GranTierra Energy Inc

17 EXPLORATIONWELLS BUDGETED IN 2011

Pacayaco

Canangucho-1

Taruka-1

Rumiyaco-1

La Vega Este-1

Stratig

raphic-1

Stratig

raphic-2

Turpial-1

San Angel-1

Block 129

Melero-1

Block 155

Kanatari-1

Pichico-1

Exploration-1

Block 142-1

Block 142-2

Gran Tierra Energy was formed to capitalize on the

expertise, experience and strategic relationships of

the management team to build substantial value and a

record of success in South America. Our mission is to

create value, sensibly and aggressively, in oil and gas

exploration and production.

Gran Tierra Energy Annual Report 2010 | 1

TOTA

L R

EV

EN

UE

& IN

TER

EST $375mm

Revenue and interest increased by 42% to $374.5 million compared with $263.7 million in 2009. This increase was primarily a result of a 13% increase in crude oil production from the continued development of the Costayaco field in the Chaza Block in Colombia combined with a 25% increase in crude oil prices.

INC

OM

E

$37mmNet income was $37.2 million compared with net income of $13.9 million for the same period in 2009. The 42% increase in revenue and other income was partially offset by an increase in operating expenses, general and administrative expenses, depletion, depreciation and accretion expense, and income tax expense.

CA

SH F

RO

M O

PE

RAT

ION

S $204mmCash from operations increased to $203.8 million compared with $165.5 million from Gran Tierra Energy’s 2009 operations. The Company ended 2010 with cash and cash equivalents of $355.4 million compared with $270.8 million in 2009. Gran Tierra Energy remains debt free.

0

38

76

114

152

190

228

266

304

342

380

0907 08 10

375($millions)TOTAL REVENUE AND INTEREST

-10

-5

0

5

10

15

20

25

30

35

40

0907 08 10

37($millions)INCOME

($millions)

0

21

42

63

84

105

126

147

168

189

210

0907 08 10

204

CASH FROM OPERATIONS

high

light

s 2010

2 | Gran Tierra Energy Annual Report 2010

Consolidated results of operations

Oil and natural gas sales $373.3 $262.6 42

Interest 1.2 1.1 8

Total revenue 374.5 263.7 42

Operating expenses 59.4 40.8 46

Depletion, depreciation, accretion and impairment 163.6 135.9 20

General and administrative expenses 40.2 28.8 40

Foreign exchange loss 16.8 19.8 (15)

Other 0.0 0.2 (123)

Total expenses 280.1 225.4 24

Income before income taxes 94.4 38.3 147

Income taxes (57.2) (24.4) 135

Net income $37.2 $13.9 167

Consolidated statements of cash flow

Net cash provided by operating activities $203.8 $165.5 23

Net cash provided by (used in) investing activities (143.9) (76.4) 88

Net cash provided by financing activities 24.8 4.9 402

Net increase in cash and cash equivalents $84.6 $94.0 94

Consolidated balance sheets

Cash and cash equivalents $355.4 $270.8 31

Other current assets 62.7 $50.0 26

Total oil and gas properties 721.2 709.6 2

Other long-term assets 109.9 113.5 (3)

Total assets 1,249.3 1,143.8 9

Current liabilities 152.3 105.6 44

Deferred tax liability — long-term 205.6 217.5 (5)

Other long-term liabilities 4.5 4.3 5

Total liabilities 362.4 327.4 11

Total shareholders’ equity 886.9 816.4 9

Total liabilities and shareholders’ equity $1,249.3 $1,143.8 9

Production (net of royalties)

Oil and natural gas liquids (BO) 5,228,554 4,621,546 13

Natural gas (mcf) 268,776 49,028 448

Total production (boe) *,** 5,273,350 4,629,717 14

* Gas volumes are converted to barrels of oil equivalent (“boe”) at the rate of six thousand cubic feet (“mcf”) of gas per barrel of oil based upon the approximate relative values of natural gas and oil. Natural gas liquid (“NGL”) volumes are converted to boe on a one-to-one basis with oil.

** Production represents production volumes adjusted for inventory changes.

TOTA

L R

EV

EN

UE

& IN

TER

EST $375mm

Revenue and interest increased by 42% to $374.5 million compared with $263.7 million in 2009. This increase was primarily a result of a 13% increase in crude oil production from the continued development of the Costayaco field in the Chaza Block in Colombia combined with a 25% increase in crude oil prices.

INC

OM

E

$37mmNet income was $37.2 million compared with net income of $13.9 million for the same period in 2009. The 42% increase in revenue and other income was partially offset by an increase in operating expenses, general and administrative expenses, depletion, depreciation and accretion expense, and income tax expense.

CA

SH F

RO

M O

PE

RAT

ION

S $204mmCash from operations increased to $203.8 million compared with $165.5 million from Gran Tierra Energy’s 2009 operations. The Company ended 2010 with cash and cash equivalents of $355.4 million compared with $270.8 million in 2009. Gran Tierra Energy remains debt free.

MIL

LIO

NS

OF

$U.S

.

MIL

LIO

NS

OF

$U.S

2010

2009

% C

HA

NG

E


EXP

LOR

ATIO

N B

LOC

KS

15.7mm gross acres

PR

OV

ED

RE

SER

VE

S

23.6MMBO NAR

PR

OD

UC

TIO

N 14,325BOPD NAR

over

view

0

7

14

21

28

35

06 0907 08 10

33

EXPLORATION BLOCKS

0

5

10

15

20

25

06 0907 08 10

23.6 (millions BO)PROVED RESERVES

0

3000

6000

9000

12000

15000

06 0907 08 10

14,325 (BOPD)PRODUCTION

2010


EXP

LOR

ATIO

N B

LOC

KS

15.7mm gross acres

PR

OV

ED

RE

SER

VE

S

23.6MMBO NAR

PR

OD

UC

TIO

N 14,325BOPD NAR

PRODUCTION total 14,325 BOPD NAR In 2010, average production was 14,325 BOPD NAR. Approximately 13,500 BOPD NAR production from Colombia and approximately 800 BOPD NAR production from Argentina. The Company anticipates that production will increase to between 17,500 to 19,000 boepd NAR for the balance of 2011, excluding exploration success.

2010 CAPITAL PROGRAM total $177 MILLION*Gran Tierra Energy’s focus for 2010 was to continue the development of the Costayaco field in Colombia, increase our land position in Peru, workover and sidetrack operations in Argentina and gain a position in the Recôncavo Basin, Brazil. Exploration success continued in Colombia with the discovery and further delineation of the Moqueta field in the Putumayo Basin.

Colombia

$105 13,547

PeruBrazil

Argentina

$23

$35 778

EXPLORATION & DEVELOPMENT ($MILLIONS) PRODUCTION (BOPD NAR)

* Includes $2 million in corporate capital.

$12


expl

orat

ion


With the addition of our new oil discovery in the Moqueta field

and our Costayaco field fully developed, Gran Tierra Energy is

continuing to focus on growing reserves through exploration.

The Company will again be undertaking our largest capital program

in company history with a planned capital budget of $355 million.

This program includes a variety of exploration and development

opportunities in Colombia, Brazil and Argentina, along with

exploration opportunities in Peru.

136mmbonet risked resource potential


CA

SH O

N H

AN

D $ 355mm

Gran Tierra Energy’s balance sheet improved dramatically through the year; at year-end, we reported cash and cash equivalents of $355 million and no debt. Our cash position, together with cash flows from operations are expected to provide us with sufficient liquidity to fund our planned 2011 capital program and acquire new blocks for exploration.

CA

SH F

RO

M O

PE

RAT

ION

S

$204MM 2010

The combination of a strong balance sheet, cash on hand, and cash flow from operations leaves us well capitalized to fund further exploration and development activities.

EXP

LOR

ATIO

N/R

ISK

RE

WA

RD 136MM

BO net risked prospective resourceWe plan to continue to explore prospective oil and gas assets to find commercial reserves and grow production to generate higher cash flow for future investment and growth.

0

20

40

60

80

100

120105

15 16

(MMBO)

ColombiaAverage

1 in 3 chanceof success

PeruAverage


BrazilAverage


NET RISKED PROSPECTIVE RESOURCE POTENTIAL

$355mm2011 capital programst

rate

gy


Colombia*

43.6†

~15,000

Peru**Brazil***

Argentina****

PLANNED PRODUCTION (BOEPD NAR) 96% LIGHT OILGTE TOTAL PROVED, PROBABLE + POSSIBLE (PPP) RESERVES (MMBO) NAR

500– 1,000

3.8†

2,000–3,000

* 5 delineation wells, 4 development wells, and 10 exploration wells providing near term oil growth potential ** 3 exploration wells high-risk high-reward oil exploration *** 4 exploration and 2 development wells providing near term oil growth potential **** 8 development wells to grow oil production

† 3P amounts do not include 35MMBOE NAR from Petrolifera acquisition.

CA

SH O

N H

AN

D $ 355mm

Gran Tierra Energy’s balance sheet improved dramatically through the year; at year-end, we reported cash and cash equivalents of $355 million and no debt. Our cash position, together with cash flows from operations are expected to provide us with sufficient liquidity to fund our planned 2011 capital program and acquire new blocks for exploration.

CA

SH F

RO

M O

PE

RAT

ION

S

$204MM 2010

The combination of a strong balance sheet, cash on hand, and cash flow from operations leaves us well capitalized to fund further exploration and development activities.

EXP

LOR

ATIO

N/R

ISK

RE

WA

RD 136MM

BO net risked prospective resourceWe plan to continue to explore prospective oil and gas assets to find commercial reserves and grow production to generate higher cash flow for future investment and growth.

TARGET 17,500–19,000 BOEPD IN 2011.


$ 355mm 2011 capital program*

CO

LOM

BIA $175mm

P Chaza Pacayaco • 15 MMBO risked resource potentialThe focus of our 2011 capital program will be to further explore our land position in the prolific Putumayo Basin. Building on our recent discovery in the Moqueta field, the majority of our capital spending will go towards exploration, which includes the drilling of ten exploration wells plus a seismic acquisition program totaling 440 km2 of 3D seismic and 370 km2 of 2D seismic to develop future exploration opportunities. In addition, we plan on spending $30 million on facility construction associated with ongoing development of the Moqueta field and further facility work at Costayaco.

P Chaza Canangucho-1 •

P Piedemonte Sur Taruka-1 •

P Rumiyaco Rumiyaco-1 •

P Azar La Vega Este-1 •

P Putumayo-10 Stratigraphic •

P Piedemonte Norte Stratigraphic •

MM Turpial Turpial-1 •

LM Magdalena San Angel-1 •

L Garibay Melero-1 •

BR

AZ

IL $55mm

R Block 129 1 well • 16 MMBO risked resource potentialIn 2010, Gran Tierra Energy acquired 70% working interest and operatorship in four blocks REC-T-129, -142, -155, and -224 in the onshore Recôncavo Basin. In its $55 million 2011 capital program, Gran Tierra Energy plans to drill the first exploration well in Block 129, followed by up to three additional exploration wells, plus two development wells on Block 155 in a recent oil discovery. Gran Tierra Energy was recently approved by the ANP as a class B Operator, permitting us to act as an Operator in both the onshore and in the shallow-water (< 400m) offshore Brazil.

R Block 142 1 well •



PE

RU $70mm

M Block 128 Kanatari-1 • 105 MMBO risked resource potentialGran Tierra Energy’s 2011 capital program in Peru is $70 million, including $47 million towards drilling exploration wells and an additional $19 million for seismic acquisition. Gran Tierra Energy has drilled the first exploration well in Block 128 and is evaluating a possible second exploration well on Block 122. Seismic activity is planned to continue in Blocks 123, 124, and 129 with exploration drilling environmental impact assessments to be conducted concurrently in Blocks 123 and 129. Upon approval of assigned interests to Gran Tierra Energy by Perupetro S.A., the Company plans to drill one exploration well on Block 95.

M Block 122 Pichico-1 •

M Block 95 Exploration-1 •

AR

GE

NTI

NA

$55mm

NO Palmar Largo PL-10ST •

Capital spending in Argentina will initially focus on reversing production declines on properties in the Neuquen Basin. Gran Tierra Energy plans to conduct work-over programs on approximately sixteen wells, along with drilling approximately six development wells, including three producers and three new water injectors. Gran Tierra Energy believes it can improve recovery in the existing reservoirs by minimizing water channeling in the waterflood project through the use of polymer.

NO Surubi Proa-2 •

NE Puesto Morales 6 wells •

* Capital program includes delineation, development and exploration drilling, facilities and seismic acquisition.

stra

tegy


CO

LOM

BIA $175mm

P Chaza Pacayaco • 15 MMBO risked resource potentialThe focus of our 2011 capital program will be to further explore our land position in the prolific Putumayo Basin. Building on our recent discovery in the Moqueta field, the majority of our capital spending will go towards exploration, which includes the drilling of ten exploration wells plus a seismic acquisition program totaling 440 km2 of 3D seismic and 370 km2 of 2D seismic to develop future exploration opportunities. In addition, we plan on spending $30 million on facility construction associated with ongoing development of the Moqueta field and further facility work at Costayaco.

P Chaza Canangucho-1 •

P Piedemonte Sur Taruka-1 •

P Rumiyaco Rumiyaco-1 •

P Azar La Vega Este-1 •

P Putumayo-10 Stratigraphic •

P Piedemonte Norte Stratigraphic •

MM Turpial Turpial-1 •

LM Magdalena San Angel-1 •

L Garibay Melero-1 •

BR

AZ

IL $55mm

R Block 129 1 well • 16 MMBO risked resource potentialIn 2010, Gran Tierra Energy acquired 70% working interest and operatorship in four blocks REC-T-129, -142, -155, and -224 in the onshore Recôncavo Basin. In its $55 million 2011 capital program, Gran Tierra Energy plans to drill the first exploration well in Block 129, followed by up to three additional exploration wells, plus two development wells on Block 155 in a recent oil discovery. Gran Tierra Energy was recently approved by the ANP as a class B Operator, permitting us to act as an Operator in both the onshore and in the shallow-water (< 400m) offshore Brazil.




PE

RU $70mm

M Block 128 Kanatari-1 • 105 MMBO risked resource potentialGran Tierra Energy’s 2011 capital program in Peru is $70 million, including $47 million towards drilling exploration wells and an additional $19 million for seismic acquisition. Gran Tierra Energy has drilled the first exploration well in Block 128 and is evaluating a possible second exploration well on Block 122. Seismic activity is planned to continue in Blocks 123, 124, and 129 with exploration drilling environmental impact assessments to be conducted concurrently in Blocks 123 and 129. Upon approval of assigned interests to Gran Tierra Energy by Perupetro S.A., the Company plans to drill one exploration well on Block 95.

M Block 122 Pichico-1 •

M Block 95 Exploration-1 •

AR

GE

NTI

NA

$55mm

NO Palmar Largo PL-10ST •

Capital spending in Argentina will initially focus on reversing production declines on properties in the Neuquen Basin. Gran Tierra Energy plans to conduct work-over programs on approximately sixteen wells, along with drilling approximately six development wells, including three producers and three new water injectors. Gran Tierra Energy believes it can improve recovery in the existing reservoirs by minimizing water channeling in the waterflood project through the use of polymer.

NO Surubi Proa-2 •

NE Puesto Morales 6 wells •

BA

SIN

*

BLO

CK

WEL

L

1/2

2011

2/2

2011

RIS

KED

RES

OU

RC

E

POTE

NTI

AL

* Putumayo Middle Magdalena Lower Magdalena Llanos Marañon Recôncavo NOroeste NEuquen


Bogotá

PutumayoBasin

Venezuela

Llanos Basin

Cauca Basin

Lower Magdalena Basin

Col

ombi

a ex

plor

atio

n

ColombiaGran Tierra Energy is the number one land holder, reserve holder, and producer in the Putumayo Basin. The Company has interests in 19 blocks that cover 524,953 net acres. In 2010, Gran Tierra Energy focused drilling on the Putumayo Basin and dedicated resources to exploring other prospective areas on our extensive land position. The highlight of the year was the discovery of the Moqueta and Jilguero oil fields. In 2011, we have plans to further explore the Putumayo Basin with a ten well exploration program along with two wells in the Magdalena Basin and one well in the Llanos Basin, in addition to further delineation and development drilling in the Moqueta oil discovery.

10exploration wells


Bogotá

PutumayoBasin

Venezuela

Llanos Basin

Cauca Basin

Lower Magdalena Basin

19 blocks*

3,139,728net acres*

370km2D seismic planned/2011*

440km23D seismic planned/2011*

10exploration wells planned/2011

* These amounts include the acquisition of Petrolifera in 2011. Gran Tierra Energy Annual Report 2010 | 13

50 km

Eastern Cordillera

Costayaco

Orito

Putumayo Basin

Ecuador

Santana Oil Sales

Point

OTA export pipeline

PiedemonteSur

PiedemonteNorte

Putumayo-10

Guayuyaco& Santana

GTE Working interest

100 0

Chaza Moqueta

Azar

Rumiyaco

Col

ombi

a pr

oduc

tion

ColombiaIn 2010, Gran Tierra Energy produced a record average of 13,547 BOPD NAR in Colombia. We continued the development of the Costayaco field, completing Costayaco-11, Costayaco-12 and Costayaco-13 as producing wells. In 2011, we have plans to further develop the Putumayo Basin with an eight well development and delineation program and pipeline construction to handle the planned increase in our production from the Moqueta oil discovery.

15%increase in average daily production


50 km

Eastern Cordillera

Costayaco

Orito

Putumayo Basin

Ecuador

Santana Oil Sales

Point

OTA export pipeline

PiedemonteSur

PiedemonteNorte

Putumayo-10

Guayuyaco& Santana


100 0

Chaza Moqueta

Azar

Rumiyaco

13,547 BOPD NAR

22.5mmbo NAR proved reserves*

43.6mmboNAR (Proved + Probable + Possible)*

8development and delineation wells

* As at December 31st 2010 Gran Tierra Energy Annual Report 2010 | 15

CostayacoField

Guayuyaco Block

ToroyacoField

LindaField

JuanambuField

Pipeline

Putumayo-1 Block

Uchupayaco

1310

6

5 12

411

127

43

12

938


Oil well Water

2 km

100% 0%

Chaza Block

MoquetaField

Col

ombi

a di

scov

ery

& d

evel

opm

ent

ColombiaWith the successful discovery of oil at Moqueta in 2010, Gran Tierra Energy will be investing in new infrastructure for the field including further appraisal drilling with Moqueta-4, drilled early in 2011, and Moqueta-5 and Moqueta-6 later in 2011, construction of a six inch diameter, eight km long flow line to Costayaco, gas reinjection facilities, road access construction and full field development planning. We are also planning seismic acquisition on the Chaza Block to further delineate the Moqueta field and to evaluate new prospects along trend with our Moqueta discovery.

3wells Moqueta discovery


CostayacoField

Guayuyaco Block

ToroyacoField

LindaField

JuanambuField

Pipeline

Putumayo-1 Block

Uchupayaco

1310

6

5 12

411

127

43

12

938


Oil well Water

2 km

100% 0%

Chaza Block

MoquetaField

1.2mmbo NAR proved reserves*

3.0mmboNAR (proved + probable reserves)*

9.7mmboNAR (proved + probable + possible reserves)*

3delineation wells

* As at December 31st 2010 Gran Tierra Energy Annual Report 2010 | 17

Recôncavo Basin

REC-T-129

REC-T-142

REC-T-155

REC-T-224

Bra

zil p

rodu

ctio

n

BrazilAfter successfully establishing our Brazil team and office, we delivered on our goal to capture a high quality exploration and production opportunity by entering the Recôncavo Basin. Gran Tierra Energy entered into an agreement to acquire operatorship and a 70% working interest in four onshore blocks in the Recôncavo Basin (Blocks 129, 142, 155 and 224) subject to ANP approval of assignment of interests in 2011. In 2010, a 93 km2 3D seismic program was completed on three of these blocks.

350BOPD NAR


4 blocks

18,953 net acres

2development wells planned/2011

4exploration wells planned/2011


Recôncavo Basin

129E1

H3

H1

D2

D1

1-ALV-2-BA

H2

142

155

Bra

zil e

xplo

ratio

n

BrazilGran Tierra Energy plans to drill four exploration wells and two development wells to further develop a new oil discovery on Block 155. Gran Tierra Energy was recently approved by the ANP as a class B Operator, permitting us to broaden our Brazil strategy to include the onshore and the shallow water (< 400m) offshore.

4exploration wells


Recôncavo Basin

129E1

H3

H1

D2

D1

1-ALV-2-BA

H2

142

155


Brazil

Ecuador

95

EcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuador

95

128

122

133

107

124123

129

AndesMountains

Pipeline

Marañon Basin

IquitosArch

Peru

exp

lora

tion

PeruIn 2010, Gran Tierra Energy completed seismic acquisition in Block 128 and Block 122. In September 2010, we entered into an agreement to acquire a 20% working interest in Block 123, Block 124, and Block 129. A 747 km 2D seismic program was shot in these three blocks in 2010. Also, we recently acquired blocks 133 and 107 through our acquisition of Petrolifera which further expands our portfolio of opportunities in Peru, with exploration drilling planned in 2012.

3exploration wells


Brazil

Ecuador

95

128

122

133

107

124123

129

AndesMountains

Pipeline

Marañon Basin

IquitosArch

8 blocks

7.2 mm net acres

2,660km2D seismic planned/2011

3exploration wells planned


Iquitos Arch Marañon/Ucayali Foreland Basin

Blocks 122 & 128

Blocks 123, 124 & 129

Block 95 Blocks 133 & 107

Andes Mountains

Fold Belt

Proven Prospective

Prospective

Hydrocarbon generation

& migration

133 & 107

Peru

exp

lora

tion

PeruIn December 2010, we entered into an agreement to acquire operatorship and a 60% working interest in Block 95, subject to government approval. This new block is located in Northeast Peru, due south of our existing acreage in the prolific Marañon Basin where more than one billion barrels of recoverable oil have been discovered. An oil discovery has already been made on this block, with the discovery well flowing 800 BOPD at Bretaña-1. This discovery is planned to be delineated with an exploration well by Gran Tierra Energy in 2012.

3exploration wells

129

123

124

122

128

95

Colombia

Brazil

Ecuador

Marañon Basin

Iquitos Arch

Arch

Oil Formation

Basin

100 km24 | Gran Tierra Energy Annual Report 2010

Iquitos Arch Marañon/Ucayali Foreland Basin

Blocks 122 & 128

Blocks 123, 124 & 129

Block 95 Blocks 133 & 107

Andes Mountains

Fold Belt

Proven Prospective

Prospective

Hydrocarbon generation

& migration


Santa Victoria

Noroeste Basin

Valle Morado

NeuquenBasin

Arg

entin

a ex

plor

atio

n &

pro

duct

ion

ArgentinaGran Tierra Energy is the largest exploration land holder in the Noroeste Basin, with an interest in seven blocks encompassing 1.6 million net acres of land. In 2010, the Company had an average production of 778 BOPD NAR* from six producing net wells.

In Argentina in 2010, we began re-entry and sidetrack operations on the Valle Morado VM.x-1001 delineation gas well. In early 2011, these operations were suspended and the well bore will be abandoned due to a number of operational challenges encountered. In 2011, Gran Tierra Energy is planning a $55 million capital program which includes a development well in Palmar Largo and Surubi, and a six well development program to enhance production from our new operations in the Neuquen Basin following the acquisition of Petrolifera.

8development wells

* This amount does not include production from Petrolifera assets acquired in 2011.


Santa Victoria

Noroeste Basin

Valle Morado

NeuquenBasin

12 blocks

1.6mmnet acres

8development wells planned/2011

778bopd2010 average daily production NAR

1.1mmbo proved reserves NAR*

3.8mmbo (Proved + Probable + Possible) NAR*

16mmboe(Proved + Probable + Possible) NAR additional from Petrolifera acquisition in 2011

*As at December 31st 2010 Gran Tierra Energy Annual Report 2010 | 27

lette

r to

shar

ehol

ders

Gran Tierra Energy made substantial progress across all areas of business in 2010 as we successfully con-tinued to grow landholdings, reserves and production. Record average daily and annual production translated into strong financial performance as we continued to perform well in our established operating regions, while also accessing new lands and partnerships in our core operating arenas. Our strong balance sheet, in combination with growing cash flow from operations, continues to provide Gran Tierra Energy with strong flexibility in funding our existing exploration and development programs, and has allowed us to pursue additional underdeveloped assets, such as those acquired in our acquisition of Petrolifera Petroleum Limited that closed subsequent to year-end 2010. The team at Gran Tierra Energy works daily to identify and execute on opportunities to create shareholder value, which saw us succeed in 2010 and positions Gran Tierra Energy for continued success in 2011.

MORE than ever


Exploration Success Continues in ColombiaGran Tierra Energy drilled the Moqueta-1 prospect on the Chaza Block in the second quarter of 2010 and subsequently confirmed a new oil discovery with testing of light oil. We went on to successfully drill three additional delineation wells allowing us to confirm substantial additional oil pay at the discovery, with the limits of the field yet to be defined. In parallel with this drilling, we also initiated new 2D and 3D seismic acquisition programs to obtain additional subsurface information to assist in the interpretation of the field and prospectivity in adjacent areas. The fifth well in this area was drilling in the second quarter of 2011 as we continue to seek the boundaries of this substantial discovery. In parallel, construction of a pipeline from Moqueta to our Costayaco facilities was initiated at year-end 2010 and is expected to be transporting new oil production from this growing discovery in the second quarter of 2011. A second oil discovery was also made in the Garibay Block in the Llanos Basin of Colombia, which is now on production and which will be followed up with additional exploration drilling in 2011.

We continue to believe that Colombia holds substantial long-term opportunities for Gran Tierra Energy and we were pleased to submit successful bids on three exploration blocks in the 2010 Colombia Bid Round. The new acreage more than doubled Gran Tierra Energy’s acreage in Colombia, adding new land in our core operating environment in the Putumayo Basin, in addition to two very large frontier exploration blocks, Cauca-6 and -7, which encompass more than 1.3 million net acres approximately 100 kilometers northwest of the Putumayo Basin.

Expanding the Portfolio in PeruIn 2010, we tripled the number of exploration blocks in Peru and added two more blocks in early 2011, which resulted in Gran Tierra Energy becoming one of the largest acreage holders in the country. Gran Tierra Energy

acquired a 20% interest from Burlington Resources Peru Limited, a wholly-owned subsidiary of ConocoPhillips Company, in 6.7 million gross contiguous exploration acres adjacent to our existing blocks 122 and 128 in the Marañon Basin. Late in the year, we also acquired a 60% working interest and operatorship in Block 95 in the Marañon Basin, from Global Energy Development PLC. The block consists of 1.3 million acres and is located south of our existing acreage in the prolific Marañon Basin. This acreage contains an oil field discovered in

1974, with an oil well that flowed 800 barrels of oil per day naturally without pumps, that was never developed. Now, Gran Tierra Energy, as operator, intends to explore this block with drilling in 2012 in an effort to prove up additional reserves for development. Finally, with the acquisition of Petrolifera Petroleum Limited completed in early 2011, two additional, highly prospective blocks were acquired in the Ucayali Basin of central Peru. These blocks lie on trend with the prolific Camisea developments in southern Peru. This first exploration well in this additional acreage is scheduled to be drilled in 2012.

Early in 2011 we drilled our first well in Peru. The unsuccessful Kanatari-1 well was a frontier exploration well located on the eastern flank of the Marañon Basin, approximately 130 kilometers from the nearest offset well in Peru. This well found good quality reservoir, but

In 2010, we tripled the number of exploration blocks in Peru and added two more blocks in early 2011, which resulted in Gran Tierra Energy becoming one of the largest acreage holders in the country.


unfortunately encountered no oil shows. Although disappointing, this was just one prospect in a vastly expanded Peru drilling portfolio, with a balanced diversity of risk-reward exploration opportunities that will be tested by drilling in the coming years.

Building a Strong Foundation in BrazilIn 2009, we opened an office in Brazil and assembled a seasoned team in-country to establish our operations. In August 2010, we succeeded in establishing our initial exploration and production position by farming into the Alvorada Petroleo acreage to obtain a 70%

working interest and operatorship in four onshore blocks in the prolific Recôncavo Basin. The Recôncavo Basin covers approximately 10,000 square kilometers, has 129 oil and gas fields, and has produced more than 1.5 billion barrels of oil to date. This initial farm-in provides us with an opportunity to delineate and develop a recently discovered oil field, an opportunity to explore for additional similar oil fields, and an opportunity to apply new technologies with horizontal drilling to test a new exploration concept in the basin defined with modern 3D seismic data. We have now established production in Brazil and intend to continue growing Gran Tierra Energy’s presence through appropriate partnerships, acquisitions and participation in land sales as those opportunities arise.

Increasing Option Value in ArgentinaActivities in Argentina in 2010 were limited to maintaining oil production levels and attempting to further develop a gas discovery at the Valle Morado field in northern Argentina. We were able to maintain our oil production through the year, but were unsuccessful in sidetracking the Valle Morado discovery well, due to the poor condition of the old casing in the well. Gran Tierra Energy is currently planning to drill a new well in the Valle Morado field in 2012 to take advantage of rising gas prices in the country. With the completion of the Petrolifera acquisition, additional work will be done in 2011 in an effort to reverse the declining oil and gas production of the newly acquired Neuquen Basin assets.

Building For the FutureGran Tierra Energy has a track record of successfully capturing and growing new assets. In 2010, we again identified an opportunity to grow through acquisition and announced an agreement late in 2010 to acquire all of the outstanding shares of Petrolifera Petroleum Limited. We successfully closed the acquisition on March 18, 2011.

This acquisition resulted in Gran Tierra Energy acquiring underdeveloped operated land in three of our core countries of operations, lands that we are comfortable that we can develop and unlock value through appropriate allocation of capital by our experienced operating teams. In Colombia, Gran Tierra Energy intends to delineate a potentially significant gas discovery in the Lower Magdalena Basin in 2011, prepare for exploration drilling in Peru in 2012, and work to reverse production declines in Argentina where both oil and gas prices are have consistently been rising. Based on 2010 year-end reserve reports, the acquisition added 17 million barrels of oil equivalent (SEC compliant) proved plus probable reserves to

In August 2010, we succeeded in establishing our initial exploration and production position by farming into Alvorada Petroleo acreage to obtain a 70% working interest and operatorship in four onshore blocks in the prolific Recôncavo Basin.

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Gran Tierra Energy’s 2010 year-end proved plus probable reserves of 31 million barrels of oil, increasing materially not only our reserves, but also our reserve life index, and our exploration and development drilling portfolio.

Giving Back to the CommunitiesGran Tierra Energy continues to grow its commitment and relationships in the communities where we operate, and view this as a key success factor in our growth. Our commitments focus on improving access to and quality of education through supporting educational programs and provision of scholastic kits, improving the health of the community through sponsorship of health centers and vaccination programs, and building sustainable community capacity by supporting various farming and fishery programs. Our employees, our Board of Directors and I personally take great pride in these endeavors. I would encourage you to read Gran Tierra Energy’s Corporate Social Responsibility report issued this year in combination with its annual report.

Well Positioned for Growth2010 was highlighted by a range of positive developments that saw us grow land holdings, reserves, and production to record levels, make new oil discoveries and expand our drilling portfolio in South America through new joint ventures, bid-rounds and acquisitions. At December 31, 2010, we had approximately $355 million in cash and cash equivalents that, combined with cash flow from operations, is expected to fund our ambitious 2011 capital program of $355 million. Taking into account the Petrolifera Petroleum Limited acquisition, we anticipate average production in 2011 to range between 17,500 and 19,000 barrels of oil equivalent per day, net after royalty, weighted approximately 95% to oil.

With a healthy balance sheet, strong oil production, today’s firm energy markets, and Gran Tierra Energy’s robust drilling portfolio, we are fully funded to execute on

our multiple opportunities to drive growth in 2011 with activities spanning four countries in South America. It is this portfolio approach to managing risks and rewards that has brought strong returns to investors in the past and we intend to continue this in the future.

In closing, I would like to thank all our stakeholders for their continued support and our growing staff for all their hard work. We look forward to updating you on our progress through the balance of 2011 and beyond.

Sincerely,

Dana CoffieldPresident and Chief Executive Officer


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Gran Tierra EnergyThe name Gran Tierra (Great Earth) embodies the respect we have for the world we live in. We are committed to making each of the regions we touch better places to live and work. We believe in building strong relationships with all stakeholders that result in tangible benefits to communities today and for generations to come. We will continue to work closely with communities, partners, and government and non-government agencies in Colombia, Peru, Argentina, and Brazil to ensure our operations have a positive impact on communities and create value for all our stakeholders.

46 Colombia projects

7 Peru projects

6 Argentina projects

32% infrastructure

26% education

26% sustainability

16% social welfare

40% social welfare

40% education

20% sustainability

40% sustainability

30% education

30% social welfare



Cautionary Information Regarding Forward-Looking StatementsThis Annual Report, particularly in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). All statements other than statements of historical facts included in this Annual Report including without limitation statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of our management for future operations, covenant compliance, capital spending plans and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct and because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, those set forth below and as more fully discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 25, 2011. The information included herein is given as of the date of the release of this Annual Report to our stockholders (other than information that speaks as of an earlier date) and, except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Annual Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Risks Related to Our Business• OurLackofDiversificationWillIncreasetheRiskofanInvestmentinOurCommonStock.• WeMayEncounterDifficultiesStoringandTransportingOurProduction,WhichCouldCauseaDecreasein

Our ProductionoranIncreaseinOurExpenses.• GuerrillaActivityinColombiaCouldDisruptorDelayOurOperations,andWeAreConcernedAboutSafeguarding

OurOperationsandPersonnelinColombia. • OurBusinessMaySufferIfWeDoNotAttractandRetainTalentedPersonnel.• OurOilSalesWillDependonaRelativelySmallGroupofCustomers,WhichCouldAdverselyAffectOur

Financial Results.• StrategicRelationshipsUponWhichWeMayRelyareSubjecttoChange,WhichMayDiminishOurAbilityto

ConductOurOperations. • OurBusinessisSubjecttoLocalLegal,PoliticalandEconomicFactorsWhichareBeyondOurControl,WhichCould

ImpairOurAbilitytoExpandOurOperationsorOperateProfitably. • ForeignCurrencyExchangeRateFluctuationsMayAffectOurFinancialResults.• ExchangeControlsandNewTaxesCouldMateriallyAffectourAbilitytoFundOurOperationsandRealizeProfitsfrom

OurForeignOperations. • CompetitioninObtainingRightstoExploreandDevelopOilandGasReservesandtoMarketOurProductionMay

ImpairOurBusiness. • MaintainingGoodCommunityRelationshipsandBeingaGoodCorporateCitizenmaybeCostlyandDifficult

to Manage.• OurOperationsInvolveSubstantialCostsandareSubjecttoCertainRisksBecausetheOilandGasIndustriesinthe

CountriesinWhichWeOperateareLessDeveloped. • NegativePoliticalandRegulatoryDevelopmentsinArgentinaMayNegativelyAffectourOperations.• TheUnitedStatesGovernmentMayImposeEconomicorTradeSanctionsonColombiaThatCouldResultInA

SignificantLossToUs. • WeMayBeUnabletoObtainAdditionalCapitalThatWeWillRequiretoImplementOurBusinessPlan,WhichCould

RestrictOurAbilitytoGrow. • WeMayNotBeAbleToEffectivelyManageOurGrowth,WhichMayHarmOurProfitability.


Risks Related to Our Industry• UnlessWeareAbletoReplaceOurReserves,and DevelopOilandGasReservesonanEconomicallyViableBasis,

OurReserves,ProductionandCashFlowsMayDeclineasaResult. • WeareRequiredtoObtainLicensesandPermitstoConductOurBusinessandFailuretoObtainThese Licenses

ortoObtainThemonaTimelyBasis CouldCauseSignificantDelaysandExpensesThatCouldMateriallyImpactOur Business.

• OurExplorationforOilandNaturalGasIsRiskyandMayNotBeCommerciallySuccessful,ImpairingOurAbilitytoGenerateRevenuesfromOurOperations.

• EstimatesofOilandNaturalGasReservesthatWeMakeMayBeInaccurateandOurActualRevenuesMayBeLowerandOurOperatingExpensesMayBeHigherthanOurFinancialProjections.

• IfOilandNaturalGasPricesDecrease,WeMaybeRequiredtoTakeWrite-DownsoftheCarryingValueofOurOilandNaturalGasProperties.

• DrillingNewWellsandProducingOilandNaturalGasfromExistingFacilitiesCouldResultinNewLiabilities,WhichCouldEndangerOurInterestsinOurPropertiesandAssets.

• OurInabilitytoObtainNecessaryFacilitiesand/orEquipmentCouldHamperOurOperations.• DecommissioningCostsAreUnknownandMaybeSubstantial;UnplannedCostsCouldDivertResourcesfrom

Other Projects.• PricesandMarketsforOilandNaturalGasAreUnpredictableandTendtoFluctuateSignificantly,WhichCould

ReduceProfitability,GrowthandtheValueofGranTierra.

Penalties We May Incur Could Impair Our Business.• Policies,ProceduresandSystemstoSafeguardEmployeeHealth,SafetyandSecurityMayNotbeAdequate.• EnvironmentalRisksMayAdverselyAffectOurBusiness.• OurInsuranceMayBeInadequatetoCoverLiabilitiesWeMayIncur.• ChallengestoOurPropertiesMayImpactOurFinancialCondition.• WeWillRelyonTechnologytoConductOurBusinessandOurTechnologyCouldBecomeIneffectiveOrObsolete.

Risks Related to Our Common Stock• TheMarketPriceofOurCommonStockMayBeHighlyVolatileandSubjecttoWideFluctuations.• WeDoNotExpecttoPayDividendsIntheForeseeableFuture.


Selected Financial Data

(ThousandsofU.S.Dollars,ExceptShareandPerShareAmounts)

Year Ended December 31,

2010

Year EndedDecember31,

2009


2008


2007


2006

StatementofOperationsData

Revenuesandotherincome

Oilandnaturalgassales $ 373,286 $ 262,629 $ 112,805 $ 31,853 $ 11,721

Interest 1,174 1,087 1,224 425 352

Totalrevenuesandotherincome 374,460 263,716 114,029 32,278 12,073

Expenses

Operating 59,446 40,784 19,218 10,474 4,233

Depletion,depreciation,accretionandimpairment 163,573 135,863 25,737 9,415 4,088

Generalandadministrative 40,241 28,787 18,593 10,232 6,999

Liquidateddamages – – – 7,367 1,528

Derivativefinancialinstruments(gain)loss (44) 190 (193) 3,040 –

Foreignexchange(gain)loss 16,838 19,797 6,235 (78) 371

Totalexpenses 280,054 225,421 69,590 40,450 17,219

Income(loss)beforeincometaxes 94,406 38,295 44,439 (8,172) (5,146)

Incometaxexpense (57,234) (24,354) (20,944) (295) (678)

Netincome(loss) $ 37,172 $ 13,941 $ 23,495 $ (8,467) $ (5,824)

Netincome(loss)percommonshare—basic $ 0.15 $ 0.06 $ 0.19 $ (0.09) $ (0.08)

Netincome(loss)percommonshare—diluted $ 0.14 $ 0.05 $ 0.16 $ (0.09) $ (0.08)

BalanceSheetData

As at December 31,

2010

As atDecember 31,

2009

As atDecember 31,

2008

As atDecember 31,

2007

As atDecember 31,

2006

Cashandcashequivalents $ 355,428 $ 270,786 $ 176,754 $ 18,189 $ 24,101

Workingcapital(includingcash) 265,835 215,161 132,807 8,058 14,541

Oilandgasproperties 721,157 709,568 765,050 63,202 56,093

Deferredtaxasset—longterm – 7,218 10,131 1,839 444

Totalassets 1,249,254 1,143,808 1,072,625 112,797 105,537

Deferredtaxliabilityanddeferredremittancetax— longterm 205,606 217,528 214,210 10,567 9,876

Otherlong-termliabilities 4,469 4,258 4,251 1,986 634

Shareholders’equity $ 886,866 $ 816,426 $ 791,926 $ 76,792 $ 76,195

Wemadeourinitialacquisitionofoilandgasproducingandnon-producingpropertiesinArgentinainSeptember2005foratotalpurchasepriceofapproximately$7 million.Priortothattimewehadnorevenues.InJune2006,weacquiredArgosyEnergyInternationalL.P.’sassetsinColombiaforconsiderationof$37.5 millioncash,870,647sharesofourcommonstockandoverridingandnetprofitinterestsincertainassetsvaluedat$1 million.InNovember2008,weacquiredSolanafor$671.8 millionthroughtheissuancetoSolanastockholdersofeithersharesofourcommonstockorsharesofcommonstockofasubsidiaryofGranTierra.


Preliminary Note to Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following Management’s Discussion and Analysis of Financial Condition and Results of Operations is as it appears in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 25, 2011.

On January 17, 2011, we entered into an Agreement to acquire all the issued and outstanding shares and warrants of Petrolifera Petroleum Limited (“Petrolifera”), which we completed on March 18, 2011. Petrolifera is a Canadian based international oil and gas company that trades on the Toronto Stock Exchange and has oil and gas assets in Argentina, Colombia, and Peru. Our discussion below therefore speaks as of the date of our filing of our Annual Report on Form 10-K, and does reflect any update as a result of the closing of this transaction, including with respect to our 2011 Work Program and Capital Expenditure Program.

Management’s Discussion and Analysis of Financial Condition and Results of OperationsThis report, and in particular this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Please see the cautionary language in the section entitled “Cautionary Information Regarding Forward-Looking Statements” earlier in this Annual Report regarding the identification and risks relating to forward-looking statements.

The following discussion of our financial condition and results of operations should be read in conjunction with the Financial Statements and Supplementary Data included in this Annual Report.

OverviewWeareanindependentinternationalenergycompanyincorporatedintheUnitedStatesandengagedinoilandnaturalgasacquisition,exploration,developmentandproduction.WeareheadquarteredinCalgary,Alberta,CanadaandoperateinSouthAmericainColombia,Argentina,Peru,andBrazil.

InSeptember2005,weacquiredourinitialoilandgasinterestsandproperties,whichwereinArgentina.During2006,weincreasedouroilandgasinterestsandpropertybasethroughfurtheracquisitionsinColombia,ArgentinaandPeru.WefundedacquisitionsofourpropertiesinColombiaandArgentinathroughaseriesofprivateplacementsofoursecuritiesthatoccurredbetweenSeptember2005andJune2006.

In2007,wemadeanewfielddiscovery,Costayaco,intheChazaBlockofthePutumayoBasininColombia.EffectiveNovember14,2008,wecompletedtheacquisitionofSolanaResourcesLimited(“Solana”),aninternational

resourcecompanyengagedintheacquisition,exploration,developmentandproductionofoilandnaturalgasinColombiaandincorporatedinAlberta,Canada.Atthedateofacquisition,SolanaheldvariousworkinginterestsinnineblocksinColombiaincludinga50%workinginterestintheChazaBlock,whichincludestheCostayacofield,anda35%workinginterestintheGuayuyacoBlock,whichincludestheJuanambufield.

Duringthethirdquarterof2009,weopenedabusinessdevelopmentofficeinRiodeJaneiro,Brazil.InJune2010,weexpandedourlandpositioninthePutumayoBasinandaddednewfrontierexplorationacreagein

ColombiathroughsuccessfulbidsonthreeblocksinColombia.InAugustandOctober2010respectively,wemadenewColombianfielddiscoveriesinMoquetaintheChazaBlock(PutumayoBasin)andJilguerointheGaribayBlock.AlsoinAugust2010,wefinalizedafarm-inagreementwithAlvoradaPetroleoS.A.relatingtotheon-shoreReconcavoBasininBrazil,pendingregulatoryapprovalfromBrazil’sAgencianacionaldePetroleoGasnaturaleBioncombustiveis(“ANP”).In PeruinSeptember2010,weacquireda20%workinginterestinthreeblocksand,inDecember2010,weacquireda60% interestinoneblock.BothtransactionsinPeruaresubjecttogovernmentapproval.

OnJanuary17,2011,weannouncedthatwehadenteredintoanArrangementAgreementtoacquirePetroliferaPetroleumLtd.(“Petrolifera”).PetroliferaisaCanadianbasedinternationaloilandgascompanylistedontheTorontoStockExchangewhichownsworkinginterestsin11explorationandproductionblocks;threelocatedinColombia,threeinPeruandfiveinArgentina.TheArrangementAgreementissubjecttoPetroliferashareholderandregulatory,stockexchangeandcourtapprovals,andisexpectedtocloseinMarch2011.See“SubsequentEvents”belowforfurtherdetailsofthis transaction.


Business StrategyOurplanistocontinuetobuildaninternationaloilandgascompanythroughacquisitionandexploitationofunder-developedprospectiveoilandgasassets,andtodeveloptheseassetswithexplorationanddevelopmentdrillingtogrowcommercialreservesandproduction.OurinitialfocusisinselectcountriesinSouthAmerica,currentlyColombia,Argentina,Peru,andBrazil;wewillconsiderotherregionsforfuturegrowthshouldthoseregionsmakestrategicandcommercialsenseincreatingadditionalvalue.

Wehaveappliedatwo-stageapproachtogrowth,initiallyestablishingabaseofproduction,developmentandexplorationassetsbyselectiveacquisitions,andsecondlyachievingadditionalreserveandproductiongrowththroughdrilling.Weintendtoduplicatethisbusinessmodelinotherareasasopportunitiesarise.Wepursueopportunitiesincountrieswithprovenpetroleumsystems;attractiveroyalty,taxationandotherfiscalterms;andstablelegalsystems.

Financial and Operational Highlights YearEndedDecember31,

2010 %Change 2009 %Change 2008

EstimatedProvedOilandGasReserves,netofroyalties– MillionsofBarrelsofOilEquivalent(1)(“Mmboe”)at yearend 23.8 6 22.4 15 19.4

Production—BarrelsofOilEquivalent(“boe”)perDay 14,448 14 12,684 249 3,635

PricesRealized—perboe $ 70.79 25 $ 56.73 (33) $ 84.78

RevenueandOtherIncome($000s) $ 374,460 42 $ 263,716 131 $ 114,029

NetIncome($000s) $ 37,172 167 $ 13,941 (41) $ 23,495

NetIncomePerShare—Basic $ 0.15 150 $ 0.06 (68) $ 0.19

NetIncomePerShare—Diluted $ 0.14 180 $ 0.05 (69) $ 0.16

FundsFlowFromOperations($000s)(2) $ 203,422 28 $ 159,531 223 $ 49,437

CapitalExpenditures($000s) $ 177,039 101 $ 88,124 89 $ 46,728

As at December31,

2010 %Change 2009 %Change 2008

Cash&CashEquivalents($000s) $ 355,428 31 $ 270,786 53 $ 176,754

WorkingCapital(includingcash&cashequivalents) ($000s) $ 265,835 24 $ 215,161 62 $ 132,807

Property,PlantandEquipment($000s) $ 727,024 2 $ 712,743 (7) $ 767,552(1) Gas volumes are converted to boes at the rate of six thousand cubic feet (“mcf”) of gas per barrel of oil, based on the approximate relative energy

content of gas and oil. The conversion ratio for natural gas to oil does not assume price equivalency and the price for a barrel of oil equivalent for natural gas may differ significantly from the price of a barrel of oil.

(2) Funds flow from operations is a non-GAAP measure which does not have any standardized meaning prescribed under United States Generally Accepted Accounting Principles (“GAAP”). Management uses this financial measure to analyze operating performance and the income (loss) generated by Gran Tierra’s principal business activities prior to the consideration of how non-cash items affect that income (loss), and believes that this financial measure is also useful supplemental information for investors to analyze operating performance and Gran Tierra’s financial results. Investors should be cautioned that this measure should not be construed as an alternative to net income (loss) or other measures of financial performance as determined in accordance with GAAP. Gran Tierra’s method of calculating this measure may differ from other companies and, accordingly, it may not be comparable to similar measures used by other companies. Funds flow from operations, as presented, is net income (loss) adjusted for depletion, depreciation, accretion and impairment, deferred taxes, stock based compensation, unrealized loss (gain) on financial instruments and unrealized foreign exchange losses (gains). A reconciliation from funds flow from operations to net income is as follows:

YearEndedDecember31,

FundsFlowFromOperations—Non-GAAPMeasure($000s) 2010 2009 2008

Netincome $ 37,172 $ 13,941 $ 23,495

Adjustmentstoreconcilenetincometofundsflowfromoperations

Depletion,depreciation,accretionandimpairment 163,573 135,863 25,737

Deferredtaxes (20,090) (15,355) (6,418)

Stock-basedcompensation 8,025 5,309 2,520

Unrealized(gain)lossonfinancialinstruments (44) 277 (2,882)

Unrealizedforeignexchangeloss 14,786 19,496 6,985

Fundsflowsfromoperations $ 203,422 $ 159,531 $ 49,437


Financial Highlights for the Year Ended December 31, 2010• In2010,productionofcrudeoil(netafterroyaltyandinventoryadjustments)averaged14,325barrelsofoilperday

(“BOPD”),anincreaseof13%over2009,duemainlytoproductionfromnewdevelopmentwellsintheCostayacofieldintheChazaBlockinColombiawhereGranTierrahasa100%workinginterest.Productionofnaturalgasaveraged123barrelsofoilequivalentperday(“BOEPD”)fromColombia.

• Revenueandotherincomeincreasedby42%from2009duetoincreasedproductionandhigheroilprices.• Aforeignexchangelossof$16.8 million,ofwhich$14.8 millionisanunrealizednon-cashforeignexchangeloss,

wasrecordedin2010primarilyduetothetranslationofadeferredtaxliabilitydenominatedinColombianpesos.Thedevaluationof6%intheU.S.dollaragainsttheColombianPesoin2010resultedintheforeignexchangeloss.This representsadecreasefromtheforeignexchangelossrecordedin2009,ofwhich$19.5 millionwasanunrealizednon-cashforeignexchangelossrelatedprimarilytothesamedeferredtaxliability.

• Ournetincomegrewby167%fromtheprioryearto$37.2 million,representingabasicnetincomepershareof$0.15comparedwith$0.06in2009.

• Oilandgaspropertyexpendituresfor2010were$177.0 million:$105.5 millioninColombia,$33.9 millioninArgentina,$23.2 millioninPeru,$12.4 millioninBrazil,and$2.0 millionofgeneralcorporateassets.Includedinthecapitalexpenditureswerethirteenwellsofwhichninewereexplorationandfourweredevelopment.

• Ourcashpositionof$355.4 million(excludingrestrictedcash)atDecember31,2010increasedfrom$270.8 millionatDecember31,2009asaresultofincreasedcashprovidedbyoperatingactivities,partiallyoffsetbycapitalexpenditures.

• Fundsflowfromoperationsincreased28%to$203.4 millionin2010from$159.5 millionin2009.Theincreasewasprimarilyduetoincreasedsalesvolumesandpricesascomparedtotheprioryear,onlypartiallyoffsetbyincreasedoperatingandgeneralandadministrative(“G&A”)expensesin2010.

• Workingcapital(includingcash&cashequivalents)was$265.8 millionatDecember31,2010,whichisa$50.7 millionincreasefromDecember31,2009,duemainlytoincreasedcashasatDecember31,2010comparedtoDecember31,2009.

• Property,plantandequipmentasatDecember31,2010was$727.0 million,anincreaseof$14.3 millionfromDecember31,2009,primarilyasaresultofa101%increaseincapitaladditions,partiallyoffsetbydepletion,depreciation,accretionandimpairment(“DD&A”).

Operational Highlights for the Year Ended December 31, 2010

Exploration and Development Activities in Colombia

ChazaBlock• Costayaco Field Drilling, Water Injection and Workovers

InJune2010,wecompletedloggingoperationsandinitiatedproductiontestingofCostayaco–11.Costayaco-11wastied-inandputonproductioninearlyJulyandwillbeusedasaCaballosandT-sandproducerandsubsequentlyasawater-injectortoprovidepressuremaintenanceintheT-Sandstonereservoir.Inthelasthalfof2010,asuccessfulworkoverprogramenhancedtheproductivityoftheCostayacofield.InSeptemberandOctober2010,aplannedwaterinjectionfacilitywascompletedandwaterinjectioncommencedfromCostayaco-5andCostayaco-6intotheT-Sandforreservoirmaintenanceandmaximizationofoilrecovery.Costayaco-12andCostayaco-13drillingcommencedinDecember2010.

• Moqueta Field Exploration and Delineation InJune2010,wecompletedinitialtestingontheMoqueta-1explorationwellintheChazaBlockinColombia.TheMoqueta-2delineationwellwasdrilledinJuly2010fromtheexistingMoqueta-1pad.TheMoqueta-3appraisalwellwascompletedandtestedinOctober,2010andconfirmedoilbearingreservoirsintheVilletaUandTSandstonesandCaballosreservoirsandstones.TheMoqueta-4developmentwellwasinprogressatDecember31,2010andtestingwillbecompleteinMarch2011.Additionalseismicwasalsoacquiredduringtheyear.ConstructionoftheMoquetatoCostayacopipelineisexpectedtocommenceinthefirstquarterof2011andfirstoilproductionisanticipatedinthesecondquarterof2011.

• Dantayaco Field Exploration TestingofDantayaco–1wascompletedandthewellpluggedandabandonedinJanuary2010.


• Pacayaco Field Exploration Pacayaco-1commenceddrillinginNovember2010andwassuspendedpendingacquisitionandinterpretationofseismic.Theacquisitionandinterpretationisnowcompleteandeitheranewwellorasidetrackoftheexistingwellwillbedrilledlateinthesecondquarterof2011.

• Rio Guineo Exploration Seismicrelatingtothisleadwasacquiredduringtheyear.

GaribayBlock• TestingofJilguero–1intheGaribayBlockwascompletedinOctober2010andlong-termproductiontestingbeganin

January2011.

RioMagdalenaBlock• Popa-3,anappraisalwellintheRioMagdalenaBlock,hasbeendrilledandloggedandgasbearingreservoirs

identified.Thewellhasbeencasedandsuspendedpendingfurtherevaluation.

PiedmonteNorteandSurBlocks• DrillingpreparationsforTaruka-1,anexplorationwellinthePiedemonteSurBlock,beganinlateDecember2010.

DrillingbeganinJanuary2011andthewellwaspluggedandabandonedinFebruary2011.• SeismicwasacquiredinboththePiedmonteNorteandPiedmonteSurblocksduringtheyear.

NewColombianExplorationandExploitationContracts• InJune2010,wewereawardedthreeblocks,Putumayo-10,Cauca-6,andCauca-7,intheColombiaBidRound

administeredbyColombia’sANH.BidcontractsareexpectedtobefinalizedbyMarch,2011.Wealsocompletedandreceivedgovernmentapprovalforafarm-inonPutumayo-1Block.

Argentina Development and Exploration

• InJuly2010,re-entryandsidetrackoperationsbeganontheGTE.St.VMor-2001wellinValleMoradoand,inFebruary2011,theseoperationsweresuspendedandthewellborewillbeabandonedduetoanumberofoperationalchallengesencountered.GranTierraEnergycontinuestoreviewalternativesassociatedwiththefielddevelopment.

• WeacquiredseismicintheSantaVictoriaBlockandhavereceiveda90dayextensionoftheexplorationperiodtoMarch29,2011,todeterminewhethertoproceedintothenextphaseofthecontract.

Peru Exploration

Block128• WereceivedEnvironmentalImpactAssessmentapprovalsforseismicanddrillingoperationsonBlock128during

2010.Weacquiredseismicduring2010andbegandrillinganexplorationwellinFebruary2011.AlsoinFebruary2011,werelinquished20%ofthisBlock.

Block122• WereceivedEIAapprovalsforseismicanddrillingoperationsonBlock122during2010.Seismicacquisitionwas

ongoingatDecember31,2010andanexplorationwellisplannedforthethirdquarterof2011.

Blocks123,124,and129• InSeptember2010,weacquireda20%workinginterestinBlock123,Block124,andBlock129,whichissubjectto

governmentapproval.Thesethreeblockshaveatotalareaofapproximately6.7 milliongrossacres.

Block95• InDecember2010,weacquireda60%workinginterestandtheoperatorshipofBlock95,whichissubjectto

governmentapproval.Block95hasatotalareaof1.3 milliongrossacres.

Brazil Exploration

• OnAugust29,2010,weenteredintoanagreementwithAlvoradaPetroleoS.A.wherebywewillfulfillcertaincommitments,includingthedrillingoftwowellsin2011,andearna70%workinginterestinfourBlocksintheon-shoreReconcavoBasin,Brazil.Thetransactionissubjecttogovernmentapproval.


Consolidated Results of Operations (1) YearEndedDecember31,

ConsolidatedResultsofOperations 2010 %Change 2009 %Change 2008

(ThousandsofU.S.Dollars)

Oilandnaturalgassales $ 373,286 42 $ 262,629 133 $ 112,805

Interest 1,174 8 1,087 (11) 1,224

374,460 42 263,716 131 114,029

Operatingexpenses 59,446 46 40,784 112 19,218

Depletion,depreciation,accretionandimpairment 163,573 20 135,863 428 25,737

Generalandadministrativeexpenses 40,241 40 28,787 55 18,593

Foreignexchangeloss 16,838 (15) 19,797 218 6,235

Other (44) 123 190 (198) (193)

280,054 24 225,421 224 69,590

Incomebeforeincometaxes 94,406 147 38,295 (14) 44,439

Incometaxexpense (57,234) 135 (24,354) 16 (20,944)

Netincome $ 37,172 167 $ 13,941 (41) $ 23,495

Production,NetofRoyalties

OilandNGL’s(“bbl”)(2) 5,228,554 13 4,621,546 248 1,328,145

Naturalgas(“mcf”)(2) 268,776 448 49,028 237 14,559

Totalproduction(“boe”)(2)(3) 5,273,350 14 4,629,717 248 1,330,572

AveragePrices

OilandNGL’s(«perbbl») $ 71.19 25 $ 56.79 (33) $ 84.89

Naturalgas(«permcf») $ 3.90 (1) $ 3.93 (20) $ 4.93

ConsolidatedResultsofOperations(“perboe”)

Oilandnaturalgassales $ 70.79 25 $ 56.73 (33) $ 84.78

Interest 0.22 (4) 0.23 (75) 0.92

71.01 25 56.96 (34) 85.70

Operatingexpenses 11.27 28 8.81 (39) 14.44

Depletion,depreciation,accretionandimpairment 31.02 6 29.35 52 19.34

Generalandadministrativeexpenses 7.63 23 6.22 (55) 13.97

Foreignexchangeloss 3.19 (25) 4.28 (9) 4.69

Other (0.01) 125 0.04 (127) (0.15)

53.10 9 48.70 (7) 52.29

Incomebeforeincometaxes 17.91 117 8.26 (75) 33.41

Incometaxexpenses (10.85) 106 (5.26) (67) (15.74)

Netincome $ 7.06 135 $ 3.00 83 $ 17.67(1) Consolidated results of operations include the operations of Solana subsequent to our acquisition of Solana on November 14, 2008.(2) Gas volumes are converted to boes at the rate of six thousand cubic feet mcf of gas per barrel of oil, based upon the approximate relative energy content

of gas and oil, which rate is not necessarily indicative of the relationship of oil and gas prices.(3) Production represents production volumes adjusted for inventory changes.


Consolidated Results of Operations for the Year Ended December 31, 2010 Compared to the Results for the Year Ended December 31, 2009

Netincomeof$37.2 million,or$0.15persharebasicand$0.14persharediluted,wasrecordedin2010comparedto$13.9 million,or$0.06persharebasicand$0.05persharediluted,in2009.A42%increaseinrevenueandotherincometo $374.5 millionfrom$263.7 millionrecordedin2009waspartiallyoffsetbyan$18.7 millionincreaseinoperatingexpenses,a$11.5 millionincreaseingeneralandadministrativeexpenses,a$27.7 millionincreaseinDD&A,anda$32.9 millionincreaseinincometaxexpense.

Revenue and other incomeincreased42%asaresultofa13%increaseincrudeoilproductioncombinedwitha25%improvementincrudeoilprices.

Crude oil and NGL production,netafterroyalties,in2010increasedto5.2 millionbarrelscomparedto4.6 millionbarrelsin2009,duetoincreasedproductionfromourColombiaoperations.Averagerealizedcrudeoilpricesfor2010increasedto$71.19perbarrelfrom$56.79perbarrelin2009,reflectinghigherWestTexasIntermediate(“WTI”)oilprices.

TheadditionalgovernmentroyaltyfortheCostayacoField(describedin“SegmentedOperations—Colombia”)beganinthefourthquarterof2009andwaspaidforonlythreemonthsof2009versusthefullyearof2010.Asaresult,ourshareofproductionwasreducedbyatotalof947,000BOE’srelatingtothisadditionalroyaltyin2010ascomparedtoonly328,000BOE’sin2009.Sinceourproductionvolumesarereportednetafterroyaltiesandthisroyaltystructurewasnotinplaceforanequalamountoftimein2009and2010,certainchangesbetweentheseyears,includingvolumes,changesinperboeoperatingcosts,andperboegeneralandadministrativecosts,willnotbereadilycomparable.Forinstance,theincreaseintheCostayacofieldproductionwillnotappearashighincomparisonwith2009asitwouldappearwithouttheadditionalroyaltyvolumesdeducted.Similarly,theperboeoperatingandgeneralandadministrativecostswillappearhigheronaperboebasisin2010thanin2009asthecostsaredividedoverasmallerbaseafterroyaltiesarededucted.

Operating expensesfor2010amountedto$59.4 million,a46%increasefromtheprioryeartotalof$40.8 million.TheincreaseinoperatingexpensesoccurredprimarilyinColombiaandwasduetoanenhancedworkoverprogramrelatedtotheCostayacoarea,anincreaseintransportationcostsrelatedtoincreasedproductionandpipelinemaintenance,andanincreaseinproducingwellsinCostayaco.Operatingexpensesonaboebasisin2010were$11.27,a28%increasefrom2009reflectingboththeincreaseintotaloperatingcostsandtheeffectoftheadditionalgovernmentroyaltypayableonperboecalculations,partiallyoffsetbyanincreaseinproduction.

DD&Aexpensefor2010increasedto$163.6 millioncomparedto$135.9 millionin2009.Theincreaseinproductionlevelswaspartiallyoffsetbyanincreaseofreservesatyear-endandareductionoffuturedevelopmentcostsincludedinthedepletablebaseascomparedto2009.DD&Aexpensein2010includeda$23.6 millionceilingtestimpairmentforourArgentinacostcenter,including$17.9 millionrelatingtotheabandonmentoftheGTE.St.VMor-2001sidetrackoperations,ascomparedtoa$1.9 millionchargein2009.Onaboebasis,DD&Ain2010was$31.02comparedto$29.35for2009,representinga6%increaseresultingfromtheceilingtestimpairmentlossoffsetpartiallybyincreasedreservesanddecreasedfuturedevelopmentcosts.

G&A expensesof$40.2 millionfor2010was40%higherthan2009duetoincreasedemployeerelatedcostsreflectingtheexpansionofoperationsinPeru,Brazil,andColombiaandhigherbusinessdevelopmentcosts.G&Aexpensesperboeincreased23%to$7.63perboecomparedto$6.22perboefor2009.Theincreaseingeneralandadministrativecostsonaperboebasisovertheprioryearwascompoundedbytheadditionalroyaltypaidin2010.

Theforeign exchange lossof$16.8 millionfor2010,ofwhich$14.8 millionisanunrealizednon-cashforeignexchangeloss,comparesto$19.8 millionrecordedin2009,ofwhich$19.5 millionisanunrealizednon-cashforeignexchangeloss.TheselossesoriginateinColombiaandrelatetoforeignexchangelossesresultingfromthetranslationofadeferredtax liability.

Incometaxexpensefor2010amountedto$57.2 millioncomparedto$24.4 millionrecordedin2009.Thisrepresentsanincreaseof135%inannualincometaxexpense,primarilyasaresultofhigherprofitsandtheapplicationofavaluationallowanceagainstpreviouslyrecognizeddeferredtaxassetsassociatedwithArgentina.Thedecreaseinthe2010effectivetaxrateto61%from64%in2009isprimarilyduetoadecreaseinthevaluationallowanceassociatedwithlossesinourU.S.,Canadian,PeruandBrazilbusinessunits,partiallyoffsetbytheincreaseinthevaluationallowanceassociatedwithlossesinourArgentinabusinessunits.Thevariancefromthe35%U.S.statutoryratefor2010resultsfromforeigncurrencytranslationlossesthatareneithertaxablenordeductiblefortaxpurposesineachoftherespectivejurisdictions,thevaluationallowancesasdescribedabove,enhancedtaxdepreciationincentiveinColombia,andColombiathirdpartyroyaltypaymentsthatarenotdeductiblefortaxpurposes.Similarfactorscausethevariancefromthe35%U.S.statutoryratefor2009.


Consolidated Results of Operations for the Year Ended December 31, 2009 Compared to the Results for the Year Ended December 31, 2008

AsaresultoftheSolanaacquisition,weincreasedourworkinginterestto100%intheCostayacofieldand70%intheJuanambufield,inColombia,whichresultedinincreasedproduction,revenue,operatingcosts,andDD&Ain2009.

Netincomeof$13.9 million,or$0.06persharebasicand$0.05persharediluted,wasrecordedin2009comparedto$23.5 million,or$0.19persharebasicand$0.16persharediluted,in2008.Aforeignexchangelossof$19.8 million,ofwhich$19.5 millionisanunrealizednon-cashforeignexchangeloss,anincreaseof$110.1 millioninDD&Ato$135.9 million,higheroperatingandgeneralandadministrativeexpenses,andincreasedincometaxexpense,morethanoffsetthehigheroilrevenuesin2009.

Revenue and interestincreased131%to$263.7 millionin2009comparedto$114.0 millionin2008.Thiswasduetoanincreaseof248%incrudeoilproductionpartiallyoffsetbya33%decreaseincrudeoilprices.

Crude oil and NGL production,netafterroyalties,in2009increasedto4.6 millionbarrelscomparedto1.3 millionbarrelsin2008,duemainlytoincreasedproductionfromourColombiaoperations.Averagerealizedcrudeoilpricesfor2009decreasedto$56.79perbarrelfrom$84.89perbarrelin2008,reflectinglowerWTIoilprices.

Operating expensesfor2009amountedto$40.8 million,a112%increasefromtheprioryear.TheincreaseinoperatingexpensesisduetoexpandedoperationsandincreasedproductionlevelsinColombia.However,operatingexpensesonaboebasisin2009were$8.81perboe,a39%declinefrom2008reflectingareductioninfixedcostsperbarrelduetoproductionincreasesatCostayaco.

DD&Aexpensefor2009increasedto$135.9 millioncomparedto$25.7 millionin2008.Increasedproductionlevels,aswellasamortizationexpenseof$102.5 millionin2009($6.9 millionin2008)relatedtothefairvalueofproperty,plantandequipmentrecordedontheacquisitionofSolana,accountedfortheincreases.Onaboebasis,DD&Ain2009was$29.35comparedto$19.34for2008.This52%increasewasprimarilyduetothesignificantadditionstotheproveddepletablecostbaseresultingfromtheSolanaacquisitionpartiallyoffsetbyhigherprovedreservesinColombia.DD&Afor2009includeda$1.9 millionceilingtestimpairmentlossinourArgentinacostcenter.Thisimpairmentlossresultedfromhigherestimatedfutureoperatingcoststoproduceremainingreserves.

G&A expensesof$28.8 millionfor2009were55%higherthan2008duetoincreasedemployeerelatedcostsreflectingtheexpandedoperationsinColombia.However,duetohigherproductionin2009,G&Aexpensesperboedecreased55%to$6.22perboecomparedto$13.97perboefor2008.

Theforeign exchangelossof$19.8 millionfor2009,ofwhich$19.5 millionisanunrealizednon-cashforeignexchangeloss,comparesto$6.2 millionrecordedin2008.TheselossesprimarilyrepresentforeignexchangelossesthatoriginateinColombiafromthetranslationofadeferredtaxliabilityrecordedonthepurchaseofSolana.

Income tax expensefor2009amountedto$24.4 millioncomparedto$20.9 millionrecordedin2008.Thisrepresentsanincreaseof16%inannualincometaxexpense,primarilyduetoanincreaseinforeigncurrencytranslationlossesthatareneithertaxablenordeductiblefortaxpurposesineachoftherespectivejurisdictions.Theincreaseinthe2009effectivetaxrateto64%from47%in2008isprimarilyduetotheincreaseinthevaluationallowanceassociatedwithincreasedlossesinourU.S.,CanadianandPerubusinessunits.Thevariancefromthe35%U.S.statutoryratefor2009resultsfromanincreaseinthevaluationallowancesasdescribedabove,andtherecaptureofenhancedtaxdepreciationincentiveinColombia,duetoadisposalofassetsduringtheyear,offsetbyenhancedtaxdepreciationtakenonoilandgascapitalexpenditures.Thevariancefromthe35%U.S.statutoryratefor2008isprimarilyattributabletorecognitionofpreviouslyunrecognizedforeigntaxcredits,foreigncurrencytranslationfluctuationsthatarenottaxableordeductibleintherelatedforeignjurisdictions,andvaluationallowancestakenonlossesincurredintheU.S.,Canada,andPeru.

Estimated Oil and Gas ReservesEstimatedprovedoilreserves,netofroyalties,asofDecember31,2010,were23.6 millionbarrels,a7%increasefromtheestimatedprovedreservesasatDecember31,2009.TheincreasewasgeneratedbyourColombianoperationsandresultedfromourexplorationsuccessinMoquetaandfromsustainedreservoirperformanceinCostayaco,whichledtoconversionofprobablereservestoprovedreservesandwhichmorethanoffset2010productionofoil.Estimatedprobableandpossibleoilandnaturalgasliquidsreserves,netofroyalties,asofDecember31,2010were7.4 millionbarrelsand16.3 millionbarrels respectively.

Estimatedprovedgasreserves,netofroyalties,asofDecember31,2010,were1.2billioncubicfeet(“bcf”),a37%decreasefromtheestimatedprovedreservesasatDecember31,2009.Estimatedprobableandpossiblegasreserves,netofroyalties,asofDecember31,2010were0.1bcfand42.1bcf,respectively.


Estimatedprovedoilreserves,netofroyalties,asofDecember31,2009,were22.1 millionbarrels,a15%increasefromtheestimatedprovedreservesasatDecember31,2008.TheincreaseresultedfromoursuccessfuldevelopmentdrillingprograminColombiawhichmorethanoffset2009productionofoil.Estimatedprobableandpossibleoilreserves,netofroyalties,asofDecember31,2009,were5.8 millionbarrelsand11.5 millionbarrels,respectively.

Estimatedprovedgasreserves,netofroyalties,asofDecember31,2009,were1.9bcf,a61%increasefromtheestimatedprovedreservesasatDecember31,2008.Estimatedprobableandpossiblegasreserves,netofroyalties,asofDecember31,2009,were1.7bcfand34.5bcf,respectively.

Segmented Results of OperationsOuroperationsarecarriedoutinColombia,Argentina,Peru,andBrazil,andweareheadquarteredinCalgary,Alberta,Canada.OurreportablesegmentsincludeColombia,ArgentinaandCorporatewiththelatterincludingtheresultsofourinitialactivitiesinPeruandBrazil.In2010,Colombiagenerated96%ofourrevenueandotherincome.

Segmented Results — Colombia (1)


SegmentedResultsofOperations—Colombia 2010 %Change 2009 %Change 2008

(ThousandsofU.S.Dollars)


Interest 460 (1) 466 (53) 995

359,762 44 249,300 139 104,197


Depletion,depreciationandaccretion 133,728 5 127,213 473 22,199


Foreignexchangeloss 17,901 (11) 20,158 204 6,622

217,276 12 193,473 323 45,707

Segmentincomebeforeincometaxes $ 142,486 155 $ 55,827 (5) $ 58,490


OilandNGL's("bbl")(2) 4,944,510 15 4,284,230 295 1,085,198

Naturalgas("mcf")(2) 268,776 448 49,028 (237) 14,559

Totalproduction("boe")(2)(3) 4,989,306 16 4,292,401 295 1,087,625

AveragePrices

OilandNGL’s(“perbbl”) $ 72.45 25 $ 58.04 (39) $ 95.04

Naturalgas(“permcf”) $ 3.90 (1) $ 3.93 (20) $ 4.93

SegmentedResultsofOperations(“perboe”)

Oilandnaturalgassales $ 72.01 24 $ 57.97 (39) $ 94.89

Interest 0.09 (18) 0.11 (88) 0.91

72.10 24 58.08 (39) 95.80


Depletion,depreciationandaccretion 26.80 (10) 29.64 45 20.41


Foreignexchangeloss 3.59 (24) 4.70 (23) 6.09

43.55 (3) 45.08 7 42.02

Segmentincomebeforeincometaxes $ 28.55 120 $ 13.00 (76) $ 53.78

(1) Segmented results of operations for Colombia include the operations of Solana subsequent to our acquisition of Solana on November 14, 2008.(2) Natural gas liquids (“NGL”) volumes are converted to boe on a one-on-one basis with oil. Gas volumes are converted to boes at the rate of six mcf of gas

per barrel of oil, based upon the approximate relative energy content of gas and oil, which rate is not necessarily indicative of the relationship of oil and gas prices.

(3) Production represents production volumes adjusted for inventory changes.


Segmented Results of Operations — Colombia for the Year Ended December 31, 2010 Compared to the Results for the Year Ended December 31, 2009

FortheyearendedDecember31,2010,income before income taxesfromColombiaamountedto$142.5 millioncomparedtoincomebeforetaxesof$55.8 millionrecordedin2009.Anincreaseinproductionrevenuemorethanoffsetincreasedoperating,G&A,andDD&Aexpenses.

FortheyearendedDecember31,2010,production of crude oil and NGLs,netafterroyalties,increasedby15%to4.9 millionbarrelscomparedto4.3 millionbarrelsin2009.TheincreaseinproductionisprimarilyduetotheincreaseinwellsonstreaminCostayacoandthesuccessoftheCostayacoworkoverprogram.Productionlevelsareaftergovernmentroyaltiesrangingfrom8%to26%andthirdpartyroyaltiesof2%to10%.Theadditionalgovernmentroyaltypaidin2010(discussedin“ConsolidatedResultsofOperations”)reducedtheincreaseintotalproductionfromtheCostayacofieldascomparedtotheprioryear.

GranTierra’sColombianoperatingresultsfortheyearendedDecember31,2010wereprincipallydrivenbytheincreaseinproductionvolumesandtheassociatedincreaseinworkover,transportation,operating,G&AandDD&Aexpenses.In 2010,ColombiaproductionincludedCostayaco-1,-2,-3,-4,-8,-9,-10(January2010),and-11(June2010),Juanambu1and2,andtheSantanaBlock.In2009,ColombiaproductionincludedCostayaco-1,-2,-3,-4,-5,-8(July2009),-9(September 2009),andJuanambu1.

OutagesontheEcopetroloperatedTransAndeanPipeline(“OTA”)resultwhensectionsofthepipelinearedamaged.OutagesreducedourdeliveriestoEcopetrolfor29daysin2010(7daysinJuneand22daysinSeptember),ascomparedto46daysin2009(32daysinJulyandAugustand14daysinJune).InJanuary2009,theJuanambuandCostayacofieldswerealsoshutinfor10daysduetoageneralstrikeintheregionwhereouroperationsarelocated.Theoveralldecreaseinsalesasaresultofthedisruptionsisestimatedtobeapproximately2%oftotalsalesin2010and14%oftotalsalesin2009.

Revenue and interestwerepositivelyaffectedbyanincreaseinnetrealizedcrudeoilpricesin2010comparedto2009.Theaveragenetrealizedpricesforcrudeoil,whicharebasedonWTIprices,increasedby25%to$72.45perbarrelfortheyearendedDecember31,2010comparedto2009.IncreasedproductioncombinedwiththeincreasednetrealizedcrudeoilpriceresultedinourrevenueandinterestfromColombiafortheyearendedDecember31,2010increasingby44%to$359.8 millionfrom2009levels.

Asaresultofachievinggrossfieldproductionoffive millionbarrelsinourCostayacofieldduringthemonthofSeptember2009,GranTierrabecamesubjecttoanadditionalgovernmentroyaltypayable.Theadditionalroyaltyiscalculatedon30%ofthefieldproductionrevenueoveraninflationadjustedtriggerpoint.ThattriggerpointforGranTierrawas$32.13for2010and$30.22for2009.Productionrevenueforthiscalculationisbasedonproductionvolumesnetofothergovernmentroyaltyvolumes.In2010,theactualgovernmentroyaltiesatCostayacoaveraged24%includingtheadditionalgovernmentroyaltyof15%.In2009,thegovernmentroyaltiesfortheyearaveraged16%,includingtheadditionalgovernmentroyalty,onceitbecameeffectiveSeptember2009.

Operating expensesfortheyearendedDecember31,2010increasedto$50.4 millionfrom$33.1 millionin2009.TheincreasedoperatingexpensesresultedfromtheCostayacoworkoverprogram($6.6 millionhigherthanin2009),increasedtruckingresultingfromincreasedvolumesandOTApipelinemaintenance,andanincreaseinproducingwellsinCostayacofor2010.Onaperboebasis,operatingexpensesfor2010increasedto$10.11comparedto$7.71incurredin2009,reflectinghigheroperatingcostspartiallyoffsetbytheeffectoftheincreaseintotalproduction.Theadditionalgovernmentroyaltypaidin2010ascomparedto2009furtherincreasedtheperboeoperatingcostamountsfrom2009.

For2010,DD&Aexpenseincreasedto$133.7 millionfrom$127.2 millionin2009.Increasedproductionlevelspartiallyoffsetbyhighercrudeoilreservelevelsandalowerfuturedevelopmentcostaddedtothedepletablebase,accountedfortheincreaseinDD&Aexpense.Onaperboebasis,theDD&AexpenseinColombiadecreasedby10%to$26.80for2010,comparedwith$29.64for2009,duetohigherproductionoffsetbyincreasedprovedreservesandlowerfuturedevelopmentcosts.

HigherG&AexpensesincurredtomanagetheincreasedlevelofdevelopmentandoperatingactivitiesresultedinG&Aexpenseincreasingto$15.2 millionfortheyearendedDecember31,2010from$13.0 millionincurredin2009.Onaperboebasis,G&Aexpensein2010increasedby1%to$3.05from$3.03in2009,duetohighercostspartiallyoffsetbyhigherproduction.Theadditionalgovernmentroyaltypaidin2010ascomparedto2009furtherincreasedtheperboeG&Aamountsfrom2009.

The foreign exchange lossof$17.9 millionfortheyearendedDecember31,2010includesanunrealizednon-cashforeignexchangelossof$14.6 millionandcomparestoaforeignexchangelossof$20.2 millionin2009,includingan


unrealizednon-cashforeignexchangelossof$19.3 million.Theunrealizednon-cashforeignexchangelossresultedprimarilyfromthetranslationofadeferredtaxliabilityrecognizedonthepurchaseofSolana.Thisdeferredtaxliability,amonetaryliability,isdenominatedinthelocalcurrencyoftheColombianforeignoperationsandasaresult,foreignexchangegainsandlosseshavebeencalculatedonconversiontotheU.S.dollarfunctionalcurrency.AstrengtheningintheColombianpesoagainsttheU.S.dollarresultsinforeignexchangelosses,estimatedat$104,000foreachonepesodecreaseintheexchangerateoftheColombianpesotooneUSdollaratDecember31,2010.

Segmented Results of Operations — Colombia for the Year Ended December 31, 2009 Compared to the Results for the Year Ended December 31, 2008

FortheyearendedDecember31,2009,income before income taxesfromColombiaamountedto$55.8 millioncomparedtoincomebeforetaxesof$58.5 millionrecordedin2008.Anincreaseinproductionrevenuewasmorethanoffsetbyincreasedexpensesincludinga$13.5 millionincreaseinforeignexchangelossto$20.2 million,ofwhich$19.3 millionisanunrealizednon-cashforeignexchangeloss,primarilyduetothetranslationofdeferredtaxes.Also,a$105.0 millionincreaseinDD&A,primarilyaresultoftheamortizationofthefairvalueofSolana’sproperty,plantandequipmentrecordeduponouracquisitionofSolana,partiallyoffsettheincreaseinproductionrevenue.HigheroperatingexpensesduetoincreasedColombianproductionandincreasedgeneralandadministrativeexpensesfromexpandedactivitiesalsocontributedtoareductioninincomebeforeincometaxes.

FortheyearendedDecember31,2009,production of crude oil and NGLs,netafterroyalties,increasedby295%to4.3 millionbarrelscomparedto1.1 millionbarrelsin2008.TheincrementalproductionvolumesfromSolanapropertiesfortheyearendedDecember31,2009were2.2 millionbarrelsofoil,comparedto69,747barrelsofoilsubsequenttotheacquisitionofSolanaonNovember14,2008.Theseproductionlevelsareaftergovernmentroyaltiesrangingfrom8%to22.5%andthirdpartyroyaltiesof2%to10%.

GranTierra’sColombianoperatingresultsfortheyearendedDecember31,2009areprincipallyimpactedbytheinclusionofproductionfromthreenewdevelopmentwellsintheCostayacofield,includingSolana’s50%shareofproductionfromCostayaco,andSolana’s35%shareofproductionfromJuanambu-1intheGuayuyacoBlock.In2008,ColombiaproductionincludedproductionfromCostayaco-1,2,3,4,5,andJuanambu-1alongwithproductionfromtheSantanaBlock.

Ourproductionin2009and2008wasimpactedbypoliticalandeconomicfactorsinColombia.Inthesecondandthirdquarterof2009,andthefirstandsecondquarterof2008,sectionsoftheEcopetroloperatedTransAndeanPipelineweredamaged,whichtemporarilyreducedourdeliveriestoEcopetrol.OnNovember24,2008,wetemporarilysuspendedproductionoperationsintheCostayacoandJuanambuoilfields.ThiswasasaresultofadeclarationofastateofemergencyandforcemajeurebyEcopetrol,duetoageneralstrikeintheregionwhereouroperationsarelocated.OnJanuary12,2009,crudeoiltransportationresumedinsouthernColombiaasaresultoftheliftingofthestrikeattheOritofacilitiesoperatedbyEcopetrol.

Asaresultofthesefactors,deliveriestoEcopetrolin2009werereducedtoapproximately3,800BOPD,netafterroyalties,for32daysbetweenJulyandAugust2009,andreducedtoapproximately2,200BOPD,netafterroyalties,for14daysinJune,andwewereshutinforthefirst10daysofJanuary.Duringthefirstquarterof2008,deliveriestoEcopetrolwerereducedtoapproximately1,900BOPD,netafterroyalties,for18daysandinthesecondquarterof2008deliverieswerereducedtoapproximately2,300BOPD,netafterroyalties,for14days.

Revenue and interestwerenegativelyimpactedbyadeclineinnetrealizedcrudeoilpricesin2009comparedto2008.Theaveragenetrealizedpricesforcrudeoil,whicharebasedonWTIprices,decreasedby39%to$58.04perbarrelfortheyearendedDecember31,2009comparedto2008.However,substantiallyincreasedproductionresultedinourrevenueandinterestfromColombiafortheyearendedDecember31,2009increasingby139%to$249.3 millionfrom2008.

Asaresultofachievinggrossfieldproductionoffive millionbarrelsinourCostayacofieldduringthemonthofSeptember2009,GranTierraisnowsubjecttoanadditionalgovernmentroyaltypayable.Thisroyaltyiscalculatedon30%ofthefieldproductionrevenueoveraninflationadjustedtriggerpoint.ThattriggerpointforGranTierrawas$30.22for2009.Productionrevenueforthiscalculationisbasedonproductionvolumesnetofothergovernmentroyaltyvolumes.AveragegovernmentroyaltiesatCostayacowithgrossproductionof19,000BOPDand$70WTIperbarrelareapproximately24.8%,includingtheadditionalgovernmentroyaltyofapproximately17.0%.TheNationalHydrocarbonsAgencyslidingscaleroyaltyat19,000BOPDisapproximately9.4%andthisroyaltyisdeductiblepriortocalculatingtheadditionalgovernmentroyalty.


Operating expensesfortheyearendedDecember31,2009increasedto$33.1 millionfrom$12.1 millionin2008.TheincreasedoperatingexpensesresultedfromtheincreaseinproductionandtheinclusionoftheSolanaoperationsacquiredonNovember14,2008.However,onaperboebasis,operatingexpensesfor2009declinedto$7.71comparedto$11.14incurredin2008,reflectingthereductionoffixedoperatingcostsperbarrelastotalproductionincreased.

For2009,DD&Aexpenseincreasedto$127.2 millionfrom$22.2 millionin2008.IncreasedproductionlevelscoupledwithahigherdepletablecostbaseresultingfromtheSolanaacquisition,partiallyoffsetbyhighercrudeoilreservelevels,accountedfortheincreaseinDD&Aexpense.TheincrementalDD&AexpenserecordedasaresultoftheSolanaacquisitionwas$102.5 millionfortheyearendedDecember31,2009comparedto$6.9 millionrecordedin2008.Onaperboebasis,theDD&AexpenseinColombiaincreasedby45%to$29.64for2009,comparedwith$20.41for2008,duetothehigherdepletablecostbasereflectingtheSolanapropertiesrecordedatfairvalueuponacquisition,partiallyoffsetbyincreasedprovedreserves.

HigherG&Aexpensesincurredtomanagetheincreasedlevelofdevelopmentandoperatingactivities,theSolanaacquiredproperties,andincreasedstock-basedcompensationexpenseresultedinG&Aexpenseincreasingto$13.0 millionfortheyearendedDecember31,2009from$4.8 millionincurredin2008.Onaperboebasis,G&Aexpensein2009decreasedby31%to$3.03from$4.38in2008,duetohigherproduction.

Theforeign exchange lossof$20.2 millionfortheyearendedDecember31,2009includesanunrealizednon-cashforeignexchangelossof$19.3 millionwhichresultedprimarilyfromthetranslationofadeferredtaxliabilitydenominatedinColombianPesosrecognizedonthepurchaseofSolana.AstrengtheningintheColombianpesoagainsttheU.S.dollarresultsinforeignexchangelosses,estimatedat$104,000foreachonepesodecreaseintheexchangerateoftheColombianpesotooneUSdollar.

Capital Program — ColombiaGranTierra’sfocusfor2010wastocontinuewiththedevelopmentoftheCostayacofieldtoincreaseourproductionandreserves,inadditiontoundertakingadditionaloilexplorationeffortstofurtherdefinethepotentialofouracreageinColombia.Insupportofthisstrategy,ourcapitalexpendituresinColombiaamountedto$105.5 millionfortheyearendedDecember31,2010.

SegmentedCapitalExpenditures—ColombiaYear Ended

December 31,

BlockandActivity(MillionsofU.S.Dollars)

2010

Chaza CostayacofacilitiesandsitepreparationanddrillingforCostayaco-11,-12,-13,Moqueta-1,-2,-3,-4,Pacayaco-1,Canangucho-1 $ 75.0

RioMagdalena Popa-3drilling 1.6Guayuyaco Juanambu-2drillingandfacilities 6.3Garibay Completionof3DseismicprogramandJilguero-1drilling 1.0Rumiyaco Commencementof3Dseismic 5.1PiedemonteSur Taruka-1well 5.9Azar 2Dand3Dseismicprograms 1.5PiedemonteNorte Commencementof3Dseismic 2.4Magangue Guepajefacilities 0.6CapitalizedG&A,$5.0property acquisitionandother 6.1SegmentedCapitalExpenditures—Colombia $ 105.5


Forcomparison,fortheyearendedDecember31,2009,wespent$81.4 milliononcapitalprojects.

SegmentedCapitalExpenditures—ColombiaYearEnded

December31,

BlockandActivity(MillionsofU.S.Dollars) 2009

Chaza DrilledandtestedCostayaco-6,-7,-8,-9,commenceddrillingofCostayaco-10,drilledDantayaco-1,commenced2Dseismicprogram,installedfacilitiesandequipment $ 53.6

RioMagdalena CompletionandlongtermtestingofPopa-2welland3D75kilometers(“km”)seismicprogram 3.4

Guachiria Completedacquisitionof115squarekilometers(“km2”)of3Dseismic 1.0

GuachiriaNorte DrillingofthePuinaves-2explorationwell,whichwasdry 5.8

GuachiriaSur Completedacquisitionof115km2of3Dseismic 3.7

Garibay Completedacquisitionof110km2of3Dseismic 3.4

Azar Commencementof2Dand3Dseismicprograms 2.3

Guayayaco Juanambuproductionseparator 2.0

Leaseholdimprovements 1.8

CapitalizedG&Aandother 4.4

SegmentedCapitalExpenditures—Colombia $ 81.4

Forcomparison,fortheyearendedDecember31,2008,wespent$31.7milliononcapitalprojects.Includedinthisamountwas$6.8 millionincapitalexpendituresrelatedtotheSolanapropertiessubsequenttotheacquisition.

Segmented Capital Expenditures—ColombiaYear Ended

December 31,

Block and Activity(Millions of U.S. Dollars) 2008

Chaza DrilledandtestedCostayaco-2,-3,-4,-5,commenceddrillingofCostayaco-6,and facilitiesandequipment $ 17.8

Costayacopipeline 15km8-inchpipelinetoconnectCostayacofieldtoexistingpipelineinfrastructure 4.0

Azar Acquired40km2 of3Dseismicandweperformedonewellre-entryonthePalmera1well,encounteringoil 1.3

Guachiria DrillingLosAceites-1andPrimavera-1 1.1

GuachiriaNorte Drilledanexplorationwell,Zafiro-1,inNovember2008,whichwasdry 3.4

CapitalizedG&Aandother 4.1

SegmentedCapitalExpenditures—Colombia $ 31.7

InOctober2010,wesolda3%overridinginterestinJilguero-1anda1%overridinginterestintheGaribayBlockfor$6.4 million.

DuetothehighcosttotransportoilproducedfromtheGuachiriaBlocksintheLlanosBasininColombia,productionwasshutinFebruary2009.InApril2009,GranTierrasignedanassetpurchaseandsaleagreementwithathirdpartyforGranTierra’sinterestsintheGuachiriaNorte,Guachiria,andGuachiriaSurblocks.Principaltermsincluded considerationof$7.0 million fromthethirdparty,comprisinganinitialcashpaymentof$4.0 millionatclosing,followedby15monthlyinstallmentsof$200,000eachbeginningJune1,2009andextendingthroughAugust3,2010,lesssettlementofoutstandingamounts.ThesaleclosedonApril16,2009and GranTierrarecordednetproceedsof$6.3 million.GranTierraretaineda10%overridingroyaltyinterestontheGuachiriaSurBlock,which,intheeventofadiscovery,isdesignedtoreimburse200%ofourcostsforpreviouslyacquiredseismicdata.


Segmented Results — Argentina YearEndedDecember31,

SegmentedResultsofOperations—Argentina(ThousandsofU.S.Dollars) 2010 %Change 2009 %Change 2008


Interest 26 (80) 127 452 23

14,010 1 13,922 45 9,626


Depletion,depreciation,accretionandimpairment 29,416 253 8,339 146 3,390


Foreignexchangeloss(gain) 165 493 (42) (114) 311

41,257 127 18,152 42 12,783

Segmentlossbeforeincometaxes $ (27,247) 544 $ (4,230) 34 $ (3,157)


OilandNGL’s(“bbl”)(1)(2) 284,044 (16) 337,316 39 242,947

AveragePrices

OilandNGL’s(“perbbl”) $ 49.23 20 $ 40.90 3 $ 39.53

SegmentedResultsofOperations(“perboe”)

OilandNGLsales $ 49.23 20 $ 40.90 3 $ 39.53

Interest 0.09 (76) 0.38 322 0.09

49.32 19 41.28 4 39.62


Depletion,depreciation,accretionandimpairment 103.56 319 24.72 77 13.95


Foreignexchangeloss(gain) 0.58 583 (0.12) (110) 1.28

145.25 170 53.81 2 52.61

Segmentlossbeforeincometaxes $ (95.93) 666 $ (12.53) (4) $ (12.99)(1) NGL volumes are converted to boe on a one-to-one basis with oil.(2) Production represents production volumes adjusted for inventory changes.

Segmented Results of Operations — Argentina for the Year Ended December 31, 2010 Compared to the Results for the Years Ended December 31, 2009 and December 31, 2008

Forthe2010fiscalyear,thepre-tax lossfromArgentinawas$27.3 million comparedtopre-taxlossesof$4.2 millionand$3.2 millionrecordedinfiscalyears2009and2008,respectively,duetolowerproductionlevelsandincreasedoperatingandG&AexpensesaswellasDD&Ain2010,onlypartiallyoffsetbyincreasedoilprices.OperatingexpensesincreaseddueprimarilytocostsassociatedwithValleMorado,whichhadlimitedoperatingcostsin2009,priortore-entryinthethirdquarterof2010.DD&AincludedchargesforceilingtestimpairmentoftheArgentinacostcenterof$23.6 millionin2010and$1.9 millionin2009.Theimpairmentlossin2010included$17.9 millionrelatingtotheabandonmentofthesidetrackoperationsattheGTE.St.VMor-2001well.Theremaining$5.2 millionimpairmentlossresultedfromanincreaseinestimatedfutureoperatingcoststoproduceremainingprovedreservesandareductioninreserves.Generalandadministrativeexpensesincreasedduetoanincreaseinstaffingandconsultingfeesover2009levels.

Crude oil and NGL production,netafter12%royalties,decreased16%to284,044barrelsin2010compared to337,316barrelsin2009and242,947barrelsin2008.Thedecreaseresultedfromgeneralproductiondeclines.Theincreaseinproductionlevelsin2009incomparisonwith2008resultedfromthesuccessfulcompletionandtestingoftheProa-1explorationwellintheSurubiBlockinthethirdquarterof2008withsalescommencinginthefourthquarterofthatyear.


Duetothelocalregulatoryregimes,thepricewecurrentlyreceiveforproductionfromourblocksisapproximately$53.50perbarrel.Furthermore,currentlyalloilandgasproducersinArgentinaareoperatingwithoutsalescontracts. AnewwithholdingtaxregimewasintroducedinArgentinawithResolution394/2007.ProducersandrefinersofoilinArgentinahavebeenunabletodetermineanagreedsalespriceforoildeliveriestorefineriessincethementionedresolution;however,wearecontinuingsalesofouroilundermonthlyagreementswithRefinorS.A. Weareworkingwithotheroilandgasproducersinthearea,aswellasRefinorS.A.,tolobbythefederalgovernmentforchange.

Capital Program — ArgentinaCapitalexpendituresfortheyearendedDecember31,2010amountedto$33.9 millionandincludedexploratoryseismicintheSantaVictoriaBlockfor$3.9 million,a$2.7 millionworkoverinElChiviland$24.4 millionrelatedtothere-entryandsidetrackoftheGTE.St.VMor-2001well,including$2.0 milliontobuyoutourpartner’soptiontobackinforanadditionalworkinginterest.

CapitalexpendituresfortheyearendedDecember31,2009amountedto$4.5 millionmainlyrelatedtoworkovers,facilityconstruction,andtheacquisitionofseismic.

CapitalexpendituresfortheyearendedDecember31,2008,amountedto$11.7 millionandincludeddrillingoftheProa-1discoverywellontheSurubiBlockforanetcostof$9.5 million.Proa-1commencedproductioninSeptember2008.TheprovincialoilcompanyREFSAfarmed-intotheblockfora15%workinginterest,andarepayingtheirshareofwellcostsfromtheirshareofproductionfromProa-1.In2008,othercostsof$1.2 millionwereincurredprimarilyoncapitalizedwellworkovers,wellre-entries,seismicacquisition,andequipmentupgrades.

Segmented Results — Corporate YearEndedDecember31,

SegmentedResultsofOperations—Corporate(ThousandsofU.S.Dollars) 2010 %Change 2009 %Change 2008

Interest $ 688 39 $ 494 140 $ 206

Operatingexpenses 207 33 156 111 74

Depletion,depreciationandaccretion 429 38 311 110 148


Derivativefinancialinstruments(gain)loss (44) 123 190 (198) (193)

Foreignexchangegain (1,228) 285 (319) (54) (698)

21,521 56 13,796 24 11,100

Segmentlossbeforeincometaxes $ (20,833) 57 $ (13,302) 22 $ (10,894)

Segmented Results of Operations — CorporateInadditiontotheexpendituresassociatedwiththemaintenanceofGranTierra’sheadquartersinCalgary,Alberta,Canada,costofcomplianceandreportingunderthesecuritiesregulations,businessdevelopmentandtechnicaloversightandsupportforouroperations,theresultsoftheCorporateSegmentincludetheresultsofourinitialoperationsinPeruand Brazil.

G&A Expenses

IncreasedstaffinglevelstosupportbusinessdevelopmentactivitiesandexpandedoperationsinPeruandBrazilaswellashigherstockbasedcompensationexpenseduetoincreasedstockoptiongrantswerethecontributingfactorstothethree-yearincreaseinCorporateG&A.


Derivative Financial Instruments (Gain) Loss


(ThousandsofU.S.Dollars) 2010 2009 2008

Realizedfinancialderivative(gain)loss $ – $ (87) $ 2,689

Unrealizedfinancialderivative(gain)loss (44) 277 (2,882)

Derivativefinancialinstruments(gain)loss $ (44) $ 190 $ (193)

As at December31,

Assets(Liabilities) 2010 2009

Derivativefinancialinstruments $ – $ (44)

InaccordancewiththetermsofthecreditfacilitywithStandardBankPlc,inFebruaryof2007weenteredintoacostlesscollarfinancialderivativecontractforcrudeoilbasedonWTIprice,withafloorof$48.00andaceilingof$80.00,forathreeyearperiod,for400barrelsperdayfromMarch 2007toDecember 2007,300barrelsperdayfromJanuary 2008toDecember 2008,and200barrelsperdayfromJanuary 2009toFebruary 2010.WehadnoderivativecontractsoutstandingatDecember31,2010.

FortheyearendedDecember31,2010,werecordedagainof$44,000.Thiscomparestoalossof$0.2 millionandgainof$0.2 million,fortheyearsendedDecember31,2009,and2008,respectively.ThesegainsandlossesarebasedontheeffectsofchangingWTIcrudeoilprice,andforwardpricecurvesusedtofairvaluethecostlesscollarattherespectiveyear ends.

Foreign Exchange Loss (Gain)

Theforeignexchangeloss(gain)resultsfromthetranslationofforeigncurrencydenominatedtransactions toU.S.Dollars.

Capital Program — CorporateThecapitalexpendituresfortheCorporateSegmentduringtheyearendedDecember31,2010were$37.6 million.Theseexpendituresincluded$21.2millionforseismicacquisitioninPeruonourexplorationblocks122and128,a$2.0 milliondepositonthefarm-inofBlock95inPeru,an$8.0 millionrefundabledepositontheBrazilfarm-in,$4.4 millionnon-refundableexpendituresrelatingtocapitalcommitmentsontheBrazilfarm-in,and$2.0 millionofgeneralcorporateassets.

ThecapitalexpendituresfortheCorporateSegmentduringtheyearendedDecember31,2009were$2.2 million.Theseexpendituresincluded$1.8 millionforPeruonourexplorationblocks122and128fordrillingfeasibilityandgeological studies.

The2008capitalexpendituresof$3.3 millionfortheCorporateSegmentincludedexpendituresof$2.8 millionforPeruonourexplorationblocks122and128.Acquisitionoftechnicaldatathroughaeromagnetic-gravitystudiesbeganin2007,andwascompletedinthefirsthalfof2008,withatotalof20,000kilometersofdataacquiredoverbothblocks.In2008,westartedEnvironmentalImpactAssessmentsandthecommunityconsultationprocessonbothblocks.Theseprojectswerecompletedin2009,alongwithdrillingfeasibilityandgeologicalstudies.


Fourth Quarter ResultsThefollowingtableprovidesananalysisofquarterlyfinancialinformation(inthousandsofdollarsexceptproduction,pershareandperBOEamounts)forthethreemonthsendedDecember31,2010comparedtothesameperiodin2009:

ThreeMonthsEnded

December31,

SelectedQuarterlyFinancialInformation 2010 2009

Production—barrelsofoilequivalentperday 15,928 14,714

PerBOEpricesrealized $ 76.79 $ 70.93

Revenueandotherincome $ 112,667 $ 96,286

Expenses 72,244 53,106

Incomebeforeincometax 40,423 43,180

Incometaxexpense 27,305 12,355

Netincome 13,118 30,825

Basicearningspershare $ 0.05 $ 0.13

Dilutedearningspershare $ 0.04 $ 0.12

Thefourthquarter2010netincomewaspositivelyimpactedbytheincreaseinproductionandhighercrudeoilprices,partiallyoffsetbytheincreaseinexpensesrelatedtoexpandedoperations.

Revenueandotherincomeforthefourthquarterof2010amountedto$112.7 million,anincreaseof17%fromthesamequarterlastyear.Higherproductionlevelsandimprovedcrudeoilpricescontributedtothissignificantincrease.Productionofcrudeoilandnaturalgasincreasedby8%to15,928BOEPDfrom14,714BOEPDinthelastquarterof2009.Thepositiveeffectofthisincreaseinproductionwascomplementedbytheincreaseincrudeoilprices.Averagepricesperboeincreasedby8%to$76.79inthefourthquarterof2010from$70.93realizedinthesamequarterlastyear.

Operatingexpensesincreased$4.7 millioninthefourthquarterof2010ascomparedtothefourthquarterof2009dueprimarilytotheworkoverprograminCostayacoandincreasedtransportationcostsrelatedtohigherproductionandpipelinemaintenancein2010.G&Aexpensesincreased$2.8 millioninthefourthquarterof2010ascomparedtothefourthquarterof2009duetoincreasedactivity.DD&Aexpensebetweenthetwoquartersincreased$15.9 millionto$56.3 millionin2010mainlyduetotheArgentinacostcenterceilingtestimpairmentofwhich$17.9 millionrelatedtotheabandonmentoftheGTE.St.VMor-2001sidetrackoperationsoffsetbyahigherreservebasein2010.Thecomparativeresultsbetweenthetwoquarterswerealsoaffectedbyaforeignexchangegainof$16.9 millionrecordedinthethreemonthsendedDecember 31,2010comparedtoaforeignexchangegainof$12.6 millionrecordedinthesamequarterofthepreviousyear,aspreviouslydiscussed.

Liquidity and Capital ResourcesAtDecember31,2010,wehadcashandcashequivalentsof$355.4 millioncomparedto$270.8 millionatDecember31,2009,and$176.8 millionatDecember31,2008.Webelievethatourcashposition,togetherwithpositivecashflowfromoperationsandnodebt,willprovideuswithsufficientliquiditytomeetourstrategicobjectivesandfundourplannedcapitalprogramforatleastthenexttwelvemonths.Inaccordancewithourinvestmentpolicy,cashbalancesareinvestedonlyinUnitedStatesorCanadiangovernmentbackedfederal,provincialorstatesecuritieswiththehighestcreditratingsandshorttermliquidity.Webelievethatourcurrentfinancialpositionprovidesustheflexibilitytorespondtobothinternalgrowthopportunitiesandthoseavailablethroughacquisitions.

GranTierrabelievesthatithassufficientavailablecashandcashflowfromoperationstocoveritsexpectedfundingneedsonbothashort-termandlong-termbasis.Iftheneedweretoarise,GranTierrabelievesthatitcouldaccessshort-termdebtmarkets,tofunditsshort-termrequirementsandtoensurenear-termliquidity.GranTierraregularlymonitorsthecreditandfinancialmarketsand,inthefuture,maytakeadvantageofwhatitbelievesarefavorablemarketconditionstoissuelong-termdebttofurtherimproveitsliquidityandcapitalresources.GranTierra’slong-termfinancingstrategyistomaintaincontinuousaccesstothedebtmarketstoaccommodateitslongtermgrowthstrategy.

EffectiveJuly30,2010,asubsidiaryofGranTierra,Solana,establishedacreditfacilitywithBNPParibasforathree-yeartermwhichmaybeextendedoramendedbyagreementbetweentheparties. Thisreservebasedfacilityhasamaximumborrowingbaseupto$100 millionandissupportedbythepresentvalueofthepetroleumreservesofourtwosubsidiarieswithoperatingbranchesinColombia—GranTierraEnergyColombiaLtd.andSolanaPetroleumExploration(Colombia)Ltd. Theinitialcommittedborrowingbaseis$20 million. Amountsdrawndownunderthefacilitybearinterest


attheUSD LIBORrateplus3.5%.Inaddition,astand-byfeeof1.50%perannumischargedontheunutilizedbalanceofthecommittedborrowingbaseandisincludedingeneralandadministrativeexpense. Underthetermsofthefacility,wearerequiredtomaintainandwereincompliancewithcertainfinancialandoperatingcovenants.AsatDecember31,2010, wehadnotdrawndownanyamountsunderthisfacility.

Cash Flows

DuringtheyearendedDecember31,2010,ourcashandcashequivalentsincreasedby$84.6 millionascashinflowsfromoperationsof$203.8 millionandfromfinancingactivitiesof$24.7 millionmorethanoffsetnetcashoutflowsforinvestingactivitiesof$143.9 million.

Netcashprovidedbyoperatingactivitiesin2010 waspositivelyaffectedbytheincreasesincrudeoilproductionandrealizedoilpriceovertheprioryear.ThepositiveaffectofthehigherproductionandpricinglevelswaspartiallyoffsetbyincreasesinoperatingandG&Aexpensesandcashtaxesaswellasanincreaseinaccountsreceivableassociatedwiththe higheroilrevenueandareductionofaccountspayablerelatedtooperatingactivities.

Aspreviouslydiscussed,theoilandgaspropertyexpendituresin2010 primarilyrelatedtocontinueddevelopmentofourCostayacofieldinColombiaandtheidentificationofnewexplorationprospectsinallbusinessunitsresultingintheincreaseincashusedforinvestingactivities.Cashprovidedbyfinancingactivitiesin2010relatedtotheexerciseofoutstandingwarrantsandemployeestockoptions.

DuringtheyearendedDecember31,2009,ourcashandcashequivalentsincreasedby$94.0 millionascashinflowsfromoperationsof$165.5 millionandfromfinancingactivitiesof$4.9 millionmorethanoffsetcashoutflowsforinvestingactivitiesof$76.4 million.

Netcashprovidedbyoperatingactivitiesin2009wasaffectedbythesignificantincreaseincrudeoilproductionpartiallyoffsetbythedecreaseinoilpricesandincreaseinreceivablesrelatedtooilsales.TheacquisitionofSolanaalongwiththeadditionalproductionfromthreenewdevelopmentwellsinColombiacontributedtotheincreasedproduction.Thisincreasedoilrevenuefromhigherproductionvolumesandahigherfourthquarter2009averageoilpricereceived,ascomparedtothesamequarteroftheprioryear,resultedinouraccountsreceivableincreasingfromthe2008yearend.Thiswasmorethanoffsetbyanincreaseinouraccountspayableandaccruedliabilitiesassociatedwithoperatingactivitiesatyearend.Inaddition,inDecember2008,ouroperationsinColombiaweresignificantlyrestrictedduetoageneralstrikewhichreducedouryearendaccountsreceivable.The2009oilandgaspropertyexpendituresprimarilyrelatedtocontinueddevelopmentofourCostayacofieldinColombiaandtheidentificationofnewexplorationprospectsinallbusinessunitsresultingintheincreaseincashusedforinvestingactivities.Cashprovidedbyfinancingactivitiesrelatedtotheexerciseofoutstandingwarrantsandemployeestockoptions.

FortheyearendedDecember31,2008,ourcashandcashequivalentsincreasedby$158.6 millionduetopositivecashinflowsfromoperationsof$109.7 million,frominvestingactivitiesof$27.1 millionandfromfinancingactivitiesof$21.7 million.NetcashprovidedbyoperatingactivitieswaspositivelyaffectedbythesignificantincreasesincrudeoilproductionandpricesaswellascollectionofreceivablesobtainedaspartoftheSolanaacquisitionandanincreaseincurrentincometaxespayablerelatedtoGranTierra’staxablepositioninColombia.Cashinflowsfrominvestingactivitiesincluded$81.9 millionassumedonthepurchaseofSolana,netofacquisitioncosts,offsetby$55.2 millionincapitalexpendituresrelatedtoourexplorationanddevelopmentandotheroilfieldrelatedactivitiesnetofthechangeinnon-cashworkingcapital.Cashinflowsfromfinancingactivitiesof$21.7 millionrelatedtotheproceedsfromtheexerciseofwarrantsandstockoptions.

Aspreviouslydiscussed,theincreaseinoilandgaspropertyexpendituresprimarilyrelatetocontinueddevelopmentofourCostayacofieldinColombiaandtheidentificationofnewexplorationprospectsinallbusinessunitsresultingintheincreaseincashusedforinvestingactivities.Cashprovidedbyfinancingactivitiesrelatestotheexerciseofoutstandingwarrantsandemployeestockoptions.

Off-Balance Sheet Arrangements

AsatDecember31,2010,2009and2008wehadnooff-balancesheetarrangements.


Contractual Obligations

GranTierraholdsthreecategoriesofoperatingleases,namelyoffice,vehicleandhousing.Wepaymonthlycostsof$0.2 millionforofficeleases,$11,000forvehicleleasesand$5,000forcertainemployeeaccommodationleasesinColombia,ArgentinaandPeru.

FutureleasepaymentsandothercontractualobligationsatDecember31,2010areasfollows: AsatDecember31,2010

PaymentsDueinPeriod

ContractualObligations(ThousandsofU.S.Dollars) Total

Lessthan1 Year

1to3years

3to5years

Morethan5 years

Operatingleases $ 5,444 $ 2,476 $ 2,068 $ 900 $ –

Softwareandtelecommunication 1,456 1,137 319 – –

Drilling,completion,facilityconstruction andoiltransportationservices 71,412 62,754 8,658 – –

Consulting 393 393 – – –

Total $ 78,705 $ 66,760 $ 11,045 $ 900 $ –

Contractualcommitmentshaveincreased$45.4 millionfromDecember31,2010asaresultofincreasedoperatingleasesprimarilyduetoenteringintomorethirdpartyfacilityconstruction,oiltransportationanddrillingrigcommitmentcontracts($46.4 million),inColombia,Argentina,andPeru.

TheacquisitionofPetrolifera,announcedJanuary2011andexpectedtocloseinMarch2011,willbeachievedthroughashareexchange;however,weexpecttoretirePetrolifera’sbankdebtafterclosing,whichwouldresultinacashoutflowofapproximately$60 million.

Related Party Transactions

OnAugust3,2010,GranTierraenteredintoacontractrelatedtothedrillingprograminPeruwithacompanyforwhichoneofGranTierra’sdirectorsisashareholderanddirector.AtDecember31,2010,$0.8 millionhasbeencapitalizedandaccruedinrelationtothiscontract,thetermsofwhich,areconsistentwithmarketconditions.

InconnectionwiththeSolanaacquisition,weacquiredadditionalofficespaceof4,441squarefeetusedbySolanaasitsheadquartersinCalgary. OnFebruary1,2009, weenteredintoa subleaseforthatofficespacewithacompany,ofwhichoneofGranTierra’sdirectorsisashareholderanddirector. ThetermofthesubleaserunsfromFebruary1,2009toAugust 31,2011andthesubleasepaymentis$7,800permonthplusapproximately$4,000foroperatingandotherexpenses. Thetermsofthesubleasewereconsistent withmarketconditionsintheCalgaryrealestatemarket.

Subsequent Events

OnJanuary17,2011,weenteredintoanAgreementtoacquirealltheissuedandoutstandingsharesandwarrantsofPetroliferaPetroleumLimited(“Petrolifera”).PetroliferaisaCanadianbasedinternationaloilandgascompanythattradesontheTorontoStockExchangeandhasoilandgasassetsinArgentina,Colombia,andPeru.UnderthetermsoftheAgreement,Petroliferashareholderswillreceive0.1241ofashareofGranTierraEnergy,foreveryPetroliferashareheld.Inaddition,wewillissuereplacementwarrantsfortheoutstandingwarrantstopurchasePetroliferacommonshares,intheamountof0.1241ofaGranTierrawarrantforeachPetroliferawarrant.Atotalofapproximately19 millionofGranTierra’ssharesareexpectedtobeissuedinthetransaction,whichrepresentsapproximatelyan8%increaseinsharesoutstanding.Totalconsiderationforthetransactionwillbeapproximately$195 million,includingtheassumptionofPetrolifera’sdebt,workingcapitalandinvestmentsasofSeptember30,2010.TheAgreementissubjecttoregulatory,court,stockexchange,andPetroliferasecurityholderapprovalsandisscheduledtocloseinMarch2011.

OnJanuary12,2011, weenteredintoanagreementtosubleaseofficespacetoacompanyforwhichGranTierra’sPresidentandChiefExecutiveOfficerservesasanindependentdirector.ThetermofthesubleaserunsfromFebruary1,2011toJanuary30,2013and,at$4,444permonth,thetermsareconsistentwithmarketconditionsintheCalgary,Alberta,Canadarealestatemarket.


Outlook

BusinessEnvironmentOurrevenueshavebeenpositivelyimpactedbytheincreaseincrudeoilpricesfromtheprioryear.Crudeoilpricesarevolatileandunpredictableandareinfluencedbyconcernsaboutfinancialmarketsandtheimpactofthedownturnintheworldwideeconomyonoildemandgrowth.Further,followingtheacquisitionofPetroliferathroughashareexchange,announcedJanuary2011andexpectedtocloseinMarch2011,weexpecttoretirePetrolifera’sbankdebt,whichwillreduceourcashbyapproximately$60 million.However,basedonprojectedproduction,prices,costsandourcurrentliquidityposition,webelievethatourcurrentoperationsandcapitalexpenditureprogramcanbemaintainedfromcashflowfromexistingoperationsandcashonhand,barringunforeseeneventsoraseveredownturninoilandgasprices.Shouldouroperatingcashflowdecline,wewouldexaminemeasuressuchasreducingourcapitalexpenditureprogram,issuanceofdebt,dispositionofassets,orissuanceofequity.

Ourfuturegrowthandacquisitionsmaydependonourabilitytoraiseadditionalfundsthroughequityanddebtmarkets.Determinationoftheborrowingbaseunderourcreditfacilitywillmostlikelybedependentonoursuccessinmaintainingorincreasingoilandgasreservesandonfutureoilprices.Shouldweberequiredtoraisedebtorequityfinancingtofundcapitalexpendituresorotheracquisitionanddevelopmentopportunities,suchfundingmaybeaffectedbythemarketvalueofourcommonstock.Ifthepriceofourcommonstockdeclines,ourabilitytoutilizeourstocktoraisecapitalmaybenegativelyaffected.Also,raisingfundsbyissuingstockorotherequitysecuritieswouldfurtherdiluteourexistingstockholders,andthisdilutionwouldbeexacerbatedbyadeclineinourstockprice.Anysecuritiesweissuemayhaverights,preferencesandprivilegesthatareseniortoourexistingequitysecurities.Borrowingmoneymayalsoinvolvepledgingofsomeorallofourassets.Volatilityinthecreditmarketsmayincreasecostsassociatedwithrenewingorissuingdebt,oraffectour,orthirdpartiesweseektodobusinesswith,abilitytoaccessthosemarkets.

2011WorkProgramandCapitalExpenditureProgramInDecember2010,priortothefinalizationandannouncementofthePetroliferaacquisition,weannouncedthedetailsofGranTierra’s2011workprogram.GranTierra’s2011workprogramisintendedtocreatebothgrowthandvalueinourexistingassetsthroughincreasingourreservesandproductionfromexplorationfinancedbycashflow,whileretainingfinancialflexibilitywithastrongcashpositionandnodebt,sothatwecanbepositionedtoundertakefurtherdevelopmentopportunitiesandtopursueacquisitionopportunities.However,actualcapitalexpendituresmayvarysignificantlyfromour2011workprogramifunexpectedeventsorcircumstancesoccur,suchasnewopportunitiespresentthemselves,oranticipatedopportunitiesdonotcometofruition,whichmaythereforeeitherincreaseordecreasetheamountofcapitalexpendituresweincurin2011.CapitalcommitmentsandotherexplorationanddevelopmentopportunitiesarisingfromthePetroliferaacquisitionwerenotcontemplatedintheoriginalcapitalprogramandmayhaveasignificantimpactontheamountandallocationofcapitalexpendituresforeachcountry.Theeffectoftheacquisitiononthecapitalprogramwillbeassessedonanongoingbasis.

Excludingpotentialexplorationsuccess,productionin2011isexpectedtorangebetween16,000and18,000BOEPDnetafterroyalty.

GranTierrahasplanneda2011capitalspendingprogramof$299 millionforexplorationanddevelopmentactivitiesinColombia,Peru,ArgentinaandBrazil.Plannedcapitalexpendituresare$148 millioninColombia,$56 millioninPeru,$39 millioninArgentina,and$55 millioninBrazil.

Weexpectthatourcommittedanddiscretionary2011capitalprogramcanbefundedfromcashflowfromoperationsandcashonhand.ThedetailsofthecapitalprogramsplannedforeachcountrydonotcontemplateanyeffectofthePetroliferaacquisitionandtheportfolioofprospectsandcommitmentsthattheacquisitionincludes.ThefollowingoutlookrepresentsthecapitalprogrambaseduponthecurrentportfolioofGranTierraproperties.

Outlook—ColombiaThe2011capitalprograminColombiais$148 million.FacilityconstructionassociatedwithongoingdevelopmentoftheMoquetafieldandfurtherfacilityworkatCostayacoisexpectedtobe$30 million.$53 millionisbudgetedforseismicand$65 millionforexplorationanddevelopmentdrilling.Thedrillingprogramincludesfourgrossdevelopmentwellsandasixwellexplorationprogramthatcomprisesfourgrossexplorationwellsandtwostratigraphictestwells.

The2011explorationdrillingprograminColombiaincludes4explorationwells,2stratigraphictestwellsandseismicacquisitionsincluding440km2of3Dseismicand370km2of2Dseismic.


Inadditiontotheaboveexplorationactivityweplantospendapproximately$30 milliononinfrastructure,whichincludesflowlines,gasreinjectionfacilities,roadaccessconstructionandfullfielddevelopmentplanning.

Outlook—ArgentinaThe2011capitalprograminArgentinais$40 million.GranTierra’splannedworkprogramfor2011includescostsrelatedtothere-entryandsidetrackoftheGTE.St.VMor-2001wellandrelatedfacilitiesupgrades,aswellasthedrillingofadevelopmentwellinPalmarLargo,workoversinElVinalar,facilityconstruction,andgeophysicalwork.InFebruary2011,thesidetrackandre-entryoperationsattheGTE.St.VMor-2001wellweresuspendedandthewellborewillbeabandonedwhileGranTierraevaluatesotheroptionsassociatedwithfielddevelopment.Thecapitalbudgetmayberevisedbasedontheresultsoftheevaluation.

Outlook—PeruThe2011capitalprograminPeruis$56 million,including$34 millionrelatedtodrillingexplorationwellsandanadditional$19 millionrelatedtoseismic.

GranTierrabegandrillingthefirstexplorationwellinBlock128inFebruary2011andplanstodrillthesecondexplorationwellonBlock122inthethirdquarterof2011.20%ofBlock128wasalsorelinquishedinFebruary2011.

Seismicactivityisplannedtocontinueinblocks123,124,and129withexplorationdrillingenvironmentalimpactassessmentstobeconductedconcurrentlyinblocks123and129.

UponapprovalofassignmentofintereststoGranTierrabyPerupetroS.A.,GranTierraplanstodrilloneexplorationwellonBlock95inthefourthquarterof2011.

Outlook—BrazilThe2011capitalprograminBrazilis$55 millionandincludes$17 millionbudgetedfordrillingandcompletionsandtheremainderrelatestoacquisitioncostsoftheworkinginterestownershipasdescribedbelow.

UpontheanticipatedregulatoryapprovalfromBrazil’sAgenciaNacionaldePetroleo,GasNaturaleBiocombustiveis(“ANP”),GranTierrawillholda70%workinginterestinBlocksREC-T-129,-142,-155,and-224intheonshoreReconcavoBasin.ThefirstexplorationwellinBlock129isplannedforthesecondquarterof2011andwillbefollowedbyuptothreeadditionalexplorationwellsincludingtwowellsonBlock142andonewellonBlock155.Additionally,twoappraisalwellsonBlock155areplannedtofurtherdeveloptheexisting1-ALV-2-BAwelldiscoveryontheBlock.

Critical Accounting Policies and Estimates

Thepreparationoffinancialstatementsundergenerallyacceptedaccountingprinciples(“GAAP”)intheUnitedStatesrequiresmanagementtomakeestimates,judgmentsandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.

Thecriticalaccountingpoliciesusedbymanagementinthepreparationofourconsolidatedfinancialstatementsarethosethatareimportantbothtothepresentationofourfinancialconditionandresultsofoperationsandrequiresignificantjudgmentsbymanagementwithregardstoestimatesused.Webelievethattheassumptions,judgmentsandestimatesinvolvedinoilandgasaccountingandreservesdetermination,establishmentoffairvaluesofassetsandliabilitiesacquiredaspartofacquisitions,impairment,assetretirementobligations,goodwillimpairment,deferredincometaxes,share-basedpaymentarrangements,andwarrantshavethegreatestpotentialimpactonourconsolidatedfinancialstatements.Theseareasarekeycomponentsofourresultsofoperationsandarebasedoncomplexruleswhichrequireustomakejudgmentsandestimates,soweconsiderthesetobeourcriticalaccountingestimates.Ourcriticalaccountingpoliciesandsignificantjudgmentsandestimatesrelatedtothosepoliciesarediscussedbelow.

Actualresultscoulddifferfromtheseestimates,however,historically,ourassumptions,judgmentsandestimatesrelativetoourcriticalaccountingestimateshavenotdifferedmateriallyfromactualresults.

Onaregularbasisweevaluateourassumptions,judgmentsandestimates.WealsodiscussourcriticalaccountingpoliciesandestimateswiththeAuditCommitteeoftheBoardofDirectors.

OilandGasAccounting-ReservesDeterminationWefollowthefullcostmethodofaccountingforourinvestmentinoilandnaturalgasproperties,asdefinedbytheU.S.SecuritiesandExchangeCommission(“SEC”),asdescribedinnote2toourannualconsolidatedfinancialstatements.Fullcostaccountingdependsontheestimatedreserveswebelievearerecoverablefromouroilandgasreserves.The process


ofestimatingreservesiscomplex.Itrequiressignificantjudgmentsanddecisionsbasedonavailablegeological,geophysical,engineeringandeconomicdata.

Toestimatetheeconomicallyrecoverableoilandnaturalgasreservesandrelatedfuturenetcashflows,weincorporatemanyfactorsandassumptionsincluding:

• Expectedreservoircharacteristicsbasedongeological,geophysicalandengineeringassessments• Futureproductionratesbasedonhistoricalperformanceandexpectedfutureoperatingandinvestmentactivities• Futurecommodityprices • Futureoilandgasqualitydifferentials • Assumedeffectsofregulationbygovernmentalagencies • Futuredevelopmentandoperatingcosts Webelieveourassumptionsarereasonablebasedontheinformationavailabletousatthetimeweprepareour

estimates.However,theseestimatesmaychangesubstantiallyasadditionaldatafromongoingdevelopmentactivitiesandproductionperformancebecomesavailableandaseconomicconditionsimpactingoilandgaspricesandcostschange.

Managementisresponsibleforestimatingthequantitiesofprovedoilandnaturalgasreservesandforpreparingrelateddisclosures.EstimatesandrelateddisclosuresarepreparedinaccordancewithSECrequirementsandgenerallyacceptedindustrypracticesintheUnitedStatesasprescribedbytheSocietyofPetroleumEngineers.Reserveestimatesareauditedatleastannuallybyindependentqualifiedreservesconsultants.

OurBoardofDirectorsoverseestheannualreviewofouroilandgasreservesandrelateddisclosures.TheBoardmeetswithmanagementperiodicallytoreviewthereservesprocess,resultsandrelateddisclosuresandappointsandmeetswiththeindependentreservesconsultantstoreviewthescopeoftheirwork,whethertheyhavehadaccesstosufficientinformation,thenatureandsatisfactoryresolutionofanymaterialdifferencesofopinion,andinthecaseoftheindependentreservesconsultants,theirindependence.

Reservesestimatesarecriticaltomanyofouraccountingestimates,including:• Determiningwhetherornotanexploratorywellhasfoundeconomicallyproduciblereserves• Calculatingourunit-of-productiondepletionrates.Provedreservesestimatesareusedtodetermineratesthatare

appliedtoeachunit-of-productionincalculatingourdepletionexpense.• Assessing,whennecessary,ouroilandgasassetsforimpairment.Estimatedfuturecashflowsaredeterminedusing

provedreserves.Thecriticalestimatesusedtoassessimpairment,includingtheimpactofchangesinreservesestimates,are

discussedbelow:

OilandGasAccountingandImpairmentTheaccountingforanddisclosureofoilandgasproducingactivitiesrequiresthatwechoosebetweenGAAPalternatives.Weusethefullcostmethodofaccountingforouroilandnaturalgasoperations.Underthismethod,separatecostcentersaremaintainedforeachcountryinwhichweincurcosts.Allcostsincurredintheacquisition,explorationanddevelopmentofproperties(includingcostsofsurrenderedandabandonedleaseholds,delayleaserentals,dryholesandoverheadrelatedtoexplorationanddevelopmentactivities)arecapitalized.Thesumofnetcapitalizedcostsandestimatedfuturedevelopmentcostsofoilandnaturalgaspropertiesforeachfullcostcenteraredepletedusingtheunit-of-productionmethod.Changesinestimatesofprovedreserves,futuredevelopmentcostsorassetretirementobligationsareaccountedforprospectivelyinourdepletioncalculation.

Investmentsinunprovedpropertiesarenotdepletedpendingthedeterminationoftheexistenceofprovedreserves.Unprovedpropertiesareassessedperiodicallytoascertainwhetherimpairmenthasoccurred.Unprovedproperties,thecostsofwhichareindividuallysignificant,areassessedindividuallybyconsideringtheprimaryleasetermsoftheproperties,theholdingperiodoftheproperties,andgeographicandgeologicdataobtainedrelatingtotheproperties.Whereitisnotpracticabletoindividuallyassesstheamountofimpairmentofpropertiesforwhichcostsarenotindividuallysignificant,thesepropertiesaregroupedforpurposesofassessingimpairment.Theamountofimpairmentassessedisaddedtothecoststobeamortizedintheappropriatefullcostpool.

TheacquisitionofSolanawasaccountedforusingthepurchasemethod,withGranTierrabeingtheacquirer,wherebytheSolanaassetsacquiredandliabilitiesassumedwererecordedattheirfairvaluesattheacquisitiondatewiththeexcessofthepurchasepriceoverthefairvaluesofthetangibleandintangiblenetassetsacquiredrecordedasgoodwill.Calculationoffairvaluesofassetsandliabilities,whichwasdonewiththeassistanceofindependentadvisors,issubject


toestimateswhichincludevariousassumptionsincludingtheextentofprovedandunprovedreservesoftheacquiredcompanyaswellasthefutureproductionanddevelopmentcostsandthefutureoilandgasprices.

Whiletheseestimatesoffairvalueforthevariousassetsacquiredandliabilitiesassumedhavenoeffectonourliquidityorcapitalresources,theycanhaveaneffectonthefutureresultsofoperations.Generally,thehigherthefairvalueassignedtobothoilandgaspropertiesandnon-oilandgasproperties,thelowerfuturenetincomewillbeasaresultofhigherfuturedepreciation,depletionandaccretionexpense.Also,ahigherfairvalueassignedtotheoilandgasproperties,basedonhigherfutureestimatesofoilandgasprices,willincreasethelikelihoodofafullcostceilingwritedownintheeventthatfutureoilandgaspricesdropbelowourpriceforecastthatweusedtooriginallydeterminefairvalue.

Companiesthatusethefullcostmethodofaccountingforoilandnaturalgasexplorationanddevelopmentactivitiesarerequiredtoperformaceilingtestcalculationeachquarteronacountry-by-countrybasis.Theceilinglimitsthesepooledcoststotheaggregateoftheafter-tax,presentvalue,discountedat10%,offuturecashflowsattributabletoprovedreserves,knownasthestandardizedmeasure,plusthelowerofcostormarketvalueofunprovedpropertieslessanyassociatedtaxeffects.Cashflowestimatesforourimpairmentassessmentsrequireassumptionsabouttwoprimaryelements—constantpricesandreserves.Itisdifficulttodetermineandassesstheimpactofadecreaseinourprovedreservesonourimpairmenttests.Therelationshipbetweenthereservesestimateandtheestimateddiscountedcashflowsiscomplexbecauseofthenecessaryassumptionsthatneedtobemaderegardingperiodendproductionrates,twelvemonthunweightedaveragepricesandcosts.Ifthesecapitalizedcostsexceedtheceiling,wewillrecordawrite-downtotheextentofsuchexcessasanon-cashchargetoearnings.Anysuchwrite-downwillreduceearningsintheperiodofoccurrenceandresultinlowerDD&Aexpenseinfutureperiods.Awrite-downmaynotbereversedinfutureperiods,eventhoughhigheroilandnaturalgaspricesmaysubsequentlyincreasetheceiling.Duetothecomplexityofthecalculation,weareunabletoprovideareasonablesensitivityanalysisoftheimpactthatareservesestimatedecreasewouldhaveonourassessmentofimpairment.Areductioninoilandnaturalgaspricesand/orestimatedquantitiesofoilandnaturalgasreserveswouldreducetheceilinglimitationandcouldresultinaceilingtestwrite-down.

WeassessedouroilandgaspropertiesforimpairmentasatDecember 31,2010andfoundnoimpairmentwrite-downwasrequiredbasedonourassumptionsforourColombiacostcenter.AsaresultofassessingouroilandgaspropertyimpairmentforourArgentinacostcenter,aceilingtestimpairmentlossof$23.6 millionwasrecordedasaresultoftheabandonmentoftheGTE.St.VMor-2001sidetrackoperations,anincreaseinestimatedfutureoperatingcoststoproduceourremainingArgentineprovedreservesandadecreaseinreservevolumes.WeassessedouroilandgaspropertiesforimpairmentasatDecember 31,2009and2008andfoundthatanimpairmentwrite-downof$1.9 millionwasrequiredin2009forourArgentinacostcenterandthatnoimpairmentwrite-downswererequiredin2008basedonourassumptions.EstimatesofstandardizedmeasureofourfuturecashflowsfromprovedreservesforourDecember31,2010ceilingtestswerebasedonrealizedcrudeoilpricesof$78.23and$3.84permcfinColombiaand$50.18foroilproductioninArgentina.

AssetRetirementObligationsWearerequiredtoremoveorremedytheeffectofouractivitiesontheenvironmentatourpresentandformeroperatingsitesbydismantlingandremovingproductionfacilitiesandremediatinganydamagecaused.Estimatingourfutureassetretirementobligationsrequiresustomakeestimatesandjudgmentswithrespecttoactivitiesthatwilloccurmanyyearsintothefuture.Inaddition,theultimatefinancialimpactofenvironmentallawsandregulationsisnotalwaysclearlyknownandcannotbereasonablyestimatedasstandardsevolveinthecountriesinwhichweoperate.

Werecordassetretirementobligationsinourconsolidatedfinancialstatementsbydiscountingthepresentvalueoftheestimatedretirementobligationsassociatedwithouroilandgaswellsandfacilities.Inarrivingatamountsrecorded,wemakenumerousassumptionsandjudgmentswithrespecttoultimatesettlementamounts,inflationfactors,creditadjusteddiscountrates,timingofsettlementandexpectedchangesinlegal,regulatory,environmentalandpoliticalenvironments.Theassetretirementobligationsresultinanincreasetothecarryingcostofourproperty,plantandequipment.Theobligationsareaccretedwiththepassageoftime.Achangeinanyoneofourassumptionscouldimpactourassetretirementobligations,ourproperty,plantandequipmentandournetincome.

Itisdifficulttodeterminetheimpactofachangeinanyoneofourassumptions.Asaresult,weareunabletoprovideareasonablesensitivityanalysisoftheimpactachangeinourassumptionswouldhaveonourfinancialresults.

GoodwillGoodwillrepresentstheexcessofpurchasepriceofbusinesscombinationsoverthefairvalueofnetassetsacquiredandwetestforimpairmentatleastannually.Theimpairmenttestrequiresallocatinggoodwillandcertainotherassetsand


liabilitiestoreportingunits.Weestimatethefairvalueofeachreportingunitandcompareittothenetbookvalueofthereportingunit.Iftheestimatedfairvalueofthereportingunitislessthanthenetbookvalue,includinggoodwill,wewritedownthegoodwilltotheimpliedfairvalueofthegoodwillthroughachargetoexpense.Becausequotedmarketpricesarenotavailableforourreportingunits,weestimatethefairvaluesofthereportingunitsbaseduponestimatedfuturecashflowsofthereportingunit.ThegoodwillonourfinancialstatementswasaresultoftheSolanaandArgosyacquisitions,andrelatesentirelytotheColombiareportingsegment.Thisreportingsegmentisnotatriskoffailingthe“Step1”goodwillimpairmenttestunderFinancialAccountingStandardsBoard(“FASB”)AccountingStandardsCodification(“ASC”)350,Intangibles – Goodwill and Others.ThecalculatedfairvalueoftheColombianbusinessunitwassignificantlyinexcessofitsbookvalues.

Differencesintheouractualfuturecashflows,operatingresults,growthrates,capitalexpenditures,costofcapitalanddiscountratesascomparedtotheestimatesutilizedforthepurposeofcalculatingthefairvalueofeachbusinessunit,aswellasadeclineinourstockpriceandrelatedmarketcapitalization,couldaffecttheresultsofourannualgoodwillassessmentand,accordingly,potentiallyleadtofuturegoodwillimpairmentcharges.

IncomeTaxesWefollowtheliabilitymethodofaccountingforincometaxeswherebywerecognizedeferredincometaxassetsandliabilitiesbasedontemporarydifferencesinreportedamountsforfinancialstatementandtaxpurposes.Wecarryonbusinessinseveralcountriesandasaresult,wearesubjecttoincometaxesinnumerousjurisdictions.Thedeterminationofourincometaxprovisionisinherentlycomplexandwearerequiredtointerpretcontinuallychangingregulationsandmakecertainjudgments.Whileincometaxfilingsaresubjecttoauditsandreassessments,webelievewehavemadeadequateprovisionforallincometaxobligations.However,changesinfactsandcircumstancesasaresultofincometaxaudits,reassessments,jurisprudenceandanynewlegislationmayresultinanincreaseordecreaseinourprovisionforincome taxes.

Toassesstherealizationofdeferredtaxassets,managementconsiderswhetheritismorelikelythannotthatsomeportionorallofthedeferredtaxassetswillnotberealized.Theultimaterealizationofdeferredtaxassetsisdependentuponthegenerationoffuturetaxableincomeduringtheperiodsinwhichthosetemporarydifferencesbecomedeductible.Weconsiderthescheduledreversalofdeferredtaxliabilities,projectedfuturetaxableincomeandtaxplanningstrategiesinmakingthisassessment.

Oureffectivetaxrateisbasedonpre-taxincomeandthetaxratesapplicabletothatincomeinthevariousjurisdictionsinwhichweoperate.Anestimatedeffectivetaxratefortheyearisappliedtoourquarterlyoperatingresults.Intheeventthatthereisasignificantunusualordiscreteitemrecognized,orexpectedtoberecognized,inourquarterlyoperatingresults,thetaxattributabletothatitemwouldbeseparatelycalculatedandrecordedatthesametimeastheunusualordiscreteitem.Weconsidertheresolutionofprior-yeartaxmatterstobesuchitems.Significantjudgmentisrequiredindeterminingoureffectivetaxrateandinevaluatingourtaxpositions.Weestablishreserveswhenitismorelikelythannotthatwewillnotrealizethefulltaxbenefitoftheposition.Weadjustthesereservesinlightofchangingfactsandcircumstances.

Share-BasedPaymentArrangementsWerecordshare-basedpaymentarrangementsinaccordancewiththeASC718,Compensation — Stock Compensation,whichrequiresthemeasurementandrecognitionofcompensationexpenseforallshare-basedpaymentawardsmadetoemployeesanddirectorsincludingemployeestockoptionsbasedonestimatedfairvalues.

ASC718requirescompaniestoestimatethefairvalueofshare-basedpaymentawardsonthedateofgrantusinganoption-pricingmodel.ThevalueoftheportionoftheawardthatisultimatelyexpectedtovestisrecognizedasexpenseovertherequisiteserviceperiodsinourConsolidatedStatementofOperations.

UnderASC718,share-basedcompensationexpenserecognizedduringtheperiodisbasedonthevalueoftheportionofshare-basedpaymentawardsthatisultimatelyexpectedtovestduringtheperiod.Compensationexpenseisrecognizedusingtheacceleratedmethod.Asshare-basedcompensationexpenserecognizedintheConsolidatedStatementsofOperationsisbasedonawardsultimatelyexpectedtovest,ithasbeenreducedforestimatedforfeitures.ASC718requiresforfeiturestobeestimatedatthetimeofgrantandrevised,ifnecessary,insubsequentperiodsifactualforfeituresdifferfromthoseestimates.

UnderASC718,weutilizeaBlack-Scholesoptionpricingmodeltomeasurethefairvalueofstockoptionsgrantedtoemployees.Ourdeterminationoffairvalueofshare-basedpaymentawardsonthedateofgrantusinganoption-pricingmodelisaffectedbyourstockpriceaswellasassumptionsregardinganumberofhighlycomplexandsubjectivevariables.


Thesevariablesinclude,butarenotlimitedto,ourexpectedstockpricevolatilityoverthetermoftheawards,andactualandprojectedemployeestockoptionexercisebehaviors. Weareresponsiblefordeterminingtheassumptionsusedinestimatingthefairvalueofourshare-basedpaymentawards.

WarrantsWefollowthefair-valuemethodofaccountingforwarrantsissuedtopurchaseourcommonstock.

New Accounting Pronouncements

VariableInterestEntitiesInJune2009,theFASBissuedrevisedaccountingstandardstoimprovefinancialreportingbyenterprisesinvolvedwithvariableinterestentities.Thestandardsreplacethequantitative-basedrisksandrewardscalculationfordeterminingwhichenterprise,ifany,hasacontrollingfinancialinterestinavariableinterestentitywithanapproachfocusedonidentifyingwhichenterprisehasthepowertodirecttheactivitiesofavariableinterestentitythatmostsignificantlyimpacttheentity’seconomicperformanceand:(1) theobligationtoabsorblossesoftheentity;or,(2) therighttoreceivebenefitsfromtheentity.ThestandardswereimplementedprospectivelyonJanuary 1,2010anddidnotmateriallyimpactGranTierra’sconsolidatedfinancialposition,operatingresultsorcashflows.

FairValueMeasurementsInJanuary2010,theFASBissuedAccountingStandardsUpdate(“ASU”),“FairValueMeasurementsandDisclosures(Topic820):ImprovingDisclosuresaboutFairValueMeasurements”.ThisASUamendsexistingdisclosurerequirementsaboutfairvaluemeasurementsbyaddingrequireddisclosuresaboutitemstransferredintoandoutoflevels1and2inthefairvaluehierarchy;addingseparatedisclosuresaboutpurchases,sales,issuances,andsettlementsrelativetolevel3measurements;andclarifying,amongotherthings,theexistingfairvaluedisclosuresaboutthelevelofdisaggregation.ThisiseffectiveforinterimandannualreportingperiodsbeginningafterDecember15,2009,exceptforthedisclosuresaboutpurchases,sales,issuances,andsettlementsintherollforwardofactivityinLevel3fairvaluemeasurements. ThosedisclosuresareeffectiveforfiscalyearsbeginningafterDecember15,2010,andforinterimperiodswithinthosefiscalyears. TheimplementationofthisupdateonJanuary1,2010didnotmateriallyimpactGranTierra’sdisclosures.

SubsequentEventsInFebruary2010,theFASBissuedASU,“SubsequentEvents(Topic855).” TheamendmentsremovetherequirementsforanSECfilertodiscloseadate,inbothissuedandrevisedfinancialstatements,throughwhichsubsequenteventshavebeenreviewed.ThisASUwaseffectiveuponissuance. TheimplementationofthisupdatedidnotmateriallyimpactGranTierra’sdisclosures.

StockCompensationInApril2010,theFASBissuedASU,“Compensation–StockCompensation(Topic718).” Theamendmentsclarifythatanemployeeshare-basedpaymentawardwithanexercisepricedenominatedinthecurrencyofamarketinwhichasubstantialportionoftheentity’sequitysecuritiestradesshouldnotbeconsideredtocontainaconditionthatisnotamarket,performance,orservicecondition.Therefore,anentitywouldnotclassifysuchanawardasaliabilityifitotherwisequalifiesasequity. ThisASUiseffectiveforfiscalyears,andinterimperiodswithinthosefiscalyears,beginningonorafterDecember15,2010.TheimplementationofthisupdateisnotexpectedtomateriallyimpactGranTierra’sconsolidatedfinancialposition,operatingresultsorcashflows.

ReceivablesInJuly2010,theFASBissuedASU,“Receivables(Topic310).” Theupdateisintendedtoprovidefinancialstatementuserswithgreatertransparencyaboutanentity’sallowanceforcreditlossesandthecreditqualityofitsfinancingreceivables.ThedisclosuresasoftheendofareportingperiodareeffectiveforinterimandannualreportingperiodsendingonorafterDecember15,2010. TheimplementationofthisupdatedidnotmateriallyimpactGranTierra’sdisclosures.

BusinessCombinationsInDecember2010,theFASBissuedASU,“BusinessCombinations(Topic850),DisclosuresofSupplementaryProFormaInformationforBusinessCombinations.” Theupdateisintendedtoconformreportingofproformarevenueandearningsformaterialbusinesscombinationsincludedinthenotestothefinancialstatementsandexpanddisclosureofnon-


recurringadjustmentsthataredirectlyattributabletothebusinesscombination.Theproformarevenueandearningsofthecombinedentityarepresentedasiftheacquisitiondatehadoccurredasofthebeginningoftheannualreportingperiod.Ifcomparativesarepresented,theproformadisclosuresforbothperiodspresentedshouldbereportedasiftheacquisitionhadoccurredasofthebeginningofthecomparablepriorannualreportingperiodonly.ThisASUiseffectiveforbusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2010. TheimplementationofthisupdateisnotexpectedtomateriallyimpactGranTierra’sdisclosures.

GranTierrahasreviewedallotherrecentlyissued,butnotyetadopted,accountingstandardupdatesinordertodeterminetheireffects,ifany,onitsconsolidatedfinancialstatements.Basedonthatreview,GranTierrabelievesthattheimplementationofthesestandardswillnotmateriallyimpactGranTierra’sconsolidatedfinancialposition,operatingresults,cashflows,ordisclosurerequirements.

Quantitative and Qualitative Disclosure About Market Risk

Ourprincipalmarketriskrelatestooilprices.Essentially100%ofourrevenuesarefromoilsalesatpriceswhicharedefinedbycontractrelativetoWTIandadjustedfortransportationandquality,foreachmonth.InArgentina,afurtherdiscountfactorwhichisrelatedtoataxonoilexportsestablishesacommonpricingmechanismforalloilproducedinthecountry,regardlessofitsdestination.

Weconsiderourexposuretointerestraterisktobeimmaterialasweholdonlycashandcashequivalents.Interestrateexposuresrelateentirelytoourinvestmentportfolio,aswedonothaveshorttermorlongtermdebt.Ourinvestmentobjectivesarefocusedonpreservationofprincipalandliquidity.Bypolicy,wemanageourexposuretomarketrisksbylimitinginvestmentstohighqualitybankissuersatovernightrates,orgovernmentsecuritiesoftheUnitedStatesorCanadianfederalgovernmentssuchasGuaranteedInvestmentCertificatesorTreasuryBills.Wedonotholdanyoftheseinvestmentsfortradingpurposes.Wedonotholdequityinvestments.

Foreigncurrencyriskisafactorforourcompanybutisamelioratedtoalargedegreebythenatureofexpendituresandrevenuesinthecountrieswhereweoperate.Wehavenotengagedinanyformalhedgingactivitywithregardtoforeigncurrencyrisk.OurreportingcurrencyisU.S.dollarsandessentially100%ofourrevenuesarerelatedtotheU.S.priceofWestTexasintermediateoil.InColombia,wereceive100%ofourrevenuesinU.S.dollars.ThemajorityofourcapitalexpendituresinColombiaareinU.S.dollarsandthemajorityoflocalofficecostsareinlocalcurrency.InArgentina,referencepricesforoilareinU.S.dollarsandrevenuesarereceivedinArgentinepesosaccordingtocurrentexchangerates.ThemajorityofcapitalexpenditureswithinArgentinahavebeeninU.S.dollarswithlocalofficecostsgenerallyinpesos.WhileweoperateinSouthAmericaexclusively,themajorityofouracquisitionexpenditureshavebeenvaluedandpaidinU.S.dollars.

Additionally,foreignexchangegains/lossesresultfromthefluctuationoftheU.S.dollartotheColombianpesoduetoourdeferredtaxliability,amonetaryliability,whichismainlydenominatedinthelocalcurrencyoftheColombian foreignoperations.Asaresult,aforeignexchangegain/lossmustbecalculatedonconversiontotheU.S.dollarfunctionalcurrency.AstrengtheningintheColombianpesoagainsttheU.S.dollarresultsinforeignexchangelosses,estimatedat$104,000foreachonepesodecreaseintheexchangerateoftheColombianpesotooneU.S.dollar.


Financial Statements and Supplementary Data

Report of Independent Registered Chartered AccountantsTotheBoardofDirectorsandShareholdersofGranTierraEnergyInc.:

WehaveauditedtheaccompanyingconsolidatedfinancialstatementsofGranTierraEnergyInc.anditssubsidiaries,whichcomprisetheconsolidatedbalancesheetsasatDecember31,2010and2009,andtheconsolidatedstatementsofoperationsandretainedearnings(accumulateddeficit),shareholders’equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2010,andasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation.

Management’sResponsibilityfortheConsolidatedFinancialStatementsManagementisresponsibleforthepreparationandfairpresentationofthese consolidatedfinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,andforsuchinternalcontrolasmanagementdeterminesisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.

Auditor’sResponsibilityOurresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.WeconductedourauditsinaccordancewithCanadiangenerallyacceptedauditingstandardsandthestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatwecomplywithethicalrequirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreefrommaterialmisstatement.

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

Webelievethattheauditevidencewehaveobtainedinourauditsissufficientandappropriatetoprovideabasisforourauditopinion.

OpinionInouropinion,theconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofGranTierraEnergyInc.anditssubsidiariesasatDecember31,2010and2009,andtheresultsofitsoperationsanditscashflowsforeachofthreeyearsintheperiodendedDecember31,2010inaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.

OtherMattersWehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theCompany’sinternalcontroloverfinancialreportingasofDecember31,2010,basedonthecriteriaestablishedinInternal Control — Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionandourreportdatedFebruary24,2011 expressedanunqualifiedopinionontheCompany’sinternalcontroloverfinancialreporting.

/s/Deloitte&ToucheLLPIndependentRegisteredCharteredAccountantsCalgary,CanadaFebruary24,2011


Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit)


(ThousandsofU.S.Dollars,ExceptShareandPerShareAmounts) 2010 2009 2008

REVENUEANDOTHERINCOME

Oilandnaturalgassales $ 373,286 $ 262,629 $ 112,805

Interest 1,174 1,087 1,224

374,460 263,716 114,029

EXPENSES

Operating 59,446 40,784 19,218

Depletion,depreciation,accretionandimpairment(Note5) 163,573 135,863 25,737

Generalandadministrative 40,241 28,787 18,593

Derivativefinancialinstruments(gain)loss(Note11) (44) 190 (193)

Foreignexchangeloss 16,838 19,797 6,235

280,054 225,421 69,590

INCOMEBEFOREINCOMETAXES 94,406 38,295 44,439

Incometaxexpense(Note8) (57,234) (24,354) (20,944)

NETINCOMEANDCOMPREHENSIVEINCOME 37,172 13,941 23,495

RETAINEDEARNINGS(ACCUMULATEDDEFICIT),BEGINNINGOFYEAR 20,925 6,984 (16,511)

RETAINEDEARNINGS,ENDOFYEAR $ 58,097 $ 20,925 $ 6,984

NETINCOMEPERSHARE—BASIC $ 0.15 $ 0.06 $ 0.19

NETINCOMEPERSHARE—DILUTED $ 0.14 $ 0.05 $ 0.16

WEIGHTEDAVERAGESHARESOUTSTANDING—BASIC(Note6) 253,697,076 241,258,568 123,421,898

WEIGHTEDAVERAGESHARESOUTSTANDING—DILUTED(Note6) 264,304,831 253,590,103 143,194,590

(Seenotestotheconsolidatedfinancialstatements)


Consolidated Balance Sheets

AsatDecember31,

(Thousands of U.S. Dollars) 2010 2009

ASSETS

CurrentAssets

Cashandcashequivalents $ 355,428 $ 270,786

Restrictedcash 250 1,630

Accountsreceivable 43,035 35,639

Inventory(Note2) 5,669 4,879

Taxesreceivable 6,974 1,751

Prepaids 1,940 1,820

Deferredtaxassets(Note8) 4,852 4,252

TotalCurrentAssets 418,148 320,757

OilandGasProperties(usingthefullcostmethodofaccounting)

Proved 442,404 474,679

Unproved 278,753 234,889

TotalOilandGasProperties 721,157 709,568

Othercapitalassets 5,867 3,175

TotalProperty,PlantandEquipment(Note5) 727,024 712,743

OtherLongTermAssets

Restrictedcash 1,190 162

Deferredtaxassets(Note8) – 7,218

Otherlongtermassets 311 347

Goodwill(Note3) 102,581 102,581

TotalOtherLongTermAssets 104,082 110,308

TotalAssets $ 1,249,254 $ 1,143,808

LIABILITIESANDSHAREHOLDERS’EQUITY

CurrentLiabilities

Accountspayable(Note9) $ 76,023 $ 36,786

Accruedliabilities(Note9) 32,120 40,229

Derivativefinancialinstruments(Note11) – 44

Taxespayable 43,832 28,087

Assetretirementobligation(Note7) 338 450

TotalCurrentLiabilities 152,313 105,596

LongTermLiabilities

Deferredtaxliability(Note8) 204,570 216,625

Deferredremittancetaxandother 1,036 903

Assetretirementobligation(Note7) 4,469 4,258

TotalLongTermLiabilities 210,075 221,786

CommitmentsandContingencies(Note10)

SubsequentEvents(Note14)

Shareholders’Equity

Commonshares(Note6) (240,440,830and219,459,361commonsharesand17,681,123and24,639,513exchangeableshares,parvalue$0.001pershare,issuedandoutstandingasatDecember31,2010and2009respectively) 4,797 1,431

Additionalpaidincapital 821,781 766,963

Warrants 2,191 27,107

Retainedearnings 58,097 20,925

TotalShareholders’Equity 886,866 816,426

TotalLiabilitiesandShareholders’Equity $ 1,249,254 $ 1,143,808



Consolidated Statements of Cash Flows


(Thousands of U.S. Dollars) 2010 2009 2008

OperatingActivities

Netincome $ 37,172 $ 13,941 $ 23,495

Adjustmentstoreconcilenetincometonetcashprovidedby operating activities:

Depletion,depreciation,accretionandimpairment(Note5) 163,573 135,863 25,737

Deferredtaxes (20,090) (15,355) (6,418)

Stockbasedcompensation 8,025 5,309 2,520

Unrealized(gain)lossonfinancialinstruments(Note11) (44) 277 (2,882)

Unrealizedforeignexchangeloss 14,786 19,496 6,985

Settlementofassetretirementobligations(Note7) (286) (52) (334)

Netchangesinnon-cashworkingcapital

Accountsreceivable (5,323) (27,926) 34,943

Inventory (1,221) (1,849) (107)

Prepaids (120) (717) 261

Accountspayableandaccruedliabilities (3,212) 36,875 10,697

Taxesreceivableandpayable 10,522 (409) 14,840

Netcashprovidedbyoperatingactivities 203,782 165,453 109,737

InvestingActivities

Restrictedcash 352 (1,792) –

Additionstoproperty,plantandequipment (152,299) (80,932) (55,217)

Proceedsfromdispositionofoilandgasproperties(Note5) 7,986 5,400 –

Cashacquiredonacquisitionnetofacquisitioncosts(Note3) – – 81,912

Longtermassetsandliabilities 36 968 446

Netcashprovidedby(usedin)investingactivities (143,925) (76,356) 27,141

FinancingActivities

Proceedsfromissuanceofcommonstock 24,785 4,935 21,687

Netcashprovidedbyfinancingactivities 24,785 4,935 21,687

Netincreaseincashandcashequivalents 84,642 94,032 158,565

Cashandcashequivalents,beginningofyear 270,786 176,754 18,189

Cashandcashequivalents,endofyear $ 355,428 $ 270,786 $ 176,754

Cash $ 272,151 $ 182,197 $ 110,688

Termdeposits 83,277 88,589 66,066

Cashandcashequivalents,endofyear $ 355,428 $ 270,786 $ 176,754

Supplementalcashflowdisclosures:

Cashpaidfortaxes $ 49,088 $ 31,527 $ 11,587

Non-cashinvestingactivities:

Non-cashworkingcapitalrelatedtoproperty,plantandequipment $ 48,640 $ 17,972 $ 11,096



Consolidated Statements of Shareholders’ Equity



ShareCapital

Balance,beginningofyear $ 1,431 $ 226 $ 95

Issueofcommonshares 3,366 1,205 131

Balance,endofyear 4,797 1,431 226

AdditionalPaidinCapital

Balance,beginningofyear 766,963 754,832 76,805

Issueofcommonshares 19,119 2,650 663,405

Issueofstockoptionsinabusinesscombination(Note3) – – 1,345

Exerciseofwarrants(Note6) 24,916 2,777 10,113

Exerciseofstockoptions 2,300 1,080 72

Stockbasedcompensationexpense 8,483 5,624 3,092

Balance,endofyear 821,781 766,963 754,832

Warrants

Balance,beginningofyear 27,107 29,884 16,403

Issueofwarrants(Note3and6) – – 23,594

Exerciseofwarrants(Note6) (24,916) (2,777) (10,113)


RetainedEarnings(AccumulatedDeficit)

Balance,beginningofyear 20,925 6,984 (16,511)

Netincome 37,172 13,941 23,495


TotalShareholders’Equity $ 886,866 $ 816,426 $ 791,926



Notes to the Consolidated Financial Statements

FortheYearsEndedDecember31,2010,2009and2008ExpressedinU.S.Dollars,unlessotherwisestated

1. Description of BusinessGranTierraEnergyInc.,aNevadacorporation(the“Company”or“GranTierra”),isapubliclytradedoilandgascompanyengagedinacquisition,exploration,developmentandproductionofoilandnaturalgasproperties.The Company’sprincipalbusinessactivitiesareinColombia,Argentina,PeruandBrazil.

2. Significant Accounting PoliciesTheconsolidatedfinancialstatementshavebeenpreparedinaccordancewithgenerallyacceptedaccountingprinciplesintheUnitedStatesofAmerica(“GAAP”).ThepreparationoffinancialstatementsinaccordancewithGAAPrequirestheuseofestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosuresofcontingentassetsandliabilitiesatthedateoftheconsolidatedfinancialstatements,andrevenuesandexpensesduringthereportingperiod.TheCompanybelievesthattheinformationanddisclosurespresentedareadequatetoensuretheinformationpresentedisnotmisleading.Significantaccountingpoliciesare:

Basis of consolidation

TheseconsolidatedfinancialstatementsincludetheaccountsoftheCompanyanditswholly-ownedsubsidiaries.Allintercompanyaccountsandtransactionshavebeeneliminated.

Use of estimates

ThepreparationoffinancialstatementsinconformitywithGAAPrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimatesandchangesfromthoseestimatesarerecordedwhenknown.Oilandnaturalgasreservesandrelatedpresentvalueoffuturecashflows,impairmentassessmentsofoilandgaspropertiesandgoodwill,stockoptionexpense,incometaxes,assetretirementobligation,derivativefinancialinstrumentvaluation,legalandenvironmentalrisksandexposuresandanyassumptionsassociatedwithvaluationofoilandgaspropertiesareallsubjecttoestimationintheCompany’sfinancialresults.

Foreign currency translation

ThefunctionalcurrencyoftheCompany,includingitssubsidiariesinColombia,Argentina,PeruandBrazil,istheUnitedStatesdollar.Monetaryitemsaretranslatedintothereportingcurrencyattheexchangerateineffectatthebalancesheetdateandnon-monetaryitemsaretranslatedathistoricalexchangerates.Revenueandexpenseitemsaretranslatedinamannerthatproducessubstantiallythesamereportingcurrencyamountsthatwouldhaveresultedhadtheunderlyingtransactionsbeentranslatedonthedatestheyoccurred.Depreciationoramortizationofassetsistranslatedatthehistoricalexchangeratessimilartotheassetstowhichtheyrelate.

Gainsandlossesresultingfromforeigncurrencytransactions,whicharetransactionsdenominatedinacurrencyotherthantheentity’sfunctionalcurrency,areincludedintheconsolidatedstatementofoperationsandretainedearnings(accumulateddeficit).

Fair value of financial instruments

TheCompany’sfinancialinstrumentsarecashandcashequivalents,restrictedcash,accountsreceivable,accountspayableandaccruedliabilitiesandderivatives.Thefairvaluesofthesefinancialinstrumentsapproximatetheircarryingvaluesduetotheirimmediateorshort-termnature


Cash and cash equivalents

TheCompanyconsidersallhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlesstobecashequivalents.

Restricted cash

Restrictedcashrelatestocashresourcespledgedtosecurelettersofcredit.Alllettersofcreditcurrentlysecuredbycashrelatetorequirementsforworkcommitmentguaranteescontainedinexplorationcontracts.

Allowance for doubtful accounts

TheCompanyestimateslossesonreceivablesbasedonknownuncollectibleaccounts,ifany,andhistoricalexperienceoflossesincurred.Theallowancefordoubtfulreceivableswasniland$0.3 millionatDecember 31,2010and2009,respectively.

Inventory

Inventoryconsistsofcrudeoilintanksandsupplies.Crudeoilintanksisvaluedatthelowerofcostormarketvalue.Suppliesarevaluedatlowerofcostormarketvalue.Thecostofinventoryisdeterminedusingtheweightedaveragemethod.Crudeoilinventoriesincludeexpendituresincurredtoproduce,upgradeandtransporttheproducttothestoragefacilities.CrudeoilinventoriesatDecember31,2010and2009were$3.6 millionand$3.8 million,respectively.SuppliesatDecember31,2010and2009were$2.1and$1.1 million,respectively.

Oil and gas properties

TheCompanyusesthefullcostmethodofaccountingforitsinvestmentinoilandnaturalgasproperties.SeparatecostcentersaremaintainedforeachcountryinwhichtheCompanyincurscosts.Underthismethod,theCompanycapitalizesallacquisition,explorationanddevelopmentcostsincurredforthepurposeoffindingoilandnaturalgasreserves,includingsalaries,benefitsandotherinternalcostsdirectlyattributabletotheseactivities.Costsassociatedwithproductionandgeneralcorporateactivities,however,areexpensedintheperiodincurred.Interestcostsrelatedtounprovedpropertiesandpropertiesunderdevelopmentarealsocapitalizedtooilandnaturalgasproperties.UnlessasignificantportionoftheCompany’sprovedreservequantitiesinaparticularcountryaresold(25%orgreater),proceedsfromthesaleofoilandnaturalgaspropertiesareaccountedforasareductiontocapitalizedcosts,andgainsandlossesarenotrecognized.

TheCompanycomputesdepletionofoilandnaturalgaspropertiesonaquarterlybasisusingtheunit-of-productionmethodbaseduponproductionandestimatesofprovedreservequantities.Unprovedpropertiesareexcludedfromtheamortizablebaseuntilevaluated.Thecostofexploratorydrywellsistransferredtoprovedpropertiesandthussubjecttoamortizationimmediatelyupondeterminationthatawellisdryinthosecountrieswhereprovedreservesexist.Futuredevelopmentcostsareaddedtotheamortizablebase.

Unprovedpropertiesareevaluatedquarterlyforpossibleimpairments.Ifimpairmenthasoccurred,theimpairmentistransferredtoprovedpropertiesandthussubjecttoamortizationimmediately.Forprospectswhereareservebasehasnotyetbeenestablished,theimpairmentischargedtoearnings.Thisevaluationconsidersamongotherfactors,seismicdata,requirementstorelinquishacreage,drillingresults,remainingtimeinthecommitmentperiod,remainingcapitalplans,andpolitical,economic,andmarketconditions.

Inexplorationareas,relatedgeologicalandgeophysical(“G&G”)costsarecapitalizedinunprovedpropertyandevaluatedaspartofthetotalcapitalizedcostsassociatedwithaproperty.G&Gcostsrelatedtodevelopmentprojectsarerecordedinprovedpropertiesandthereforesubjecttoamortizationasincurred.

TheCompanyperformsaceilingtestcalculationeachquarterinaccordancewiththeU.S.SecuritiesandExchangeCommission(“SEC”)Regulation S-XRule 4-10.Inperformingitsquarterlyceilingtest,theCompanylimits,onacountry-by-countrybasis,thecapitalizedcostsofprovedoilandnaturalgasproperties,netofaccumulateddepletionanddeferredincometaxes,totheestimatedfuturenetcashflowsfromprovedoilandnaturalgasreservesdiscountedattenpercent,netofrelatedtaxeffects,plusthelowerofcostorfairvalueofunprovedpropertiesincludedinthecostsbeingamortized.Ifcapitalizedcostsexceedthislimit,theexcessischargedasadditionaldepletionexpense.AsaresultofimplementingSECFinalRule,“ModernizationofOilandGasReporting”whichrevisedtheexistingRegulationS-KandRegulationS-XreportingrequirementstoalignwithcurrentindustrypracticesandtechnologicaladvancesasatDecember31,2009,theCompanycalculatesfuturenetcashflowsbyapplyingthetwelvemonthperiodunweightedarithmeticaverageofthepriceasofthefirstdayofeachmonthwithinthattwelvemonthperiod,unlesspricesaredefinedbycontractualarrangements,


excludingescalationsbasedonfutureconditions.Inprioryears,theCompanydeterminedfuturenetcashflowsbyapplyingthosepricesineffectforeachcountryattheendofthereportingperiod.

Asset retirement obligations

TheCompanyprovidesforfutureassetretirementobligationsonitsoilandnaturalgaspropertiesbasedonestimatesestablishedbycurrentlegislation.Theassetretirementobligationisinitiallymeasuredatfairvalueandcapitalizedtocapitalassetsasanassetretirementcost,usingthecreditadjustedinterestratetodiscounttheobligation.Theassetretirementobligationaccretesuntilthetimetheassetretirementobligationisexpectedtosettlewhiletheassetretirementcostisamortizedovertheusefullifeoftheunderlyingcapitalassets.

Theamortizationoftheassetretirementcostandtheaccretionoftheassetretirementobligationareincludedindepletion,depreciation,accretionandimpairment(“DD&A”).Actualassetretirementcostsarerecordedagainsttheobligationwhenincurred.Anydifferencebetweentherecordedassetretirementobligationsandtheactualretirementcostsincurredisrecordedasagainorlossintheperiodofsettlement.

Other assets

Otherassets,includingadditionsandreplacements,arerecordedatcostuponacquisitionandincludefurnitureandfixtures,computerequipment,automobilesandassetsundercapitalleases.Thecostofrepairsandmaintenanceischargedtoexpenseasincurred.DepreciationrelatedtoassetsundercapitalleasesisrecordedaspartofDD&Aintheconsolidatedstatementofoperations.Depreciationisprovidedusingthedeclining-balance-basisata30%annualrateforcomputerequipment,furnitureandfixturesandautomobiles.Leaseholdimprovementsaredepreciatedonastraight-linebasisoverthetermoftherelatedlease.

Revenue recognition

Revenuefromtheproductionofcrudeoilandnaturalgasisrecognizedwhentitlepassestothecustomerandwhencollectionoftherevenueisreasonablyassured.FortheCompany’sColombianoperations,GranTierra’scustomerstaketitlewhenthecrudeoilistransferredtotheirpipeline.InArgentina,GranTierratransportsproductfromthefieldtothecustomer’srefinerybytruck,wheretitleistransferred.RevenuerepresentstheCompany’sshareandisrecordednetofroyaltypaymentstogovernmentsandothermineralinterestowners.

Goodwill

Goodwillrepresentstheexcessofthepurchasepriceofbusinesscombinationsoverthefairvalueofnetassetsacquiredandistestedforimpairmentatleastannuallyunlessbusinesseventsindicateanimpairmenttestisrequired.Theimpairmenttestrequiresallocatinggoodwillandcertainotherassetsandliabilitiestoassignedreportingunits.Thefairvalueofeachreportingunitisestimatedandcomparedtothenetbookvalueofthereportingunit.Iftheestimatedfairvalueofthereportingunitislessthanthenetbookvalue,includinggoodwill,thenthegoodwilliswrittendowntotheimpliedfairvalueofthegoodwillthroughachargetoexpense.BecausequotedmarketpricesarenotavailablefortheCompany’sreportingunits,thefairvaluesofthereportingunitsareestimatedbaseduponestimatedfuturecashflowsofthereportingunit.ThegoodwillontheCompany’sfinancialstatementswasaresultoftheacquisitionsofSolanaResourcesLimited(“Solana”)andArgosyEnergyInternationalL.P.(“Argosy”),andrelatesentirelytotheColombiareportingsegment.TheCompanyperformedannualimpairmenttestsofgoodwillatDecember31,2010and2009.Basedontheseassessments,no impairmentofgoodwillwasidentified.

Income taxes

Deferredincometaxesarerecognizedusingtheliabilitymethod,wherebydeferredtaxassetsandliabilitiesarerecognizedforthefuturetaxconsequencesattributabletodifferencesbetweentheconsolidatedfinancialstatementcarryingamountsofexistingassetsandliabilitiesandtheirrespectivetaxbase,andoperatinglossandtaxcreditcarryforwards.Deferredtaxassetsandliabilitiesaremeasuredusingenactedtaxratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesandcarryforwardsareexpectedtoberecoveredorsettled.Valuationallowancesareprovidedif,afterconsideringavailableevidence,itismorelikelythannotthatsomeorallofthedeferredtaxassetswillberealized.


Theevaluationofanuncertaintaxpositionisatwo-stepprocess.Thefirststepisrecognition:TheCompanydetermineswhetheritismorelikelythannotthatataxpositionwillbesustaineduponexamination,includingresolutionofanyrelatedappealsorlitigationprocesses,basedonthetechnicalmeritsoftheposition.Inevaluatingwhetherataxpositionhasmetthemore-likely-than-notrecognitionthreshold,theCompanypresumesthatthepositionwillbeexaminedbytheappropriatetaxingauthoritythathasfullknowledgeofallrelevantinformation.Thesecondstepismeasurement:Ataxpositionthatmeetsthemore-likely-than-notrecognitionthresholdismeasuredtodeterminetheamountofbenefittorecognizeinthefinancialstatements.Thetaxpositionismeasuredatthelargestamountofbenefitthatisgreaterthan50percentlikelyofbeingrealizeduponsettlement.TheCompanyrecognizespotentialaccruedinterestandpenaltiesrelatedtounrecognizedtaxbenefitsasacomponentofincometaxexpenseintheconsolidatedstatementofoperations.ThisisanaccountingpolicyelectionmadebytheCompanythatisacontinuationoftheCompany’shistoricalpolicyandwillcontinuetobeconsistentlyappliedinthefuture.

Income per share

Basicincomepersharecalculationsarebasedonthenetincomeattributabletocommonshareholdersfortheperioddividedbytheweightedaveragenumberofcommonsharesissuedandoutstandingduringtheperiod.Thedilutedincomepersharecalculationisbasedontheweightedaveragenumberofcommonsharesoutstandingduringtheperiod,plustheeffectsofdilutivecommonshareequivalents.Thismethodrequiresthatthedilutiveeffectofoutstandingoptionsandwarrantsissuedshouldbecalculatedusingthetreasurystockmethod.Thismethodassumesthatallcommonshareequivalentshavebeenexercisedatthebeginningoftheperiod(oratthetimeofissuance,iflater),andthatthefundsobtainedtherebywereusedtopurchasecommonsharesoftheCompanyattheaveragetradingpriceofcommonsharesduringtheperiod.

Stock based compensation

TheCompanyfollowsthefair-valuebasedmethodofaccountingforstockoptionsgrantedtodirectors,officersandemployees.Compensationexpenseforoptionsgrantedisbasedontheestimatedfairvalue,usingtheBlack-Scholesoptionpricingmodel,atthetimeofgrantandtheexpenseisrecognizedovertherequisiteserviceperiodoftheoption.Stockbasedcompensationexpenseisincludedaspartofoilandnaturalgasproperties,operatingexpenses,andgeneralandadministrativeexpenseswithacorrespondingincreasetocontributedsurplusandrecognizedusingtheaccelerated method.

Accounting for oil and gas derivative instruments

TheCompanyrecognizesallderivativeinstrumentsaseitherassetsorliabilitiesatfairvalueinitsfinancialstatements.TheCompanymayormaynotelecttodesignateaderivativeinstrumentasahedgeagainstchangesinthefairvalueofanassetoraliability(a“fairvaluehedge”)oragainstexposuretovariabilityinexpectedfuturecashflows(a“cashflowhedge”).Theaccountingtreatmentforthechangesinfairvalueofa derivativeinstrumentisdependentuponwhetherornotaderivativeinstrumentisacashflowhedgeorafairvaluehedge,anduponwhetherornotthederivativeisdesignatedasahedgeasnotedabove.Changesinfairvalueofaderivativeinstrumentdesignatedasacashflowhedgearerecognized,totheextentthehedgeiseffective,inothercomprehensiveincomeuntilthehedgeditemisrecognizedinearnings.Changesinthefairvalueofaderivativeinstrumentdesignatedasafairvaluehedgearerecognizedintheconsolidatedstatementofoperationsalongwiththechangesinfairvalueofthehedgeditemattributabletothehedgedrisk.Wherehedgeaccountingisnotelectedorifaderivativeinstrumentdoesnotqualifyaseitherafairvaluehedgeoracashflowhedge,changesinfairvaluearerecognizedinearningsasaderivativefinancialinstrumentgainorloss.TheCompany’sderivativeinstruments,outstandinguntilFebruary2010,didnotqualifyaseitherafairvaluehedgeoracashflowhedgeand,atDecember31,2010,theCompanyhasnoderivativeinstrumentsoutstanding.

Warrants

Uponissuance,theCompanyrecordswarrantsissuedtopurchaseitscommonstockatfair-value;subsequently,thewarrantsarecarriedatamortizedcost.TheCompanydeterminesthefairvalueofwarrantsissuedbyusingtheBlack-Scholesoptionpricingmodel.WarrantswereassumedontheacquisitionofSolanaandtheirfairvalueof$23.6 millionwas recordedaspartoftheconsiderationpaidfortheacquisition(Note3).


New accounting pronouncements

VariableInterestEntitiesInJune2009,theFinancialAccountingStandardsBoard(the“FASB”)issuedrevisedaccountingstandardstoimprovefinancialreportingbyenterprisesinvolvedwithvariableinterestentities.Thestandardsreplacethequantitative-basedrisksandrewardscalculationfordeterminingwhichenterprise,ifany,hasacontrollingfinancialinterestinavariableinterestentitywithanapproachfocusedonidentifyingwhichenterprisehasthepowertodirecttheactivitiesofavariableinterestentitythatmostsignificantlyimpacttheentity’seconomicperformanceand:(1) theobligationtoabsorblossesoftheentity;or,(2) therighttoreceivebenefitsfromtheentity.ThisstandardwaseffectiveforinterimandannualreportingperiodsbeginningafterNovember15,2009.TheimplementationofthisstandarddidnotmateriallyimpacttheCompany’sconsolidatedfinancialposition,operatingresultsorcashflows.

FairValueMeasurementsInJanuary2010,theFASBissuedAccountingStandardsUpdate(“ASU”),“FairValueMeasurementsandDisclosures(Topic820):ImprovingDisclosuresaboutFairValueMeasurements”.ThisASUamendsexistingdisclosurerequirementsaboutfairvaluemeasurementsbyaddingrequireddisclosuresaboutitemstransferredintoandoutoflevels1and2inthefairvaluehierarchy;addingseparatedisclosuresaboutpurchases,sales,issuances,andsettlementsrelativetolevel 3measurements;andclarifying,amongotherthings,theexistingfairvaluedisclosuresaboutthelevelofdisaggregation.ThisiseffectiveforinterimandannualreportingperiodsbeginningafterDecember15,2009,exceptforthedisclosuresaboutpurchases,sales,issuances,andsettlementsintherollforwardofactivityinLevel3fairvaluemeasurements.ThosedisclosuresareeffectiveforfiscalyearsbeginningafterDecember15,2010,andforinterimperiodswithinthosefiscalyears. TheimplementationofthisupdateonJanuary1,2010didnotmateriallyimpacttheCompany’sdisclosures.

SubsequentEventsInFebruary2010,theFASBissuedASU,“SubsequentEvents(Topic855).” TheamendmentsremovetherequirementsforanSECfilertodiscloseadate,inbothissuedandrevisedfinancialstatements,throughwhichsubsequenteventshavebeenreviewed.ThisASUwaseffectiveuponissuance. TheimplementationofthisupdatedidnotmateriallyimpacttheCompany’sdisclosures.

StockCompensationInApril2010,theFASBissuedASU,“Compensation–StockCompensation(Topic718).” Theamendmentsclarifythatanemployeesharebasedpaymentawardwithanexercisepricedenominatedinthecurrencyofamarketinwhichasubstantialportionoftheentity’sequitysecuritiestradesshouldnotbeconsideredtocontainaconditionthatisnotamarket,performance,orservicecondition.Therefore,anentitywouldnotclassifysuchanawardasaliabilityifitotherwisequalifiesasequity. ThisASUiseffectiveforfiscalyears,andinterimperiodswithinthosefiscalyears,beginningonorafterDecember15,2010.TheimplementationofthisupdateisnotexpectedtomateriallyimpacttheCompany’sconsolidatedfinancialposition,operatingresultsorcashflows.

ReceivablesInJuly2010,theFASBissuedASU,“Receivables(Topic310).” Theupdateisintendedtoprovidefinancialstatementuserswithgreatertransparencyaboutanentity’sallowanceforcreditlossesandthecreditqualityofitsfinancingreceivables.ThedisclosuresasoftheendofareportingperiodareeffectiveforinterimandannualreportingperiodsendingonorafterDecember15,2010. TheimplementationofthisupdatedidnotmateriallyimpacttheCompany’sdisclosures.


BusinessCombinationsInDecember2010,theFASBissuedASU,“BusinessCombinations(Topic850),DisclosuresofSupplementaryProFormaInformationforBusinessCombinations.” Theupdateisintendedtoconformreportingofproformarevenueandearningsformaterialbusinesscombinationsincludedinthenotestothefinancialstatementsandexpanddisclosureofnon-recurringadjustmentsthataredirectlyattributabletothebusinesscombination.Theproformarevenueandearningsofthecombinedentityarepresentedasiftheacquisitiondatehadoccurredasofthebeginningoftheannualreportingperiod.Ifcomparativesarepresented,theproformadisclosuresforbothperiodspresentedshouldbereportedasiftheacquisitionhadoccurredasofthebeginningofthecomparablepriorannualreportingperiodonly.ThisASUiseffectiveforbusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2010. TheimplementationofthisupdateisnotexpectedtomateriallyimpacttheCompany’s disclosures.

3. Business Combinations

Solana Resources Limited (“Solana”)OnJuly29,2008,GranTierraannouncedthatithadenteredintoanagreementprovidingforthebusinesscombinationofGranTierraandSolana,aninternationalresourcecompanyengagedintheacquisition,exploration,developmentandproductionofoilandnaturalgasinColombiawithitsheadofficelocatedinCalgary,Alberta,Canada. UnderthetermsoftheagreementwithSolana,eachSolanashareholderreceived,foreachSolanacommonshareheld,either:(1)0.9527918ofashareofGranTierracommonstock;or(2)0.9527918ofacommonshareofaCanadiansubsidiaryofGranTierra(the“exchangeableshares”).Theexchangeableshares:(a)havethesamevotingrights,dividendentitlementsandotherattributesasGranTierracommonstock;(b)areexchangeable,ateachstockholder’soption,onaone-for-onebasisintoGranTierracommonstock.Exchangeableshares,issuedupontheacquisition,arelistedontheTorontoStockExchangeunderthesymbolGTXandwillautomaticallybeexchangedforGranTierracommonstockfiveyearsfromclosing,andincertainotherevents.Inaddition,certainSolanastockoptionswereexchangedforstockoptionsofGranTierrabasedontheaboveexchangeratio,andholdersofSolanawarrantselectedtocontinuetoholdtheirwarrants,whichareexercisableintosharesofcommonstockofGranTierrapursuanttothetermsofsuchwarrantsandbasedontheaboveexchangeratio.

ThetransactionwascompletedNovember14,2008pursuanttoaplanofarrangementinaccordancewiththeBusinessCorporationsAct(Alberta). Uponcompletionofthetransaction,Solanabecameanindirectwholly-ownedsubsidiaryofGranTierra.Onadilutedbasis,upontheclosingoftheplanofarrangement,Solanasecurityholdersownedapproximately49%ofthecombinedcompanyandGranTierrasecurityholdersownedapproximately51%ofthecombinedcompany.

Theacquisitionwasaccountedforusingthepurchasemethod,withGranTierrabeingtheacquirer,wherebytheSolanaassetsacquiredandliabilitiesassumedarerecordedattheirfairvaluesattheacquisitiondateofNovember14,2008andtheresultsofSolanahavebeenconsolidatedwiththoseofGranTierrafromthatdate. ThefairvalueofGranTierra’sshareswasdeterminedastheweightedaverageclosingpriceofthecommonsharesofGranTierraforthefive-dayperiodaroundtheannouncementdateofJuly29,2008,beingtwodayspriortoandaftertheacquisitionwasagreedtoandannounced,andtheannouncementdate.ThefairvalueofeachexchangeableshareissuedisequaltothefairvalueofacommonshareofGranTierra.

Underthetermsoftheacquisition,GranTierraacquiredalloftheissuedandoutstandingcommonsharesofSolanainexchangefor120,620,967sharescomprisedof51,516,332GranTierracommonsharesand69,104,635exchangeablesharesofGranTierraExchangeCo,awholly-ownedsubsidiaryofGranTierra.Inaccordancewiththeprovisionsoftheagreement,490,001Solanastockoptionswereexchangedfor466,869GranTierrastockoptions.Also,7,500,000Solanawarrantswereassumedonthedateoftheacquisitionandwereexchangeablefor7,145,938GranTierracommonshares.ThefairvalueoftheoptionsandwarrantswasincludedaspartoftheconsiderationforthisacquisitionandwasdeterminedbasedonmarketpriceoverafivedayperiodbeforeandaftertheannouncementdateusingtheBlack-Scholesoptionpricingmodelwiththefollowingassumptions:


Warrants:Exerciseprice(Canadiandollarsperwarrant) $ 2.00

Risk-freeinterestrate 2.28%

Expectedlife 1.7years

Volatility 75%

Expectedannualdividendpershare Nil

Fairvalueperwarrant $ 3.39

Stock Options:Exerciseprice(Canadiandollarsperstockoption) $ 2.36-$4.33

Risk-freeinterestrate 2.28%

Expectedlife 1.3-4.8years

Volatility 71%—75%

Expectedannualdividendpershare Nil

Weightedaveragefairvalueperoption $ 2.75

Basedontheconditionsexistingatthecompletiondate,November14,2008,thefairvalueoftheSolana warrants,asdeterminedbyGranTierra,exceededthefairvalueoftheSolana warrants, asdeterminedbySolana,byapproximately$0.6 million,andwasrecordedbyGranTierraimmediatelyascompensationexpenseandreportedaspartofgeneralandadministrativeexpenses.

OnNovember14,2008andpriortotheNovember15,2008deadline,ascontractuallyagreed,GranTierraissued2 millioncommonsharestoacquiretheparticipatinginterestinSolana’spropertiesthat,undertheColombianParticipationAgreemententeredintoin2006withCrosbyCapitalLLC(“Crosby”)aspartoftheacquisitionofArgosy,wouldotherwiseaccruetotheformerownersofArgosy.Theascribedvalueofcommonsharesissuedhasbeenincludedinthepurchaseconsiderationfortheacquisitionasthecompletionoftheacquisitionwasdependentonthesuccessfulacquisitionofthisparticipatinginterest.Theshareswereissuedinaprivateplacement,subjecttoaregistrationrightsagreement,andwereregisteredwiththeSECinFebruary2009.

Thefollowingtableshowstheallocationofthepurchasepricebasedonthefairvaluesoftheassetsandliabilitiesacquired:(Thousands of U.S. Dollars)

PurchasePrice:

CommonShares/ExchangeableSharesissuednetofshareissuecosts $ 631,451

Warrants 23,594

Stockoptions 1,345

Two millioncommonsharesissuedunderColombianParticipationAgreement 10,470

Transactioncosts 4,938

$ 671,798

PurchasePriceAllocated:

OilandGasProperties

Proved $ 320,773

Unproved 360,493

Otherassets 1,113

Otherlong-termassets 1,329

Goodwill(1)(2) 87,576

Networkingcapital(includingcashacquired)(2) 95,356

Assetretirementobligations (3,148)

Deferredincometaxes (191,694)

$ 671,798(1) Goodwill is not deductible for tax purposes and is subject to annual impairment test. (2) Due to new information received during 2009, the Company reclassified $4.4 million from taxes payable to goodwill in the purchase price allocation

relating to the Solana acquisition.


TheunauditedproformaresultsfortheyearendedDecember 31,2008isshownbelow,asiftheacquisitionhadoccurredonJanuary 1,2008.Proformaresultsarenotindicativeofactualresultsorfutureperformance.

Year Ended

December 31,

(Unaudited)(ThousandsofU.S.DollarsExceptPerShareAmounts) 2008

Oilandnaturalgassalesandinterest $ 221,043

Netincome $ 66,886

Netincomepershare—basic $ 0.29

Netincomepershare—diluted $ 0.26

Argosy Energy International L.P. (“Argosy”)

In2006,theCompanyrecorded$15.0 millionofgoodwillinrelationtotheArgosyacquisition.This$15.0 millioncombinedwiththe$87.6recordedinrelationtotheSolanaacquisition,totalsthegoodwillbalanceof$102.6 millionatDecember31,2010and2009.

4. Segment and Geographic ReportingTheCompany’sreportableoperatingsegmentsareColombiaandArgentinabasedonageographicorganization.TheCompanyisprimarilyengagedintheexplorationandproductionofoilandnaturalgas.PeruandBrazilarenotreportablesegmentsbecausethelevelofactivityontheselandholdingsisnotsignificantatthistimeandareincludedaspartoftheCorporatesegment.Theaccountingpoliciesofthereportableoperatingsegmentsarethesameasthosedescribedinthesummaryofsignificantaccountingpolicies.TheCompanyevaluatesperformancebasedonprofitorlossfromoilandnaturalgasoperationsbeforeincometaxes.

TheresultsofColombiaandCorporatesegmentsincludetheoperationsofSolanasubsequenttotheCompany’sacquisitionofSolana(Note3)onNovember14,2008.

ThefollowingtablespresentinformationontheCompany’sreportablegeographicsegments: YearEndedDecember31,2010

(ThousandsofU.S.Dollarsexceptperunit ofproductionamounts) Colombia Argentina Corporate Total

Revenues $ 359,302 $ 13,984 $ – $ 373,286Interestincome 460 26 688 1,174Depreciation,depletion,accretionandimpairment 133,728 29,416 429 163,573Depreciation,depletion,accretionandimpairment— perunitofproduction 26.80 103.56 – 31.02Segmentincome(loss)beforeincometaxes 142,486 (27,247) (20,833) 94,406Segmentcapitalexpenditures(1) $ 105,482 $ 33,930 $ 37,627 $ 177,039

YearEndedDecember31,2009

(ThousandsofU.S.Dollarsexceptperunit ofproductionamounts) Colombia Argentina Corporate Total

Revenues $ 248,834 $ 13,795 $ – $ 262,629

Interestincome 466 127 494 1,087

Depreciation,depletion,accretionandimpairment 127,213 8,339 311 135,863

Depreciation,depletion,accretionandimpairment— perunitofproduction 29.64 24.72 – 29.35

Segmentincome(loss)beforeincometaxes 55,827 (4,230) (13,302) 38,295

Segmentcapitalexpenditures $ 81,364 $ 4,532 $ 2,228 $ 88,124


YearEndedDecember31,2008

(ThousandsofU.S.Dollarsexceptperunitof productionamounts) Colombia Argentina Corporate Total

Revenues $ 103,202 $ 9,603 $ – $ 112,805

Interestincome 995 23 206 1,224

Depreciation,depletionandaccretion 22,199 3,390 148 25,737

Depreciation,depletionandaccretion— perunitofproduction 20.41 13.95 – 19.34

Segmentincome(loss)beforeincometaxes 58,490 (3,157) (10,894) 44,439

Segmentcapitalexpenditures $ 31,725 $ 11,690 $ 3,313 $ 46,728

AsatDecember31,2010

(ThousandsofU.S.Dollars) Colombia Argentina Corporate Total

Property,plantandequipment $ 654,416 $ 29,031 $ 43,577 $ 727,024Goodwill 102,581 – – 102,581Otherassets 155,798 15,220 248,631 419,649TotalAssets $ 912,795 $ 44,251 $ 292,208 $ 1,249,254

AsatDecember31,2009


Property,plantandequipment $ 681,854 $ 24,510 $ 6,379 $ 712,743

Goodwill 102,581 – – 102,581

Otherassets 123,380 12,574 192,530 328,484

TotalAssets $ 907,815 $ 37,084 $ 198,909 $ 1,143,808(1) Net of net proceeds from the disposition of the Garibay overriding royalty in 2010 (see Note 5) and the Guachiria Blocks in 2009 (see Note 5).

TheCompany’srevenuesarederivedprincipallyfromuncollateralizedsalestocustomersintheoilandnaturalgasindustry.TheconcentrationofcreditriskinasingleindustryaffectstheCompany’soverallexposuretocreditriskbecausecustomersmaybesimilarlyaffectedbychangesineconomicandotherconditions.In2010,theCompanyhadonesignificantcustomerforitsColombiancrudeoil,EcopetrolS.A.(“Ecopetrol”),aColombianmajoritystateownedagency.SalestoEcopetrolaccountedfor96%oftheCompany’srevenuesin2010,94%in2009,and89%in2008.InArgentina,theCompanyhadonesignificantcustomer,RefineriadelNorteS.A.(“Refinor”).SalestoRefinoraccountedfor4%oftheCompany’srevenuesin2010,6%in2009,and9%in2008.


5. Property, Plant and Equipment AsatDecember31,2010

(ThousandsofU.S.Dollars) CostAccumulated

DD&ANet

book value

Oilandnaturalgasproperties Proved $ 777,262 $ (334,858) $ 442,404Unproved 278,753 – 278,753 1,056,015 (334,858) 721,157Furnitureandfixturesandleaseholdimprovements 5,233 (2,831) 2,402Computerequipment 5,521 (2,358) 3,163Automobiles 779 (477) 302TotalProperty,PlantandEquipment $ 1,067,548 $ (340,524) $ 727,024

AsatDecember31,2009

(ThousandsofU.S.Dollars) CostAccumulated

DD&ANet

book value

Oilandnaturalgasproperties

Proved $ 648,061 $ (173,382) $ 474,679

Unproved 234,889 – 234,889

882,950 (173,382) 709,568

Furnitureandfixturesandleaseholdimprovements 3,843 (2,185) 1,658

Computerequipment 3,148 (1,907) 1,241

Automobiles 513 (237) 276

TotalProperty,PlantandEquipment $ 890,454 $ (177,711) $ 712,743

DD&Afor2010includeda$23.6 millionceilingtestimpairmentlossintheCompany’sArgentinacostcenterascomparedtoa$1.9 millionimpairmentlossforDecember31,2009. Ofthe2010impairmentloss,$17.9 millionrelatedtotheabandonmentoftheValleMoradosidetrackoperationsandtheremaining$5.7 millionresultedfromadecreaseinreservescombinedwithhigherforecastedoperatingcoststoproducetheremainingprovedreserves.The2009impairmentlossresultedfromhigherforecastedoperatingcoststoproducetheremainingprovedreserves.

TheCompanycapitalized$4.1 million(2009—$1.6 million;2008—$1.9 million)ofgeneralandadministrativeexpensesrelatedtotheColombianfullcostcenter,including$0.3 million(2009—$0.2 million;2008—$0.4 million)ofstockbasedcompensationexpense,and$1.2 million(2008—$0.6 million;2007—$0.8 million)ofgeneralandadministrativeexpensesintheArgentinafullcostcenter,including$0.2 million(2009—$0.1 million;2008—$0.1 million)ofstockbasedcompensation.

TheunprovedoilandnaturalgaspropertiesconsistofexplorationlandsheldinColombia,ArgentinaandPeru.TheCompanyhad$228.8 million(December31,2009—$229.1 million)inunprovedassetsinColombia,$9.4 million(December 31,2009—$0.4 million)ofunprovedassetsinArgentinaand$28.2 million(December31,2009—$5.4 million)ofunprovedassetsinPeru,and$12.4 million(December31,2009—nil)ofunprovedassetsinBrazilforatotalof$278.8 million(December31,2009—$234.9 million).Thesepropertiesarebeingheldfortheirexplorationvalueandarenotbeingdepletedpendingdeterminationoftheexistenceofprovedreserves.GranTierrawillcontinuetoassesstheunprovedpropertiesoverthenextseveralyearsasprovedreservesareestablishedandasexplorationdictateswhetherornotfutureareaswillbe developed.

InApril2009,GranTierraclosedthesaleoftheCompany’sinterestsintheGuachiriaNorte,Guachiria,andGuachiriaSurblocksinColombia.Principaltermsincludedconsiderationof$7.0 millioncomprisinganinitialcashpaymentof$4.0 millionatclosing,followedby15monthlyinstallmentsof$200,000eachwhichbeganonJune1,2009andendedonAugust3,2010.TheCompanyrecordednetproceedsof$6.3 millionin2009.GranTierraretaineda10%overridingroyaltyinterestontheGuachiriaSurBlock,which,intheeventofadiscovery,isdesignedtoreimburse200%oftheCompany’scostsforpreviouslyacquiredseismicdata.

InOctober2010,theCompanyrecordedproceedsof$6.4 millionforthesaleofanoverridinginterestintheGaribayBlockinColombia.


ThefollowingisasummaryofGranTierra’soilandnaturalgaspropertiesnotsubjecttodepletionasatDecember31,2010: CostsIncurredin

(ThousandsofU.S.Dollars) 2010 2009 2008 2007 2006 Total

Acquisitioncosts—Colombia $ 5,000 $ – $ 188,001 $ – $ 1,637 $ 194,638

Acquisitioncosts—Peru 2,000 – – – – 2,000

Acquisitioncosts—Brazil 12,395 – – – – 12,395

Explorationcosts—Argentina 3,933 163 229 – – 4,325

Explorationcosts—Colombia 27,812 3,376 487 – – 31,675

Explorationcosts—Peru 20,847 1,969 2,767 656 – 26,239

Developmentcosts—Argentina 5,021 – – – – 5,021

Developmentcosts—Colombia 2,460 – – – – 2,460

Totaloilandnaturalgasproperties notsubjecttodepletion $ 79,468 $ 5,508 $ 191,484 $ 656 $ 1,637 $ 278,753

6. Share CapitalTheCompany’sauthorizedsharecapitalconsistsof595,000,002sharesofcapitalstock,ofwhich570 millionaredesignatedascommonstock,parvalue$0.001pershare,25 millionaredesignatedaspreferredstock,parvalue$0.001pershare(collectively,“commonstock”),andtwosharesaredesignatedasspecialvotingstock,parvalue$0.001pershare.OnJune16,2009,theshareholdersofGranTierraapprovedanamendmenttotheArticlesofIncorporationtoincreasetheauthorizednumberofsharesofcommonstockfrom300,000,000to570,000,000shares.AsatDecember31,2010,outstandingsharecapitalconsistsof240,440,830commonvotingsharesoftheCompany,9,870,011exchangeablesharesofGranTierraExchangeCo.,automaticallyexchangeableonNovember14,2013,and7,811,112exchangeablesharesofGoldstrikeExchangeCo.,automaticallyexchangeableonNovember10,2012.TheexchangeablesharesofGranTierraExchangeCo,wereissueduponacquisitionofSolana.TheexchangeablesharesofGranTierraGoldstrikeInc.wereissueduponthebusinesscombinationbetweenGranTierraEnergyInc.,anAlbertacorporation,andGoldstrike,Inc.,whichisnowtheCompany.EachexchangeableshareisexchangeableintoonecommonvotingshareoftheCompany.TheholdersofcommonstockareentitledtoonevoteforeachshareonallmatterssubmittedtoastockholdervoteandareentitledtoshareinalldividendsthattheCompany’sboardofdirectors,initsdiscretion,declaresfromlegallyavailablefunds.Theholdersofcommonstockhavenopre-emptiverights,noconversionrights,andtherearenoredemptionprovisionsapplicabletothecommonstock.Holdersofexchangeableshareshavesubstantiallythesamerightsasholdersofcommonvotingshares.

Warrants

AtDecember31,2010,theCompanyhad7,769,864warrantsoutstandingtopurchase3,884,932commonsharesfor$1.05 pershare,expiringbetweenJune20,2012andJune30,2012.FortheyearendedDecember31,2010,11,127,527commonshareswereissuedupontheexerciseof15,109,116warrants(yearendedDecember31,2009,4,221,193commonshareswereissuedupontheexerciseof10,913,660warrants;yearendedDecember31,2008,20,479,546commonshareswereissuedupontheexerciseof41,138,370warrants).Includedinwarrantsexercisedin2010were7,145,938warrantstopurchase7,145,938commonsharesfor$14.4 million,assumedintheacquisitionofSolanainNovember2008.

Stock Options

AsatDecember31,2010,theCompanyhasa2007EquityIncentivePlan,formedthroughtheapprovalbyshareholdersoftheamendmentandrestatementofthe2005EquityIncentivePlan,underwhichtheCompany’sboardofdirectorsisauthorizedtoissueoptionsorotherrightstoacquiresharesoftheCompany’scommonstock.OnNovember14,2008,theshareholdersofGranTierraapprovedanamendmenttotheCompany’s2007EquityIncentivePlan,whichincreasedthenumberofsharesofcommonstockavailableforissuancethereunderfrom9,000,000sharesto18,000,000shares.OnJune16,2010,anotheramendmenttotheCompany’s2007EquityIncentiveplanwasapprovedbyshareholders,whichincreasedthenumberofsharesofcommonstockavailableforissuancethereunderfrom18,000,000sharesto23,306,100 shares.

TheCompanygrantsoptionstopurchasecommonsharestocertaindirectors,officers,employeesandconsultants.Eachoptionpermitstheholdertopurchaseonecommonshareatthestatedexerciseprice.Theoptionsvestoverthree


yearsandhaveatermoftenyears,orthegrantee’sendofservicetotheCompany,whicheveroccursfirst.Atthetimeofgrant,theexercisepriceequalsthemarketprice.FortheyearendedDecember31,2010,2,895,553commonshareswereissuedupontheexerciseof2,895,553stockoptions(yearendedDecember31,2009—1,391,028;yearendedDecember 31,2008—209,164).ThefollowingoptionsareoutstandingasofDecember31,2010:

Number ofOutstanding

Options

WeightedAverage

Exercise Price$/Option

Number ofNonvestedOptions

WeightedAverage

Grant-DateFair Value$/Option

Balance,December31,2009 11,088,616 $ 2.43 5,959,212 $ 1.74

Grantedin2010 3,045,000 5.97 3,045,000 3.36

Exercisedin2010 (2,895,553) (1.95) – –

Vestedin2010 – – (3,192,516) 1.61

Forfeitedin2010 (295,005) (4.09) (295,005) 1.69

Balance,December31,2010 10,943,058 $ 3.49 5,516,691 $ 2.68

Theweightedaveragegrantdatefairvalueforoptionsgrantedin2010was$3.36(2009—$2.43;2008—$1.55).Theintrinsicvalueofoptionsexercisedin2010was$12.8 million(2009—$2.9 million;2008—$0.8 million).Thetotalfairvalueofsharesvestedduring2010was$5.1 million(2009—$4.7 million;2008—$2.0 million).

ThetablebelowsummarizesstockoptionsoutstandingatDecember31,2010:

RangeofExercisePrices($/option)

NumberofOutstanding

Options

Weighted Average

ExercisePrice$/Option

WeightedAverage

ExpiryYears

0.50to1.30 1,280,836 $ 1.10 5.5

1.31to2.00 88,334 1.72 6.9

2.01to3.50 5,675,555 2.45 7.8

3.51to5.50 478,333 4.45 8.8

5.51to7.75 3,420,000 6.02 9.1

Total 10,943,058 $ 3.49 8.0

TheaggregateintrinsicvalueofoptionsoutstandingatDecember31,2010is$49.9 million(2009—$39.0 million)basedontheCompany’sclosingstockpriceof$8.05(2009—$5.73)forthatdate.AtDecember31,2010,therewas$6.1 million(2009—$5.4 million)ofunrecognizedcompensationcostrelatedtounvestedstockoptionswhichisexpectedtoberecognizedoverthenextthreeyears.

ThetablebelowsummarizesexercisablestockoptionsatDecember31,2010:

Range of Exercise Prices($/option)

Number of Exercisable

Options

Weighted Average

Exercise Price$/Option

Weighted Average ExpiryYears

0.50to1.30 1,280,836 $ 1.1 5.5

1.31to2.00 88,334 $ 1.72 6.9

2.01to3.50 3,747,200 $ 2.42 7.7

3.51to5.50 111,665 $ 4.77 8.8

5.51to7.75 198,332 $ 6.54 8.4

Total 5,426,367 $ 2.30 7.2

Theweightedaveragegrantdatefairvalueforoptionsvestedin2010was$1.61(2009—$1.38).TheaggregateintrinsicvalueofoptionsexercisableatDecember31,2010is$49.9 million(2009—$19.8 million)basedontheCompany’sclosingstockpriceof$8.05forthatdate.

In2010,thestockbasedcompensationexpensewas$8.5 million(2009—$5.6 million;2008—$3.1 million)ofwhich$7.2 million(2009—$4.5 million;2008—$2.3 million)wasrecordedingeneralandadministrativeexpenseand$0.8 million(2009—$0.8 million;2008—$0.2 million)wasrecordedinoperatingexpenseintheconsolidatedstatementofoperations.In2010,$0.5 million(2009—$0.3 million;2008—$0.6 million)ofstockbasedcompensationwascapitalizedaspartofexplorationanddevelopmentcosts.


ThefairvalueofeachstockoptionawardisestimatedonthedateofgrantusingtheBlack-Scholesoptionpricingmodelbasedonassumptionsnotedinthefollowingtable.TheCompanyuseshistoricaldatatoestimateoptionexercises,expectedtermandemployeedeparturebehaviorusedintheBlack-Scholesoptionpricingmodel.ExpectedvolatilitiesusedinthefairvalueestimatearebasedonhistoricalvolatilityoftheCompany’sstock.Therisk-freerateforperiodswithinthecontractualtermofthestockoptionsisbasedontheU.S.Treasuryyieldcurveineffectatthetimeofgrant. YearEndedDecember31,

2010 2009 2008

Dividendyield(pershare) $ nil $ nil $ nil

Volatility 84% to 90% 94%to98% 75%to103%

Risk-freeinterestrate 0.2% to 0.5% 0.4%to0.6% 1.1%to2.1%

Expectedterm 3 years 3years 3years

Estimatedforfeiturepercentage(peryear) 10% 10% 10%

Weighted average shares outstanding


2010 2009 2008

Weightedaverage numberofcommonandexchangeablesharesoutstanding 253,697,076 241,258,568 123,421,898

Sharesissuablepursuanttowarrants 3,750,781 9,503,818 14,663,885

Sharesissuablepursuanttostockoptions 7,402,966 5,797,322 6,020,738

Sharestobepurchasedfromproceedsofstockoptions (545,992) (2,969,605) (911,931)

Weightedaveragenumberofdilutedcommonandexchangeable sharesoutstanding 264,304,831 253,590,103 143,194,590

Income (loss) per share

AtDecember 31,2010,2009and2008,290,000,1,080,000and100,000optionstopurchasecommonshareswereexcludedfromthedilutedincomepersharecalculationastheinstrumentswereanti-dilutive.

7. Asset Retirement ObligationAsat December31,2010theCompany’sassetretirementobligationwascomprisedofaColombianobligationintheamountof$3.7 million(December31,2009—$3.5 million)andanArgentineobligationintheamountof$1.1 million(December31,2009—$1.2 million).Theundiscountedassetretirementobligationis$8.7 million.ChangesinthecarryingamountsoftheassetretirementobligationsassociatedwiththeCompany’soilandnaturalgaspropertieswereasfollows: AsatDecember31,

(ThousandsofU.S.Dollars) 2010 2009

Balance,beginningofyear $ 4,708 $ 4,251

Settlements (286) (52)

Disposal (720) (734)

Liabilityincurred 719 921

Foreignexchange 58 24

Accretion 328 298

Balance,endofyear $ 4,807 $ 4,708

Assetretirementobligation—current $ 338 $ 450

Assetretirementobligation—longterm 4,469 4,258

Balance,endofyear $ 4,807 $ 4,708


8. Income TaxesTheincometaxexpensereporteddiffersfromtheamountcomputedbyapplyingtheUSstatutoryratetoincomebeforeincometaxesforthefollowingreasons: YearEndedDecember31,


Incomebeforeincometaxes $ 94,406 $ 38,295 44,439

35% 35% 35%

Incometaxexpense(benefit)expected 33,042 13,403 15,554

Foreigncurrencytranslationadjustments 6,409 1,099 4,636

Impactofforeigntaxes (3,094) (1,565) (1,337)

Enhancedtaxdepreciationincentive (7,971) (3,380) (4,560)

Stockbasedcompensation 2,381 1,814 707

Non-deductibleroyalty 5,506 3,532 3,129

Increaseinvaluationallowance 19,991 16,199 8,537

Partnershipandbranch(loss)incomepick-upintheUnitedStates andCanada (3,957) (5,931) 21,673

Utilizationofforeigntaxcredits – 71 (26,989)

Otherpermanentdifferences 4,927 (888) (406)

Totalincometaxexpense $ 57,234 $ 24,354 $ 20,944

Currentincometax 76,913 38,795 25,256

Deferredtaxrecovery (19,679) (14,441) (4,312)

Totalincometaxexpense $ 57,234 $ 24,354 $ 20,944

AsatDecember31,

(ThousandsofU.S.Dollars) 2010 2009

DeferredTaxAssets

Taxbenefitoflosscarryforwards $ 27,527 $ 22,318

Taxbasisinexcessofbookbasis 7,975 1,691

Foreigntaxcreditsandotheraccruals 16,895 15,508

Capitallosses 1,413 1,481

Deferredtaxassetsbeforevaluationallowance 53,810 40,998

Valuationallowance (48,958) (29,528)

$ 4,852 $ 11,470

Deferredtaxassets—current $ 4,852 $ 4,252

Deferredtaxassets—long-term – 7,218

4,852 11,470

DeferredTaxLiabilities

Long-term—bookvalueinexcessoftaxbasis (204,570) (216,625)

(204,570) (216,625)

NetDeferredTaxLiabilities $ (199,718) $ (205,155)

TheCompanywasrequiredtocalculateadeferredremittancetaxinColombiabasedon7%ofprofitswhicharenotreinvestedinthebusinessonthepresumptionthatsuchprofitswouldbetransferredtotheforeignownersuptoDecember 31,2006.AsofJanuary1,2007,theColombiangovernmentrescindedthislaw;therefore,nofurtherremittancetaxliabilitieswillbeaccrued.ThehistoricalbalancewhichwasincludedintheCompany’sfinancialstatementsasofDecember31,2010was$0.5 million(December31,2008—$0.9 million).

TheCompanyanditssubsidiariesfileincometaxreturnsintheU.S.federalandstatejurisdictionsandcertainotherforeignjurisdictions.TheCompanyissubjecttoincometaxexaminationsforthecalendartaxyearsended2004through2010inmostjurisdictions.

AsatDecember31,2010,theCompanyhasdeferredtaxassetsrelatingtonetoperatinglosscarryforwardsof$27.5 million(December31,2009—$22.3 million)andcapitallossesof$1.4 million(December31,2009—$1.5 million)beforevaluationallowances.Oftheselosses,$20.5 million(December31,2009—$18.2 million)arelossesgeneratedby


theforeignsubsidiariesoftheCompany.Ofthetotallosses nil(December31,2009—$0.1 million)willbegintoexpireby2011and$28.9 millionofnetoperatinglosses(December31,2009—$23.7 million)willbegintoexpirethereafter.

9. Accounts Payable and Accrued LiabilitiesThebalancesinaccountspayableandaccruedliabilitiesarecomprisedofthefollowing: AsatDecember31,2010


Property,plantandequipment $ 32,854 $ 10,452 $ 9,815 $ 53,121Payroll 3,256 186 2,300 5,742Audit,legal,consultants – 140 1,692 1,832Generalandadministrative 1,039 590 433 2,062Operating 43,037 2,141 208 45,386Total $ 80,186 $ 13,509 $ 14,448 $ 108,143

AsatDecember31,2009


Property,plantandequipment $ 17,723 $ 844 $ 213 $ 18,780

Payroll 1,792 339 1,052 3,183

Audit,legal,consultants – 137 1,472 1,609

Generalandadministrative 2,542 284 213 3,039

Operating 48,756 1,648 – 50,404

Total $ 70,813 $ 3,252 $ 2,950 $ 77,015

10. Commitments and Contingencies

LeasesGranTierraholdsthreecategoriesofoperatingleases:office,vehicleandhousing.TheCompanypaysmonthlyamountsof$0.2 millionforofficeleases,$11,000forvehicleleasesand$5,000forcertainemployeeaccommodationleasesinColombia,ArgentinaandPeru.FutureleasepaymentsasatDecember31,2010areasfollows: As at December 31, 2010

Payments Due in Period

Contractual Obligations(ThousandsofU.S.Dollars) Total

Less than 1Year

1 to 3years

3 to 5years

More than 5years

Operatingleases $ 5,444 $ 2,476 $ 2,068 $ 900 $ –

Softwareandtelecommunication 1,456 1,137 319 – –

Drilling,completion,facilityConstruction andoiltransportationservices 71,412 62,754 8,658 – –

Consulting 393 393 – – –

Total $ 78,705 $ 66,760 $ 11,045 $ 900 $ –

Totalrentexpensefor2010was$2.3 million(2009—$2.1 million;2008—$0.9 million).

GuaranteesCorporateindemnitieshavebeenprovidedbytheCompanytodirectorsandofficersforvariousitemsincluding,butnotlimitedto,allcoststosettlesuitsoractionsduetotheirassociationwiththeCompanyanditssubsidiariesand/oraffiliates,subjecttocertainrestrictions.TheCompanyhaspurchaseddirectors’andofficers’liabilityinsurancetomitigatethecostofanypotentialfuturesuitsoractions.Themaximumamountofanypotentialfuturepaymentcannotbereasonablyestimated.

TheCompanymayprovideindemnificationsinthenormalcourseofbusinessthatareoftenstandardcontractualtermstocounterpartiesincertaintransactionssuchaspurchaseandsaleagreements.Thetermsoftheseindemnificationswillvarybaseduponthecontract,thenatureofwhichpreventstheCompanyfrommakingareasonableestimateofthemaximumpotentialamountsthatmayberequiredtobepaid.ManagementbelievestheresolutionofthesematterswouldnothaveamaterialadverseimpactontheCompany’sliquidity,consolidatedfinancialpositionorresultsofoperations.


ContingenciesEcopetrol andGranTierra EnergyColombia Ltd. “GranTierraColombia”,thecontractingpartiesoftheGuayuyacoAssociationContract,areengagedinadisputeregardingtheinterpretationoftheprocedureforallocationofoilproducedandsoldduringthelongtermtestoftheGuayuyaco-1andGuayuyaco-2wells.ThereisamaterialdifferenceintheinterpretationoftheprocedureestablishedinClause3.5ofAttachment-BoftheGuayuyacoAssociationContract.Ecopetrolinterpretsthecontracttoprovidethattheextendedtestproductionuptoavalueequalto30%ofthedirectexplorationcostsofthewellsisforEcopetrol’saccountonlyandservesasreimbursementofits30%back-intotheGuayuyacodiscovery.GranTierraColombia’scontentionisthatthisamountismerelytherecoveryof30%ofthedirectexplorationcostsofthewellsandnotexclusivelyforbenefitofEcopetrol.Therehasbeennoagreementbetweentheparties,and EcopetrolhasfiledalawsuitintheContraventionAdministrativeCourtintheDistrictof Caucaregardingthismatter.GranTierraColombiafiledaresponseonApril29,2008inwhichitrefutedallofEcopetrol’sclaimsandrequestedachangeofvenuetothecourtsinBogotá. AtthistimenoamounthasbeenaccruedinthefinancialstatementsastheCompanydoesnotconsideritprobablethatalosswillbeincurred.Ecopetrolisclaimingdamagesofapproximately$5.5 million.

GranTierrahasseverallawsuitsandclaimspendingforwhichtheCompanycurrentlycannotdeterminetheultimateresult.GranTierrarecordscostsastheyareincurredorbecomedeterminable.GranTierrabelievestheresolutionofthesematterswouldnothaveamaterialadverseeffectontheCompany’sconsolidatedfinancialpositionorresultsofoperations.

11. Financial Instruments, Fair Value Measurements and Credit RiskTheCompany’sfinancialinstrumentsrecognizedinthebalancesheetconsistofcashandcashequivalents,restrictedcash,accountsreceivable,accountspayable,accruedliabilities,andderivativefinancialinstruments.TheestimatedfairvaluesofthefinancialinstrumentshavebeendeterminedbasedontheCompany’sassessmentofavailablemarketinformationandappropriatevaluationmethodologies;however,theseestimatesmaynotnecessarilybeindicativeoftheamountsthatcouldberealizedorsettledinamarkettransaction.AsatDecember31,2010,thefairvaluesoffinancialinstrumentsapproximatetheirbookamountsduetotheshorttermmaturityoftheseinstruments.MostoftheCompany’saccountsreceivablerelatetooilandnaturalgassalesandareexposedtotypicalindustrycreditrisks.TheCompanymanagesthiscreditriskbyenteringintosalescontractswithonlycreditworthyentitiesandreviewingitsexposuretoindividualentitiesonaregularbasis.Thebookvalueoftheaccountsreceivablereflectsmanagement’sassessmentoftheassociatedcreditrisks.TheCompanyholdsnoderivativeinstrumentsatDecember31,2010.

Additionally,foreignexchangegains/lossesresultfromthefluctuationoftheU.S.dollartotheColombianpesoduetoGranTierra’sdeferredtaxliability,amonetaryliability,whichismainlydenominatedinthelocalcurrencyoftheColombian foreignoperations.Asaresult,aforeignexchangegain/lossmustbecalculatedonconversiontotheUSdollarfunctionalcurrency.AstrengtheningintheColombianpesoagainsttheU.S.dollarresultsinforeignexchangelosses,estimatedat$104,000)foreachonepesodecreaseintheexchangerateoftheColombianpesotooneU.S.dollar.

TheCompany’srevenuesarederivedprincipallyfromuncollateralizedsalestocustomersintheoilandnaturalgasindustry.TheconcentrationofcreditriskinasingleindustryaffectstheCompany’soverallexposuretocreditriskbecausecustomersmaybesimilarlyaffectedbychangesineconomicandotherconditions.In2010,theCompanyhadonesignificantcustomerforitsColombiancrudeoil,Ecopetrol.InArgentina,theCompanyhadonesignificantcustomer,Refinor.

TheCompanyrecognizesthefairvalueofitsderivativeinstrumentsasassetsorliabilitiesonthebalancesheet. NoneoftheCompany’sderivativeinstruments,whichexpiredinFebruary2010,qualifiedasfairvaluehedgesorcashflowhedges,andaccordingly,changesinfairvalueofthederivativeinstrumentswererecognized asincomeorexpenseintheconsolidatedstatementofoperationsandretainedearnings(accumulateddeficit)withacorrespondingadjustmenttothefairvalueofderivativeinstrumentsrecordedonthebalancesheet.UnderthetermsoftheCreditFacilitywithStandardBank(Note12),theCompanywasrequiredtoenterintoaderivativeinstrumentforthepurposeofobtainingprotectionagainstfluctuationsinthepriceofoilinrespectofatleast50%oftheJune30,2006IndependentReserveEvaluationReportprojectedaggregatenetshareofColombianproductionafterroyaltiesforthethreeyeartermoftheFacility.InaccordancewiththetermsoftheFacility,theCompanyenteredintoacostlesscollarderivativeinstrumentforcrudeoilbasedonWestTexasIntermediate(“WTI”)price,withafloorof$48.00andaceilingof$80.00,forathreeyearperiodendingFebruary2010,for400barrelsperdayfromMarch2007toDecember2007,300barrelsperdayfromJanuary 2008toDecember 2008,and200barrelsperdayfromJanuary 2009toFebruary 2010.ThecompanyhadnoderivativecontractsoutstandingatDecember31,2010.




Realizedfinancialderivative(gain)loss $ – $ (87) $ 2,689

Unrealizedfinancialderivative(gain)loss (44) 277 (2,882)

Derivativefinancialinstruments(gain)loss $ (44) $ 190 $ (193)

As at December31,

Assets(Liabilities) 2010 2009

Derivativefinancialinstruments $ – $ (44)

CertainofGranTierra’sassetsandliabilitiesarereportedatfairvalueintheaccompanyingconsolidatedbalancesheets.ThefollowingtablesprovidefairvaluemeasurementinformationforsuchassetsandliabilitiesasatDecember31,2010andDecember31,2009.

Thecarryingvaluesofcashandcashequivalents,restrictedcash,accountsreceivableandaccountspayable(includingaccruedliabilities)includedintheaccompanyingconsolidatedbalancesheetsapproximatedfairvalueatDecember31,2010andDecember31,2009.Theseassetsandliabilitiesarenotpresentedinthefollowingtables. AsatDecember31,2010

Fair Value Measurements Using:

Carrying Amount

Total Fair Value

Quoted Prices in

Active Markets (Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

FinancialAssets(Liabilities)(ThousandsofU.S.Dollars)

Crudeoilcollar $ – $ – $ – $ – $ –

As at December 31, 2009

Fair Value Measurements Using:

CarryingAmount

Total FairValue

QuotedPrices inActive

Markets(Level 1)

SignificantOther

ObservableInputs

(Level 2)

Significant

UnobservableInputs

(Level 3)

FinancialAssets(Liabilities)(ThousandsofU.S.Dollars)

Crudeoilcollar $ (44) $ (44) $ – $ (44) $ –

GAAPestablishesafairvaluehierarchythatprioritizestheinputstovaluationtechniquesusedtomeasurefairvalue.Aspresentedinthetableabove,thishierarchyconsistsofthreebroadlevels.Level1inputsonthehierarchyconsistofunadjustedquotedpricesinactivemarketsforidenticalassetsandliabilitiesandhavethehighestpriority.Level2and3inputshavelowerpriorities.TheCompanyusesappropriatevaluationtechniquesbasedontheavailableinputstomeasurethefairvaluesofassetsandliabilities.Whenavailable,GranTierrameasuresfairvalueusingLevel1inputsbecausetheygenerallyprovidethemostreliableevidenceoffairvalue.

TheCompanyusesaLevel2methodtomeasurethefairvalueofitscrudeoilcollars.Thefairvaluesofthecrudeoilareestimatedusinginternaldiscountedcashflowcalculationsbaseduponforwardcommoditypricecurves,non-bindingquotesobtainedfrombrokersforcontractswithsimilartermswhichcanbesubstantiallyobservedorcorroboratedinthemarketplace,orquotesobtainedfromcounterpartiestotheagreements.TheCompanydoesnothaveanyotherassetsorliabilitieswhosefairvalueismeasuredusingLevel1or3methods.

Thefollowingmethodsandassumptionswereusedtoestimatethefairvaluesoftheassetsandliabilitiesinthetableabove.

Level1FairValueMeasurementsTheCompanydoesnothaveanyassetsorliabilitieswhosefairvalueismeasuredusingthismethod.


Level2FairValueMeasurementsCrude oil collars—Thefairvaluesofthecrudecollarswereestimatedusinginternaldiscountedcashflowcalculationsbaseduponforwardcommoditypricecurves,non-bindingquotesobtainedfrombrokersforcontractswithsimilartermswhichcouldbesubstantiallyobservedorcorroborateinthemarketplace,orquotesobtainedfromcounterpartiestotheagreements.

Level3FairValueMeasurementsTheCompanydoesnothaveanyfinancialassetsorfinancialliabilitieswhosefairvalueismeasuredusingthismethod.

12. Credit FacilitiesEffectiveFebruary28,2007,theCompanyenteredintoacreditfacilitywithStandardBankPlc.Asaresultofre-negotiationsconcludedinAugust2009,themaximumamountofthecreditfacilitywas$200 millionwitha$7 millionborrowingbasethatcouldbere-determinedsemi-annuallybasedonreserveevaluationreports.AmountsdrawndownunderthefacilityboreinterestattheEurodollarrateplus4%.Astand-byfeeof1%perannumwaschargedontheun-drawnamountoftheborrowingbase.ThefacilitywassecuredprimarilybytheassetsofGranTierraColombiaandSolanaPetroleumExploration(Colombia)Ltd.AsatDecember31,2009,noamountwasdrawn-downunderthisfacility.ThisfacilityexpiredFebruary 22, 2010.

EffectiveJuly30,2010,asubsidiaryofGranTierra,Solana,establishedacreditfacilitywithBNPParibasforathree-yeartermwhichmaybeextendedoramendedbyagreementbetweentheparties. Thisreservebasedfacilityhasamaximumborrowingbaseupto$100 millionandissupportedbythepresentvalueofthepetroleumreservesoftheCompany’stwosubsidiarieswithoperatingbranchesinColombia—GranTierraEnergyColombiaLtd.andSolanaPetroleumExploration(Colombia)Ltd. Theinitialcommittedborrowingbaseis$20 million. AmountsdrawndownunderthefacilitybearinterestattheUSDLIBORrateplus3.5%.Inaddition,astand-byfeeof1.50%perannumischargedontheunutilizedbalanceofthecommittedborrowingbaseandisincludedingeneralandadministrativeexpense. Underthetermsofthefacility,theCompanyisrequiredtomaintainandwasincompliancewithcertainfinancialandoperatingcovenants.AsatDecember31,2010,theCompanyhadnotdrawndownanyamountsunderthisfacility.

13. Related Party TransactionsOnFebruary1,2009,theCompanyenteredintoasubleaseforofficespacewithacompany,ofwhichoneofGranTierra’sdirectorsisashareholderanddirector.ThetermofthesubleaserunsfromFebruary1,2009toAugust31,2011andthesubleasepaymentis$7,800permonthplusapproximately$4,000foroperatingandotherexpenses.ThetermsofthesubleasewereconsistentwithmarketconditionsintheCalgary,Alberta,Canadarealestatemarket.

OnAugust3,2010,GranTierraenteredintoacontractrelatedtothePerudrillingprogramwithacompanyforwhichoneofGranTierra’sdirectorsisashareholderanddirector.AtDecember31,2010,$0.8 millionwascapitalizedandincludedinaccountspayablerelatedtothiscontract,thetermsofwhichareconsistentwithmarketconditions.

14. Subsequent EventsOnJanuary12,2011,theCompanyenteredintoanagreementtosubleaseofficespacetoacompanyforwhichGranTierra’sPresidentandChiefExecutiveOfficerservesasanindependentDirector.ThetermofthesubleaserunsfromFebruary1,2011toJanuary30,2013and,at$4,444permonth,thetermsareconsistentwithmarketconditionsintheCalgary,Alberta,Canadarealestatemarket.

OnJanuary17,2011,theCompanyenteredintoanArrangementAgreement(the“Agreement”)toacquirealltheissuedandoutstandingsharesandwarrantsofPetroliferaPetroleumLimited(“Petrolifera”).PetroliferaisaCanadianbasedinternationaloilandgascompanythattradesontheTorontoStockExchangeandhasoilandgasassetsinArgentina,Colombia,andPeru. UnderthetermsoftheAgreement,Petroliferashareholderswillreceive0.1241ofashareofGranTierraEnergy,foreveryPetroliferashareheld.Inaddition,wewillissuereplacementwarrantsfortheoutstandingwarrantstopurchasePetroliferacommonshares,intheamountof0.1241ofaGranTierrawarrantforeachPetroliferawarrant.Atotalofapproximately19 millionofGranTierra’ssharesareexpectedtobeissued,whichrepresentsapproximatelyan8%increaseinsharesoutstanding.Totalconsiderationforthetransactionwillbeapproximately$195 million,includingtheassumptionofPetrolifera’sdebt,workingcapitalandinvestmentsasofSeptember30,2010.TheAgreementissubjecttoregulatory,court,stockexchange,andPetroliferasecurityholderapprovalsandisscheduledtocloseinMarch2011.


Supplementary Data (Unaudited)

1) Oil and Gas Producing Activities

A. Reserve Quantity InformationGranTierra’snetprovedreservesandchangesinthosereservesforoperationsaredisclosedbelow.Thenetprovedreservesrepresentmanagement’sbestestimateofprovedoilandnaturalgasreservesafterroyalties.Reserveestimatesforeachpropertyarepreparedinternallyeachyearand100%ofthereserveshavebeenassessedbyindependentqualifiedreservesconsultants,GLJPetroleumConsultants.

Estimatesofcrudeoilandnaturalgasprovedreservesaredeterminedthroughanalysisofgeologicalandengineeringdata,anddemonstratereasonablecertaintythattheyarerecoverablefromknownreservoirsundereconomicandoperatingconditionsthatexistedatyearend.SeeCriticalAccountingEstimatesinItem7foradescriptionofGranTierra’sreservesestimationprocess.

PROVEDRESERVESNETOFROYALTIES(1) Colombia Argentina Total

Crudeoilisinbarrelsandnaturalgasisinmillioncubicfeet Oil Gas Oil Gas Oil Gas

ProvedDevelopedandUndevelopedReserves, December 31,2007 4,383,000 – 2,035,000 – 6,418,000 –

ExtensionsandDiscoveries 5,344,202 – 377,300 – 5,721,502 –

PurchasesofReservesinPlace 9,016,148 1,179 – – 9,016,148 1,179

Production (1,085,198) (15) (242,947) – (1,328,145) (15)

RevisionsofPreviousEstimates 22,848 (2) (612,353) – (589,505) (2)

ProvedDevelopedandUndevelopedreserves, December 31,2008 17,681,000 1,162 1,557,000 – 19,238,000 1,162

ExtensionsandDiscoveries 2,025,000 – – – 2,025,000 –

PurchasesofReservesinPlace (113,000) – – – (113,000) –

Production (4,284,230) (49) (337,316) – (4,621,546) (49)

RevisionsofPreviousEstimates 5,482,230 – 71,316 756 5,553,546 756

ProvedDevelopedandUndevelopedReserves, December 31,2009 20,791,000 1,113 1,291,000 756 22,082,000 1,869

ExtensionsandDiscoveries 3,107,400 – 43,300 – 3,150,700 –PurchasesofReservesinPlace – – – – – –Production (4,877,600) (277) (296,800) – (5,174,400) (277)RevisionsofPreviousEstimates 3,464,400 396 75,200 (756) 3,539,600 (360)ProvedDevelopedandUndevelopedReserves, December 31,2010 22,485,200 1,232 1,112,700 – 23,597,900 1,232ProvedDevelopedReserves,December 31,2008(2) 7,832,000 – 1,134,000 – 8,966,000 –

ProvedDevelopedReserves,December 31,2009(2) 20,194,000 1,113 1,080,000 756 21,274,000 1,869

ProvedDevelopedReserves,December 31,2010(2) 18,528,000 1,232 940,000 – 19,468,000 1,232(1) Proved oil and gas reserves are the estimated quantities of natural gas, crude oil, condensate and natural gas liquids that geological and engineering

data demonstrate with reasonable certainty can be recovered in future years from known reservoirs under existing economic and operating conditions. Reserves are considered “proved” if they can be produced economically, as demonstrated by either actual production or conclusive formation testing.

(2) Proved developed oil and gas reserves are expected to be recovered through existing wells with existing equipment and operating methods.


B. Capitalized Costs

Proved

PropertiesUnprovedProperties

AccumulatedDD&A

CapitalizedCosts

CapitalizedCosts,December 31,2009 $ 648,061 $ 229,497 $ (173,382) $ 704,176

Colombia 104,504 (332) (132,050) (27,878)Argentina 24,697 8,954 (29,426) 4,225CapitalizedCosts,December 31,2010 $ 777,262 $ 238,119 $ (334,858) $ 680,523

C. Costs Incurred OilandGas

Colombia Argentina Total

TotalCostsIncurredbeforeDD&A

AsatDecember31,2007 $ 52,726 $ 23,360 $ 76,086

PropertyAcquisitionCosts

Proved $ 320,773 $ – $ 320,773

Unproved 360,493 – 360,493

ExplorationCosts 3,443 7,990 11,433

DevelopmentCosts 27,597 3,874 31,471

AsatDecember 31,2008 $ 765,032 $ 35,224 $ 800,256

PropertyAcquisitionCosts

Proved $ – $ – $ –

Unproved – – –

ExplorationCosts 24,103 246 24,349

DevelopmentCosts 48,232 4,721 52,953

AsatDecember 31,2009 $ 837,367 $ 40,191 $ 877,558

PropertyAcquisitionCosts Proved $ – $ – $ – Unproved – – –ExplorationCosts 63,115 26,404 89,519DevelopmentCosts 41,057 7,248 48,305AsatDecember 31,2010 $ 941,539 $ 73,843 $ 1,015,382


D. Results of Operations for Producing Activities Colombia Argentina Total

YearendedDecember 31,2008

NetSales $ 103,202 $ 9,603 $ 112,805

ProductionCosts (12,117) (7,027) (19,144)

ExplorationExpense – – –

DD&A (22,183) (3,355) (25,538)

IncomeTax(Expense)Recovery (22,063) 1,122 (20,941)

ResultsofOperations $ 46,839 $ 343 $ 47,182

YearendedDecember 31,2009

NetSales $ 248,834 $ 13,795 $ 262,629

ProductionCosts (33,091) (7,537) (40,628)

ExplorationExpense – – –

DD&A (126,261) (8,312) (134,573)

IncomeTax(Expense)Recovery (25,824) 1,470 (24,354)

ResultsofOperations $ 63,658 $ (585) $ 63,073

YearendedDecember 31,2010 NetSales $ 359,302 $ 13,984 $ 373,286 ProductionCosts (50,431) (8,808) (59,239) ExplorationExpense – – – DD&A (132,050) (29,426) (161,476) IncomeTax(Expense)Recovery (51,047) (5,687) (56,734)ResultsofOperations $ 125,774 $ (29,937) $ 95,837

E. Standardized Measure of Discounted Future Net Cash Flows and ChangesThefollowingdisclosureisbasedonestimatesofnetprovedreservesandtheperiodduringwhichtheyareexpectedtobeproduced.Futurecashinflowsfor2010and2009arecomputedbyapplyingthetwelvemonthperiodunweightedarithmeticaverageofthepriceasofthefirstdayofeachmonthwithinthattwelvemonthperiod,unlesspricesaredefinedbycontractualarrangements,excludingescalationsbasedonfutureconditionstoGranTierra’safterroyaltyshareofestimatedannualfutureproductionfromprovedoilandgasreserves.Futurecashinflowsfor2008arecomputedbyapplyingyearendpricestoGranTierra’safterroyaltyshareofestimatedannualfutureproductionfromprovedoilandgasreserves.The2010twelvemonthperiodunweightedarithmeticaverageofthepriceasofthefirstdayofeachmonthwithinthattwelvemonthperiodwas$78.23(2009—$61.04)forColombiaand$50.18(2009—$40.98)forArgentina.TheperiodendoilpricesatDecember31,2008were$44.60forColombiaand$33.94forArgentina.ThecalculatedweightedaverageproductioncostsatDecember31,2010were$10.48(2009—$14.92;2008—$12.21)forColombiaand$18.87(2009—$20.73;2008—$13.05)forArgentina.Futuredevelopmentandproductioncoststobeincurredinproducingandfurtherdevelopingtheprovedreservesarebasedonyearendcostindicators.Futureincometaxesarecomputedbyapplyingyearendstatutorytaxrates.Theseratesreflectallowabledeductionsandtaxcredits,andareappliedtotheestimatedpre-taxfuturenetcashflows.

Discountedfuturenetcashflowsarecalculatedusing10%mid-yeardiscountfactors.Thecalculationsassumethecontinuationofexistingeconomic,operatingandcontractualconditions.However,sucharbitraryassumptionshavenotprovedtobethecaseinthepast.Otherassumptionscouldgiverisetosubstantiallydifferentresults.

TheCompanybelievesthisinformationdoesnotinanywayreflectthecurrenteconomicvalueofitsoilandgasproducingpropertiesorthepresentvalueoftheirestimatedfuturecashflowsas:

• noeconomicvalueisattributedtoprobableandpossiblereserves;• useofa10%discountrateisarbitrary;and• priceschangeconstantlyfromthetwelvemonthperiodunweightedarithmeticaverageofthepriceasofthefirstday

ofeachmonthwithinthattwelvemonthperiod.


Colombia Argentina Total

December 31,2008

FutureCashInflows $ 734,727 $ 52,856 $ 787,583

FutureProductionCosts (131,317) (19,154) (150,471)

FutureDevelopmentCosts (159,219) (4,279) (163,498)

FutureSiteRestorationCosts (1,738) (226) (1,964)

FutureIncomeTax (123,634) (8,588) (132,222)

FutureNetCashFlows 318,819 20,609 339,428

10%DiscountFactor (60,180) (4,126) (64,306)

StandardizedMeasure $ 258,639 $ 16,483 $ 275,122

December 31,2009

FutureCashInflows $ 1,117,879 $ 55,076 $ 1,172,955

FutureProductionCosts (312,950) (29,140) (342,090)

FutureDevelopmentCosts (91,867) (4,923) (96,790)

FutureSiteRestorationCosts (1,415) (566) (1,981)

FutureIncomeTax (208,237) (5,771) (214,008)

FutureNetCashFlows 503,410 14,676 518,086

10%DiscountFactor (109,043) (2,659) (111,702)

StandardizedMeasure $ 394,367 $ 12,017 $ 406,384

December 31,2010

FutureCashInflows $ 1,621,461 $ 55,833 $ 1,677,294FutureProductionCosts (373,467) (27,314) (400,781)FutureDevelopmentCosts (136,688) (4,965) (141,653)FutureSiteRestorationCosts (8,070) (385) (8,455)FutureIncomeTax (295,146) – (295,146)FutureNetCashFlows 808,090 23,169 831,25910%DiscountFactor (225,990) (4,270) (230,260)StandardizedMeasure $ 582,100 $ 18,899 $ 600,999

ChangesintheStandardizedMeasureofDiscountedFutureNetCashFlowsThefollowingaretheprincipalsourcesofchangeinthestandardizedmeasureofdiscountedfuturenetcashflows: 2010 2009 2008

BeginningofYear $ 406,384 $ 275,122 $ 196,284

SalesandTransfersofOilandGasProduced,NetofProductionCosts (313,840) (222,479) (94,598)

NetChangesinPricesandProductionCostsRelatedtoFutureProduction 208,649 147,810 (109,116)

Extensions,DiscoveriesandImprovedRecovery,LessRelatedCosts 32,194 54,388 115,089

DevelopmentCostsIncurredduringthePeriod 107,856 59,024 28,084

RevisionsofPreviousQuantityEstimates 140,893 149,597 (28,716)

AccretionofDiscount 58,043 38,934 28,970

PurchasesofReservesinPlace – – 184,470

SalesofReservesinPlace – 3,035 –

NetchangeinIncomeTaxes (39,180) (99,047) (45,345)

EndofYear $ 600,999 $ 406,384 $ 275,122


2) Summarized Quarterly Financial Information

Revenue andother Income Expenses

Income (Loss)Before Income

TaxesIncomeTaxes

Net Income(Loss)

BasicEarningsNetIncome

(Loss)PerShare—

Basic

Diluted NetIncome (Loss)Per Share—

Diluted

2010 FirstQuarter $ 93,110 $ 71,968 $ 21,142 $ 11,182 $ 9,960 $ 0.04 $ 0.04SecondQuarter 84,114 53,890 30,224 12,853 17,371 0.07 0.07ThirdQuarter 84,569 81,952 2,617 5,894 (3,277) (0.01) (0.01)FourthQuarter 112,667 72,244 40,423 27,305 13,118 0.05 0.04 $ 374,460 $ 280,054 $ 94,406 $ 57,234 $ 37,172 $ 0.15 $ 0.142009

FirstQuarter $ 33,565 $ 19,518 $ 14,047 $ (85) $ 14,132 $ 0.06 $ 0.06

SecondQuarter 58,511 82,586 (24,075) 4,125 (28,200) (0.12) (0.12)

ThirdQuarter 75,354 70,211 5,143 7,959 (2,816) (0.01) (0.01)

FourthQuarter 96,286 53,106 43,180 12,355 30,825 0.13 0.12

$ 263,716 $ 225,421 $ 38,295 $ 24,354 $ 13,941 $ 0.06 $ 0.05

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

OurcommonstocktradesontheNYSE,Amex,andontheTSXunderthesymbol“GTE”.Inaddition,theexchangeablesharesinoneofoursubsidiaries,GranTierraExchangeco,arelistedontheTSXandaretradingunderthesymbol“GTX”.

AsofFebruary18,2011therewereapproximately:51holdersofrecordofsharesofourcommonstockand240,857,632sharesoutstandingwith$0.001parvalue;andoneshareofSpecialAVotingStock,$0.001parvaluerepresentingapproximately9holdersofrecordof7,811,112exchangeableshareswhichmaybeexchangedona1-for-1basisintosharesofourCommonStock;andoneshareofSpecialBVotingStock,$0.001parvalue,representing10holdersofrecordof9,539,042sharesofGranTierraExchangecoInc.,whichareexchangeableona1-for-1basisintosharesofourcommon stock.

ForthequartersindicatedfromJanuary1,2009throughtheendofthefourthquarterof2010,thefollowingtableshowsthehighandlowclosingsalepricespershareofourcommonstockasreportedontheNYSEAmex. High Low

FourthQuarter2010 $ 8.39 $ 7.23ThirdQuarter2010 $ 7.72 $ 5.06SecondQuarter2010 $ 6.64 $ 4.70FirstQuarter2010 $ 6.08 $ 4.68FourthQuarter2009 $ 6.00 $ 3.99

ThirdQuarter2009 $ 4.26 $ 2.92

SecondQuarter2009 $ 3.51 $ 2.31

FirstQuarter2009 $ 3.50 $ 2.06


Dividend PolicyWehaveneverdeclaredorpaiddividendsonthesharesofcommonstockandweintendtoretainfutureearnings,ifany,tosupportthedevelopmentofthebusinessandthereforedonotanticipatepayingcashdividendsfortheforeseeablefuture.Paymentoffuturedividends,ifany,willbeatthediscretionofourboardofdirectorsaftertakingintoaccountvariousfactors,includingcurrentfinancialcondition,operatingresultsandcurrentandanticipatedcashneeds.Underthetermsofourcreditfacilitywecannotpayanydividendsifweareindefaultunderthefacility,andifwearenotindefaultthenarerequiredtoobtainbankapprovalforanydividendpaymentsmadebyusexceeding$2 millioninanyfiscalyear.

Performance Graph

12/05 12/06 12/07 12/08 12/09 12/10

GranTierraEnergyInc 100 43.12 94.93 101.45 207.61 291.67RussellSmallCapCompleteness 100 114.89 120.46 73.51 101.22 128.18DowJonesUSExploration&ProductionTSM 100 105.08 147.43 86.94 123.04 145.68

TheDowJonesUSExplorationandProductionTSMwaspreviouslynamedtheDJWilshireExplorationandProduction.

$0

$50

$100

$150

$200

$250

$300

Gran Tierra Energy Inc

Russell Small Cap Completeness

Dow Jones US Exploration & Production TSM


Glossary of Commonly Used Terms

3DSeismic—Threedimensionalseismic2DSeismic—Twodimensionalseismic2P—ProvedandprobablereservesBBO—BillionbarrelsofoilBCF—Billioncubicfeet(gas)BO—BarrelsofoilBOPD—BarrelsofoilperdayBOE—Barrelsofoilequivalent*EUR—Estimatedultimaterecoverykm2—Squarekilometerskm—KilometersMCF—Thousandcubicfeet(gas)MM—MillionMMBO—MillionbarrelsofoilMMSCF—Millionstandardcubicfeet(gas)NAR—Netafterroyalty

*ABOEconversionratioofsixthousandcubicfeetofgastoonebarrelofoilisbasedonanenergyequivalencyconversionmethodprimarilyapplicableattheburnertipanddoesnotrepresentavalueequivalencyatthewellhead.

DirectorsJeffrey Scott Chairman of the Board President, Postell Energy Co. Ltd.

Ray Antony, CA Corporate Director

Dana Coffield President, Chief Executive Officer, Director

Gerald Macey Corporate Director

Verne Johnson President, KristErin Resources Inc.

Nicholas G. Kirton, FCA, ICD.D Corporate Director

J. Scott Price President, Prospect International Inc.

Executive Officers Dana Coffield President, Chief Executive Officer, Director

Martin Eden Chief Financial Officer

Shane O’Leary Chief Operating Officer

David Hardy General Counsel and Corporate Secretary

Foreign Subsidiary Managers Rafael Orunesu President, Gran Tierra Energy Argentina

Julian Garcia President, Gran Tierra Energy Colombia

Júlio César Moreira President, Gran Tierra Energy Brazil

Carlos Monges President, Gran Tierra Energy Peru

Legal Counsel For United States matters Cooley LLPFive Palo Alto Square 3000 El Camino Real Palo Alto, California 94306–2155, U.S.A.

For Canadian matters Blake, Cassels & Graydon LLP 855–2nd Street S.W. Suite 3500, Bankers Hall East Tower Calgary, Alberta T2P 4J8, Canada

Transfer Agents For Gran Tierra Energy Inc.Computershare — USA350 Indiana Street, Suite 800, Golden, Colorado 80401, USA800·962·4284For Gran Tierra Exchangeco Inc.Computershare — Canada600, 530–8th Avenue SW, Calgary, Alberta T2P 3S8, Canada800·736·1755

Exchangeable SharesOlympia Trust Company2300, 125–9 Avenue SE, Calgary, Alberta T2G 0P6phone: 403·261·0900 fax: 403·265·1455toll free: 1·800·727·4493 Stock Exchange ListingTSX: GTE & NYSE AMEX:GTE

Investor RelationsJason CrumleyDirector, Investor Relations300, 625 11 Avenue S.W. Calgary, Alberta, Canada, T2R 0E1403·265·3221 [email protected]

Independent AccountantsDeloitte and Touche LLP3000, 700 Second Street SWCalgary, Alberta T2P 0S7, Canada

Annual General MeetingThe 2010 annual meeting of Shareholders will be held on June 28, 2011 at 3:00 pm MDT at:Calgary Petroleum Club, Devonian Room319 Fifth Avenue SW, Calgary, Alberta T2P 0L5, Canada

Material RequestsGran Tierra Energy will supply a copy of the Form 10-K, including financial statements and schedules, without charge, upon receiving a written request for these materials. Please submit your requests to Jason Crumley by email at [email protected] or by mail to: 300, 625 11 Avenue S.W, Calgary, Alberta, Canada, T2R 0E1. Gran Tierra Energy’s filings are also available on a Website maintained by the Securities and Exchange Commission at www.sec.gov and on SEDAR at www.sedar.com.

Youth Singers of Calgary

Gran Tierra Energy is a proud supporter of the Safe Haven Foundation

in Calgary, the Youth Singers of Calgary and the Glenbow Museum.

Visit www.safehavenfoundation.ca, www.youthsingers.org

and www.glenbow.org.

Design and production by TMX Equicom

300, 625 11 Avenue S.W.Calgary, Alberta, Canada, T2R 0E1Phone: 403·265·3221Fax 403·265·3242 www.grantierra.com


Documents

GranTierra Energy Inc