DES.L Regulatory News (DES)



Desire Petroleum

('Desire' or 'The Company')

Preliminary Results

Desire Petroleum plc (AIM: DES) the exploration company focusing on the North Falkland Basin, is pleased to announce its Preliminary Results for the year ended 31 December 2010.

Operational Highlights

·; Drilled five exploration wells in the North Falkland Basin

·; Majority of efforts have been concentrated on the East Flank Play Fairway where a significant discovery (Sea Lion) has been made by Rockhopper Exploration

·; Commissioned the Polarcus Nadia to shoot 3D seismic over previously uncovered acreage in the North Falklands Basin, particularly on the East Flank Play Fairway

·; Eddie Wisniewski appointed as Finance Director (formerly a Non-Executive Director)

·; Ken Black (formerly Exploration Manager) appointed Exploration Director since the year end

Financial Highlights

·; Loss for the period was $3,499,000 (2009: loss $3,768,000)

·; Group raised $70.9 million, net of costs, to fund its exploration drilling and 3D seismic programmes

·; Resources available to the Group at the year end were in excess of $100 million, sufficient to complete our committed exploration and 3D seismic programmes.

Stephen Phipps, Chairman of Desire Petroleum commented:

"The past twelve months have been extremely energetic for Desire Petroleum. We have drilled five wells on prospects and have commissioned 3D seismic over previously uncovered acreage. The geological information gathered from these wells combined with the new seismic data is expected to have a significant impact on the prospect portfolio. It is our belief that the East Flank Play Fairway has a great deal of potential, and it is with this in mind that we are currently drilling the Ninky exploration well."

·; The Desire 2010 Annual Report will be available on the Desire website, www.desireplc.co.uk, from 4 April 2011 and printed copies will be posted shortly to those shareholders who have elected to receive a hard copy report.

·; The prospect inventory on the Desire website has been updated and includes details of the Elaine prospect.

For further information please contact:

Chairman's Statement

Dear Shareholder,

The twelve months since my last annual report statement have been particularly active ones for Desire. Since drilling the Liz well in April we have drilled a further four wells on our prospects, at Rachel, Rachel sidetrack, Rachel North and on the Dawn/Jacinta prospect. The first three of these wells were drilled on the East Flank Play Fairway following the success of Rockhopper Exploration's Sea Lion discovery on the same play type. The fourth well, Dawn/Jacinta, was drilled on Tranche I in our southern acreage. In addition we have commissioned, in conjunction with Rockhopper Exploration, the Polarcus Nadia to shoot 3D seismic over previously uncovered acreage.

When our drilling campaign was initially planned, apart from the knowledge that we would begin by drilling the Liz well, the remainder of the campaign was planned with flexibility in mind. The successful Sea Lion discovery moved us to focus the majority of our efforts on to what we now call the East Flank Play Fairway. The Sea Lion discovery is particularly significant as this has demonstrated that oil has been trapped in potentially significant quantities in a good quality reservoir. The oil at Sea Lion is trapped in a fan sandstone and we believe that this is one of a number of such fan sandstones on the eastern flank. Accordingly we concentrated our geoscience resources on these fan play types and subsequently drilled Rachel, Rachel sidetrack and Rachel North. Despite good oil shows and good quality sands being present at the Rachel Sidetrack and Rachel North wells, both proved ultimately to be unsuccessful. The Dawn/Jacinta well was drilled in our southern acreage on a different play type but also proved unsuccessful.

However, post the successful Sea Lion appraisal well, it is still very much our belief that further discoveries will be made on the East Flank Play Fairway. With this in mind we are currently drilling the Ninky well. The Ninky prospect is a combined structural dip and stratigraphic pinch-out trap with multiple reservoir targets within the Barremian source rock interval.

The full nature of these fans on the eastern flank can only be identified on 3D data and currently Desire has 3D seismic coverage on less than 50% of the relevant acreage. Desire has chartered the Polarcus Nadia to acquire 3D seismic data over the remainder of our acreage on the East Flank Play Fairway plus the area on the Ann prospect that is not already covered by 3D. Seismic acquisition began in December and is expected to be completed in April. Subsequent processing and interpretation should be complete during the third quarter and enable us to add new prospects to our inventory for future drilling.

When the Ninky well is complete Desire will have drilled the six wells for which funds were raised in late 2009 and early 2010. It will also mark the end of the 10 well drilling campaign that Desire undertook with the Ocean Guardian drilling rig. The Ocean Guardian rig has been contracted for a further three wells after the completion of the Ninky well, and these further wells will be drilled by Rockhopper. Post the Ninky well it is estimated that Desire will have funds of circa $37 million which, whilst more than adequate for our share of rig and vessel demobilisation, completion of our 3D seismic acquisition, processing and interpretation plus general working capital needs, is insufficient to drill further wells. Given our continuing confidence that oil will be discovered on Desire's acreage, further wells will need to be drilled and, therefore, once your Board has digested both the results of the Ninky well plus the 3D seismic survey, we will review all financing options available with the intention of rejoining the drilling campaign later in the year if possible.

The results for the year ended 31 December 2010 have been prepared under International Financial Reporting Standards (IFRS). The loss for the period was $3,499,000 (2009: loss $3,768,000). During the year the Group raised $70.9 million, net of costs, to fund its exploration drilling and 3D seismic programmes. This was done through a combination of an open offer to shareholders in January 2010, raising $32.7 million, and a share placing to institutions in September 2010, raising $34.6 million, with the balance coming from the exercise of share options.

During the year the Group incurred a total of $104 million of expenditure on its oil and gas interests, leading to an increase in the year of its intangible assets from $26 million to $130 million at the end of the year. Resources available to the Group at the yearend were in excess of $100 million, comprising $57.8 million in cash and cash equivalents, and $43.0 million of restricted cash held in escrow accounts.

Administrative expenses at $892,000 were lower than last year's figure of $1,103,000. Increased operational activity meant that professional fees and employment costs were higher then the previous period, but this was more than offset by the level of costs reallocated to exploration licences. The majority of administrative expenses continue to be incurred in sterling, and exchange rate movements will influence the dollar presentation.The translated sterling equivalent charge for the year of £598,000 compares with £708,000 in 2009.

The non-cash charge for share-based payment at $68,000 is lower than the 2009 figure of $82,000, as the economic cost of share-based compensation plans is largely expensed, and in the absence of any further awards this charge will continue to decline.

The Group's funds are held in a combination of US dollars and sterling, to match expected expenditure on exploration and 3D seismic programmes. As a US dollar reporting entity, the Group is therefore exposed to sterling-dollar exchange rate fluctuations, both during the year and at period ends, on its sterling balances held either as cash and cash equivalents or as restricted cash.

The exchange loss for the period of $2,757,000 is similar to the 2009 exchange loss of $2,731,000 and shows an improvement from the $5,954,000 exchange loss reported at the half year. The exchange loss arises on these sterling balances, and follows a weakening of sterling against the US dollar between the beginning and the end of the year, and between the open offer date and the year-end.

Investment income of $218,000 is higher than the corresponding period figure of $148,000, reflecting the increased cash balances following the fund raising exercises during the year, with interest rates continuing at their historic lows.

I am pleased to report that Ken Black, having joined us initially as Exploration Manager in October 2010, has recently accepted the position of Exploration Director and that Eddie Wisniewski has been appointed as Finance Director - he was previously a Non-Executive director. Finally it remains for me to thank my colleagues for their hard work during the year and especially to our three main contractors, AGR Petroleum Services, who run our drilling operations, Senergy (GB) Limited who provide us with our geosciences support and Diamond Offshore Drilling (UK) Limited who operate the Ocean Guardian rig. I am also delighted to confirm that all the wells we have drilled have been completed with an excellent safety record.

Yours sincerely,

Stephen L Phipps

Report of the Directors

The Directors present their report and audited financial statements of the Group for the year ended 31 December 2010.

Principal activity

The principal activity of the Group for the year continued to be that of oil and gas exploration.

Business review

The Company is required by the Companies Act to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2010 and the position of the Group at the end of the year, and a description of the principal risks and uncertainties facing the Group. The information that fulfils the requirements of the business review can be found within the Chairman's Statement above and Technical Review shown on the Desire website. These include details of the expected future developments in the business of the Group. The Directors do not believe that there are any significant key performance indicators that are relevant to the Group at present.

Dividends

The Directors do not recommend payment of a dividend (2009-$nil)

Share capital

On 12 January 2010, the Company issued 28,971,544 shares under an open offer at a subscription price of 70 pence per share, raising $32.7 million, net of costs.

On 2 February 2010, options were exercised over 7,203,583 shares, and these were subsequently allotted raising $3.6 million.

On 29 September 2010, the Company issued 16,294,600 shares under a placing at 140 pence per share raising $34.6 million, net of costs.

On 4 October 2010, options were exercised over 100,000 shares, and these were subsequently allotted raising $0.06 million.

Directors and their interests

The Directors, all of whom, with the exception of Mr K Black, served throughout the year are shown on page 3. Mr K Black was appointed on 30 March 2011.

The interests of the Directors who served during the year in the ordinary shares of the Company are shown in the Report of the Remuneration and Nomination Committees.

Mr R Lyons and Mrs A R Neve will retire by rotation at the Annual General Meeting and, being eligible, offer themselves for re-election. In addition, Mr K Black, who was appointed since the last Annual General Meeting, retires and offers himself for election.

Details of the Directors' interests in contracts with the Group are set out in note 25 to the accounts.

Special business - Annual General Meeting resolutions

Items 6 and 7 of the Notice of the forthcoming Annual General Meeting contain resolutions which renew and extend existing authorisations for a further year. The Directors believe that they should have the authorities proposed under items 6 and 7 in order to take advantage of business opportunities as they arise, thus maintaining a desirable degree of flexibility.

6 Under the Companies Act 2006, the Directors are prohibited from allotting securities of the Company without prior authorisation from shareholders to do so. The effect of this resolution is to give the Directors authority until the 2012 Annual General Meeting to allot relevant securities up to an aggregate nominal amount of £342,285.

7 The Companies Act 2006 also provides that, unless shareholders otherwise consent, all new equity securities to be offered for cash must first be offered to existing shareholders in proportion to their individual holdings. The effect of this resolution is to give the Directors authority, until the 2012 Annual General Meeting, to allot equity securities for cash, other than to existing shareholders, up to a limited aggregate nominal amount of £171,142.

Substantial shareholdings

As at 23 March 2011 the Company had been notified of the following holdings of 3% or more of its issued share capital:

Corporate governance 

The Combined Code Principles of Good Governance and Code of Best Practice is not mandatory for companies traded on the Alternative Investment Market of the London Stock Exchange. However, the Directors are committed to applying the requirements of the Code where they are considered appropriate. This statement explains how the Group has applied the principles of the Code throughout the year. The Board meets regularly throughout the year and is responsible for the overall Group strategy, acquisition and divestment policy, approval of major capital expenditure and consideration of significant financing matters. It reviews the strategic direction of individual trading subsidiaries, their annual budgets, their progress toward achievement of these budgets and their capital expenditure programmes.

Status of non-executive directors

None of the non-executive directors would be deemed independent under the Combined Code. However, the non-executive directors have considerable experience in the Oil and Gas sector which the Company draws upon on a regular basis. In addition, the non-executive directors are sufficiently independent of management so as to be able to exercise independent judgement and bring an objective viewpoint and, thereby, protect and promote the interests of shareholders.

Going concern

It is the opinion of the Board that both the Group and the Company have adequate resources to continue in operational existence for the foreseeable future, being twelve months from the date of the approval of the financial statements. For this reason, the Board has adopted the going concern basis in the preparation of the financial statements.

Qualifying third party indemnity provisions

The Company's articles of association contain qualifying indemnity provisions under which each Director shall be entitled to be indemnified by the Company in respect of certain liabilities which may attach to him or her in their capacity as a Director of the Company. These provisions were in force throughout the year and remain in force at the date of this report.

Audit Committee

The Audit Committee was chaired by Mr E Wisniewski and included Mr A G Windham and Mr R Lyons as members throughout the year. The Committee convenes twice a year and its terms of reference include the review of the Annual and Interim Accounts, accounting policies of the Company and its subsidiaries, internal management and financial controls, and the planning, scope and results of the Auditor's programme. UHY Hacker Young Manchester LLP attend the meetings at the request of the Committee. Following the year end Mr E Wisniewski was appointed as an Executive Director and his place as Chairman was taken by Mr S L Phipps. Mr E Wisniewski will continue to attend the Audit Committee meetings by invitation.

Remuneration Committee and Nomination Committee

The Committees both comprise of at least two non-executive directors and meet as required during the year.

The Remuneration Committee is chaired by Mr A G Windham and included Mr E Wisniewski and Mr R Lyons as members throughout the year. Following the year end Mr E Wisniewski resigned from the Remuneration Committee.

The Nomination Committee is chaired by Mr R Lyons and included Mr E Wisniewski and Mr A G Windham as members throughout the year. Following the year end Mr E Wisniewski resigned from the Nomination Committee.

The Committees' responsibilities include the consideration and approval of the terms of service, nomination, remuneration and benefits of the Company's Directors.

The Board, as a whole, determines the remuneration of the non-executive directors (with Directors absenting themselves from discussions regarding their own remuneration as appropriate).

Internal control

The Board, which presently comprises the Chairman, the Chief Executive Officer, the Finance Director, the Exploration Director and non-executive directors, meets formally on a regular basis. The Directors are responsible for ensuring that the Group maintains adequate internal control over the business and its assets. There is an agreed schedule of matters requiring referral to the Board. These matters include the Group's corporate strategy, acquisitions and disposals, approval of major capital expenditure, treasury policy and risk management policies. Procedures have been formalised where the Directors may need to take independent professional advice. The Audit Committee has reviewed the necessity for the establishment of an internal audit function, but considers that, due to the nature and size of the Group at present, it would not be appropriate for the Group to have its own internal audit department.

On the wider aspects of internal control, relating to operational and compliance controls and risk management, as included in provision D.2.1 of the Code, the Board, in setting the control environment, identifies, reviews, and reports on the key areas of business risk facing the Group. These procedures have been in place throughout the current financial year.

There is close day-to-day involvement by the Directors in all of the Group's activities. This includes the comprehensive review of both management and technical reports, the monitoring of foreign exchange and interest-rate fluctuations, commitment to the Health, Safety and the Environment Management System, government and fiscal-policy issues, employment and information technology requirements and cash control procedures. Attendance at joint venture meetings and site visits are made whenever appropriate. In this way, the key risk areas can be monitored effectively and specialist expertise applied in a timely and productive manner.

Any system of internal control can provide only reasonable, and not absolute assurance that the risk of failure to achieve business objectives is eliminated. The Directors having reviewed the effectiveness of the system of internal controls and risk management, consider that the system of internal control operated effectively throughout the financial year and up to the date the financial statements were signed.

Performance evaluation

A formal performance evaluation of the Board, its Committees and its Directors was not undertaken during the year due to the nature and size of the Group at present.

The Board is satisfied that the Board and its Committees are operating in an effective and constructive manner.

Relations with shareholders

The Group is active in communicating with both its institutional and private investors. The Annual General Meeting, at which Directors are introduced and available for questions, provides further opportunities for dialogue.

Creditor-payment policy

It is the policy of the Group to ensure that all of its suppliers of goods and services are paid promptly and in accordance with contractual and legal obligations. At 31 December 2010 there were 55 days (2009 - 35 days) purchases remaining unpaid.

Political contributions and charitable donations

The Group made no charitable donations during the year (2009 - $7,961 for Falklands Conservation).

Auditors

Each of the persons who is a Director at the date of approval of this annual report confirms that:

A so far as the Director is aware, there is no relevant audit information

of which the Company's Auditors are unaware, and

B the Director has taken all steps that they ought to have taken as a

Director in order to make themselves aware of any relevant audit

information and to establish that the Company's auditors are aware

of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.

UHY Hacker Young Manchester LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.

This report was approved by the Board on 4 April 2011 and signed on its behalf by

Mrs A R Neve BA Secretary

Report of the Remuneration and Nomination Committees

Remuneration Committee and Nomination Committee

The Committees met as required during the year.

The Chairman and other Directors may also attend meetings but are not involved in any matter relating to themselves.

The Group considers that it has, to the extent appropriate given the Company's particular circumstances, applied the Combined Code throughout the year regarding remuneration committees. In formulating remuneration policy the Committees gives due consideration to the best practice provisions section of the Code.

Remuneration policy

The remit of the Committees is to advise on all aspects of the remuneration packages of Directors.

The policy of the Committees is to ensure that the remuneration packages offered are competitive and designed to attract, retain and motivate Directors of a high calibre, with a significant proportion of the remuneration package linked to performance.

The Directors' emoluments are not pensionable.

Details of Directors' emoluments are set out in note 5 to the financial statements.

Directors' contracts

The Directors' Service contracts are for an indefinite period but can be terminated with six months notice by either party.

Details of the Directors' contracts are summarized as follows:-

Directors' interests

The interests (all of which are beneficial) of the Directors in office at the end of the year in the ordinary shares of the Company are shown below, together with their share options under the Desire Petroleum Plc Unapproved Share Option Scheme and their share appreciation rights.

Mr S L Phipps' and Mrs A R Neve's interests in 33,532,633 (31 December 2010 - 33,532,633 and 2009 - 30,582,633) shares are through their shareholding in Phipps & Company Limited.

Mr S L Phipps and Mrs A R Neve have an interest in 2,840,000 (31 December 2010 and 2009 - 2,840,000) shares through their interest in the Phipps & Company Retirement Benefit Scheme.

At 31 December 2010, the interest of Dr I G Duncan includes 107,143 (2009 - 107,143) held by Chase Energy Limited of which he is a director and shareholder. His interest also includes 92,571 (2009 - 92,571) shares held by Hargreave Hale Nominees Limited.

Mr K Black, who was appointed a Director on 30 March 2011, held no shares as of 4 April 2011.

Share options

Following the open offer in January 2010, under which 28,971,544 shares were issued, an option reorganisation was carried out. The options and exercise prices at 1 January 2010 have been restated such that the potential percentage holding of options in the Company is the same as prior to the share issue.

The restatement was approved by the Company's auditors.

Share options held by the Directors in office at the end of the year, are shown in the table below.

The weighted average market price when the share options were exercised was 115p resulting in an aggregate gain of £5.95m.

Share Appreciation Rights ('SARs')

In 2005, the Company introduced a new incentive plan that would permit the grant of awards over up to 5% of the issued share capital of the Company. The Remuneration Committee sought advice from external independent remuneration consultants as to its design and implementation, and in 2006 the Company adopted the new Desire Incentive Plan 2006 (the "Plan").

The Plan will operate for the potential benefit of both executive and non-executive directors. The Committee is aware that, under normal circumstances, it would be unusual for non-executive directors to participate in share-based incentive arrangements. However, the Committee believes that offering participation in such arrangements to non-executive directors should be continued. This approach reflects the specific roles and responsibilities of the non-executive directors which are wider than is typically the case at other companies, an approach that keeps head office full-time staff levels and costs to a minimum. It also ensures that each member of the Board is fully aligned with both their colleagues' interests and with the interests of all other shareholders.

The awards under the Plan are structured as "Share Appreciation Rights" ("SARs"). SARs are designed to deliver a net gain equal to the increase in the price of a share between grant and exercise. The number of shares actually issued following exercise will therefore be less than the number of shares to which the grant relates as referred to below.

SARs have been granted to the Directors, as shown in the table below.

As described above upon exercise of the SARs, the relevant Awardee will be issued with shares with a market value at the date of exercise equivalent to the notional gain that the Awardee would have made, being the amount by which the aggregate market value on exercise of the number of shares in respect of which the SAR is exercised, exceeds the aggregate base price of that number of shares. The base price of a SAR will be the middle-market quotation of a share on the dealing day immediately preceding the date of grant.

SARs can be satisfied by either the issue of new shares, the transfer of existing shares or the cash equivalent.

No further awards of SARs will be made to the listed Awardees. No consideration is payable on the grant of a SAR.

The market price of the shares on 31 December 2010 was 47.75p and the range during the year was 37.75p to 168.50p

Other than shown above, no Director had any interest in the shares of the Company or any of its subsidiaries at 31 December 2010.

Approval

This Report was approved by the Board on 4 April 2011

Mr A G Windham

Chairman of the Remuneration Committee

Mr R Lyons

Chairman of the Nomination Committee

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ACCOUNTS

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations.

Company law requires the Directors to prepare such financial statements for each financial year. Under the law the Directors are required to prepare group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and have also chosen to prepare the Parent Company financial statements under IFRS as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

● properly select and apply accounting policies;

● present information, including accounting policies, in a manner that provide relevant, reliable, comparable and understandable information;

● provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

● make an assessment of the company's ability to continue as a going concern.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' responsibility statement

We confirm to the best of our knowledge:

● the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

● the review, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board

S L Phipps

Chairman

INDEPENDENT REPORT OF THE AUDITORS

Registered Auditor

UHY Hacker Young Manchester LLP

St. James Building

79 Oxford Street

Manchester M1 6HT

4 April 2011

To the shareholders of Desire Petroleum Plc

We have audited the financial statements of Desire Petroleum Plc for the year ended 31 December 2010 which comprise the Group Income Statement, the Group and Parent Company Statements of Comprehensive Income, Group and Parent Company Balance Sheets, the Group and Parent Company Statements of Changes in Equity, the Group and Parent Company Cash Flow Statements and the related notes 1 to 26. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and Auditors

As explained more fully in the Directors' Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of; whether the accounting policies are appropriate to the Group's and the Parent Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.

Opinion on financial statements

In our opinion:● the financial statements give a true and fair view of the state of the Group's and of the

Parent Company's affairs as at 31 December 2010 and of the Group's and the Parent Company's loss for the year then ended;

● the financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and

 ● the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

● adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

● the Parent Company financial statements are not in agreement with the accounting records and returns; or

● certain disclosures of directors' remuneration specified by law are not made; or

● we have not received all the information and explanations we require for our audit.

M D C Robertson(Senior Statutory Auditor)

For and on behalf of

UHY Hacker Young Manchester LLP

Chartered Accountants and Statutory Auditors

Manchester

Consolidated Income Statement

Movements on reserves are shown in note 21 to these Accounts.

There is no difference between the results as disclosed above and the results on an historical cost basis.

All operating income and operating gains and losses relate to continuing activities.

Consolidated Statement of Comprehensive Income

Balance Sheets

The Group The Company

These Accounts were approved by the Board of Directors and authorised for issue on 4 April 2011.

They were signed on its behalf by:

S L Phipps

Chairman

Company Registration No: 3168611

Statement of Changes in Equity

Equity attributable to equity holders of the Company

Consolidated and Company Cash Flow Statement

Material non-cash transactions

As restricted cash is excluded from cash and cash equivalents, then payments for oil expenditure costs from restricted cash are treated as non-cash transactions. In addition to the purchase of tangible and intangible assets stated above, there were $103,868,000 paid from restricted cash.Notes to the Financial Statements

1 Accounting policies

The Accounts are based on the following policies which have been consistently applied:

Basis of preparation

The results for the year ended 31 December 2010 have been prepared in accordance with IFRS as adopted by the EU.

The Group has continued to apply the full cost accounting policy, explained further in the Goodwill and intangible asset accounting policy note, as permitted by IFRS 6 'Exploration for and Evaluation of Mineral Resources'.

Basis of consolidation

The Group accounts consolidate the accounts of the Parent Company and all its subsidiary undertakings, all of which were made up to 31 December 2010.

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the business review.

Goodwill and intangible assets

a) Goodwill

When the fair value of the consideration for an acquired undertaking exceeds the fair value of its separable net assets, the difference is treated as purchased goodwill and is capitalised. When the fair value of the consideration for the acquired undertaking is less than the fair value of its separable net assets, the difference is taken directly to the income statement. Goodwill is not amortised but is reviewed at least annually for impairment.

b) Acquired intangibles

Intangible assets, which are capable of being recognised separately and measured reliably on acquisition of a business, are capitalised at fair value on acquisition. Where these assets have a finite life, they are amortised over the period that they are expected to generate benefits, but generally not exceeding ten years.

c) Computer software 

Computer software costs are amortised over their expected useful lives, as follows:

Computer software 20% straight line basis

d) Oil and gas expenditure

The Group applies the full-cost method of accounting, as set out in the Statement of Recommended Practice "Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities" and as permitted by IFRS 6 "Exploration for and Evaluation of Mineral Resources". Under the full-cost method of accounting, all costs associated with exploring for and developing oil and gas reserves are capitalised, irrespective of the success or failure of specific parts of the overall exploration activity. Costs are accumulated in cost centres known as 'cost pools' and the costs in each cost pool are written off against income arising from production of the reserves attributable to that pool. Oil and gas assets are assessed for impairment under paragraphs 18 to 20 of IFRS 6 only when the facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount.

Notes to the Financial Statements (continued)

e. Consortia and farm out agreements

In addition to holding licences on its own account, the Group is a member of consortia (a joint arrangement). The Group's proportionate share of the consortia costs are included in intangible assets or PPE, as appropriate. During the year, the Group continued with farm out agreements with third parties in respect of certain licences. The Group's proportionate share of the costs is included in intangible assets and PPE as appropriate.

Where the Group act as operator to a joint arrangement and has a direct legal liability to third party creditors or a similar entitlement in respect of debtors then the gross liabilities and receivables (including amounts due to or from non-operating partners) are included in the Group balance sheet.

Where the Group acts as a non-operating participant to a joint arrangement, the entitlement or liability in respect of its share of working capital balance relating to the joint arrangement is analysed across the underlying elements of working capital such as stocks, debtors, cash and creditors.

f. Decommissioning costs

Provision for the future cost of decommissioning an installation is recognised as part of the total investment to gain access to future economic benefit. The asset is established and included as part of the overall cost pool. Provision is made when the Group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reasonable estimate of that liability can be made.

The decommissioning asset is recognised and capitalised as the related facilities are installed, simultaneously with the recognition of the provision. The incremental amount capitalised on each phase of installation should equal the incremental amount provided in respect of each phase.

Property, plant and equipment (PPE)

a. Oil and gas expenditure 

Tangible assets acquired as exploration and evaluation assets are capitalised as such and, to the extent that the asset is consumed in developing an intangible asset, the amount reflecting the consumption is capitalised as the cost of an intangible asset.

b. Other

Property plant and equipment are stated at cost or valuation less depreciation. Depreciation is provided at rates calculated to write off the cost or valuation, less estimated residual value of each asset, over its expected useful life, as follows:

Equipment and fixtures 20% straight line basis

Investments

Investments in subsidiary undertakings are shown at cost less provisions for estimated impairments in value.

Foreign currencies 

a. Functional and presentation currency

Items included in the financial statements of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The functional and presentation currency is US dollars, and the 2010 Annual Report is presented in US dollars as this better reflects the primary economic environment in which the Group operates.

b. Transactions and balances

Transactions denominated in foreign currencies are translated into the functional currency at the exchange rate prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates ruling at the year-end. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-end exchange rates of monetary assets

Notes to the Financial Statements (continued)

and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying investment hedges. Exchange differences arising from the translation of the balance sheets and income statements of foreign operations into US$ are recognised as a separate component of equity on consolidation. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

Revenue Recognition

a) Interest revenue

Interest income is recognised when it is probable that economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis.

Taxation 

a) Current income tax

Current tax, including UK corporation tax, is provided on amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date.

b) Deferred income tax 

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary differences are controlled by the Group, and it is probable that the temporary differences will not reverse in the foreseeable future.

Cash and cash equivalents 

Cash and cash equivalents includes cash in hand, deposits held at call with banks and bank overdrafts. Bank overdrafts are shown within current liabilities on the balance sheet.

Restricted cash

Where cash is deposited with financial institutions, securing various guarantees and performance bonds associated with the Group's operating activities, it is treated as a financial asset of the Group and released on maturity of the guarantee or performance bond.Where cash balances are not under the exclusive control of the Company, such amounts are disclosed as restricted cash.

Share based payments

The Group operates equity-settled, share based compensation plans. The economic cost of awarding shares and share options is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models. The charge is recognised in the income statement over the vesting period of the award.

Financial instruments

The Group uses certain financial instruments in its operating and investing activities that are appropriate to its strategy and circumstances.

Financial instruments currently comprise cash and short-term receivables and payables. The Group regularly reviews the funding opportunities available to it in order to finance its

Notes to the Financial Statements (continued)

operations, including considering the use of borrowings, as well as equity, to fund short-term cash requirements.

The main risks arising from the Group's present use of financial instruments are currently foreign exchange movements relating to the Group's non-US$ cash resources. The addition of any borrowings to the Group's portfolio of financial instruments will introduce interest rate risk.

Operating segments

The Group considers itself to have a single purpose, the exploration and exploitation of its licences in the North Falkland Basin, and therefore concludes that it has only one business segment and only one geographic segment.

Adoption of new and revised Standards

In the current year, the following significant new and revised Standards and Interpretations have been adopted none of which have affected the amounts reported in these financial statements.

IFRS 2 Share based payments

(The amendment relates to accounting for Group cash settled share based

payments)

IFRS 3 Business combinations

IAS 27 Consolidated and separate financial statements

IAS 28 Investments in associates

IAS 31 Interest in joint ventures

(Introduced a number of changes in accounting for business combinations when acquiring a subsidiary or an associate. It also includes additional disclosure requirements)

The following amendments were made as part of Improvements to IFRS (2009).

IFRS 2 Share based payments

IFRS 7 Financial instruments disclosures

IAS 1 Presentation of financial statements

IAS 17 Leases

IAS 27 Consolidated and separate financial statements

IAS 34 Interim financial reporting

IAS 39 Financial instruments: recognition and measurement

At the date of authorisation of these financial statements, the following significant Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:

IFRS 9 Financial instruments

IAS 24 (amended) Related party disclosures

IAS 32 (amended) Classification of rights issues

IFRIC 19 Extinguishing financial liabilities with equity

instruments

Improvements to IFRS (May 2010)

The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future periods.

2 Estimates, assumptions and judgements

In the application of the Group's accounting policies, described in note 1, the Directors are required to make judgements, estimates and assumptions about assets, liabilities and disclosures that are not readily available from other sources. The estimates and associated assumptions are based on experience and other factors that are considered to be relevant. These may include expectations of future events that are believed to be reasonable under the

Notes to the Financial Statements (continued)

circumstances. Actual results may differ from these estimates and the estimates and underlying assumptions are regularly reviewed.

The most significant areas relate to the amount of and timing of drilling rig and equipment demobilisation costs, and is based on contractual terms and forecasts.

3 Production costs incurred

Pre-production costs incurred, or provided, in Oil and Gas Exploration Activities were as follows:

Falkland Islands

4 Operating expenses

In addition to the Auditors' remuneration stated above, the Auditors received $nil (2009 - $60,000) in respect of other review costs, the cost of which is included in share premium account.

Notes to the Financial Statements (continued)

5 Directors emoluments

Further information on the remuneration of Directors and their share awards can be found in the Remuneration and Nomination Committee's report.

Information on related-party transactions is disclosed in note 25 to these Accounts.

6 Employment costs

7 Investment revenues

Notes to the Financial Statements (continued)

8 Taxation

c) Factors that may affect future tax charges

The Company is carrying forward an amount of tax-deductible expenditure under the assumption that it will have income from oil exploration in the future.

The amount currently available for offset against future revenue is estimated at $164million.

No deferred tax is provided on this expenditure as it is not reasonably certain that the income from this source will materialise.

9 Earnings per share

The calculation of basic earnings per ordinary share is based on a loss of $3,499,000 (2009: loss $3,768,000) and on 328,527,337 (2009: 237,103,714) ordinary shares, being the weighted-average number of ordinary shares in issue during the year.

As the Group reports a loss for the current and comparative year, then in accordance with IAS 33, the share options and Share Appreciation Rights in issue are not considered dilutive. Details of such instruments that could potentially dilute basic-earnings per share in the future are included in note 20.

10 Loss for the financial period

Desire Petroleum Plc has not presented its own income statement, as permitted by section 408 of the Companies Act 2006. The loss for the financial period dealt with in the accounts of the Holding Company amounts to $3,499,000 (2009: $3,768,000).

Notes to the Financial Statements (continued)

11 Intangible fixed assets

The Group's oil and gas interests all relate to the Falkland Islands.

The Company's oil and gas interests all relate to the Falkland Islands.

Notes to the Financial Statements (continued)

12 Property, plant and equipment

The Group and Company's oil and gas interests all relate to the Falkland islands.

13 Investments

Particulars of the subsidiary undertakings at 31 December 2010 were as follows:

During the year the dormant subsidiaries, Interoil Limited and Anglo Scandinavian Petroleum Plc, were dissolved.

Notes to the Financial Statements (continued)

14 Trade and other receivables

The Group The Company

The Directors consider that the carrying amount of receivables approximates to their fair value. Included within other receivables is an amount of $13,162,000 which relates to expected partner contributions toward the demobilisation provision.

15 Restricted cash

The Group The Company

The amount is treated as restricted cash as the balance of cash is not under the exclusive control of the group.

16 Cash and cash equivalents

The Group The Company

17 Trade and other payables

The Group The Company

The Directors consider that the carrying amount of payables approximates to their fair value.

Notes to the Financial Statements (continued)

18 Provisions

The Group The Company

During the period the Group made a provision for demobilisation cost of drilling rig and equipment.

19 Financial Instruments

The Group's policies as regards to financial instruments are set out in the accounting policies. The Group does not trade in financial instruments. The risks and uncertainties facing the Group include, but are not limited to:

Credit risk and counter-party risk

The Group's principal financial assets are cash at bank and other receivables. The Group's credit risk is primarily attributable to amounts included in other receivables. The maximum credit-risk exposure relating to financial assets is represented by the carrying values as at the Balance Sheet date. The Group manages its counter-party risk by holding its cash with a range of recognised banks and institutions.

Currency rate risk

The Group currency risk is primarily attributable to GBP cash deposits held at the bank. These deposits are held in GBP as the Group incurs expenditure in this currency. Foreign exchange movements on monetary assets and liabilities are taken to the income statement and the potential exposure is set out in the table below.

Notes to the Financial Statements (continued)

Liquidity risk

The Group manages liquidity risk via maintaining adequate cash reserves, and by continuously monitoring forecast and actual cash flows relating to oil exploration and administrative costs.

Interest rate risk

The Group is exposed to the risk that investment income may be affected by interest rates in the UK and USA. The Group holds its cash in short term fixed rate accounts and floating rate accounts in order to maximise liquidity. At 31 December 2010, the short term deposits were earning interest at a fixed rate of 0.1% and the weighted average floating rate was 0.2%

Capital risk management

The Group manages its capital to ensure that the Group will be able to continue as a going concern while maximising the return to shareholders through the use of equity. The overall strategy remains unchanged from 2009.

The capital structure consists of cash and cash equivalents and equity. The Group is not subject to any externally imposed capital requirements.

20 Share capital

The Company has one class of ordinary shares which carry no rights to fixed income.

Notes to the Financial Statements (continued)

On 12 January 2010, the Company issued 28,971,544 shares under an open offer at 70 pence per share.

On 2 February 2010, share options over 7,203,583 were exercised and shares issued at 32.46 pence or 35.21 pence per share.

On 29 September 2010, the Company issued 16,294,600 shares under a placing at 140 pence per share.

On 4 October 2010, the Company issued a further 100,000 shares following the exercise of share options at 35.21 pence per share.

Share options

Following the Open Offer in January 2010, under which 28,971,554 shares were issued, a share option reorganisation was carried out. The options and exercise prices were restated so that the potential percentage holding of options in the Company is the same as prior to the share issue.

In addition, on the 13 September 2010 options over 500,000 shares were issued to Mr K Black, who was subsequently appointed Exploration Director on 30 March 2011.

The restatement has been approved by the Company's auditors.

The weighted average share price at the date of exercise for share options exercised during the year was 116p.

Notes to the Financial Statements (continued)

On 13 September 2010, the Company granted share options over 500,000 shares. The estimated fair value of the grant is $115,000. The inputs to the option pricing model are as follows:-

Expected volatility 21% - calculated from historical share price over 12 month period prior to grant

Expected life 3 Years

Risk free rate 0.55%

No share options have been awarded since the year end.

Share Appreciation Rights ("SARs')

Details relating to the SARs in which Directors are interested can be found in the Report of the Remuneration and Nomination Committees.

In addition to the SARs in which the Directors are interested, the following SARs were in issue at the start and end of the year.

No SARs have been granted during or since the year end.

21 Reserves

Share premium

The balance classified as share premium is the premium on the issue of the Group's equity share capital, comprising £0.01 Pounds Sterling ordinary shares less any costs of issuing the shares.

Notes to the Financial Statements (continued)

22 Commitments