WesternZagros 2Q Results

WesternZagros Resources Ltd. (TSX VENTURE:WZR) (“WesternZagros” or “the Company”) provides its results for the period ended June 30, 2010, key highlights, and activities to date.

During the second quarter, the Company continued to drill the Kurdamir-1 well sidetrack. At a depth of 3,214 metres the well encountered high-pressure sour gas which resulted in well control difficulties. Subsequently, the drill string parted and the Company initiated emergency response procedures. The well was safely controlled with no injuries or atmospheric release of gas. Efforts to recover the drill string continue. Kurdamir-1 is the Company’s second exploration well in the Kurdistan Region of Iraq.

Following drill string recovery operations, WesternZagros and its partners will decide whether to conduct further drilling operations in order to test the various potential hydrocarbon bearing zones that include the Shiranish, Kometan, Upper Aaliji and Lower Oligocene formations. Another option is to re-drill the Kurdamir structure, in a location designed to meet the dual objectives of testing the down dip flank oil potential in the the Oligocene reservoir and the oil potential of the deeper Cretaceous targets. A recently completed geochemical study of drill cuttings from the Kurdamir-1 well supports the interpretation that the Oligocene reservoir is oil bearing down dip on the flanks of the Kurdamir structure.

The costs of the well control operations, sidetracking activities and a re-drill of the Kurdamir-1 well (if necessary) are covered by an insurance policy and coverage was confirmed by the insurers during the second quarter. WesternZagros has submitted claims, and payments under the policy are being received as expected.

While proceeding with operations at Kurdamir-1, WesternZagros continued to assess the prospectivity of the Production Sharing Contract (“PSC”) lands. This work has identified additional attractive opportunities, including a new prospect in the Upper Fars reservoir target named Mil Qasim, located close to the Sarqala-1 well (the first exploration well drilled by WesternZagros). While drilling through the Upper Fars interval at Sarqala-1, high quality light oil shows (35 degree API gravity) were encountered, which had not been originally anticipated by WesternZagros. This Upper Fars target at Mil Qasim is considerably shallower than the original target formations in both Sarqala and Kurdamir.

In order to maintain financial and operational flexibility while continuing with Kurdamir-1 and evaluation of multiple future drilling options, WesternZagros is involved in active discussions with its two partners, the Kurdistan Regional Government (“KRG”) and Talisman Block K44 B.V. (“Talisman”), around how to structure and sequence the future activities of the joint venture.

Commenting on the results from the second quarter of 2010, WesternZagros Chief Executive Officer Simon Hatfield said, “While we had anticipated completing the Kurdamir-1 well by this time, we are nonetheless pleased to have brought the well safely under control following the potentially dangerous drill string failure experienced in May. Our current focus is on completing the drill string recovery operations at the well so that we can test the promising oil-bearing zones that we have encountered. We are also in constructive discussions with our co-venturers, as we assess options that will enable us to move ahead on evaluating and drilling the additional prospects identified on our exploration block. In spite of the challenges we have encountered while drilling our first two wells in this under-explored area, we remain highly confident about the prospectivity of the region and optimistic about the potential to discover and produce oil.”

WesternZagros’ highlights and activities for the second quarter of 2010 to August 12, 2010 include the following:

Operations

– WesternZagros drilled a sidetrack at the Kurdamir-1 well during the second quarter, exiting the 9 5/8″ casing at approximately 2,600 metres through the Upper Aaliji Formation into the Lower Aaliji Seal and reached a depth of 3,214 metres on April 25, 2010. At this depth, the well unexpectedly encountered a high pressure, hydrogen sulfide (H2S) bearing, hydrocarbon zone. The well was shut in while attempting to stabilize this zone.

– On May 15, 2010, the drill string parted and the Company activated its Emergency Response Plan and began well control operations. As a precaution, the Company moved non-essential personnel and local inhabitants who were within its Emergency Planning Zone (“EPZ”) to locations outside of the EPZ.

– The Company safely and successfully secured the well on May 31, 2010 and the local residents who had been evacuated were able to return to their homes in early June.

– A hydraulic workover rig, known as a snubbing unit, that enables well intervention to be safely performed while the well is under pressure was installed in June in order to recover the drill string from the well and complete well kill operations. The upper 450 metre portion of the parted drill string was recovered in early July 2010. A further 1655 metres was recovered in early August 2010 with approximately 800 metres remaining in the well bore. The Company is now removing the snubbing unit prior to resuming further well control operations.

– The gross costs for Kurdamir-1 as of June 30, 2010 were approximately $92 million ($55 million net to WesternZagros). These gross costs include approximately $35 million of incremental costs associated with well control and sidetrack activities ($21 million net to WesternZagros). The Company is pursuing reimbursement of a significant portion of these costs under an insurance claim. WesternZagros, as operator, has notified the KRG of a force majeure event under the terms of the PSC related to the well control and subsequent sidetracking operations associated with Kurdamir-1. Under the terms of the PSC, when a force majeure event occurs, the time resulting from any such delay and the time necessary to repair any damage resulting from the delay will be added to the first exploration sub-period.

Exploration

– WesternZagros completed a geochemical study of various drill cuttings from Kurdamir-1 in the Aaliji seal to analyze whether this source rock interval is likely to be generating oil or gas. Results from this study provide further support for the potential of an oil flank in the Oligocene reservoir at Kurdamir, as the source rock was found to be both oil prone and likely to be generating oil present day.

– WesternZagros has completed an evaluation of the Upper Fars interval drilled at Sarqala-1, where high quality light oil shows (35 degree API gravity) were encountered while drilling, and has identified a nearby Upper Fars drilling prospect named Mil Qasim. Mil Qasim is a seismically defined anticline, the crest of which lies approximately three kilometres from the Sarqala-1 well. In order to test this prospect, it would require a well to be drilled to a proposed total depth of 2,400 metres.

– During the second quarter of 2010, WesternZagros completed the majority of the work required to prepare the Qulijan-1 well site, including preparing the drilling site and building roads. However, the Company has suspended further work on Qulijan-1 while its operational efforts are focused on Kurdamir-1 and while discussions are underway with its partners on the sequencing of future drilling.

– WesternZagros continues to compile further seismic data and information from wells on the exploration blocks surrounding its PSC lands. WesternZagros is integrating this new information, along with the reprocessed seismic data from its PSC lands, into its seismic interpretations to further define and update its prospects and lead inventory.

Financial

– As at June 30, 2010, WesternZagros had $54.2 million in working capital.

– WesternZagros’ share of capital expenditures for the six months ended June 30, 2010 associated with its PSC activities and other capitalized costs was $29.4 million, prior to insurance recoveries. Year-to-date expenditures for 2010 include $27.2 million of drilling-related costs; $0.4 million of geological and geosciences related work; $1.3 million of supervision and local office costs; and $0.5 million of corporate-related expenditures. Estimated insurance recoveries of $19.7 million, net of deductibles, were recorded in the second quarter of 2010 related to the year-to-date well recovery costs incurred at Kurdamir-1.

Insurance

– WesternZagros initiated an insurance claim in the first quarter of 2010 related to well control operations at Kurdamir-1, commencing when Kurdamir-1 was drilled into a high pressure formation in the Gulneri seal and continuing with the well control operations related to subsequent additional high pressure zone in the Aaliji seal The Company received confirmation of coverage for the claim from the insurers in the second quarter of 2010.

– As at June 30, 2010, WesternZagros had received $5.4 million in insurance proceeds and had accrued a further receivable of $14.3 million. Subsequent to June 30, 2010, the Company has received an additional $4.0 million in insurance proceeds. The Company continues to submit interim insurance claims as allowable costs are incurred.

– The Company’s maximum limit for the current insurance claim is $45 million, which is expected to cover a substantial portion of the well recovery costs and related sidetrack drilling costs and a portion of the re-drill costs should this prove necessary.

Corporate

– On June 23, 2010, WesternZagros announced Mr. Ian McIntosh, Vice President, Kurdistan Business Unit had assumed the position of acting Senior Vice President, Engineering and Operations on an interim basis following the departure of Mr. Robert Theriault.

– Given the difficulties encountered during drilling operations, in the second quarter WesternZagros undertook a comprehensive review of its operations to determine how to achieve better performance. The Company’s Board of Directors and an external expert led this review, and the resulting recommendations are now being implemented. WesternZagros continues to work closely with Talisman in order to take maximum advantage of its partner’s expertise in operating complex wildcat exploration wells.

Political

– A federal election was held in Iraq on March 7, 2010; however, the government has yet to be formed.

Corporate Social Responsibility

– During the first six months of 2010, WesternZagros and its co-venturers continued to focus on three key corporate social responsibility initiatives in the Garmian region of Kurdistan – water supply, education and health care. Activities during the first half of 2010 included: Extensive local procurement of water tanker services;

– Road repairs and livestock water pit construction for several Garmian villages

– Implementation of the a biosand water filter project with the Kurdistan Village Reconstruction Association; and

– Building of a sports recreation facility.

– When the emergency response plan was activated in May 2010, it required the evacuation of a village near the Kurdamir-1 well. WesternZagros worked closely with local residents to minimize the inconvenience they faced and to ensure their needs were met.

Management’s Discussion and Analysis

The following management’s discussion and analysis (“MD&A”) reviews WesternZagros Resources Ltd.’s (“WesternZagros” or the “Company”) financial condition, activities and results of operations for the period ended June 30, 2010. It should be read in conjunction with the unaudited interim consolidated financial statements for the period ended June 30, 2010, the audited consolidated financial statements for the year ended December 31, 2009 and the related notes. The effective date of this MD&A is August 12, 2010.

Forward-Looking Information

This discussion offers management’s analysis of the financial and operating results of WesternZagros and contains certain forward-looking statements relating, but not limited, to operational information, future drilling plans and testing programs and the timing associated therewith, estimated Production Sharing Contract (“PSC”) commitments, anticipated capital and operating budgets, anticipated insurance recoveries, anticipated working capital and estimated costs. Forward-looking information typically contains statements with words such as “anticipate”, “estimate”, “expect”, “potential”, “could”, or similar words suggesting future outcomes. The Company cautions readers and prospective investors in the Company’s securities to not place undue reliance on forward-looking information as, by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros.

Forward looking information is based on management’s current expectations and assumptions regarding, among other things, outcomes of well control operations (including timing associated therewith), plans for and results of drilling activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), insurance recoveries, future economic conditions, future currency and exchange rates, continued political stability, timely receipt of any necessary government or regulatory approvals, the Company’s continued ability to employ qualified staff and to obtain equipment in a timely and cost efficient manner, the continued participation of the Company’s co-venture partners in exploration activities and the timely receipt of insurance proceeds. In addition, budgets are based upon WesternZagros’ current plans and anticipated costs, both of which are subject to change based on, among other things, the actual outcomes of well control operations and results of drilling activity, unexpected delays and changes in market conditions. Although the Company believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in exploration; inherent uncertainties in interpreting geological data; changes in plans with respect to exploration or capital expenditures; interruptions in operations together with any associated insurance proceedings; denial of any portion of the insurance claims; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity.

Readers are cautioned that the forgoing list of important factors is not exhaustive. The forward-looking statements contained in this MD&A are made as of the date of this MD&A and, except as required by law, WesternZagros does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. See the Risk Factors section of this MD&A for a further description of these risks and uncertainties facing WesternZagros. Additional information relating to WesternZagros is also available on SEDAR at www.sedar.com.

Overview

WesternZagros is a publicly-traded, Calgary-based, international oil and gas company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros holds a PSC with the Kurdistan Regional Government (“KRG”) which covers a 2,120 square kilometre exploration block (the “Kalar – Bawanoor Block” or “PSC lands”) in the Kurdistan Region of Iraq and it is on trend with, and adjacent to, a number of prolific historic oil and gas discoveries. WesternZagros (operator) holds a 40 percent working interest, the KRG holds a 20 percent working interest (carried by WesternZagros) and a wholly-owned subsidiary of Talisman Energy Inc. (“Talisman”) holds the remaining 40 percent working interest.

Basis of Presentation

Reporting and Functional Currency

The reporting and functional currency of the Company is the United States (“U.S.”) dollar. All references herein to US$ or to $ are to United States dollars and references herein to Cdn$ are to Canadian dollars.

Going Concern Uncertainty

The financial data presented below has been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) on the basis that the Company will continue to operate as a going concern, which implies the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from June 30, 2010.

Since inception and typical with development stage companies, the Company has incurred losses from operations and negative cash flows from operating activities, and has an accumulated deficit at June 30, 2010. During the three months ended June 30, 2010, the Company had expenditures of $1.2 million for operating activities and $16 million for oil and gas property expenditures, partially offset by an overall decrease in non-cash working capital of $0.5 million. During the six months ended June 30, 2010, the Company had expenditures of $1.8 million for operating activities and $29.4 million for oil and gas property expenditures, as well as an overall increase in non-cash working capital of $7.1 million. The Company will require additional funding over time to maintain ongoing exploration programs and property commitments, as well as for administration expenses.

There are material uncertainties that could raise significant doubt about the Company’s ability to continue as a going concern, as further outlined below:

Kurdamir-1 Well Recovery Operations:

The Company is currently pursuing ongoing well recovery operations at Kurdamir-1 related to a parted drill string. A negative outcome from these operations, which could potentially result in sidetracking the well or possibly re-drilling the well entirely, would add additional cost and could significantly impact the Company’s ability to access any further financial resources required to meet its Production Sharing Contract (“PSC”) commitments.

Insurance Claim Related To Well Control Operations:

The Company has now received confirmation of coverage from its insurers, which partially mitigates the uncertainty associated with the additional costs of the well recovery operations at Kurdamir-1. However, any unforeseen delays in payment from the insurers could impair the Company’s ability to continue funding ongoing activities under the PSC. In addition, the insurance claim will only cover the Company’s share of allowable costs up to a maximum of $45 million ($75 million gross). If the total costs of the current well recovery operations and any associated sidetracking or re-drilling actitivities exceed the $45 million limit, it could impair the Company’s ability to continue funding ongoing activities under the PSC.

Other Uncertainties

In general, the Company’s ability to continue operations and exploration activities as a going concern is dependent upon its ability to obtain additional funding over time. The consolidated financial statements do not reflect adjustments in the carrying values of assets and liabilities reported, revenue or expenses, nor the balance sheet classification used that would be necessary if the going concern assumption was not appropriate. Such adjustments could be material.

Highlights

WesternZagros is currently exploring for crude oil and natural gas in the Kurdistan Region of Iraq and the Company currently has no reserves or production. WesternZagros’ revenue is comprised entirely of interest earned on cash and cash equivalent balances and short-term investments. WesternZagros’ highlights and activities to August 12, 2010 include the following.

Operations

– WesternZagros drilled a sidetrack at the Kurdamir-1 well during the second quarter, exiting the 9 5/8″ casing at approximately 2,600 metres through the Upper Aaliji Formation into the Lower Aaliji Seal and reached a depth of 3,214 metres on April 25, 2010. At this depth, the well unexpectedly encountered a high pressure, hydrogen sulfide (H2S) bearing, hydrocarbon zone. The well was shut in while attempting to stabilize this zone.

– On May 15, 2010, the drill string parted and the Company activated its Emergency Response Plan and began well control operations. As a precaution, the Company moved non-essential personnel and local inhabitants who were within its Emergency Planning Zone (“EPZ”) to locations outside of the EPZ.

– The Company safely and successfully secured the well on May 31, 2010 and the local residents who had been evacuated were able to return to their homes in early June.

– A hydraulic workover rig, known as a snubbing unit, that enables well intervention to be safely performed while the well is under pressure was installed in June in order to recover the drill string from the well and complete well kill operations. The upper 450 metre portion of the parted drill string was recovered in early July 2010. A further 1655 metres was recovered in early August 2010 with approximately 800 metres remaining in the well bore. The Company is now removing the snubbing unit prior to resuming further well control operations.

– The gross costs for Kurdamir-1 as of June 30, 2010 were approximately $92 million ($55 million net to WesternZagros). These gross costs include approximately $35 million of incremental costs associated with well control and sidetrack activities ($21 million net to WesternZagros). The Company is pursuing reimbursement of a significant portion of these costs under an insurance claim. WesternZagros, as operator, has notified the KRG of a force majeure event under the terms of the PSC related to the well control and subsequent sidetracking operations associated with Kurdamir-1. Under the terms of the PSC, when a force majeure event occurs, the time resulting from any such delay and the time necessary to repair any damage resulting from the delay will be added to the first exploration sub-period.

Exploration

– WesternZagros completed a geochemical study of various drill cuttings from Kurdamir-1 in the Aaliji seal to analyze whether this source rock interval is likely to be generating oil or gas. Results from this study provide further support for the potential of an oil flank in the Oligocene reservoir at Kurdamir, as the source rock was found to be both oil prone and likely to be generating oil present day.

– WesternZagros has completed an evaluation of the Upper Fars interval drilled at Sarqala-1, where high quality light oil shows (35 degree API gravity) were encountered while drilling, and has identified a nearby Upper Fars drilling prospect named Mil Qasim. Mil Qasim is a seismically defined anticline, the crest of which lies approximately three kilometres from the Sarqala-1 well. In order to test this prospect, it would require a well to be drilled to a proposed total depth of 2,400 metres.

– During the second quarter of 2010, WesternZagros completed the majority of the work required to prepare the Qulijan-1 well site, including preparing the drilling site and building roads. However, the Company has suspended further work on Qulijan-1 while its operational efforts are focused on Kurdamir-1 and while discussions are underway with its partners on the sequencing of future drilling.

– WesternZagros continues to compile further seismic data and information from wells on the exploration blocks surrounding its PSC lands. WesternZagros is integrating this new information, along with the reprocessed seismic data from its PSC lands, into its seismic interpretations to further define and update its prospects and lead inventory.

Financial

– As at June 30, 2010, WesternZagros had $54.2 million in working capital.

– WesternZagros’ share of capital expenditures for the six months ended June 30, 2010 associated with its PSC activities and other capitalized costs was $29.4 million, prior to insurance recoveries. Year-to-date expenditures for 2010 include $27.2 million of drilling-related costs; $0.4 million of geological and geosciences related work; $1.3 million of supervision and local office costs; and $0.5 million of corporate-related expenditures. Estimated insurance recoveries of $19.7 million, net of deductibles, were recorded in the second quarter of 2010 related to the year-to-date well recovery costs incurred at Kurdamir-1.

Insurance

– WesternZagros initiated an insurance claim in the first quarter of 2010 related to well control operations at Kurdamir-1, commencing when Kurdamir-1 was drilled into a high pressure formation in the Gulneri seal and continuing with the well control operations related to subsequent additional high pressure zone in the Aaliji seal The Company received confirmation of coverage for the claim from the insurers in the second quarter of 2010.

– As at June 30, 2010, WesternZagros had received $5.4 million in insurance proceeds and had accrued a further receivable of $14.3 million. Subsequent to June 30, 2010, the Company has received an additional $4.0 million in insurance proceeds. The Company continues to submit interim insurance claims as allowable costs are incurred.

– The Company’s maximum limit for the current insurance claim is $45 million, which is expected to cover a substantial portion of the well recovery costs and related sidetrack drilling costs and a portion of the re-drill costs should this prove necessary.

Corporate

– On June 23, 2010, WesternZagros announced Mr. Ian McIntosh, Vice President, Kurdistan Business Unit had assumed the position of acting Senior Vice President, Engineering and Operations on an interim basis following the departure of Mr. Robert Theriault.

– Given the difficulties encountered during drilling operations, in the second quarter WesternZagros undertook a comprehensive review of its operations to determine how to achieve better performance. The Company’s Board of Directors and an external expert led this review, and the resulting recommendations are now being implemented. WesternZagros continues to work closely with Talisman in order to take maximum advantage of its partner’s expertise in operating complex wildcat exploration wells.

Political

– A federal election was held in Iraq on March 7, 2010; however, the government has yet to be formed.

Corporate Social Responsibility

– During the first six months of 2010, WesternZagros and its co-venturers continued to focus on three key corporate social responsibility initiatives in the Garmian region of Kurdistan – water supply, education and health care. Activities during the first half of 2010 included: Extensive local procurement of water tanker services;

– Road repairs and livestock water pit construction for several Garmian villages

– Implementation of the a biosand water filter project with the Kurdistan Village Reconstruction Association; and

– Building of a sports recreation facility.

– When the emergency response plan was activated in May 2010, it required the evacuation of a village near the Kurdamir-1 well, WesternZagros worked closely with local residents to minimize the inconvenience they faced and to ensure their needs were met.

General and Administrative Expenses

For the three and six month periods ended June 30, 2010 WesternZagros incurred $1.6 million and $3.0 million in general and administrative expenses (“G&A”), respectively, compared to $1.2 million and $2.5 for the comparable periods in the prior year. G&A expenses were higher in the comparative periods of 2010 due to the stronger Canadian dollar compared to 2009, which impacts a large portion of the Company’s G&A expenditures. As well, a lower proportion of G&A support costs were allocated to capital projects in the second quarter of 2010 as compared to 2009.

Depreciation, Depletion and Amortization (DD&A)

For the three and six month periods ended June 30, 2010, WesternZagros had $0.1 and $0.3 million, respectively, of depreciation related to certain administrative assets (2008: $0.2 and $0.4 million). No depletion on oil and gas related assets is recorded because WesternZagros has yet to determine whether proved reserves are attributable to the PSC lands.

Stock-Based Compensation

The Company recognizes stock-based compensation expense for all stock options granted, with a corresponding increase to contributed surplus. For the three months ended June 30, 2010, WesternZagros had $0.4 million of stock-based compensation expense included in G&A and $0.1 million in capitalized G&A, and for the six months ended June 30, 2010, had $0.5 million of expense and $0.6 million in capitalized G&A. In comparison WesternZagros had $0.4 million of stock-based compensation expense included in G&A and $0.2 million in capitalized G&A for the three month period ended June 30, 2009, and had $0.8 million of expense and $0.5 million in capitalized G&A for the six month period ending June 30, 2009.

Foreign Exchange

WesternZagros adopted the U.S. dollar as its measurement and reporting currency, because the majority of its expenses are, or will be, directly or indirectly denominated in U.S. dollars, and also to facilitate a more direct comparison to other international crude oil and natural gas exploration and development companies. WesternZagros holds over 95 percent of its cash and cash equivalents and short-term investments in U.S. dollar accounts and U.S. dollar-priced Government of Canada bonds; however, the Company has certain assets and liabilities in currencies other than the U.S. dollar, mainly Canadian dollars. These are converted to U.S. dollars at the end of each period resulting in foreign exchange gains and losses. The Canadian dollar balances are held for the purpose of funding WesternZagros’ Canadian dollar expenditures, which are mainly related to G&A costs for its head office and certain drilling-related services and tangibles procured from Canadian suppliers. In the second quarter of 2010, WesternZagros recorded a foreign exchange loss of $0.2 million compared to a foreign exchange loss of $0.01 million in the second quarter of 2009 relating to these conversions. In the six months ended June 30, 2010, WesternZagros recorded a foreign exchange loss of $0.2 million compared to a foreign exchange gain of $0.05 million for the six months ended June 30, 2009.

Income Taxes

For the three month period ended June 30, 2010, WesternZagros had an income tax recovery of $0.1 million (2009: $0.06 million expense), comprised of $0.2 million of current income tax recovery and reduced by $0.1 million of future income tax expense. For the six month period ended June 30, 2010, WesternZagros had an income tax recovery of $0.8 million (2009: $0.9 million recovery), made up of $0.9 million of current income tax recovery and reduced by $0.1 million of future income tax expense. The current tax recovery relates to the expected recovery of taxes incurred in 2008 on realized foreign exchange gains and losses in WesternZagros’ wholly-owned Canadian subsidiary. The tax recovery uses the associated G&A costs incurred by and related tax pools available in the subsidiaries. The future income tax expense results from the utilization of share issuance costs in the current year to recover a portion of the current income tax expense. WesternZagros anticipates recovering the majority of the current income tax expense incurred in 2008 as it continues to incur G&A and other expenditures related to its exploration and financing activities.

Revenue

WesternZagros’ revenue is comprised entirely of interest earned on cash and cash equivalents. Interest of $0.017 million was earned in the second quarter of 2010 compared to $0.035 million in the second quarter of 2009. For the six month period ending June 30, 2010 WesternZagros earned $0.036 million of interest, compared to $0.116 million in the six months ended June 30, 2009. The decrease in interest income during 2010, versus the comparative periods in 2009, is mainly due to the decreased balances of cash and cash equivalents.

Net Loss

For the three month period ended June 30, 2010, WesternZagros had a net loss of $1.7 million compared to a net loss of $1.4 million in the second quarter of 2009. The increased net loss was mainly due to increased G&A costs associated with the stronger Canadian dollar and a lower proportion of support costs allocated to capital projects, as well as greater foreign exchange losses, but was partially offet by increased tax recoveries during the second quarter of 2010 as compared to the same quarter of 2009. For the six month period ended June 30, 2010, WesternZagros recorded a net loss of $2.7 million as compared to a $1.7 million loss in the corresponding period of 2009. This was due to increased G&A costs and foreign exchange losses as well as slightly lower tax recoveries in the current year.

Capital Expenditures

For the three month period ended June 30, 2010, total capital expenditures on the Kalar-Bawanoor Block were $25.3 million, including $23.5 million for drilling and related operations, $0.4 million of geological and geosciences related work (reprocessing and interpretation of seismic data), and $1.4 million for supervision and local office costs in support of drilling operations. Included in drilling and related operations during the second quarter of 2010 were $21.3 million for operations at Kurdamir-1 and $2.2 million for site construction, planning costs and long lead items for Qulijan-1, (which was formerly named the Sarhad prospect).

WesternZagros’ share of capital expenditures for the three months ended June 30, 2010 associated with its PSC activities and other capitalized costs was $16.0 million, prior to any insurance recoveries. Expenditures during the second quarter of 2010 include $14.8 million of drilling-related costs; $0.3 million of geological and geosciences related work; $0.7 million of supervision and local office costs; and $0.2 million of corporate-related expenditures. By comparison, WesternZagros’ share of capital expenditures in the second quarter of 2009 was $14.8 million, which included $11.6 million of costs related to Kurdamir-1 and $0.6 million of supervision and local office costs in support of drilling operations, $1.5 million for Sarqala-1, and $1.1 million for long-lead items and other tangibles for subsequent wells and consumables for testing operations.

For the six month period ended June 30, 2010, total capital expenditures on the Kalar-Bawanoor Block were $46.8 million, prior to any insurance recoveries, compared to $31.7 million for the comparable period in 2009. WesternZagros’ share of capital expenditures for the six months ended June 30, 2010 associated with its PSC activities and other capitalized costs was $29.4 million, prior to recovery of insurance proceeds. Year-to-date expenditures for 2010 include $27.2 million of drilling-related costs; $0.4 million of geological and geosciences related work; $1.3 million of supervision and local office costs; and $0.5 million of corporate-related expenditures.

For the six month period ended June 30, 2010, the costs for Kurdamir-1 have been credited by approximately $19.7 million, net to WesternZagros, for estimated claimable costs under the current insurance claim. This amount is net of deductibles.

WesternZagros capitalized $1.6 million in G&A expenses (2009: $1.4 million), including $0.6 million of stock-based compensation costs (2009: $0.5 million), directly related to exploration activities for the six months ended June 30, 2010.

Production Sharing Contract – Summary

Under the terms of its PSC, WesternZagros has a 40 percent working interest and the KRG has a 20 percent interest in the PSC which is carried by WesternZagros. The remaining 40 percent was allocated to Talisman in June 2008 by the KRG. WesternZagros, the KRG and Talisman are collectively the “Contractor Group” under the PSC. WesternZagros is the operator of the PSC lands until the end of the first operating sub-period of the PSC, when a Joint Operating Company may be established if so elected by the Contractor Group.

Production Sharing Contract – Commercial Terms

Under the PSC, the sharing of oil occurs as follows: of the total oil produced, operations oil is available to WesternZagros for use in carrying out its obligations under the PSC; the remaining oil is subject to a 10 percent royalty payable to the KRG (the residual is considered to be “net available oil”). The net available oil is determined on a development by development basis. Up to 45 percent of the net available oil is available for cost recovery, with the remainder as “profit oil.” Expenses eligible for cost recovery include all costs and expenditures incurred by the Contractor Group for exploration, development, production and decommissioning operations, as well as any other costs and expenditures incurred directly or indirectly with these activities. The portion of profit oil available to the Contractor Group is based on a sliding scale from 35 percent to 16 percent, depending on a calculated R-Factor. The R-Factor is established by reference to the ratio of cumulative revenues over cumulative costs. When the ratio is below one, the Contractor Group is entitled to 35 percent of the profit oil. The percentage is then reduced on a linear sliding scale to a minimum of 16 percent at an R-Factor ratio of two or greater.

The production sharing terms for natural gas are the same as the oil production sharing terms except that the net available gas available for cost recovery is 55 percent and the profit sharing component percentages and the R-Factor levels are increased. For natural gas, the portion of profit natural gas available for the Contractor Group is based on a sliding scale from 40 percent to 20 percent depending on a calculated R-factor. The R-Factor is established by reference to the ratio of the Contractor Group’s cumulative revenue over cumulative costs. When the R-Factor is below one, the Contractor Group is entitled to 40 percent of the profit oil. The Contractor Group’s percentage is then reduced on a linear scale to a minimum of 20 percent at a ratio of 2.75 or greater.

Production

Pursuant to the terms of the PSC, WesternZagros maintains the right to market its share of oil on the world market. There is an obligation under the PSC to make oil production available to meet regional market demand. The price of such oil is a market-based oil price based on a basket of crudes. The price for natural gas is based on local commercial value and Iraq tariffs. Currently, no markets exist for natural gas within Iraq and there is no infrastructure for export.

Contract Obligations and Commitments

The PSC contemplates two exploration sub-periods of three years and two years, respectively, with two possible one-year extensions. The first exploration sub-period ends December 31, 2010. During the first sub-period, the Contractor Group is required to complete a minimum of 1,150 kilometres of seismic surveying (which has been completed), to drill three exploration wells, and to commit a minimum of $75 million in the aggregate on these activities. At the end of the first exploration sub-period, WesternZagros and the other parties to the PSC may relinquish the entire contract area (other than any discovery or development areas), continue further exploration operations by entering into the second exploration sub-period, or request a one-year extension for further exploration and appraisal activities prior to deciding to enter into the second exploration sub-period.

The PSC also includes capacity-building support payments, which concluded in April 2009, and annual funding for certain technological, logistical, recruitment and training support during the exploration sub-periods. To meet its remaining commitments for the first exploration sub-period, WesternZagros estimates expenditures of approximately $25 million to $30 million, excluding the costs associated with future activities at Kurdamir-1. Additional costs of any testing, if required, would be in addition to these amounts. This represents the Company’s 60 percent funding requirement and includes the remaining costs associated with drilling one additional exploration commitment well by the end of the first exploration sub-period, and providing associated supervision and local office support.

WesternZagros, on behalf of the Contractor Group, has applied to the KRG to extend the first exploration sub-period for up to 12 months, i.e. to December 31, 2011, in order to allow sufficient time for drilling the flank of the Kurdamir structure to determine whether the downdip Oligocene Reservoir is oil bearing or gas-condensate bearing. The Company, on behalf of the Contractor Group, has also notified the KRG of a force majeure event under the terms of the PSC. See “Force Majeure” and “Outlook” sections in this MD&A for further information.

To ensure that adequate time is available to complete operations at Kurdamir-1, to make efficient use of limited capital, and to optimize the chances of success on the next well, WesternZagros is in active discussions with its partners, the KRG and Talisman. The three partners share the objectives of completing a well and finding oil on the Kurdamir prospect, enabling further exploration on the Kalar-Bawanoor block, and encouraging additional industry interest in Kurdistan. WesternZagros management is therefore optimistic that it will be possible to find a creative solution that will allow the Company’s the amount of time required to complete future exploration activities.

During the second exploration sub-period, the Contractor Group, or those parties that have elected to participate in further exploration, are required to complete a minimum of 575 kilometres of seismic surveying, drill at least two exploration wells and commit a minimum of $35 million to these activities. At the end of the second exploration sub-period, WesternZagros, and the other parties to the PSC who have elected to participate in the second exploration sub-period, may relinquish the entire contract area (other than any discovery or development areas) or continue further exploration and appraisal operations into the extension periods subject to the following relinquishment requirements. At the end of the second exploration sub-period, and at the end of each subsequent extension period, the PSC requires WesternZagros, and other parties who have elected to participate, to relinquish 25 percent of the remaining undeveloped area within the PSC lands or the entire contract area (other than any discovery or development areas).

WesternZagros has entered into various exploration-related contracts, including contracts for drilling equipment, services and tangibles. The following table summarizes these contractual obligations as at June 30, 2010.

                                       For the period ended December 31

($ 000's)                         2010   2011   2012   2013   2014+   Total
----------------------------------------------------------------------------
Exploration                      4,532      -      -      -      -    4,532
Office                             255    480    160      -      -      895
----------------------------------------------------------------------------
Total                            4,787    480    160      -      -    5,427
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The exploration commitments at June 30, 2010 have increased compared to prior periods due to increased activity relating to the ongoing well recovery operations. The Company expects to recover a substantial portion of these costs under the insurance claim.

Third Party Obligations and Commitments

In 2003, WesternZagros entered into a consulting service agreement that provides for a three percent right to indirectly participate in the future profits the Company may earn in respect to the PSC, in exchange for consulting services provided since that date. In the determination of profits under this agreement, WesternZagros is entitled to deduct the consultant’s proportional share of all costs associated with acquiring the PSC and the exploration, appraisal, development and production expenditures incurred by the Corporation (“eligible costs”), together with interest on such percentage of eligible costs at LIBOR plus three percent.

Further in 2004, WesternZagros entered into a consulting service agreement that provides for a two percent right to indirectly participate in the future profits the Corporation may earn in respect to the PSC, in exchange for the provision of consulting services during the period 2004 to 2006. In the determination of profits under this agreement, WesternZagros is entitled to deduct one percent of all eligible costs, together with interest on such percentage of eligible costs at LIBOR plus ten percent. The consultant is required to fund the additional one percent of all eligible costs.

Off Balance Sheet Arrangement

The Company does not presently utilize any off-balance sheet arrangements to enhance its liquidity and capital resource positions, or for any other purpose. During the period ended June 30, 2010, WesternZagros did not enter into any off-balance sheet transactions.

Related Party Transactions

Included in accounts receivable is a loan to a senior officer of $0.2 million, the loan is non-interest bearing and was to mature on December 31, 2010. The original transaction was recorded at the exchange amount, which is the amount of consideration established and agreed to by the related party. This loan was fully repaid subsequent to June 30, 2010.

Insurance Claim Update

WesternZagros has initiated an insurance claim related to the cost of well control operations at Kurdamir-1, including those when Kurdamir-1 was drilled into a high pressure formation in the Gulneri seal and the subsequent high pressure zone encountered in the Lower Aaliji seal in the subsequent sidetrack. The control of well insurance policy covering these claims has a net aggregate limit to WesternZagros of $45 million with a $0.4 million deductible.

During the second quarter of 2010, WesternZagros received the Comprehensive Report prepared by the insurance adjuster and which was been submitted to the insurers. The Comprehensive Report included a request for the first interim payment on account of $5.7 million net to WesternZagros, after consideration of deductibles representing the costs incurred, paid and submitted to the adjuster as of that date for well control operations and subsequent sidetracking. As at June 30, 2010, WesternZagros had received $5.4 million related to the first interim payment and has subsequently received the remaining $0.3 million. Further claimable costs of $14.3 million, net to WesternZagros, have been recorded as a receivable as at June 30, 2010. These costs, under the terms of the insurance policy, are subject to review and approval by the adjuster appointed by the insurers, and are submitted by WesternZagros as they are incurred and paid. Subsequently, WesternZagros has submitted further claims totalling $6.7 million and to date has received a further $3.7 million.

WesternZagros anticipates that the proceeds of this claim will cover a significant portion of the well control and sidetrack drilling costs that have been and will be incurred. WesternZagros continues to prepare the required submissions to the adjuster for further interim payments on account as the costs incurred are paid. The insurance policy covers re-drill of the well if required. A separate well control insurance policy is in place for the third commitment well.

Force Majeure

WesternZagros, on behalf of the Contractor Group, has notified the KRG of a force majeure event under the terms of the PSC related to the well control and subsequent sidetracking operations associated with Kurdamir-1. Under the terms of the PSC, when a force majeure event occurs, the time resulting from any such delay and the time necessary to repair any damage resulting from the delay will be added to the first exploration sub-period. The period of force majeure started on January 22, 2010 and continues to date.

Outlook

In spite of the challenges that WesternZagros has encountered while drilling its first two wells in the Kurdistan Region of Iraq, management remains confident about the prospectivity of the region and optimistic about the potential to discover and produce oil. However, the delays encountered at the Kurdamir-1 well have introduced an element of timing pressure to WesternZagros’ forward plans. The PSC requires the Company to drill its third exploration commitment well by the end of 2010, although the force majeure event extends the time period provided under the first exploration sub-period. The force majeure event commenced on January 22, 2010 and continues to date.

To ensure that adequate time is available to complete operations at Kurdamir-1, to make efficient use of limited capital, and to optimize the chances of success on the next well, WesternZagros is in active discussions with its partners, the KRG and Talisman. The three partners share the objectives of completing a well and finding oil on the Kurdamir prospect, enabling further exploration on the Kalar-Bawanoor block, and encouraging additional industry interest in Kurdistan. WesternZagros management is therefore optimistic that it will be possible to find a creative solution that will allow the Company’s the amount of time required to complete future exploration activities.

While proceeding with operations at Kurdamir-1, WesternZagros has also continued to analyze the petroleum prospectivity of the other parts of the PSC lands. This activity has identified an additional prospects, close to the first exploration well drilled by WesternZagros at Sarqala-1. This prospect, named Mil Qasim, is shallower and considerably less complex than other prospects.

With the objective of maximizing optionality and flexibility to increase the likelihood of success, WesternZagros’ priorities for the remainder of 2010 are now as follows:

– Having successfully overcome the emergency situation at the Kurdamir-1 well and minimized the risk to human safety, the focus is on recovering the remaining drill string and achieving a successful test of the Aaliji and lower Oligocene formations. The oil shows encountered in these formations while drilling are encouraging, and a test is required to establish whether commercial quantities of hydrocarbons are present.

– WesternZagros is currently in active discussions with the KRG and Talisman, in order to seek a conclusion that gives the Company flexibility around the timing of the third commitment well, to ensure efficient use of capital and an orderly progression of drilling and other exploration activity.

– The decision on whether or not to drill forward at Kurdamir-1 to attempt to reach the Shiranish and Kometan reservoir will depend on the condition of the well-bore following the recovery of the remaining drill string and several other factors. Other options include a new well on the same site (a re-drill is covered by the insurance policy), or a well to test the flanks of the Kurdamir structure.

Because the Kurdamir-1 operations have yet to be completed and decisions on the next well still pending, the letter of intent that had been signed to secure a drilling rig for the Qulijan-1 well has been cancelled. The decision on the next well to be drilled will depend on the results at Kurdamir-1 and the outcome of the discussions with the joint venture partners.

WesternZagros estimates its share of expenditures for the remainder of 2010 to be between $17 million and $24 million after insurance proceeds. This range includes $21 million of costs for the continued drilling operations at Kurdamir 1, of which $18 million is estimated to be recoverable from insurance, leaving a net cost to the Company of $3 million. The remainder of the costs include approximately $10 to $15 million for the next exploration well, with the balance associated with various other support costs.

Liquidity and Capital Resources

WesternZagros is currently exploring for crude oil and natural gas in the Kurdistan Region of Iraq and currently has no reserves, production or operational cash flows. WesternZagros’ revenue is comprised entirely of interest earned on cash and cash equivalent balances. WesternZagros invests its cash and cash equivalents with major Canadian financial institutions with investment grade credit ratings and in Government of Canada instruments. This is in accordance with an Investment Policy approved by the Board of Directors. WesternZagros had no outstanding bank debt or other interest-bearing indebtedness as at June 30, 2010.

At June 30, 2010, WesternZagros had $54.2 million in working capital. Management currently expects to use this balance to fund future capital expenditures described in the “Outlook” section. WesternZagros is considering the proper timing to access further financial resources, including assessing the following factors:

– The outcome of well control operations at Kurdamir-1, and ability to continue drilling Kurdamir-1 to the Shiranish and Kometan formations;

– The opportunity to conduct cased hole testing operations at Kurdamir-1 in the Shiranish, Kometan, Upper Aaliji and Lower Oligocene Formations, if well control and subsequent drilling operations are successful;

– The conclusion of discussions with both the KRG and Talisman as it relates to the PSC and associated timing of work commitments;

– Continued reimbursement of costs under the insurance claim;

– Continued participation of the Company’s co-venturers in the PSC activities;

– Capital and operating budgets, including the budget for commencing drilling activities on the third exploration commitment well;

– The completion of the recent federal election process in Iraq and naming of a President, Prime Minister and federal cabinet;

– The status of the Federal Petroleum Law of Iraq and the ability to export oil and natural gas from the Kurdistan Region of Iraq in accordance with the economic terms under the PSC; and

– The current conditions in the financial markets, including the potential for further market instability.

Given the well control operations, the potential for further market instability and the continued delays in concluding the Federal Petroleum Law of Iraq, WesternZagros will seek to maintain financial flexibility and will monitor and assess its financing requirements and its ability to access additional financing as its exploration activities progress. Any significant delay in collecting amounts under its insurance claims, problems with the well control operations that increase the costs of Kurdamir-1, or a decision to re-drill the Cretaceous intervals at Kurdamir in a separate well, would require WesternZagros to secure additional financial resources to complete its future activities, including drilling the third exploration commitment well and any further testing program in either Kurdamir-1, a re-drill or Kurdamir, or the third exploration commitment well. WesternZagros will also require additional financial resources over time to complete an appraisal program, and ultimately any development program, that is warranted by discoveries at Kurdamir-1 or subsequent wells.

Future global economic events and conditions may result in further volatility in the financial markets which, in turn, could negatively impact WesternZagros’ ability to access equity or debt markets over time. In addition, the results of the Company’s exploration activities or any prolonged delay in the export of oil from the Kurdistan Region of Iraq in accordance with the economic terms under the PSC could negatively impact the future ability to access equity or debt markets. Any inability to access the equity or debt markets for sufficient capital, at acceptable terms and within required timeframes, could have a material adverse effect on WesternZagros’ financial condition, results of operations and prospects.

Outstanding Share Data

As at June 30, 2010, there were 207,464,320 shares issued and outstanding. The number of common shares reserved for issuance pursuant to options granted will not exceed 10 percent of the issued and outstanding common shares. For the six month period ended June 30, 2010, 28,000 stock options were granted to employees and 608,334 forfeited by employees bringing the total stock options outstanding as of June 30, 2010 to 12,484,000.

Supplemental Quarterly Information

The following tables summarizes the key financial information on a quarterly basis for the periods indicated.

($ thousands, unless                  June 30   March 31   Dec 31   Sept 30
 otherwise indicated)                    2010       2010     2009      2009
----------------------------------------------------------------------------
Revenue                                    17         19       32        36

Net Loss                                1,720      1,006    1,035     2,712

Net Loss per Share (US$/share)
 (Basic and Fully Diluted)              0.008      0.005    0.005     0.013

Capital Expenditures                   16,041     13,334   11,250    11,456

Total Assets                          236,006    235,977  241,077   241,600

Total Long-term Liabilities               207        178      175       171

Dividend (US$ per share)                  Nil        Nil      Nil       Nil
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($ thousands, unless                  June 30   March 31   Dec 31   Sept 30
 otherwise indicated)                    2009       2009     2008      2008
----------------------------------------------------------------------------
Revenue                                    35         81      495       867

Net Loss                                1,404        340    6,653       984

Net Loss per Share (US$/share)
 (Basic and Fully Diluted)              0.006      0.002    0.030     0.005

Capital Expenditures                   14,796     16,854   20,339    20,531

Total Assets                          241,171    239,288  243,697   248,919

Total Long-term Liabilities               197         71       69        68

Dividend (US$ per Share)                  Nil        Nil      Nil       Nil
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Risk Factors

The risks factors that could influence actual results have not changed since the 2009 Annual Report and Annual Information Form including the risk that WesternZagros’ ability to access the equity or debt markets in the future may be affected by further drilling challenges and related increases to exploration well costs. The financial market instability seen in the first half of 2010 may impact WesternZagros’ ability, and that of other exploration and development companies, to access equity or debt markets at all or with acceptable terms. For future capital requirements beyond the Company’s current financing capability, which consists of its cash and cash equivalents balances at June 30, 2010, risks associated with the global economic conditions have increased. The inability to access the equity or debt markets for sufficient capital, at acceptable terms and within required time frames, could have a material adverse effect on WesternZagros’ financial condition, results of operations and prospects.

An investment in WesternZagros should be considered highly speculative due to the nature of its activities, the present stage of its development, the need for continued participation of the Company’s co-venturers in the PSC activities and its need for additional financing in the future for any acquisition, exploration, development and production of oil and gas reserves beyond current funding levels. WesternZagros’ risk factors include, but are not limited to, all the risks normally incidental to the exploration, development and operation of crude oil and natural gas properties and the drilling of crude oil and natural gas wells, including geological risk, encountering unexpected formations or pressures, potential environment damage, blow-outs, fires and spills, all of which could result in personal injuries, loss of life and damage to property of WesternZagros and others; premature declines of reservoirs; environment risks; delay or changes in plans with respect to exploration or development projects or capital expenditures; the ability to attract key personnel; the risk of commodity price and foreign exchange rate fluctuations.

All of WesternZagros’ assets are located in the Kurdistan Region of Iraq. As such, WesternZagros is subject to political, economic, and other uncertainties, including, but not limited to, the uncertainty of negotiating with foreign governments, expropriation of property without fair compensation, adverse determinations or rulings by governmental authorities, changes in energy policies or the personnel administering them, nationalization, currency fluctuations and devaluations, disputes between various levels of authorities, arbitrating and enforcing claims against entities that may claim sovereignty, authorities claiming jurisdiction, potential implementation of exchange controls, royalty and government take increases and other risks arising out of foreign governmental sovereignty over the areas in which WesternZagros’ operations are conducted, as well as risks of loss due to civil strife, acts of war, guerrilla activities and insurrections. WesternZagros’ operations may be adversely affected by changes in government policies and legislation or social instability and other factors which are not within the control of WesternZagros including, among other things, adverse legislation in Iraq and/or the Kurdistan Region, a change in crude oil or natural gas pricing policy, the risks of war, terrorism, abduction, expropriation, nationalization, renegotiation or nullification of existing concessions and contracts, taxation policies, economic sanctions, the imposition of specific drilling obligations and the development and abandonment of fields.

For a complete list of risk factors please refer to Company’s Annual Information Form, which is available at www.westernzagros.com or on SEDAR at www.sedar.com.

Future Accounting Pronouncements

International Financial Reporting Standards (“IFRS”)

In February 2008, the Accounting Standards Board confirmed that all Canadian publicly accountable enterprises will be required to adopt IFRS for interim and annual reporting purposes for fiscal years beginning on or after January 1, 2011. WesternZagros has performed its preliminary review on the accounting policy choices upon its conversion to IFRS for the fiscal year beginning on January 1, 2011. The implementation of IFRS 6 “Exploration for and Evaluation of Mineral Resources” (“IFRS 6”) is expected to have the most significance to the Company’s results of operations, financial position and disclosures.

WesternZagros currently utilizes the full cost method for accounting for its exploration activities in the Kurdistan Region of Iraq under Canadian GAAP. Under the full cost method, all costs associated with the acquisition of, exploration for and the development of crude oil and natural gas, including asset retirement obligations, are capitalized and accumulated within cost centres on a country-by-country basis. Such costs include land acquisition, geological and geophysical activity, drilling and testing of productive and non-productive wells, carrying costs directly related to unproved properties, major development projects and administrative costs directly related to exploration and development activities. As WesternZagros is only currently operating in the Kurdistan Region of Iraq and has only one PSC in that region, it has capitalized all costs associated with those exploration activities, including certain costs incurred prior to entering into the PSC.

Under Canadian GAAP, amounts capitalized under the full cost method are reviewed for impairment whenever events or conditions indicate that their net carrying amount may not be recoverable from estimated future cash flows. If an impairment is identified, the assets are written down to the estimated fair market value. The calculation of these future cash flows is dependent on a number of estimates, which include reserves, timing of production, crude oil price, operating cost estimates and foreign exchange rates.

Upon conversion to IFRS, WesternZagros will be required to adopt IFRS 6, which is the standard that deals with accounting for exploration and evaluation (“E&E”) assets in the extractive industries. Typical costs included in the E&E assets are acquisition of rights to explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling, and activities in relation to evaluating the technical feasibility and commercial viability of extracting mineral resources. Under IFRS 6, costs incurred prior to the legal rights to explore an area being obtained may no longer be capitalized within E&E assets and requires that upon initial recognition E&E assets should be measured at cost.

IFRS 6 allows either of two alternatives to be chosen as the accounting policy for E&E assets after initial recognition. The first alternative is the “cost model” whereby the item is carried at cost less impairment. The other alternative is the “revaluation model.” The revaluation model requires that, after initial recognition, an asset whose fair value can be reliably measured should be carried at a re-valued amount, being fair value at the date of measurement, less any subsequent accumulated depreciation or accumulated impairment losses. For the purpose of completing an impairment test under IFRS 6, the E&E assets must be allocated to specific cash-generating units (CGUs). The level of grouping of CGUs for impairment testing purpose is based on how management makes decisions about continuing/disposing of assets and operations and the commercial terms associated with these assets and operations.

In July 2009, the International Accounting Standards Board (“IASB”) approved additional exemptions that will allow entities to allocate their oil and gas asset balances as determined under full cost accounting to the IFRS categories of exploration and evaluation assets and development and producing properties. Under the exemption, exploration and evaluation assets are measured at the amount determined under an entity’s previous GAAP. This exemption will relieve entities from significant adjustments resulting from retrospective adoption of IFRS. The Company currently intends to utilize this exemption. The Company is also evaluating other first-time adoption exemptions and elections available upon initial transition that provide relief from retrospective application of IFRS.

The Company continues to focus on analyzing and developing implementation strategies and processes for the key IFRS transition issues identified. Where applicable, key IFRS transition alternatives are being considered and evaluated. The Company continues to perform preliminary accounting assessments on IFRS transition issues and has commenced analysis of IFRS financial statement presentation and disclosure requirements. These assessments will be further analyzed and evaluated throughout the implementation phase of the Company’s project. At this time, the impact on the Company’s financial position and results of operations is not reliably determinable or estimable.

A detailed implementation plan and timeline has been developed, which also includes the development of a training plan and the resources required to complete the conversion. The project team is working on the design, planning and implementation phases, which includes determining the specific qualitative and quantitative impacts for each IFRS requirement that is relevant to the Company and anticipates completion of this prior to the issuance of the Company’s December 31, 2010 consolidated financial statements.

INTERIM CONSOLIDATED BALANCE SHEETS
(United States dollars thousands)
(Unaudited)

                                                     June 30,   December 31,
                                                        2010           2009
----------------------------------------------------------------------------
Assets
Current Assets
 Cash and Cash Equivalents                        $   43,769      $  76,708
 Accounts Receivable (note 14)                         8,565          6,880
 Insurance Recoveries Receivable (note 4)             14,307              -
 Prepaid Expenses                                        395            183
 Income Tax Recoverable                                2,044          1,738
 Future Income Taxes (note 7)                            153            231
----------------------------------------------------------------------------
                                                      69,233         85,740
Long-term Assets
 Property, Plant and Equipment (note 4)              166,353        154,911
 Deposits held in trust (note 5)                         420            420
 Future Income Taxes (note 7)                              -              6
----------------------------------------------------------------------------
                                                     166,773        155,337
----------------------------------------------------------------------------
                                                  $  236,006     $  241,077
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current Liabilities
 Accounts Payable and Accrued Liabilities         $   14,860     $   18,297
----------------------------------------------------------------------------
                                                      14,860         18,297
Long-term Liabilities
 Asset Retirement Obligation (note 6)                    182            175
 Future Income Taxes (note 7)                             25              -
----------------------------------------------------------------------------
                                                      15,067         18,472
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Shareholders' Equity
Share Capital (note 8)                               253,583        253,583
Contributed Surplus (note 10)                          9,809          8,749
Deficit                                              (42,453)       (39,727)
----------------------------------------------------------------------------
                                                     220,939        222,605
----------------------------------------------------------------------------
                                                  $  236,006     $  241,077
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Going Concern (note 1)
Commitments and Contingencies (note 15)

See Accompanying Notes to the Interim Consolidated Financial Statements

Approved by the Board of Directors

Fred J. Dyment        Randall Oliphant
Director              Director

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS,
COMPREHENSIVE LOSS AND DEFICIT
(United States dollars thousands, except per share amounts)
(Unaudited)

                                 Three months ended        Six months ended
                                 June 30,   June 30,     June 30,   June 30,
                                    2010       2009         2010       2009
----------------------------------------------------------------------------
Revenues
 Interest Income                $     17   $     35     $     36   $    116

Expenses
 General and Administrative        1,557      1,182        2,994      2,467
 Depreciation                        132        188          311        377
 Accretion on Asset Retirement
  Obligation                           4          2            7          4
 Foreign Exchange (Gain) Loss        193          8          245        (53)
----------------------------------------------------------------------------
                                   1,886      1,380        3,557      2,795
----------------------------------------------------------------------------

Loss Before Income Taxes           1,869      1,345        3,521      2,679

Income Tax Expense (Recovery)
 (note 7)                           (149)        59         (795)      (935)
----------------------------------------------------------------------------

Net Loss and Other Comprehensive
 Loss                              1,720      1,404        2,726      1,744

Deficit, Beginning of Period      40,733     34,576       39,727     34,236
----------------------------------------------------------------------------
Deficit, End of Period          $ 42,453   $ 35,980     $ 42,453   $ 35,980
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Loss Per Share
 - Basic and Diluted (note 11)  $  0.008   $  0.006     $  0.013   $  0.008
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Going Concern (note 1)

See Accompanying Notes to the Interim Consolidated Financial Statements

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States dollars thousands)
(Unaudited)

                                 Three months ended        Six months ended
                                 June 30,   June 30,     June 30,   June 30,
                                    2010       2009         2010       2009
----------------------------------------------------------------------------
Cash Provided By (Used In)

Cash From Operating Activities
 Net Loss                      $  (1,720) $  (1,404)   $  (2,726) $  (1,744)
Non-cash Items
 Depreciation                        132        188          311        377
 Accretion on Asset Retirement
  Obligation (note 6)                  4          2            7          4
 Stock-based Compensation            367        363          495        792
 Future Income Tax Recovery
  (note 7)                            58        196          109        465
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                                  (1,159)      (655)      (1,804)      (106)

Decrease (Increase) in Non-Cash
 Working Capital (note 13)           439     (1,697)        (565)    (7,723)
----------------------------------------------------------------------------
                                    (720)    (2,352)      (2,369)    (7,829)
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Cash From Financing Activities
 None                                  -          -            -          -
----------------------------------------------------------------------------
                                       -          -            -          -
----------------------------------------------------------------------------

Cash From Investing Activities
 Short-term Investments                -          -            -     39,967
 Capital Expenditures            (16,041)   (14,796)     (29,375)   (31,650)
 Insurance Recoveries (note 4)     5,380          -        5,380          -
 Decrease (Increase) in Non-cash
  Working Capital (note 13)           67      2,642       (6,575)     6,808
----------------------------------------------------------------------------
                                 (10,594)   (12,154)     (30,570)    15,125
----------------------------------------------------------------------------

Increase (Decrease) in Cash and
 Cash Equivalents                (11,314)   (14,506)     (32,939)     7,296

Cash and Cash Equivalents at
 Beginning of Period              55,083    111,818       76,708     90,016
----------------------------------------------------------------------------
Cash and Cash Equivalents at
 End of Period                 $  43,769  $  97,312    $  43,769  $  97,312
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Supplemental cash flow
 information:
 Income Taxes Recovered (Paid) $     598 $   (1,667)   $     598  $  (6,362)
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Going Concern (note 1)

See Accompanying Notes to the Interim Consolidated Financial Statements

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Three and six months ended June 30, 2010 and 2009
(Tabular amounts in United States dollars thousands)
(Unaudited)

1. GOING CONCERN UNCERTAINTY AND BASIS OF PRESENTATION

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) on the basis that WesternZagros Resouces Ltd. (the “Corporation” or “WesternZagros”) will continue to operate as a going concern, which implies the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future.

Since inception and typical with development stage companies, the Corporation has incurred losses from operations and negative cash flows from operating activities, and has an accumulated deficit at June 30, 2010. During the three months ended June 30, 2010, the Corporation had expenditures of $1.2 million for operating activities and $16.0 million for oil and gas property expenditures, partially offset by an overall decrease in non-cash working capital of $0.5 million. During the six months ended June 30, 2010, the Corporation had expenditures of $1.8 million for operating activities, and $29.4 million for oil and gas property expenditures, as well as an overall increase in non-cash working capital of $7.1 million. The Corporation will require additional funding over time to maintain ongoing exploration programs and property commitments, as well as for administration expenses.

There are material uncertainties that could raise significant doubt about the Corporation’s ability to continue as a going concern, as further outlined below:

Kurdamir-1 Well Recovery Operations:

The Corporation is currently pursuing ongoing well recovery operations at Kurdamir-1 related to a parted drill string. A negative outcome from these operations, which could potentially result in sidetracking the well or possibly re-drilling the well entirely, would add additional cost and could significantly impact the Corporation’s ability to access any further financial resources required to meet its Production Sharing Contract (“PSC”) commitments (see Note 15 for a further description of Commitments and Contingencies).

Insurance Claim Related To Well Control Operations:

The Corporation has now received confirmation of coverage from the insurers, which partially mitigates the uncertainty associated with the additional costs of the well recovery operations at Kurdimar-1. However, any unforeseen delays in payment from the insurers could impair the Corporation’s ability to continue funding ongoing activities under the PSC. In addition, the insurance claim will only cover the Corporation’s share of allowable costs up to a maximum of $45 million ($75 million gross). If the total costs of the current well recovery operations and any associated sidetracking or re-drilling activities exceed the $45 million limit, it could impair the Corporation’s ability to continue funding ongoing activities under the PSC.

Other Uncertainties

In general, the Corporation’s ability to continue operations and exploration activities as a going concern is dependent upon its ability to obtain additional funding over time. While the Corporation has been successful in obtaining its required funding in the past, there is no assurance that sufficient funds will be available to the Corporation in the future. The Corporation has no assurance that such financing will be available or be available on favorable terms. Factors that could affect the availability of financing include the continued support of its shareholders; the results of its exploration activities; meeting all commitments under the PSC; the resolution of remaining political disputes in Iraq; progress on the Federal Petroleum Law and the ability to export oil and natural gas from the Kurdistan Region of Iraq in accordance with the economic terms under the PSC; the state of the capital markets and the ability of the Corporation to obtain financing to develop reserves; the continued participation of the Corporation’s co-venturers in the PSC activities; and the timely receipt of proceeds from the current insurance claim associated with the Kurdamir-1 well control operations.

These consolidated financial statements do not reflect adjustments in the carrying values of assets and liabilities reported, revenue or expenses, nor the balance sheet classification used that would be necessary if the going concern assumption was not appropriate. Such adjustments could be material.

2. NATURE OF OPERATIONS

WesternZagros Resources Ltd. (the “Corporation”) was incorporated on August 22, 2007 under the laws of the Province of Alberta. The Corporation, an international oil and gas company, is engaged in acquiring properties and exploring for, developing and in due course producing crude oil and natural gas in Iraq and is in the developmental stage. Through its subsidiaries, the Corporation’s operations are related to its interest in a Production Sharing Contract with the Kurdistan Regional Government (“KRG”) in respect of an exploration project area in the Kurdistan Region of Iraq.

3. SIGNIFICANT ACCOUNTING POLICIES

The interim consolidated financial statements are presented in accordance with Canadian generally accepted accounting principles. The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the audited consolidated financial statements for the year ended December 31, 2009. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in the Corporation’s annual report for the year ended December 31, 2009.

4. PROPERTY, PLANT AND EQUIPMENT

                                              Accumulated
                                            Depletion and
As at June 30, 2010               Cost       Depreciation    Net Book Value
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Kurdistan Region
 Exploration Project         $ 165,849         $        -         $ 165,849
Corporate                        1,832             (1,328)              504
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                             $ 167,681         $   (1,328)        $ 166,353
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                                              Accumulated
                                            Depletion and
As at December 31,2009            Cost       Depreciation    Net Book Value
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Kurdistan Region
 Exploration Project         $ 154,244         $        -         $ 154,244
Corporate                        1,684             (1,017)              667
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                             $ 155,928         $   (1,017)        $ 154,911
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All costs included in the Kurdistan Region Exploration Project are excluded from depletion as they represent costs incurred related to properties in cost centres that are considered to be in the development stage. Currently, there are no proved reserves. All costs, net of any associated revenues, have been capitalized. The Corporation capitalized $1.6 million of general and administrative costs (June 30, 2009 – $1.4 million) including $0.6 million of stock-based compensation (June 30, 2009 – $0.5 million) directly related to exploration activities for the six months ended June 30, 2010.

In the second quarter of 2010, the Corporation credited $18.2 million of net insurance recoveries related to the well recovery operations at Kurdamir-1 against the Kurdistan Region Exploration Project. The Corporation’s share of allowable costs incurred to date was $20.1 million, which was reduced by a $0.4 million deductible and a $1.5 million loss load premium payable to the insurers at the conclusion of the current insurance claim.

Proceeds from the first interim claim of $5.4 million were received from the insurers during the second quarter. Further claimable costs of $14.3 million, net to WesternZagros, have been recorded as a receivable as at June 30, 2010. These costs, under the terms of the insurance policy, are subject to review and approval by the adjuster appointed by the insurers and are submitted by WesternZagros as they are incurred and paid. Subsequent to June 30, 2010, a further $4.0 million in insurance proceeds was received.

5. DEPOSITS HELD IN TRUST

The Corporation had deposited in trust certain amounts to be utilized to fund certain expenditures for drilling operations. The deposits bear interest at prevailing market rates. As of June 30, 2010, the Corporation had a $0.4 million deposit held in trust for a supplier.

6. ASSET RETIREMENT OBLIGATION

The Corporation records the fair value of legal obligations associated with the retirement and reclamation of tangible long-lived assets when incurred. The asset retirement cost, equal to the estimated fair value of the asset retirement obligation, is capitalized as part of the cost of the related long-lived asset. The estimation of this cost is based on engineering estimates using current costs and technology and in accordance industry practice. The Corporation’s share of total undiscounted amount of estimated cash flow required to settle the obligation is $1.2 million, which is assumed to be paid in the years 2033 and 2034 in the most likely cases. The Corporation used a credit risk adjusted risk-free rate of 10 percent and an inflation factor of 4 percent to calculate the net present value of the future retirement obligation.

The following table presents the reconciliation of the Corporation’s asset retirement obligation:

                                          June 30, 2010   December 31, 2009
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Balance, beginning of year                       $  175            $     69
Liabilities incurred                                  -                  95
Accretion expense                                     7                  11
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Balance at end of period                         $  182            $    175
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7. INCOME TAXES

Six Month Period Ended                    June 30, 2010       June 30, 2009
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Current Income Tax Recovery                      $ (904)           $ (1,400)
Future Income Tax Expense                           109                 465
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                                                 $ (795)           $   (935)
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The Future Income Tax assets are comprised of:

As at                                     June 30, 2010   December 31, 2009
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Current Future Income Tax Asset:
 Non-Capital Loss Carryforwards                  $    -            $     27
 Share Issue Costs                                  153                 204
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                                                 $  153            $    231

As at                                     June 30, 2010   December 31, 2009
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Long-term Future Income Tax Asset
 (Liability):
 Share Issue Costs                               $  336            $    387
 Book Values in Excess of Tax Values               (178)               (198)
 Valuation Allowance                               (183)               (183)
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                                                 $  (25)           $      6
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8. SHARE CAPITAL

a. Authorized

The Corporation is authorized to issue an unlimited number of ordinary and preferred shares. The common shares are without nominal or par value.

b. Common Shares Issued and Outstanding

                                       Number of Shares       Amount (000's)
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Balance as at December 31, 2009
 and June 30, 2010                          207,464,320           $ 253,583
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9. STOCK OPTIONS AND STOCK-BASED COMPENSATION

Pursuant to the stock option plan, the Board of Directors may grant options to directors, officers, other employees and other service providers. The aggregate number of shares that may be reserved for issuance pursuant to stock options may not exceed 10 per cent of the issued and outstanding common shares on a non-diluted basis of the Corporation at the time of granting. Stock options expire not more than five years from the date of grant, or earlier if the individual ceases to be associated with the Corporation, and vest at the discretion of the Board of Directors.

The following table presents the reconciliation of stock options granted as of June 30, 2010:

                                                          Weighted Average
Six Month Period Ended             Number of Options  exercise price ($CAD)
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Outstanding, beginning of the year        13,007,334               $  1.50
Granted                                       85,000                  0.50
Exercised                                          -                     -
Forfeited                                   (608,334)                 1.53
Expired                                            -                     -
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Outstanding, end of period                12,484,000               $  1.49
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The fair value of all options granted have been estimated at the grant date using the Black-Scholes option pricing model and are summarized in the following table:

Six Month Period Ended                                        June 30, 2010
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Weighted average fair value of stock options granted               $   0.28
Risk Free Interest Rate                                                2.00%
Expected Life                                                       3 years
Expected Volatility                                                      88%
Dividend Per Share                                                      Nil
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10. CONTRIBUTED SURPLUS

The following table presents the reconciliation of Contributed Surplus:

Six Month Period Ended                                        June 30, 2010
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Balance, beginning of year                                         $  8,749
Stock-based Compensation                                              1,060
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Balance, end of period                                             $  9,809
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11. LOSS PER SHARE

The basic weighted average number of common shares outstanding calculated for the three and six month period ended June 30, 2010 was 207,464,320 (June 30, 2009 – 207,464,320). In computing diluted per share amounts, the Corporation’s options totaling 12,484,000 (June 30, 2009 – 13,035,334) have been excluded as anti-dilutive. Accordingly, no additional common shares were added to the basic weighted average shares outstanding to account for dilution.

12. SHAREHOLDER RIGHTS PLAN

On October 18, 2007, the Corporation adopted a shareholder rights plan (the “Plan”). Under the Plan, one right has been issued in respect of each currently issued common share and one right will be issued with each additional common share which is issued. The rights remain attached to the common shares and are not exercisable or separable unless one or more of certain specified events occur. If a person or group acting in concert acquires 20 per cent or more of the common shares of the Corporation, the rights will entitle the holders thereof (other than the acquiring person or group) to purchase common shares at a substantial discount from the then market price. The rights are not triggered by a “Permitted Bid” as defined in the Plan. The Plan will remain in effect until termination of the annual meeting of shareholders in 2013, unless extended by resolution of the shareholders at such meeting.

13. CHANGES IN NON-CASH WORKING CAPITAL

                                  Three months ended       Six months ended
                                  June 30,   June 30,    June 30,   June 30,
                                     2010       2009        2010       2009
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Operating Activities
 Accounts Receivable             $     51   $    108    $    (47)  $     67
 Prepaid Expenses                       1         81        (212)        75
 Income Tax Receivable                392     (1,900)       (306)    (3,179)
 Accounts Payable and
 Accrued Liabilities                   (5)        14           -         (7)
 Income Tax Payable                     -          -           -     (4,679)
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                                 $    439   $ (1,697)   $   (565)  $ (7,723)
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Investing Activities
 Accounts Receivable             $ (1,230)  $     83    $ (3,137)  $  4,354
 Accounts Payable and
  Accrued Liabilities               1,297      2,559      (3,438)     2,454
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                                 $     67   $  2,642    $ (6,575)  $  6,808
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14. RELATED PARTY TRANSACTIONS

At June 30, 2010 the accounts receivable included a loan to a senior officer of $0.2 million. The loan was non-interest bearing and was to mature on December 31, 2010. The original transaction was recorded at the exchange amount, which is the amount of consideration established and agreed to by the related party. Subsequent to June 30, 2010, this loan was fully repaid.

15. COMMITMENTS AND CONTINGENCIES

Commitments

a) Production Sharing Contract

Under the terms of its PSC, the Corporation has a 40 percent working interest and the KRG has a 20 percent interest in the PSC which is carried by the Corporation. The remaining 40 percent was allocated to a wholly-owned subsidiary of Talisman by the KRG as announced on June 23, 2008. The Corporation, the KRG and Talisman are collectively the “Contractor Group” under the PSC. WesternZagros is the operator of the PSC lands until the end of the first operating sub-period of the PSC, when a Joint Operating Company may be established if so elected by the Contractor Group.

The PSC contemplates two exploration sub-periods of three years and two years, respectively, with two possible one-year extensions. The first exploration sub-period ends December 31, 2010. During the first sub-period, the Contractor Group is required to complete a minimum of 1,150 kilometres of seismic surveying (which has been completed), to drill three exploration wells, and to commit a minimum of $75 million in the aggregate on these activities. At the end of the first exploration sub-period, the Corporation and the other parties to the PSC may relinquish the entire contract area (other than any discovery or development areas), continue further exploration operations by entering into the second exploration sub-period, or request a one-year extension for further exploration and appraisal activities prior to deciding to enter into the second exploration sub-period.

The PSC also includes capacity building support, which concluded in April 2009, and annual funding for certain technological, logistical, recruitment and training support during the exploration sub-periods. To meet its remaining commitments for the first exploration sub-period, the Corporation estimates expenditures of approximately $25 million to $30 million, excluding the costs associated with future activities at Kurdamir-1. Additional costs of any testing, if required, would be in addition to these amounts. This represents the Corporation’s 60 percent funding requirement and includes the remaining costs associated with drilling one additional exploration commitment well by the end of the first exploration sub-period, and providing associated supervision and local office support.

The Corporation, on behalf of the Contractor Group, has applied to the KRG to extend the first exploration sub-period for a period of up to 12 months (i.e. to December 31, 2011), in order to allow sufficient time for drilling the flank of the Kurdamir structure to determine whether the downdip Oligocene Reservoir is oil bearing or gas-condensate bearing. The Corporation, on behalf of the Contractor Group, has also notified the KRG of a force majeure event under the terms of the PSC. See “Force Majeure” below.

During the second exploration sub-period, the Contractor Group, or those parties who have elected to participate in further exploration, is required to complete a minimum of 575 kilometres of seismic surveying, drill at least two exploration wells and commit a minimum of $35 million to these activities. At the end of the second exploration sub-period, the Corporation and the other parties to the PSC who have elected to participate in the second exploration sub-period, may relinquish the entire contract area (other than any discovery or development areas) or continue further exploration and appraisal operations into the extension periods subject to the following relinquishment requirements. At the end of the second exploration sub-period, and at the end of each subsequent extension period, the PSC requires the Corporation, and other parties who have elected to participate, to relinquish 25 percent of the remaining undeveloped area within the PSC lands or the entire contract area (other than any discovery or development areas).

Force Majeure

The Corporation, on behalf of the Contractor Group, has notified the KRG of a force majeure event under the terms of the PSC related to the well control and subsequent sidetracking operations associated with Kurdamir-1. Under the terms of the PSC, when a force majeure event occurs, the time resulting from any such delay and the time necessary to repair any damage resulting from the delay will be added to the first exploration sub-period.

b) Consulting Service Agreements

In 2003 the Corporation entered into a consulting service agreement that provides a three percent right to indirectly participate in the future profits the Corporation may earn in respect to the PSC, in exchange for consulting services provided since that date. In the determination of profits under this agreement, the Corporation is entitled to deduct the consultant’s proportional share of all costs associated with acquiring the PSC and the exploration, appraisal, development and production expenditures incurred by the Corporation (“eligible costs”), together with interest on such percentage of eligible costs at LIBOR plus three percent.

Further, in 2004 the Corporation entered into a consulting service agreement that provides a two percent right to indirectly participate in the future profits the Corporation may earn in respect to the PSC, in exchange for the provision of consulting services during the period 2004 to 2006. In determination of profits under this agreement, the Corporation is entitled to deduct one percent of all eligible costs, together with interest on such percentage of eligible costs at LIBOR plus ten percent. The consultant is required to fund the additional one percent of all eligible costs.

c) Other

The Corporation has entered into various exploration-related contracts, including contracts for drilling equipment, services and tangibles. The following table summarizes the commitments the Corporation has under these exploration-related contracts and other contractual obligations at June 30, 2010:

                                 For the Years Ending December 31,

                        2010     2011     2012     2013     2014+     Total
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Exploration            4,532        -        -        -        -      4,532
Office                   255      480      160        -        -        895
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                       4,787      480      160        -        -      5,427
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Contingencies

Litigation

From time to time the Corporation may become involved in legal or administrative proceedings in the normal conduct of business. Amounts involved in such matters are not reasonably estimable due to uncertainty as to the final outcome. The Company’s assessment of the likely outcome of these matters is based on its judgement of a number of factors, including precedents and facts specific to the matters. The Corporation does not believe these matters in aggregate will have a material adverse effect on its consolidated financial position or results of operations.

Regulatory

Oil and gas operations are subject to extensive controls and regulations imposed by various levels of government that may be amended from time to time. The Corporation’s operations may require licenses and permits from various governmental authorities in the countries in which it operates. Under the PSC, the KRG is obligated to assist in obtaining all permits and licenses from any government agencies in the Kurdistan Region and from any other government administration in Iraq. There can be no assurance that the Corporation will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development of its projects.

The political and security situation in Iraq is unsettled and volatile. The Kurdistan Region is the only “Region” of Iraq that is constitutionally established pursuant to the Iraq Constitution, which expressly recognizes the Kurdistan Region. The political issues of federalism and the autonomy of the Regions of Iraq are matters about which there are major differences between the various political factions in Iraq. These differences could adversely impact the Corporation’s interest in the Kurdistan Region including the ability to export any hydrocarbons as a result of our activities.

16. CHANGE IN FINANCIAL STATEMENT PRESENTATION

Certain comparative information has been changed in conformity to the current year financial statement presentation.

For further details on WesternZagros Resources Ltd., please refer to the June 2010 corporate presentation available on the WesternZagros website:
http://www.westernzagros.com/documents/WZRCorporatePresentationJune2010.pdf

About WesternZagros Resources Ltd.

WesternZagros is an international natural resources company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros, through its wholly-owned subsidiaries, holds a Production Sharing Contract with the Kurdistan Regional Government in the Kurdistan Region of Iraq. WesternZagros’ shares trade in Canada on the TSX Venture Exchange under the symbol “WZR”.

This news release may contain forward-looking information based on assumptions that are subject to a wide range of business risks. WesternZagros’ operations are subject to all risks normally incident to the exploration, development and operation of crude oil and natural gas properties and the drilling of crude oil and natural gas wells, including geological risk, encountering unexpected formations or pressures, premature declines of reservoirs, potential environment damage, blow-outs, fires and spills, all of which could result in personal injuries, loss of life and damage to property of WesternZagros and others; environment risks; delay or changes in plans with respect to exploration or development projects or capital expenditures; its joint venture partner’s continued participation in the exploration activities under the PSC, the ability to attract key personnel; the risk of commodity price and foreign exchange rate fluctuations.

All of WesternZagros’ assets are located in the Kurdistan Region of Iraq. As such, WesternZagros is subject to political, economic, and other uncertainties of that region as well as risks of loss due to civil strife, acts of war, guerrilla activities and insurrections. WesternZagros’ operations may be materially adversely affected by changes in government policies and legislation or social instability and other factors which are not within its control. Risks also include the uncertainty involved in the estimation of undiscovered resources. For further information on WesternZagros and the risks associated with its business, please see WesternZagros’ Annual Information Form dated March 25, 2010 which is filed at www.sedar.com and on the Company’s web site.

Forward-looking information typically contains statements with words such as “anticipate”, “estimate”, “expect”, “potential”, “could”, or similar words suggesting future outcomes. We caution readers and prospective investors of the Company’s securities not to place undue reliance on forward-looking information as by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros.

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