992

Non-current

-

1,163

1,633

2,155

Non-current

Accounts payable and accrued liabilities

Asset retirement obligations

Financial Statements

6. Discontinued Operations

Years ended December 31,

(CDN $ thousands) REVENUE Petroleum and natural gas sales

194

3,259

Royalties

(12)

182

EXPENSES Operating General and administration Exploration expense Depletion, depreciation and accretion

2009

2010

(390) 2,869

419

2,109

-

414

188

312

72

1,220

Expiry of undeveloped land

-

122

Impairment of property and equipment

-

2,169

Interest income Other (income)/expense

Income loss before tax

(6)

(17)

(78)

127

595

6,456

(413)

(3,587)

Current income tax expense

-

29

Future income tax expense

-

4,889

Net loss from discontinued operations

(413)

(8,505)

Discontinued operations include Canadian and Hungarian operations. Effective September 1, 2009 Winstar disposed of the majority of its Canadian assets and continues to evaluate disposal options for the remaining Sturgeon Lake assets. Effective September 14, 2010 the Company disposed of its Igall II exploration permits for a net royalty interest on future production and is actively pursuing the disposal of its remaining Hungarian assets.

Operations in Hungary were limited to intermittent production in 2010.

Winstar | Notes to Consolidated Financial Statements | 45

Financial Statements

Triassic flowing well: Chouech Essaida

7. Restricted Cash As at December 31, 2010, the Company has a $1.4 million irrevocable standby letter of credit issued by a Canadian chartered bank as required to meeting future abandonment obligations existing on certain oil and gas properties.

The Company has pledged $1.4 million of short term investments as security, which is recorded as restricted cash.

8. Accounts Receivable As at December 31,

(CDN $ thousands)

2010

2009

Trade receivables

7,427

3,533

Other receivables

550

1,392

92

242

International accrued royalty income Taxation recoverable

2,301

337

10,370

5,504

Accrued royalty income has been recognized as at December 31, 2010 and 2009 from ETAP, the governmentowned oil and gas company of Tunisia. The royalty income arises pursuant to a requirement for ETAP to pay to Winstar a pre-determined total amount, to be funded from 25% of ETAP’s share of oil production from the Sabria concession, in which ETAP has a 55% working interest. The royalty is calculated annually in November in an amount based on the oil production during the preceding 12 months. As at December 31, 2010 the Company has accrued the entirety of the pre-determined amount, therefore no additional revenue is expected prior to the payout of the existing accrual in 2011.

9. Inventory As at December 31,

(CDN $ thousands) Materials

2010

2009

1,151

1,034

Production

Operating Expenses

-

79

Transportation Costs

-

17

Depletion

-

154

1,151

1,284

46 | Notes to Consolidated Financial Statements | Winstar

equipment due to long lead times and remote field operations in the Company’s concessions in Southern Tunisia.

10. Property & Equipment

(CDN $ thousands) As at December 31, 2010 Petroleum and natural gas properties Work in progress Other property and equipment

As at December 31, 2009 Petroleum and natural gas properties

Cost

Accumulated Depletion and Depreciation

Net Book Value

140,640

60,084

80,556

14,392

-

14,392

1,816

1,235

581

156,848

61,319

95,529

114,897

46,855

68,042 7,998

Work in progress

7,998

-

Other property and equipment

1,664

1,013

651

124,559

47,868

76,691

Financial Statements

Materials inventory consist of inventory on hand to reduce the time required for repairs and maintenance of field

During the year ended December 31, 2010, $274,000 of engineering salaries (2009 - $57,000) and $57,000 of stockbased compensation expense (2009 - nil) relating to those employees was capitalized.

The Company performed impairment tests on a property-by-property basis in each country in which it operates. No impairments were recognized in the current or prior year. Fair value is calculated using discounted cash flows at a risk-free rate.

11. Other Assets As at December 31,

(CDN $ thousands)

2010

2009

107

1,732

Non-current deposits

68

68

Other

92

75

267

1,875

Non-current taxes receivable

The Company pays various withholding and advance taxes in its Tunisian concessions, which are deductible against taxable income. For those assets where it is not anticipated that these advances will be used as a deduction against current taxes payable, the balances are therefore classified as other long term assets.

12. Deferred Revenue At December 31, 2010 the Company overlifted 37,338 bbls of crude, which is valued at its contracted price of US$93.87/bbl resulting in $3.5 million (2009 – nil) of deferred revenue.

Winstar | Notes to Consolidated Financial Statements | 47

Financial Statements

13. Asset Retirement Obligation & Other Provisions As at December 31,

(CDN $ thousands)

2010

2009

Balance, beginning of year

5,006

5,829

Increase in obligations during the period

1,328

-

-

412

Change in estimate Translation adjustment Settlement of obligations during the period Accretion expense Reclassified as discontinued operations for prior period - Hungary

(851)

(296)

(3)

498

502

-

(883)

Balance, end of year

6,536

5,006

Other provisions

1,310

411

Asset retirement obligations and other provisions

7,846

5,417

The future asset retirement obligation relates to the Company’s wells and facilities and was calculated by management using estimated costs to abandon and reclaim the properties and the estimated timing of the costs to be incurred in future periods. At December 31, 2010, the estimated total undiscounted asset retirement obligation from continuing operations was $17.9 million (2009 - $16.1 million). These obligations will be settled based on the useful lives of the underlying assets, the majority of which are expected to be settled within the next 20 years, primarily between 2022 and 2030. The discounted future asset retirement obligation was calculated using a weighted average discount rate of 10% and an expected inflation rate of 2%.

14. Share Capital (a) Authorized Unlimited number of voting common shares with no par value.

Unlimited number of first and second preferred shares.

The first and second preferred shares may be issued in one or more series. The directors of the Company are authorized to fix the number of preferred shares in each series and to determine the designation, rights, privileges, restrictions and conditions attached to the preferred shares.

Balance, December 31, 2008 and December 31, 2009 Issued on exercise of stock options Re-classification of contributed surplus on exercise of options Balance, December 31, 2010

Number of shares (thousands)

Amount ($ thousands)

34,223

108,490

1,057

3,205

35,280

1,394 113,089

(b) Stock-based compensation The Company has established a stock option plan whereby options may be granted to the Company’s directors, officers, employees and consultants for up to 10% of the outstanding common shares. As at December 31, 2010, the maximum number of remaining grantable options was 1,476,000 (2009 – 724,000). The exercise price of each option shall not be less than the weighted average trading price of the common shares on the TSX for the five trading days immediately prior to the grant date. Existing options have a maximum term of five years and option vesting is determined by the Board of Directors.

48 | Notes to Consolidated Financial Statements | Winstar

December 31, 2010

December 31, 2009

Options (thousands)

Weighted Average Exercise Price ($ per share)

Options (thousands)

Weighted Average Exercise Price ($ per share)

2,698

3.63

2,509

3.75

510

3.85

355

2.02

(1,057)

3.03

-

-

(103)

4.20

(166)

4.96

3.69

2,698

3.63

Opening balance Granted Exercised Forfeited Closing balance

2,048

The fair market value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: Years ended December 31, 2010

2009

3

3

Risk free interest rate (%) Expected life (years) Expected volatility (%)

4

4

62

58

Financial Statements

The following is a continuity schedule of outstanding stock options for which shares have been reserved:

Based on fair market values, compensation expense for the year ended December 31, 2010, was $917,000 (2009 - $498,000), of which $860,000 (2009 - $464,000) has been recorded as non-cash stock-based compensation expense classified as general and administrative expense.

The following summarizes information about stock options outstanding at December 31, 2010: Options Outstanding Range of exercise prices ($ per share)

Weighted average exercise price ($ per share)

Options Exercisable

Number outstanding at December 31, 2010 (thousands)

Weighted average remaining contractual life (years)

Weighted average exercise price ($ per share)

Number outstanding at December 31, 2010 (thousands)

2.02– 2.70

2.30

535

2.99

2.37

429

2.90 – 4.36

3.81

1,087

2.41

3.79

757

5.00 – 5.65

5.16 3.69

425 2,048

2.27 2.66

5.16 3.77

426 1,612

(c) Contributed surplus The following table outlines the changes in the contributed surplus balance: (CDN $ thousand) Balance, January 1 Stock-based compensation costs Re-classification to common shares on exercise of stock options Expiry of unvested options Balance, December 31

2010

2009

3,740

3,242

917

498

(1,394) (26) 3,237

3,740

Winstar | Notes to Consolidated Financial Statements | 49

Financial Statements

(d) Earnings per share The following is a reconciliation of basic and diluted net income/(loss) per common share: Years ended December 31,

(CDN $ thousands)

2009

2010

Net income from continuing operations

1,909

2,061

Net loss from discontinued operations

(8,505)

(413)

Net income/(loss) for the period

(6,596)

1,648

34,646

34,233

(thousands of common shares) Weighted average number of common shares Dilutive securities issued under stock compensation plan Weighted average number of diluted common shares

138

-

34,784

34,233

Basic and diluted from continuing operations

0.06

0.06

Basic and diluted from discontinued operations

(0.01)

(0.25)

Basic and diluted

0.05

(0.19)

(dollars per common share)

Options have a dilutive effect under the treasury stock method only when the average market price of the common stock during the year exceeds the exercise price of the option.

15. Commitments Romania Joint Venture Agreement During Q2 2009, the Company entered into a joint venture agreement whereby the Company would fulfill certain commitments to earn a 60% interest in the onshore Satu Mare concession in northwestern Romania. Under the terms of the joint venture, the Company has committed to a work program, which is estimated to cost US $6.6 million by 2012. The remaining work program consists of the acquisition of 300 kilometres of new 2D seismic, and the drilling of one exploration well.

Chouech Essaida Concession The Tunisian state oil and gas company, ETAP, has the right to earn up to a 50% working interest in the Chouech Essaida concession if and when the cumulative liquid hydrocarbon sales net of royalties and shrinkage from the concession exceeds 6.5 million barrels. As at December 31, 2010, cumulative liquid hydrocarbon sales net of royalties and shrinkage was 3.9 million barrels. Management is of the opinion that, there are sufficient exploration and development opportunities which, if successful, could result in this provision being exercised within the next 10 years.

Rent The Company has a six-year lease for office space in Calgary expiring in 2012 with an option to extend the agreement for an additional five-year term. The Company’s Tunisian operations have a one-year lease in Tunisia expiring in 2010, as well as an indefinite termed land and mineral lease in the Zinnia concession. The effects of these commitments have been included in the following: Accounts payable from continuing operations Accounts payable from discontinued operations Current ARO from discontinued operations Office leases – Canada Office leases – Winstar BV Total 50 | Notes to Consolidated Financial Statements | Winstar

2011

2012

2013

2014

Total

13,572

-

-

-

13,572

314

-

-

-

314

1,319

-

-

-

1,319

400

243

-

-

634

148 15,753

234

-

-

148 15,987

16. Income Taxes

Financial Statements

Pumping wellhead at Chouech Essaida

Years ended December 31,

(CDN $ thousands)

2010

2009

Computed expected income tax expense at 28%

3,345

564

Higher foreign tax rates

4,349

1,326

Permanent differences

(213)

(369)

Stock-based compensation

245

109

Foreign exchange

383

(1,127)

1,721

1,096

-

(623)

57 9,887

(457) 519

Increase in valuation allowance Recoverable income taxes Other Total expense

The disposition of Canadian and Hungarian assets has diminished Winstar’s ability to benefit from its remaining future tax pools. Therefore, a valuation allowance was taken on 100% of Winstar’s Canadian and Hungarian future tax assets.

The Tunisian operations incur tax on a concession-by-concession basis. During the year ended December 31, 2010, the Company’s current tax expense was $65,000 (2009 - nil). The remaining Tunisian concessions have capitalized expenses and tax loss carry forwards, which on a concession-by-concession basis shelter current revenue from income tax. As at December 31, 2010, the Tunisian concessions had $8.8 million (2009 - $4.8 million) of tax loss carry forwards and $51.1 million (2009 - $56.1 million) of undepreciated capital costs. The tax loss carry forwards will continue through to the end of the concessions term which may be as long as 25 years. The undepreciated capital costs have no expiry dates.

The components of the future income tax liability are as follows: Years ended December 31,

(CDN $ thousands) Differences between the tax bases and reported amounts for depreciable assets Asset retirement obligation Share issue costs Tax loss carry forwards Deferred revenue Other Gross liability Valuation allowance Total liability

2010

2009

(25,360)

(12,061)

3,008

2,414

92

206

10,192

6,778

1,744

-

(122)

121

(10,446)

(2,542)

(6,083)

(4,848)

(16,529)

(7,390)

Winstar | Notes to Consolidated Financial Statements | 51

Financial Statements

17. Segmented Disclosure (CDN $ thousands) Year ended December 31, Revenues Oil and liquids Natural gas Petroleum and natural gas sales International royalty income Royalties

Segmented expenses Operating General and administrative Exploration expense DD&A Interest expense Foreign exchange loss/(gain) Other (income)/expense

Earnings before tax Current tax expense Future income tax expense Net earnings/(loss) from continuing operations Net earnings/(loss) from discontinued operations Net earnings/(loss) Capital expenditures Development & exploration Other Discontinued operations Total capital expenditure Total assets

Tunisian Operations 2010

2009

European Operations (1) 2010

2009

Corporate (2) 2009

2010

Total 2010

2009

47,564

32,294

-

-

-

-

47,564

32,294

5,171

4,290

-

-

-

-

5,171

4,290

52,735

36,584

-

-

-

-

52,735

36,584

1,103

1,272

-

-

-

-

1,103

1,272

(7,133)

(5,119)

-

-

-

-

(7,133)

(5,119)

46,705

32,737

-

-

-

-

46,705

32,737

9,150

7,786

-

-

-

-

9,150

7,786

2,513

1,669

654

727

3,884

3,560

7,051

5,956

560

571

200

104

-

-

760

675

16,913

16,628

-

-

77

142

16,990

16,770

22

142

(9)

-

-

5

13

147

509

(23)

-

-

32

116

9

13

-

124

-

253

9

29,783

26,782

858

831

4,117

2,696

34,758

30,309

16,922

5,955

(858)

(831)

(4,117)

(2,696)

11,947

2,428

65

-

-

-

-

-

65

-

9,822

519

-

-

-

-

9,822

519

7,035

5,436

2,060

1,909

(858)

(831)

(4,117)

-

-

(465)

(511)

7,035

5,436

(1,323)

(1,342)

52

38,012

18,052

-

-

198

76

-

-

-

-

-

-

-

38,210

18,128

-

-

101

88,990

96,014

1,092

1,419

32,679

(4,065)

(1,011)

(2,696) (7,994) (10,690)

541

(413) 1,647

(1,034)

(8,505) (6,596)

-

-

38,012

18,052

101

23

299

99

50

-

50

73

38,311

18,201

208

122,761

97,641

(1) The European segment consists of Winstar Satu Mare SRL operating in Romania as well as Hungarian operations which are classified as discontinued operations.

(2) The Corporate segment includes Canadian operations, which are classified as discontinued.

52 | Notes to Consolidated Financial Statements | Winstar

Independent Directors Bruce Libin (Chairman) Former President, Logan International Inc.

Bernard de Combret Former Deputy Chairman Executive Committee, TotalFinaElf S.A.

James O’Connor General Counsel & Corporate Secretary

Third Party Advisors Engineers RPS Energy

Russ Duncan Vice-President, Sky Hunter Exploration Ltd.

Bankers HSBC Bank Canada ABN AMRO Export Development Canada (EDC)

Evgenij Iorich Pala Investments AG

Auditors PricewaterhouseCoopers LLP

Bryan Lawrence Founder & General Partner, Yorktown Partners LLC

Lawyers Stikeman Elliott LLP

Robert Mitchell Former Executive Vice-President, Talisman Energy Inc.

Chief Executive Office Athanor Management Services SA c/o KPMG SA 111, Rue de Lyon P.O. Box 347 1211 Geneva 13, Switzerland T: +41 22 361 14 45 Winstar Hungary Ltd. Hungarian Operations Office: Arany Janos u8 Szolnok 5000 Hungary T: +36 56 514 371 Winstar Tunisia B.V. Tunisian Operations Office: Immeuble Leman Centre 3eme etage Bloc D Rue du Lac Leman Tunis 1053 Tunisia T: +216 71 963 517 Winstar Satu Mare Romanian Operations Centre: 17 CA Rosetti Floor 7, Room 706, 2nd District Bucharest 020011 Romania T: +40 722 647 572 Winstar Resources Ltd. 845, 401 – 9 Ave. SW Calgary, Alberta T2P 3C5 Canada T: 403-205-3722 E: info@winstar.ca W: www.winstar.ca

Christopher Whyte President and Chief Executive Officer, PetroSantander Inc.

Executive Management Charles de Mestral Chief Executive Officer, Director David Monachello President, Director Roger McMechan Executive Vice-President, Director Brad Giblin Chief Financial Officer Mohamed Yaich General Manager, Tunisia Gabor Tihanyi General Manager, Hungary and Romania

Investor Relations David Monachello President, Director T: 403-513-4200 E: dmonachello@winstar.ca

Brad Giblin Chief Financial Officer T: 403-513-4207 E: bgiblin@winstar.ca

Charles de Mestral Chief Executive Officer T: +41 22 361 1445 E: cdemestral@winstar-resources.ch (Note: Mr. de Mestral is based in Europe, in a time zone eight hours ahead of Calgary time)

Corporate Information

Douglas Baker Former Vice-President and Chief Financial Officer, Valiant Energy Inc.

Corporate Secretary

Abbreviations bbl boe

boepd bopd mbbl mboe mcf mcfd mmbbl mmscf

barrel barrel of oil equivalent. A boe is converted on the basis of one barrel of crude oil for 6,000 cubic feet of natural gas (6 Mcf = 1 bbl). This conversion factor is not based on either energy or current prices. barrels of oil equivalent per day barrels of oil per day thousand barrels thousands of barrels of oil equivalent thousand cubic feet thousand cubic feet per day millions of barrels millions of standard cubic feet Winstar | Annual Report 2010 | 53

Winstar Resources Ltd. Suite 845, 401 - 9 Avenue SW Calgary, Alberta Canada T2P 3C5 T: 403-205-3722 F: 403-205-2722

info@winst ar.ca T S X: WIX