canoro-oil & gas

2009 AnnuAl RepoRt | FoR the yeAR ended MARch 31, 2009

b u i l d i n g t h e f o u n d a t i o n

ANJITA KAUR LAMBA - NOIDA ANKURJYOTI CHUTIA - JORHAT ANKUSH DUTTA - JORHAT ANSHU RUSTAGI - NOIDA BABUL HANDIQUE - JORHAT BHUPEN SHAMANTA - JORHAT BIDYUT CHUTIA - JORHAT

C A N O RO R E S O U R C E S L T D . | 2 0 0 9 A N N U A L R E P O R T2

PROFILE

highlights 4

message to shareholders 6

operations review 12

management’s discussion & analysis 21

management’s report 34

auditors’ report 35

financial statements 36

notes to the financial statements 39

corporate information 50

ANJITA KAUR LAMBA - NOIDA ANKURJYOTI CHUTIA - JORHAT ANKUSH DUTTA - JORHAT ANSHU RUSTAGI - NOIDA BABUL HANDIQUE - JORHAT BHUPEN SHAMANTA - JORHAT BIDYUT CHUTIA - JORHAT

B U I L D I N G T H E F O U N D A T I O N3

canoro is a publicly listed independent international oil and

gas exploration and production company based in calgary,

canada and new delhi, India with operations in the prolific

Assam/Arakan basin of northeast India. having established a

core operation and infrastructure in India, the company is well

positioned for growth, both organic and through additional

projects in the region. the company has an inventory of

development, exploitation and exploration opportunities within

its existing asset base to drive its growth strategy. canoro has

a full complement of experienced management, technical and

operations personnel, backed by a board of directors committed

to the disciplined growth of the company.

BIJU MONI DAS - JORHAT BIKRAMJEET BHATTACHARYA - JORHAT BRIAN GIENI - NOIDA BRIEN GOGOI - JORHAT CHANG WON WEINGKEN - JORHAT DARCY DORSCHER - JORHAT DARREN ARCURI - CALGARY

• Averagedailyproductionincreased162%fromanaverageof298barrelsofoilequivalentperday(boe/d)in2008to781boe/dperdayin2009.

• Amgurireserveswereincreasedby1.2mmboeprovedand1.0mmboeprovedplusprobable,netofproductionof0.3mmboe.

• AA-ON/7explorationdrillingwasunsuccessfulaftertwowells,thePSCwasrelinquishedand3.5mmboeofprobablereserveswerewrittenoff.

• AmguriBarailappraisaldrillingwasverydisappointingaswellA-12camein significantlybelowprognosisandwet.Amguri13Bhoweverencountered10metersofoilpayand24metersofpotentialgaspayyetduetooperationalproblemsthewellcouldnotbecompleted.

• AmguriTipamappraisalwassuccessfulyieldinganexcellentdrygaswellatA-14testingatstabilisedratesof2.7mmcfd.

• AmguricondensaterecoveryandgasinjectionprojectwascommencedandexpectedtobeonstreaminQ12010.

• Asignificantre-interpretationofAmgurifieldwascommissionedusingPre-StackDepthMigration(PSDM)seismicreprocessingof3Ddatatodevelopanewmodelofthefield.

• Lossof$6.3million($0.06pershare)withfundsfromoperationspositiveforthefirsttimeat$2.0million($0.02pershare).

• Atyearend,theCompanyhadnodebtandpositiveworkingcapitalof$7.0million.

• $30millioncapitalprogramspentprimarilyonexplorationandappraisaldrilling.

SubSEquEnt tO yEaR-End and 2009/10 OutLOOk

• PositiveelectionresultsinIndiashouldallowtheCompanytomoveahead onitsNagalandjointventurewithONGC.

• Closedlimited-recoursefundingofUS$4.0millionforthepurchaseandinstallationofthegascompression.

• 2009/10capitalexpenditureprogramof$9millionto$11millionfocusedprimarilyongascompressionplantandwellworkovers.

• Outlookforaverage2009/10productionof700boe/dto900boe/dwithasignificantimpactoncashflowtowardsyear-endasproductionmixmovesfrom30/70oil/gasto60/40oil/gasoncommissioningthegasre-injectionfacility.


Highlights of FY2009 Results

HIG

HLIG

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BIJU MONI DAS - JORHAT BIKRAMJEET BHATTACHARYA - JORHAT BRIAN GIENI - NOIDA BRIEN GOGOI - JORHAT CHANG WON WEINGKEN - JORHAT DARCY DORSCHER - JORHAT DARREN ARCURI - CALGARY


Highlights of FY2009 ResultsYears ended 31 March (US$000s, US$ per share) 2009 2008 % Change

FInancIaL

Fundsgeneratedbyoperations 1,969 (1,319) n/m

persharediluted 0.02 (0.01) n/m

Profit(loss)fortheyear (6,304) (7,088) 11%

persharediluted (0.06) (0.06) 0%

Operatingnetbackperbarrelofoilequivalent ($/boe) 29.55 33.86 (13%)

Capitalexpenditures 30,000 13,708 119%

Workingcapital 6,989 35,545 (80%)

Long-termdebt – – n/m

Shareholders’equity 78,138 82,091 (5%)

Commonsharesoutstanding (000s) 113,709 112,992 1%

OPERatInG

Production

Crudeoilandcondensateproduction(bbl/d) 244 106 130%

Naturalgasproduction(mcf/d) 3,223 1,153 179%

Barrelsofoilequivalent (boe/d) 781 298 162%

Commodityprices

Averagecrudeoilprice NigerianBonnyLight($/bbl) 87.81 84.59 4%

Averagerealizedcrudeoilprice($/bbl) 95.96 97.32 (2%)

Averagenaturalgasprice($/mcf) 2.18 2.45 (11%)

RESERvES

Volumes(mboe)

Proved 3,944 2,773 42%

Proved+probable 7,372 9,853 (25%)

Proved+probable+possible 11,287 16,417 (31%)

NetpresentvalueBTAX10%(US$000s)

Proved 37,956 69,631 (45%)

Proved+probable 73,024 170,133 (57%)

Proved+probable+possible 98,647 286,351 (66%)

Netassetvalue(BTAXNPV10%)US$ per share

Proved 0.40 0.93 (57%)

Proved+probable 0.70 1.82 (62%)

Proved+probable+possible 0.93 2.85 (67%)

DHRUBAJYOTI DUTTA - JORHAT DIPAK KALITA - JORHAT DOUG UFFEN - CALGARY DR. GAURI KANTA HANIQUE - NOIDA DULAL BORA - JORHAT G.P.G. BARUAH - JORHAT GAURAV CHANDRA SINGH - NOIDA

CanorohasbeenbuildingitsoperationinnortheastIndiasince2003.TheCompanybeganbytakingovera60%participatinginterestintheAmguriProduc-tionSharingContractinAssamandworkingoverthefield.MuchhadtobedoneinordertocreateabeachheadinnortheastIndia.MuchhadtobedonetorealizeproductionandrevenuefromourAmgurifield.NowourobjectiveistogrowtheCompany.Wehavemuchtodo.

2009 – a yEaR OF mIxEd RESuLtS

The2009FiscalYearwasayearofmixedresultsforyourcompany.Wesufferedmajordisappointmentsfromourexplorationandappraisaldrillingprogram,yetwerealizedastrengtheningofourreservebaseinourcoreassetatAmguriandestablishedaproductionbasewithpositivecashflow.

Your Company posted a loss of $6.3 million, or$0.06 per share.However, for the first year since itsinception, Canoro generated positive funds fromoperationsof$2.0millionor$0.02per share.Oil&gas production more than doubled to average 781barrelsofoilequivalent(“boe”)perday.Productionrevenueduringtheyearmorethandoubledto$11.1millionasaresultoftheincreaseinproduction,offsetslightlybyan11%decreaseingaspricesastheIndianrupee weakened during the year. We have madesignificant progress this year in establishing Canoroasanoperatingentity.Overthepastyear,wemadeamajorinvestmentinpeopleandinfrastructuretocarrytheCompanytothenext levelofgrowth.Atcurrentlevelsofproduction,ourcoststructureistoohigh.Asthegrowth inproduction is realized,we fullyexpectourmetrics to be competitive.Notwithstanding,wehavemadesignificantcostreductionsthroughouttheorganizationandwillcontinuetodoso.

Canoro incurred a record capital spending programduring the year, spending $30 million primarily onexploration and appraisal drilling. Drilling resultswere poor, with only two of six wells successful.Expectations were high for Amguri-12, whichprovedtobeanexpensivefailureofboththeAmgurigeologicalmodelandthedrillingoperationsitself.Thewellwas significantlyoffprognosis andoverbudget.A-12wasthethirdwelltomissthetargetzonealongthe extremely complex fault bounding the Amgurifield. The drilling program was shut down and therigs released while the geological and geophysicalgroup began to reassess the entire Amguri Barailzonemodel.Therisk levelof theCompany’sdrillinghad proved unacceptably high and with indicationsof a failed velocitymodel,we have embarked on anextensivepre-stackdepthmigration(PSDM)analysisofthefield.WeremainconvincedofthepotentialforAmguri, but are committed to having a significantlybetter technical understanding before embarking onanotherdrillingprogram.

As many international E&P companies haveexperienced,Canorosufferedforhavingsecureddrillingrigs in an over-heated servicesmarket of 2008. Bothrigsranintoseveralmajorproblemswhichresultedinpoor execution, costly delays and failed completions.Itwasadifficultandexpensivedecisiontoreleasebothrigs,howeverwebelievethatitwasprudenttohalttheprogramgivenourexperience.


Message to Shareholders

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DHRUBAJYOTI DUTTA - JORHAT DIPAK KALITA - JORHAT DOUG UFFEN - CALGARY DR. GAURI KANTA HANIQUE - NOIDA DULAL BORA - JORHAT G.P.G. BARUAH - JORHAT GAURAV CHANDRA SINGH - NOIDA

There was some good news in the drilling programhowever.IntheshallowerTipamzoneatAmguri,theCompany successfully completed theA-14 appraisalwell.Thewell tested 4.8million standard cubic feet(“mmscf”)perdayintoan8mmchokeandastabilisedrate of 2.7 mmcfd into a 6mm choke at minimalpressuredrawdown.A-14isanimportantadditiontothewellstockatAmguri,bothasasourceofdrygastofacilitatethecondensaterecoveryandgasreinjectionproject,aswellasincrementalnaturalgassalestothelocal market. With the potential for greater gas de-liverability,Canoro is aggressivelyexamining thegasmarketingpotentialinthearea.

TwoexplorationwellsontheAA-ON/7Blockproveddry. With these results, the Company withdrewfrom AA-ON/7, writing off 15.2 billion cubic feet(“Bcf ”)ofprobablegasreserves(about3.5mmboe).The Company also withdrew its application for anextension and effectively relinquished the block.UniqueinIndia,aportionofAA-ON/7extendedintoNagaland,whichportionisthesubjectofanewPSCapplicationbyCanoroanditspartners.

The Amguri asset continued to improve as Canoroposted a 42% increase in proved reserves for the yearto3.9mmboe,replacingproductionbyoverfivetimes.With the significant writeoff of AA-ON/7 reserves,by the end of FY2009 Canoro’s proved and probablereservesweredown25%to7.4mmboe.TheAA-ON/7writeoffdidmasktheimprovementatAmguriwhere2Preservesincreased16%bytheendoftheyear.

Asmanyintheindustryareexperiencinginthewakeof the turbulence in both commodity and capitalmarkets, the investment community has yet torecognizetheintrinsicvalueintheCompany.Canorohasbeenhitparticularlyhard,withthestockcurrentlytrading at approximately 20% of its net asset value.Our task is to ensure that themarket price of yoursharesbegintoreflectthetruevalueoftheCompany.

OutLOOk FOR 2009/10

2009/10willbeamarkedlydifferentyearforCanoroaswefocusentirelyonproductionoperationsas opposedtoexplorationandappraisaldrilling. ThekeyprojectfortheyearwillbetheconstructionandcommissioningofthecondensaterecoveryandgasreinjectionfacilityatAmguri.ThisisimportantasitsignificantlychangestheCompany’sproductionmixfrom30/70oil/gasto60/40oil/gas.Insodoing,weeffectivelydoubletheoil&condensateproduc-tionwhichissoldatworldprices,currentlyaround$70/bblasopposedtogaswhichiscurrentlysoldonthespotmarketforaround$12/boe.Whileweareexpectingasmallincreaseinproductionfor2009/10toaverageapproximately700boe/dto900boe/d,weareanticipatingasignificantincreaseincashflowatyearendduetothechangeinproductionmix. Weexpecttoexittheyearinexcessof1,000boe/d.


GAUTAM NEOG - JORHAT GAUTAM SAIKIA - JORHAT HEMANTA TAMULY - JORHAT HEMNATH PHUKON - JORHAT HENRY SHEN - CALGARY JAMIRATDDIN AHMED - JORHAT JINU MONI BORDOLOI - JORHAT

buILdInG a bEttER undERStandInG

OF amGuRI

Amguri is a very complex field. Bounded by asignificant fault, the various reservoirs have provedelusivegeologicaltargets.TheCompanyhasstruggledwith threewells drilled along the fault, all of whichwereproblematic.Twowells,A-10andA-13,missedthe target initiallyandneededtobesidetracked intothemainreservoir.A-12havingcomeinsignificantlylower than prognosis was definitive proof that thegeological model of the field was seriously flawed.With well results in hand, we determined that theseismic velocity model was unable to accuratelypredict the various formation tops. A key issue wasthevelocitydifferencesacrossthefaultwhichresultedindeptherrors.Todevelopabettermodelofthefieldand negate the velocity problems, a depth-migratedseismic volume needed to be generated by way ofPSDM reprocessing of theAmguri 3D seismic data.The PSDM work is underway and we expect to becompleting a full reinterpretation of Amguri by theendoftheyear.Onthebasisofthisreinterpretation,weexpecttohaveaclearerpictureofthefieldandbeabletopickwelllocationstofullydevelopAmguriatsignificantlylowerrisk.

cREatInG vaLuE tHROuGH GaS maRkEtInG

Canoro has begun to develop significant gasproduction potential, which could be expandedwith additional Tipam drilling. The Company hashowever been restricted to low priced spot marketsales and large seasonal swings in demand from theneighbouring tea gardens. We have begun a majorinitiative to secure more lucrative markets for theCompany’sgasproduction.Thereisthepotentialfordirectmarketingofgastoregionalconsumersaswellasthepossibilityofdevelopingagas-firedpowerplant.GasmarketingwillbeakeyobjectivefortheCompanygoinginto2009/10.

nEw vEntuRES and StRatEGIc PaRtnERSHIPS

AsanintegralcomponentoftheCompany’sstrategygoing forward, Canoro will be actively pursuing avarietyofnewbusinessinitiativesaimedatacquiringproduction and development assets. The expansionanddiversificationoftheassetbaseiscriticaltothelongtermsuccessofCanoro.Weplan tobuildoutofourcoreoperationsintheNorthEastandmoveintootherregionsofIndiaandbeyond.Theimmediateobjectivefor theCompany is toclose itsdealwithONGConChangpang and the adjacent exploration blocks inNagaland.Thistransactionhasbeenconsiderabletimeinthemakingasithasinvolvedgainingthesupportofmanylevelsofstakeholders.DuringtherecentgeneralelectionsinIndia,amajoritygovernmentwaselectedinNagaland,whichwebelievewill clear theway forthe necessary agreements between the NagalandgovernmentandONGC.Whilethereisnoassurancethatthetransactionwillbeultimatelyconsummated,we are working ahead in earnest to bring the dealtogether both from a stakeholder and a financingperspective. Success with Changpang would have amaterial impact on the operations and value of theCompany.


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GAUTAM NEOG - JORHAT GAUTAM SAIKIA - JORHAT HEMANTA TAMULY - JORHAT HEMNATH PHUKON - JORHAT HENRY SHEN - CALGARY JAMIRATDDIN AHMED - JORHAT JINU MONI BORDOLOI - JORHAT

In addition to Changpang, we have a number ofstrategic initiatives aimed at gaining strong partnersandabroader suiteofassets.Over thecourseof theyear,itisourobjectivetosecureastrategicpartneroracquisition andmake thenext step in the growthofyourCompany.

buILdInG a bEttER ORGanIzatIOn

During the course of the year, we added two newdirectorstotheboard,JamesN.SmithandRobertS.Wynne,bothofwhomhavesignificantexperienceinbuildingsuccessfulE&Pcompaniesandrealisingtheintrinsicvaluefortheshareholders.Wehavealsomadesomesignificantchangestoourmanagementteamtobetterexecute thestrategy. Inparticular,BrianGienihasmoved into theCountryManager role reflectingtheneedforseniorexecutiveinexertinggreatercontrolandguidance incountry.RyanEllsonhasassumedtheroleofVicePresidentFinanceandwillassumemuchofthefinancialresponsibilitiesofMr.Gieni.

buILdInG a PLatFORm FOR GROwtH

Over the last year Canoro has built a platform forfuture growth that allows us to be positioned toseizehighpotentialopportunities thatarebeginningto present themselves.We have the beginnings of asignificantassetbaseinIndia,highvalueprospectsandthe technical and management expertise to exploreanddeveloptheopportunitiesinfrontofus.

We appreciate the investment of our shareholders,thecontinued loyaltyofouremployees, theongoingsupport of theGovernment of India, the support ofthecommunitiesinwhichweworkandthestrengthofourco-venturers inbuildinga trulysubstantial inter-nationaloilandgasproductioncompany.

Onbehalfoftheboardandmanagement,

Douglas R. Martin Les B. Kondratoff

ChairmanoftheBoard PresidentandChief ExecutiveOfficer

July27,2009


JITENDER RAKHRAI - NOIDA JOHN BILSLAND - NOIDA K.C. GUPTA K.K BURAGOHAIN - JORHAT KATRINA VEYSEY - CALGARY KEN READ - JORHAT KISHORE KUMAR - NOIDA KUMUD HAZARIKA - JORHAT

C A N O RO R E S O U R C E S L T D . | 2 0 0 9 A N N U A L R E P O R T1 0

INDIANOCEAN

India

INDIANOCEAN

TURKMENISTAN

Amritsar

Delhi

Islamabad

New Delhi

Kolkata

Mumbai

Kabol

TAJIKISTAN

AFGHANISTAN

PAKISTAN

TROPIC DU CANCER

NEPAL

BHUTAN

BANGLADESH

MYANMAR(BURMA)

SRI LANKATrivandrum

Bengaluru Chennai

PUDUCHERRY

GOA

Kathmandu Thimpu

Yangon

JITENDER RAKHRAI - NOIDA JOHN BILSLAND - NOIDA K.C. GUPTA K.K BURAGOHAIN - JORHAT KATRINA VEYSEY - CALGARY KEN READ - JORHAT KISHORE KUMAR - NOIDA KUMUD HAZARIKA - JORHAT

B U I L D I N G T H E F O U N D A T I O N1 1

amguri, India

LES KONDRATOFF - CALGARY M.C.ROYCHOUDHARY - JORHAT MAHIPAL SINGH - NOIDA MANJU GIRI GOSWAMI - NOIDA MANOJ KUMAR GUPTA - NOIDA MRIGANKA BORGOHAIN - JORHAT


Operations Reviewo

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LES KONDRATOFF - CALGARY M.C.ROYCHOUDHARY - JORHAT MAHIPAL SINGH - NOIDA MANJU GIRI GOSWAMI - NOIDA MANOJ KUMAR GUPTA - NOIDA MRIGANKA BORGOHAIN - JORHAT


AMGuRI – cAnoRo’S coRe ASSet

backGROund

On November 27, 2003, the State of Assam granted the petroleum mining lease to the owners of the AmguriProductionSharingContract(PSC).AnamendmenttotheAmguriPSCrecognizingCanoroasa60%ownerandoperatoroftheAmguriPSCwasexecutedinSeptember2004.CanorophysicallytookoveroperationsoftheAmgurifieldinNovember2004.Withthetransferofoperationscameoneproducingnaturalgaswell,Amguri8A.DuringtheyearendedMarch31,2006,thiswellproducednaturalgasatarateof430thousandstandardcubicfeetperday(“mcf/d”).

InApril2005,Canorobeganitsworkprogramforreenteringthethreesuspendedwells to re-establishproduction and test newpotentialhydrocarbonbearingzones.Workoveroperationswerecompletedonthefirstwell,Amguri1.Canorocompletedthetestingof threepotentialhydrocarbonzonesinthiswellandtemporarilysuspendedthewell as apotential gasproducer.Thewell testednatural gas atratesexceeding1mmcf/d.InSeptember,Canorore-enteredAmguri5 and tested the original producing zone at gross oil rates of 588barrelsperday(“bbl/d”)of44°APIoiland0.8mmcf/dofnaturalgas.Amguri6wasre-enteredandtestednext,withgrossoilratesof405bbl/dof56°APIoiland2.6mmcf/dofnaturalgas.InlightofthesuccessofreentriesatAmguri5and6,Canorore-enteredAmguri2anddidnotencounteranyhydrocarbons.Thiswellhasnowbeenconvertedintoawaterdisposalwell.

In July 2007, Canoro announced that the Amguri 10B wellencountereda32meterthickgas-condensatereservoiratadepthof 2,882 meters to 2,914 meters in the Barail formation. Thisintervalisalsoapproximately26metershigherand12metersthickerthanthesamesandsintheproducingAmguri6well.Thewelltestedintwointervalswiththelower13meter intervalbeingtestedfirst.Thisintervalflowedataclean-uptestrateof375bbl/dof50°APIcondensateand1.1mmcf/dofnaturalgasthrougha12/64inchchokeandtubingheadpressureof2,200psiwithlessthan5%BS&W.

InearlyAugust2007,CanorobegandrillingoperationsattheAmguri11appraisallocationontheAmguridevelopmentblock.Laterthatmonth,CanoroannouncedthatitdrilledAmguri11throughtheBarailtoadepthof3327meters.Thewelldiscoveredtwonewreservoirsandthemainsand(totaling65metersofnetpay),andflowedatatotalof1,190bbl/dofcondensateand12mmcf/dofnaturalgas,or3,190barrelsofoilequivalentperday(“boe/d”).

kEy FEatuRES OF tHE amGuRI PSc

TheCompany’sinterestsintheAmgurifieldaregovernedbyaproductionsharingcontractbetweentheGovernmentof India (“GOI”), Canoro (60%) and its partner, AssamCompany Limited (40%).TheAmguri PSC contains anumberofkeyprovisionsinthat:

i. itenablestheAmguripartnerstorecoverallexploration,developmentandproductioncostsandexpensesincurred(collectively,the“Investment”)inafieldorblockfromthepetroleumproducedfromthatfield;

ii. it establishes formulas for sharing the petroleum produced over and above the amount required forInvestmentrecovery(the“ProfitPetroleum”).IntheAmguriField,theGOIisentitledtoa10%netprofitsinterestintheProfitPetroleumoncetheCompanyanditspartnerhaverecovered100%ofitsinvestmentintheblockfromcashflowsfromtheblock.TheGOI’snetprofitsinterestincreasestoamaximumof35%once300%oftheInvestmenthasbeenrecovered;

iii. itgrantstheAmguripartnerstherighttomarketnaturalgastothirdpartiesatmarketdeterminedprices;

iv. thepartnersarerequiredtosellcrudeoilproducedtotheGOIatinternationalprices;

v. itprovidesatermof25yearswithprovisionfortheGOItograntextensionsforoilandgasproductionforsuchtermsasmutuallyagreedbetweenthepartiesconsideringthebalanceofrecoverablereserves;

NAREN KONWAR - JORHAT NILKANT DHINGIA PHUKAN - JORHAT NITUL ALI - JORHAT NITUL KAKOTI - JORHAT NITYAM THAKURIA - JORHAT PALLAV BARUAH - JORHAT PANKAJ TAXALI - NOIDA


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vi. it provides that at the end of the contract life, all of thewells, facilities, and infrastructure equipmentassociatedwithaparticularblockorfieldbereturnedtotheGOI;

vii. a10%royaltyassumedbythenaturalgaspurchaser,payabletotheGOIonnaturalgasproduction;

viii. acombinationofroyaltyandcesspaymentsof1,455Indianrupees(“Rs”)permetrictonneofoil(ap-proximately$3.88perbarrelofcondensateusinganexchangerateofRs50=US$1asatMarch31,2009)ispayableoncrudeoilproduction;and

ix. itprovidesthattheGOIhastherighttoterminatetheAmguriPSCon90daysnoticeupontheoccurrenceofcertainevents,includingcertainbreachesoftheAmguriPSCbytheAmguripartners.

OPERatIOnaL REvIEw

Productionfortheyearending31March2009averaged781boe/dnettoCanororepresentinga162percentincreaseover theprioryear. Productionconsistedof3.2mmcf/dgasand244bbls/dofcondensateproduction,a ratioof69/31gastooil.Canororeceivedanaveragegaspriceof$2.45mcfforgasand$97.32bblofcondensate.ProductionoriginatedfromtheMainBarailsandformationinwellsA-6,A-10B,A-11(knownasthe“A”pool),theMainBarailSandinA-5andalsofromtheTipamformationintheA-8Awell,priortothiszonewateringoutandbeingsuspendedinSeptember2008.

PVT (Pressure – Volume – Temperature) data acquired in March 2008 clearly identified the Amguri “A” poolas defined bywells A-6, A-10B andA-11, as a retrograde gas condensate reservoir.The condensate from the “A”poolmeasures56-60degreeAPIandreceivesapremiumpricetoNigerianBonnyLightduetothehighqualityofcondensate produced. As a result of prudent reservoir management practices, a detailed Front End EngineeringDeisgn(“FEED”)studywasconductedinQ1FY2008todiscernthefeasibilityofinstallingcompressionforthe“A”pool.Thefacilitywentthroughdetaildesignandordershavebeenplacedforcompressionequipmentfabrication.ThegasrecyclingschemeisprojectedtohaveamaterialimpactonCanoro’sfundsflowfromoperationsasitsproductionmixisprojectedtochangefromapproximately30%condensatetoover60%condensate.TherecyclingschemeshouldalsomitigatetheimpactofseasonaldemandfactorsastheCompanywillstillbeabletoextractcondensateregardlessofnaturalgasdemandintheregion.

Duringtheyear,theCompanydrilledthreewellsintheAmgurifieldwithmixedresults:

amGuRI 13 - CanorospudAmguri13A inearlyFebruaryandunfortunately thewellcame in10meters lower thananticipatedbasedonseismic interpretation.TheCompanydecidedtosidetrackthewell.Amguri13Bencounteredtwohydrocarbon-bearingzonesintheBarailformation,basedonloganddrillingresults.A13-Bwellcameinapproximately10metersstructurallyhigherthantheoriginalAmguri1discoverywell.Thewellhadapproximately10metersofnetoilpayand24metersofpotentialnetgaspayintheBarailformation.TheoilpaycorrelatestothemainBarailsandinAmguri1,whilethegaspaycorrelatestotheuppergaszonepreviouslytestedinAmguri1.Drillingcomplicationspreventedthecompletionandtestingofthewell.Basedonafullre-interpretationofthefield,theCompanywilldeterminethepossibilityofwhipstockingthewellorperformingaslimholecompletion.

amGuRI 12 - theCompanyhadhighexpectationsfortheAmguri-12well,however,afterproductiontesting,thetwomainBarail intervalswereunsuccessfuldespite loganalysis indicatingthepresenceofhydrocarbons.ThewelltestedwaterinbothtargetBarailsands.TheA-12wellcameinsignificantlylowerthanprognosisandappearstobeinaseparatecompartmentandnotconnectedtothe“A”poolasdefinedbytheA-11,A-10BandA-6producers.Thedisap-pointingresultsofA-12ledtheCompanytoceasefurtherdrillingandcompletelyre-evaluateitsgeologicstructuralmodelwiththeaidofPre-StackDepthMigration(“PSDM”)seismicprocessing.

NAREN KONWAR - JORHAT NILKANT DHINGIA PHUKAN - JORHAT NITUL ALI - JORHAT NITUL KAKOTI - JORHAT NITYAM THAKURIA - JORHAT PALLAV BARUAH - JORHAT PANKAJ TAXALI - NOIDA


amguri field

amGuRI 14 - theappraisalwellwasflowtestedintheupperTipamformation.Athree-dayproductiontestyieldedmaximumratesof4.8mmscfdonan8mmchokewithatubingheadpressureof2100poundspersquareinch(“psi”),andastabilizedfinal rateof2.7mmscfdona6mmchokewitha tubingheadpressureof2,180psi.Theseresultscombinedwithasubsequentpressurebuild-uptest,supporttheCompany’sviewthattheA-14wellisanexcellentdrygaswell.Thiswellre-establishestheTipamformationasaviableproducingzoneatAmguri.ThisTipamformationproductionenablestheCompanytoutilizethewellasaswingproducertoservicethelocalcyclicalgasmarketswhilealsoassistingwithvoidagereplacementwithintheMainBarailgascondensatereservoironcecompressionisinstalled.

TheCompanycompletedtheconstructionofafour-inchdiametersalesgasflowlineinQ22009toservicelocalmarkets.TheA-14wellisplannedtobeconnectedtothegasre-injectionflow-linesforcompressionsupporttothe“A”poolbyearly2010.Additionally,theA-14wellassiststheCompanytoobserveprudentreservoirmanagementpracticesforthe“A”poolbysupportinglocalgasmarketsuntilcompressionisinstalledbeginninginQ12010.

dEvELOPmEnt OF amGuRI FIELd

Thefollowingdevelopmentactivitiesareplannedfor2009/10:

Earlierintheyear,theCompanycompletedtheevaluationofbidsforgasre-injectionandcondensateextractionfacilitiesatAmguri.Themainequipmentpackageshavebeenawardedformanufacturewithcommissioningexpectedbyearly2010basedonmanufacturers’currentdeliverydates;

l TheAmguri-IIwellisplannedtoberecompletedasadualproducer/injector;

l CompletionofthePre-StackDepthMigrationAnalysisofexisting3Dseismicinprogressandreconstructionofthegeologicalmodelalongwith2DreinterpretationisalsoproposedtobetakenupandcompletedbyQ42009;

l ConstructionofnewoilreceivingfacilityatMorantoreceiveandpumpenhancedoilproductiontotheOilIndia–operatedpumpstationthrougha1.2kmfour-inchpipeline–thisisexpectedtodecreasetheoiltreatmentcostsofthecondensateproductionandallowforincreasednetbacks;

l InstallationofproducedwatertreatmentandconditioningfacilitiestofacilitateproducedwaterdisposalintotheAmguri-2wellusingawaterinjectionpump.

Tipam A

Amguri 5

Amguri 13B

Tipam B

Amguri A Pool

Canoro Low Pressure Gas Pipeline

Canoro Low Pressure Gas Pipeline (alternative)

Assam Gas Company Ltd. (AGCL) Oil Pipeline

Assam Gas Company Ltd. (AGCL) Oil Pipeline (alternative)

Existing pools

Block boundary

Railway

Rivers / Waterbodies

Tea Gardens

Faults

Abandoned O&G

Gas with condensate

Gas

Dry and abandoned

Suspended

Suspended Oil

Suspended Gas

A-9

A-5

A-6A-10B

A-11A-14

A-12

A-10

TK-5REC-7

A-2

A-8

A-8a

A-3

A-1A-13B

A-13

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Tipam A

Amguri 5

Amguri 13B

Tipam B

Amguri A Pool

Canoro Low Pressure Gas Pipeline

Canoro Low Pressure Gas Pipeline (alternative)

Assam Gas Company Ltd. (AGCL) Oil Pipeline

Assam Gas Company Ltd. (AGCL) Oil Pipeline (alternative)

Existing pools

Block boundary

Railway

Rivers / Waterbodies

Tea Gardens

Faults

Abandoned O&G

Gas with condensate

Gas

Dry and abandoned

Suspended

Suspended Oil

Suspended Gas

A-9

A-5

A-6A-10B

A-11A-14

A-12

A-10

TK-5REC-7

A-2

A-8

A-8a

A-3

A-1A-13B

A-13

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POOJA AERON - NOIDA POOJA AWASTHI - NOIDA PRAMODE CHETIA - JORHAT PRANJIT BORAH - JORHAT PRASANTHA PHUKAN - JORHAT PROSENNJIT PHUKAN - JORHAT RAHUL AWASTHI - NOIDA


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Canoroisfocusingalleffortsin2009/10ondevelopmentprojectstoincreaseproductiononalowcostbasisandloweroperatingcosts.OncetheinterpretiveresultsofthePSDMareknown,theCompanyplanstoembarkuponanothercycleofdrillingactivityin2010/11thatwillbereflectedinanupdatedPlanofDevelopmentdocumenttobesubmittedtoindustryregulatorsinQ42009.

eXploRAtIon blockS

aa-Onn-2003/2 (canORO 15% wI) On theArunachalPradeshBlockAA-ONN-2003/2, theoperatorhascontractedadrillingrigandcommenced locationandroadbuilding.Canoroand its jointventurepartnershaveacommitment under the PSC to drill sevenwells. At present, however, based on current interpretation of the 3Dseismic,onlythreedrillableprospectshavebeenidentifiedandapprovedfordrillingtodate.Itisanticipatedthattheoperatorwillcompletethethreewellsbyearly2010withestimatedexpendituresof$3.0millionnettoCanoro’s15%workinginterest.

aa-On/7 (canORO 65% wI) Uniquetotheoil&gas industry inIndia, theAA-ON/7blockboundariesarespreadoverthetwoadjoiningstatesofAssamandNagaland.OnePetroleumExplorationLicensewasissuedforeachstatein2001and2006respectively.TheExplorationperiodforthePELissuedin2001endedinMarch2008.TheCompanyhadfiledanapplicationforextensionofthisperiodbyoneyeartotakeupadditionalactivities.

Duringtheyear,theCompanydrilledtwowells,BorkathaniandDeragonIIontheAssamportionofAA-ON/7.Bothexplorationwellsfailedtofindcommercialhydrocarbonsandwerepluggedandabandoned.

Subsequent todrilling and abandonmentof theBhorkatani and theDeragon IIwells, theCompanywithdrew itsapplicationtotheGovernmentofIndiaseekinganextensionoftheexplorationphasetherebyrelinquishingtheAssamportionoftheAA-ON/7Block.Asaresultoftherelinquishment,probablereservesof21.2BCF(3.5MMBOE)nettoCompany’s65%workinginterestandpossiblereservesof15.8BCF(2.6MMBOE)nethavebeenwrittenoffbytheCompany.Provenreservesareunaffectedbythisrelinquishment.

WithrespecttothePELissuedin2006fortheNagalandarea,theCompany’sapplicationonbehalfofthepartnersforanewPSChasbeensubmittedtotheGovernmentofIndia.

aa-Onn-2004/3 & aa-Onn-2004/5InQ42008,Canoroenteredintoafarm-inagreementwithalargeIndianindustrial company on two blocks in Northeast India. Blocks AA-ONN-2004/3 and AA-ONN-2004/5 have acombinedareatotaling1,285km2andaresubjecttoGOIapprovals.TheseblockshaveaPhaseIcommitmentthatrequire2Dand3Dseismicprograms,whichisproposedtobetakenupinlate2009orearly2010andthedrillingofoneexplorationwelloneachblock.TheestimatedcapitalexpendituresrequiredontheseblocksforPhaseIoverthenextthreeyearsisapproximately$6.8millionnettoCanoro’s30%workinginterest.Proceduresforthetransferofthe30%interestandoperatorshiptoCanoroaresubjecttocertainagreementsbeingcompletedalongwithapprovalsoftheGovernmentofIndia.However,thereisnoguaranteetheGovernmentofIndiawillapprovethetransactionandthereforeCanorowouldnothaveaninterestintheblocks.Oncompletion,Canorowouldhavea30%participatinginterestandwouldbetheoperatorofbothblocks.Initialexplorationoftheseblocksisanticipatedtocommencein2009/10withPhaseIcommitmentsthatrequire2Dand3Dseismicprograms,whichwillbedeferredtolaterthisyearorearly2010,andthedrillingofoneexplorationwelloneachblock.

POOJA AERON - NOIDA POOJA AWASTHI - NOIDA PRAMODE CHETIA - JORHAT PRANJIT BORAH - JORHAT PRASANTHA PHUKAN - JORHAT PROSENNJIT PHUKAN - JORHAT RAHUL AWASTHI - NOIDA


RESERvES

SprouleAssociatesLimited(Sproule),anindependentpetroleumengineeringfirm,hasevaluatedthecrudeoil,naturalgasandnaturalgasliquidsreservesoftheCompanyasatMarch31,2009andpreparedareservesreportinaccordancewithNationalInstrument51–101“StandardsofDisclosureforOilandGasActivities”.Sproulebaseditsevaluationonlanddata,wellandgeological information,reservoirstudies,estimatesofonstreamdates,contract information,operatingcostdata,capitalbudgetsandfutureoperatingplansprovidedbytheCompany,informationobtainedfrompublicrecordsandSproule’sinternalnon–confidentialfilesandcommoditypriceforecast.TheReservesCommittee,with themandateof reviewing the independent engineering report, recommended the acceptanceof theSproulereserveestimatesandithasbeenapprovedbytheBoardofDirectorsforthepurposesoftheAnnualReport.SeetheCompany’sAnnualInformationForm(AIF)foradditionalreserveinformation.

RESERvE REcOncILIatIOn (FOREcaSt PRIcES)

Proved Proved + Probable

Proved +Probable +Possible

amGuRI GROSS RESERvES (1)

March 31, 2008 (mboe) 2,773 6,329 10,263

Netadditions/revisions 1,456 1,328 1,309

Production (285) (285) (285)

March 31, 2009 (mboe) 3,944 7,372 11,287

Productionreplacement(%) 511 466 459

aa-On/7 GROSS RESERvES (1)

March 31, 2008 (mboe) – 3,525 6,154

Relinquishment(2) – (3,525) (6,154)

Production – – –

March 31, 2009 (mboe) – – –

Productionreplacement(%) – – –

cOmPany GROSS RESERvES (2), (3)

March 31, 2008 2,773 9,853 16,417

Netadditions 1,456 (2,196) (4,845)

Production (285) (285) (285)

March 31, 2009 3,944 7,372 11,287

Productionreplacement(%) 511 (770) (1,700)

(1) Gross reserves represent the Company’s 60% interest before deducting royalties

(2) During the year the Company relinquished the Assam portion of the AA-ON/7 block

(3) Includes both Amguri and AA-ON/7 reserves

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amGuRI GROSS RESERvES (1), (3)

2009 2008 % change

ProvedproducingoilandNGL(mbbls) 391 356 10

Provedproducingnaturalgas(mmcf) 7,582 4,692 62

Total proved producing (mboe) 1,655 1,138 45

ProveddevelopednotproducingoilandNGL(mbbls) – 32 (100)

Proveddevelopednotproducingnaturalgas(mmcf) 4,239 63 6,597

Total proved developed not producing (mboe) 707 42 1,580

ProvedundevelopedoilandNGL(mbbls) 392 527 (26)

Provedundeveloped(mmcf) 7,146 6,401 12

Total proved undeveloped (mboe) 1,583 1,594 (1)

Total proved (mboe) 3,944 2,773 42

ProbableoilandNGL(mbbls) 953 1,031 (8)

Probablenaturalgas(mmcf) 14,848 15,148 (2)

Total probable (mboe) 3,428 3,555 (4)

Proved+probableoilandNGL(mbbls) 1,736 1,945 (11)

Proved+probablenaturalgas(mmcf) 33,815 26,304 29

Total proved plus probable (mboe) 7,372 6,329 16

PossibleoilandNGL(mmbls) 839 1,944 (57)

Possiblenaturalgas (mmcf) 18,456 11,947 54

Total possible (mboe) 3,915 3,935 (0)

Proved+probable+possibleoilandNGL (mbbls) 2,575 3,888 (34)

Proved+probable+possiblenaturalgas(mmcf) 52,271 38,250 37

Proved + probable + possible (mboe) 11,287 10,263 10

aa-On/7 GROSS RESERvES (1), (3)

2009 2008 % change

ProvedproducingoilandNGL(mbbls) – – –

Provedproducingnaturalgas (mmcf) – – –

Total proved producing (mboe) – – –

ProveddevelopednotproducingoilandNGL(mbbls) – – –

Proveddevelopednotproducingnaturalgas(mmcf) – – –

Total proved developed not producing (mboe) – – –

ProvedundevelopedoilandNGL (mbbls) – – –

Provedundeveloped(mmcf) – – –

Total proved undeveloped (mboe) – – –

Total proved (mboe) – – –

ProbableoilandNGL(mbbls) – – –

Probablenaturalgas (mmcf) – 21,147 (100)

Total probable (mboe) – 3,525 (100)

Proved+probableoilandNGL(mbbls) – –

Proved+probablenaturalgas(mmcf) – 21,147 (100)

Total proved plus probable (mboe) – 3,525 (100)

PossibleoilandNGL(mmbls) – –

Possiblenaturalgas (mmcf) – 15,776 (100)

Total possible (mboe) – 2,629 (100)

Proved+probable+possibleoilandNGL(mbbls) – – –

Proved+probable+possiblenaturalgas (mmcf) – 36,923 (100)

Proved + probable + possible (mboe) – 6,154 (100)

RAJEEV KUMAR SINGH - NOIDA RAJEN CHANDRA SARMAH - JORHAT RAJEN GOGOI - JORHAT RAJESH MADAN - NOIDA RAJIB BORAH - JORHAT RAJIB KUMAR PHUKAN - JORHAT


cOmPany GROSS RESERvES (1), (2), (3)

2009 2008 % change

ProvedproducingoilandNGL(mbbls) 391 356 10

Provedproducingnaturalgas(mmcf) 7,582 4,692 62

Total proved producing (mboe) 1,655 1,138 45

ProveddevelopednotproducingoilandNGL(mbbls) – 32 (100)

Proveddevelopednotproducingnaturalgas(mmcf) 4,239 63 6,597

Total proved developed not producing (mboe) 707 42 1,580

ProvedundevelopedoilandNGL(mbbls) 392 527 (26)

Provedundeveloped(mmcf) 7,146 6,401 12

Total proved undeveloped (mboe) 1,583 1,594 (1)

Total proved (mboe) 3,944 2,773 42

ProbableoilandNGL(mbbls) 953 1,031 (8)

Probablenaturalgas(mmcf) 14,848 36,295 (59)

Total probable (mboe) 3,428 7,080 (52)

Proved+probableoilandNGL(mbbls) 1,736 1,945 (11)

Proved+probablenaturalgas(mmcf) 33,815 47,451 (29)

Total proved plus probable (mboe) 7,372 9,853 (25)

PossibleoilandNGL(mmbls) 839 1,944 (57)

Possiblenaturalgas (mmcf) 18,456 27,723 (33)

Total possible (mboe) 3,915 6,564 (40)

Proved+probable+possibleoilandNGL(mbbls) 2,575 3,888 (34)

Proved+probable+possiblenaturalgas(mmcf) 52,271 75,173 (30)

Proved + probable + possible (mboe) 11,287 16,417 (31)

(1) Gross reserves represent the Company’s interest before deducting royalties (2) Includes both Amguri and AAON/7 reserves (3) Columns may not add due to rounding

RESERvE LIFE IndEx

ThereserveindexofCanorohasbeencalculatedbyusingtheaverage2009productionof781boe/d.Accordingly,thereservelifeindexis26yearsonaprovedplusprobablebasis.

RESERvES – maRcH 31, 2009 Proved ProbableProven + Probable

Reserves 3,944 3,428 7,372

Production 285 285 285

Reservelifeindex(years) 13.8 12.0 25.8

nEt PRESEnt vaLuE – bEFORE tax – FOREcaSt PRIcES (US$000)

ASATMARCH31,2009 0% 5% 10% 15%

Proveddevelopedproducing 31,388 27,248 23,995 21,388

Proveddevelopednon–producing 5,381 3,932 2,953 2,269

Provedundeveloped 24,255 16,279 11,008 7,443

Total proved 61,024 47,459 37,956 31,100

Total probable 77,253 51,319 35,068 24,494

Total proved + probable 138,277 98,778 73,024 55,594

Total possible 66,438 39,022 25,623 18,312

Total proved + probable + possible 204,715 137,800 98,647 73,906

RANDEE EASTGAARD - CALGARY RANJEET BORUAH - JORHAT RIKHYA NATH DAS - JORHAT RITISH PHUKAN - JORHAT ROBERT WYNNE - CALGARY ROBIN GOGOI - JORHAT ROGER SAKATCH - CALGARY


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nEt PRESEnt vaLuE – aFtER tax – FOREcaSt PRIcES (US$000)

ASATMARCH31,2009 0% 5% 10% 15%

Proveddevelopedproducing 31,388 26,639 22,962 20,057

Proveddevelopednon–producing 5,381 3,843 2,824 2,126

Provedundeveloped 21,766 14,307 9,439 6,192

Total proved 58,535 44,789 35,225 28,375

Total probable 42,287 27,828 18,789 12,904

Total proved + probable 100,822 72,617 54,014 41,279

Total possible 36,612 21,679 14,501 10,617

Total proved + probable + possible 137,434 94,296 68,515 51,896

IndEPEndEnt EvaLuatOR’S cOmmOdIty PRIcInG aSSumPtIOnS

Amguri Natural Gas

Year

Nigeria Bonny Light

Crude Oil ProvedProved plus

Probable

Proved plus Probable

plus Possible

Annual Cost Inflation

Rate

($/Bbl) ($/mcf) ($/mcf) ($/mcf)

2009(9mos) 48.10 2.13 2.13 2.13 3.7%

2010 53.89 2.20 2.20 2.20 4.0%

2011 58.80 2.31 2.50 3.25 3.0%

2012 73.78 2.43 3.14 4.21 2.0%

2013 79.56 2.55 3.59 4.29 2.0%

2014 81.15 2.68 4.04 4.37 2.0%

2015 82.77 2.73 4.46 4.46 2.0%

2016 84.43 2.79 4.55 4.55 2.0%

2017 86.12 2.84 4.64 4.64 2.0%

2018 87.84 2.90 4.74 4.74 2.0%

Thereafterperyear 2.0% 2.0% 2.0% 2.0% 2.0%

nEt aSSEt vaLuE

ThenetassetvaluesoftheCompanyasatMarch31,2009atadiscountrateoffive,tenandfifteenpercentbeforetaxesaresummarizedbelow:

Estimated net future revenues (1) (US$000) 5% 10% 15%

Proven 47,459 37,956 31,100

Proven+probable 98,778 73,024 55,594

Proven+probable+possible 137,800 98,647 73,906

Working capital at March 31, 2009 6,989 6,989 6,989

Total asset value (2) (US$000)

Proven 54,448 44,945 38,089

Proven+probable 105,767 80,013 62,583

Proven+probable+possible 144,789 105,636 80,895

Commonsharesoutstanding 113,708,941 113,708,941 113,708,941

Basic net asset value per share (US$)

Proven $0.48 $0.40 $0.33

Proven+probable $0.93 $0.70 $0.55

Proven+probable+possible $1.27 $0.93 $0.71

(1) before income taxes and reclamation costs

(2) estimated net future revenue plus working capital at March 31, 2009

RANDEE EASTGAARD - CALGARY RANJEET BORUAH - JORHAT RIKHYA NATH DAS - JORHAT RITISH PHUKAN - JORHAT ROBERT WYNNE - CALGARY ROBIN GOGOI - JORHAT ROGER SAKATCH - CALGARY

Management’s Discussion & Analysis


ROY HEATH - JORHAT RUPANKAR RAJKHOWA - JORHAT RYAN ELLSON - CALGARY SADANANDA GOGOI - JORHAT SANJANA BARUAH - JORHAT KAMTA PRASAD - NOIDA SANJEEV GUPTA - NOIDA


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Management’s Discussion and AnalysisFORTHETHREEANDTWELVEMONTHSENDEDMARCH31,2009

baSIS OF PRESEntatIOn ThefollowingdiscussionandanalysisasprovidedbytheManagementofCanoroResourcesLtd.(“Canoro”or“Company”)asofJuly27,2009istobereadinconjunctionwiththeaccompanyingauditedfinancialstatementsandrelatednotesfortheyearsendedMarch31,2009and2008.ThefinancialdatapresentedhasbeenpreparedinaccordancewithCanadiangenerallyacceptedaccountingprinciples(“GAAP”).ThereportingandthefunctionalcurrencyistheUnitedStatesdollar(US$).

EffectiveApril1,2008,theCompany’sfunctionalcurrencychangedfromCanadiandollarstoUS$asaresultofincreasedsignificanceoftheUS$totheCompany’scashflows.Amongstotherthings,thisincreasedsignificanceoftheUS$isaresultofincreasedcapitalexpendituresinUS$andanincreasedproportionofrevenuesearnedinUS$.AsboththefunctionalandthereportingcurrenciesoftheCompanyareinUS$,therearenotranslationgainsandlossesthatwillimpactaccumulatedothercomprehensiveincome.

Monetary assets and liabilities of theCompany that aredenominated in currencies other thanUS$ are translated into its functioncurrencyattheratesofexchangeineffectattheperiodenddate.Anygainsandlossesarerecordedinearnings.

FORwaRd-LOOkInG StatEmEntS Certain statements included or incorporated by reference in this MD&A constituteforward-lookingstatementsor forward-looking informationunderapplicablesecurities legislation.Suchforward-lookingstatementsorinformationareforthepurposeofprovidinginformationaboutmanagement’scurrentexpectationsandplansrelatingtothefuture.Readersarecautionedthatrelianceonsuchinformationmaynotbeappropriateforotherpurposes,suchasmakinginvestmentdecisions.Forward-looking statements or information typically contain statementswithwords such as “anticipate”, “believe”, “expect”, “plan”,“intend”,“estimate”,“propose”,“project”orsimilarwordssuggesting futureoutcomesorstatementsregardinganoutlook.Forward-

looking statements or information in this MD&A include, but are not limited to, statements or information with respect to:

businessstrategyandobjectives;developmentplans;explorationplans;acquisitionanddispositionplansandthetimingthereof;reservequantitiesandthediscountedpresentvalueoffuturenetcashflowsfromsuchreserves;futureproductionlevels;capitalexpenditures;netrevenue;operatingandothercosts;royaltyratesandtaxes.

Forward-lookingstatementsor informationarebasedonanumberof factorsandassumptionsthathavebeenusedtodevelopsuchstatements and informationbutmayprove tobe incorrect.Although theCompanybelieves that the expectations reflected in suchforward-lookingstatementsorinformationarereasonable,unduerelianceshouldnotbeplacedonforward-lookingstatementsbecausetheCompanycangivenoassurancethatsuchexpectationswillprovetobecorrect.In addition to other factors and assumptions may

be identified in this MD&A, assumptions have been made regarding, among other things:theimpactofincreasingcompetition;thegeneral stabilityof theeconomicandpoliticalenvironment inwhich theCompanyoperates; the timely receiptofany requiredregulatoryapprovals;theabilityoftheCompanytoobtainqualifiedstaff,equipmentandservicesinatimelyandcost-efficientmanner;theabilityoftheoperatoroftheprojectswhichtheCompanyhasaninterestintooperatethefieldinasafe,efficientandeffectivemanner;theabilityoftheCompanytoobtainfinancingonacceptableterms;fieldproductionratesanddeclinerates;theabilitytoreplaceandexpandoilandnaturalgasreservesthroughacquisition,developmentorexploration;thetimingandcostsofpipeline,storageandfacilityconstructionandexpansionandtheabilityoftheCompanytosecureadequateproducttransportation;futureoilandnaturalgasprices;currency,exchangeandinterestrates;theregulatoryframeworkregardingroyalties,taxesandenvironmentalmattersinthecountriesinwhichtheCompanyoperates;andtheabilityoftheCompanytosuccessfullymarketitsoilandnaturalgasproducts.Readersarecautionedthattheforegoinglistisnotexhaustiveofallfactorsandassumptionsthatmayhavebeenused.

Forward-looking statements or information are based on current expectations, estimates and projections that involve a number ofrisksanduncertaintiesthatcouldcauseactualresultstodiffermateriallyfromthoseanticipatedbytheCompanyanddescribedintheforward-looking statementsor information.These risks anduncertainties thatmaycauseactual results todiffermaterially from theforward-lookingstatementsorinformationinclude,amongotherthings:theabilityofmanagementtoexecuteitsbusinessplan;generaleconomicandbusinessconditions;theriskofwarorinstabilityaffectingcountriesorstatesinwhichtheCompanyoperates;therisksoftheoilandnaturalgasindustry,suchasoperationalrisksinexploringfor,developingandproducingcrudeoilandnaturalgas;marketdemand; thepossibility thatgovernmentpoliciesor lawsmaychangeorgovernmentalapprovalsmaybedelayedorwithheld; risksanduncertaintiesinvolvinggeologyofoilandnaturalgasdeposits;theuncertaintyofreservesestimatesandreserveslife;theabilityoftheCompanytoaddproductionandreservesthroughacquisition,developmentandexplorationactivities;theCompany’sabilitytoenterintoorrenewproductionsharingcontracts;potentialdelaysorchangesinplanswithrespecttoexplorationordevelopmentprojectsor capital expenditures; theuncertaintyof estimatesandprojections relating toproduction(includingdecline rates), costsandexpenses;fluctuationsinoilandnaturalgasprices,foreigncurrency,exchange,andinterestrates;risksinherentintheCompany’smarketingoperations,includingcreditrisk;uncertaintyinamountsandtimingofroyaltyorcesspayments;health,safetyandenviron-mentalrisks;risksassociatedwithexistingandpotentialfuturelawsuitsandregulatoryactionsagainsttheCompany;uncertaintiesasto

ROY HEATH - JORHAT RUPANKAR RAJKHOWA - JORHAT RYAN ELLSON - CALGARY SADANANDA GOGOI - JORHAT SANJANA BARUAH - JORHAT KAMTA PRASAD - NOIDA SANJEEV GUPTA - NOIDA


theavailabilityandcostoffinancing;andfinancialrisksaffectingthevalueoftheCompany’sinvestments.Seepage29oftheMD&Aforafurtherdiscussionofspecificrisksanduncertainties.Readersarecautionedthattheforegoinglistisnotexhaustiveofallpossiblerisksanduncertainties.AdditionalriskfactorsaffectingtheCompanyanditsbusinessarecontainedintheCompany’sAnnualInformationFormfiledonSEDARatwww.sedar.com.

nOn-GaaP tERmS TheMD&Acontainstheterms“fundsfromoperations”,and“netbacks”whicharenotrecognizedmeasuresunderCanadiangenerallyacceptedaccountingprinciples.TheCompanyusesthesemeasurestohelpevaluateitsperformance.Managementconsidersnetbacksanimportantmeasureasitdemonstratesitsprofitabilityrelativetocurrentcommodityprices.Managementusesfunds fromoperations toanalyzeperformanceandconsiders itakeymeasureas itdemonstrates theCompany’sability togeneratethecashnecessarytofundfuturecapitalinvestmentsandtorepaydebt.FundsfromoperationshasbeendefinedbytheCompanyasnetearningsadjustedfornon-cashitems(depletion,depreciationandaccretion,stockbasedcompensation,unrealized(gain)/lossonforeignexchange, andunrealized investment (gain)/loss) andexcludes thechange innon-cashworkingcapital related tooperatingactivitiesandexpendituresonassetretirementobligationsandreclamation.Canoro’sdeterminationoffundsfromoperationsmaynotbecomparabletothatreportedbyothercompaniesnorshoulditbeviewedasanalternativetocashflowfromoperatingactivities,netearningsorothermeasuresoffinancialperformancecalculatedinaccordancewithCanadianGAAP.

baRREL OF OIL EquIvaLEnt Whereamountsareexpressedonabarrelofoilequivalent(boe)basis,naturalgasvolumeshavebeenconvertedtobarrelsofoilequivalentatsixthousandcubicfeettoonebarrelofoilequivalent(6mcf=1boe).Thisconversionratioistheconventionusedintheoilandnaturalgasindustryandisbasedonanenergyequivalentconversionmethodprimarilyapplicableattheburnertipanddoesnotrepresentavalueequivalentatthewellhead.Theuseofboe’smaybemisleading,particularlyifusedinisolation.

opeRAtIonAl And FInAncIAl hIGhlIGhtS

InaccordancewithCanadianindustrypractice,productionvolumes,reservevolumesandrevenuesarereportedonaCompanyinterestbasis,beforedeductionofroyalties.Canoro’sresultsofoperationsweredependentonproductionvolumesofnaturalgas,crudeoilandnaturalgasliquidsandthepricesreceivedforthisproduction.

PROductIOn and REaLIzEd SaLES PRIcES

Operational and Financial Highlights ($ thousands, except per unit amounts)

Three months ended March 31 Twelve months ended March 31

2009 2008 % change 2009 2008 % change

Naturalgas(mcf/d) 2,617 1,462 79 3,223 1,153 179

Crudeoil(bbl/d) 209 146 43 244 106 130

Total(boe/d) 645 390 66 781 298 162

Realizedgasprice($/mcf) 1.84 2.45 (25) 2.18 2.45 (11)

Realizedoilprice($/bbl) 50.64 104.47 (52) 95.76 97.32 (2)

NigerianBonnyLight ($/bbl) 47.59 99.20 (52) 87.81 84.59 4

Realizedprice($/boe) 23.87 48.36 (51) 38.92 44.13 (12)

Royalties ($/boe) 2.86 5.21 (45) 4.00 3.34 20

Operatingcosts($/boe) 9.68 6.70 44 5.37 6.93 (23)

Netback($/boe) 11.33 36.45 (69) 29.55 33.86 (13)

SANJIB BARUAH - NOIDA SARAT CHAND GOGOI - NOIDA SHIRLEY TAYLOR - CALGARY SIVA DUTTA - JORHAT SOUMYA SRIKANTH - NOIDA SUMAN KUMAR - NOIDA SURAJIT DUTTA - NOIDA


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production

ProductionforthethreeandtwelvemonthsendedMarch31,2009averaged645boe/dand781boe/drepresentinga66percentand162percentincreaseoverthecomparativeperiods.Theincreaseinproductionisduetoproductionadditionsfromtwosuccessfulwells,A-10BandA-11,drilled in2007andbroughtontoproduction inMarchof2008.Consequent todetail samplingand transient testdataanalysisconductedduringthelastquarterof2007/08onthesewells,itwasdeterminedthereservoirwasaretrogradecondensatereservoir. Canoro initiated detailed engineering analysis including Front End EngineeringDesign (FEED). Engineering identifiedtheneedofgasrecyclingtomaintainthereservoirpressureatdewpointtooptimize liquidrecoveryandpracticeprudentreservoirmanagement.Theengineeringstudiesledtotechnicalspecificationsofgascompressorsandassociatedequipmentforsourcing.Afteracompetitivebidprocess,themainequipmentpackageswereawardedinthethirdquarterwithcommissioningexpectedinearly2010basedonmanufacturers’deliverydates.ThegasrecyclingschemeisprojectedtohaveamaterialimpactonCanoro’sfundsflowfromoperationsas itsproductionmix isprojectedtochangefromapproximately30%condensatetoover60%condensate.TherecyclingschemeshouldalsomitigatetheimpactofseasonaldemandfactorsastheCompanywillstillbeabletoextractcondensateregardlessofnaturalgasdemandintheregion.

PreparationsarebeingmadetoconverttheA-11welltoadualproducer/injector.CanoroplansoninjectinggasintotheMainBarailzoneandproducefromtheMid-Barailzonewhichtestedat2.1mmcf/dand280bbl/din2007througha16/64inchchokewithtubingheadpressureof2,500psi.Subsequenttoyear-end,theCompanycompletedthetieinofA-14withrestrictedproductionratesof1.0mmcf/d.A-14gasisplannedtobeusedforsalesandadditionalre-injectionsupply.

realized sales price

Natural gas

ForthethreeandtwelvemonthsendedMarch31,2009theCompanyreceived$1.84and$2.18permcfrespectively,comparedto$2.45inthecomparativeperiods.ThedecreaseisattributedtotheweakeningoftheIndianrupee(Rs)againsttheUSdollarthroughouttheyear.TheIndianrupeerangedfromahighofapproximately40:1(RupeetoUS$)inApril2008toalowofapproximately52:1(RupeetoUS$)inMarch2009.

ThemajorityofnaturalgasproductionissoldatafixedpriceofRs3,840per1000m3,however,contractuallytheCompanymustsellthefirst12,000m3/d(approximately340mcf/d)atRs2,304per1000m³,(approximately$1.64permcf).TheCompanyispaidinrupeesand issubject to foreignexchangefluctuationsontheaveragepricereceivedonchangesbetweentherupeeandUS$.AlthoughtheCompanyisnotdirectlyimpactedbyfluctuationsinglobalnaturalgaspricesduetothenatureitscontracts,increasesinglobalnaturalgaspricesresultsinregionalmarketpressuretoincreasethepricereceivedfornaturalgasinIndia.

Crude oil

Crudeoilpricesexperiencedunprecedentedvolatilityduringtheyear.Thisinturn,hasaffectedthepriceoftheCompany’sbenchmarkcrude,NigerianBonnyLightwhichhasrangedfromahighof$149.87toalowof$38.26duringtheyear.NigerianBonnyLightisahighgradeofNigeriancrudeoilwithhighAPIgravityproducedintheNigerDeltabasintradingnearBrent,andisconsideredmorerelevantwithinIndia.TheincreaseinthefirsthalfoftheyearwasduetostrongglobaldemandgrowthprimarilyinChinaandIndiacombinedwithlimitedsupplyandlowinventoriesforoil.Duringtheyear,crudeoilpricesbenefitedfromgeo-politicaleventsintopproducingregionsincludingtheMiddleEastandAfrica.Theprecipitousfallinpricesresultedfromglobaldemanddestructionfromtheinterna-tionalcreditcrisisandfearsofaglobalrecession.Astheyearprogressedoildemandforecastsbecameincreasinglybearishandwerecontinuallyreviseddownwards.

ForthethreeandtwelvemonthstheCompanyreceived$50.64and$95.76perbblcomparedtotheaverageNigerianBonnyLightpriceof$47.59and$87.81.TheCompanyreceivesapremiumtotheBonnyLightduetothehighqualityofthecondensateproduced.

TheCompany’srealizedsalespriceforthethreeandtwelvemonthsendedMarch31,2009was$23.87and$38.92perboerespectively,comparedto$48.36and$44.13perboeforthesameperiodin2008.ThechangeinrealizedpricereceivedisconsistentwiththechangeintheNigerianBonnyLightprice.

PEtROLEum and natuRaL GaS SaLES

PetroleumandnaturalgassalesforthetwelvemonthsendedMarch31,2009were$11.1million,up131percentoverthe$4.8millionintheprioryear.Theincreaseinrevenueisattributabletoa162percentincreaseinsalesvolumesoffsetbyan11percentdecreaseintherealizedsalesprice.PetroleumandnaturalgassalesforthethreemonthsendedMarch31,2009were$1.4million,down18percentfromthecomparativeperiodintheprioryear.Thedecreaseinrevenueisduetoa51percentdecreaseintherealizedsalespriceoffsetbya65percentincreaseinsalesvolumes.

SANJIB BARUAH - NOIDA SARAT CHAND GOGOI - NOIDA SHIRLEY TAYLOR - CALGARY SIVA DUTTA - JORHAT SOUMYA SRIKANTH - NOIDA SUMAN KUMAR - NOIDA SURAJIT DUTTA - NOIDA


ROyaLtIES and cESS

($000)


2009 2008 % change 2009 2008%

change

Total 166 183 (9) 1,142 363 215

Perboe 2.86 5.22 (45) 4.00 3.34 20

TheCompanypaysroyaltiesimposedbytheGovernmentofIndiaPetroleumandNaturalGasRulestotherespectiveStategrantingtheleaseinwhichcrudeoilisproduced.TheCompanyisresponsibleforpayingroyaltiesatarateofRs528permetrictonneofcrudeoilproduced(approximately$1.41perbbl).Inaddition,theCompanyisresponsibleforpayingcessattherateofRs927permetrictonneofcrudeoilsold(approximately$2.47perbbl).CessisalevyimposedbytheOilIndustryDevelopmentActoncrudeoilsalesandispayabletotheCentralGovernment.StateandCentralroyaltiesarepaidinIndianRupee’sandaresubjecttoforeignexchangefluctuations.Royaltiesonnaturalgasareassessedat10%ofwellheadvalueofgasandarepaidbythepurchaserof thenaturalgas;therefore,theCompanydoesnotpayroyaltiesonnaturalgasproduction.

OnSeptember20,2007,theCompanyenteredintoanagreementwithaprivatefundbasedinJersey,ChannelIslands,wherebythefundprovidedlimited-recoursefunding(“EntitlementFund”)of$10,000,000forappraisalanddevelopmentdrillingintheCompany’sAmguriFieldinAssam,India.Thefunddoesnothaveaparticipatinginterestinthefield,norisitresponsibleforfuturecapitalcosts.ThefundonlyreceivespaymentsbasedontheCompany’s60%shareofgrossrevenuefromtheAmguriFieldrangingfrom7%beforerecoveryoftheoriginal$10,000,000and3.5%thereafter.AsatMarch31,2009,thefundhasrecoveredapproximately$1.0million.

ForthethreemonthsandtwelvemonthsendedMarch31,2009,totalroyaltiesandcessonproductionamountedto$0.2and$1.1millioncomparedto$0.2and$0.4millioninthecomparativeperiodsintheprioryear.Duringthethreeandtwelvemonthsended,theCompanycontinuedpaymentstotheEntitlementFundaspertheagreement.PaymentstotheEntitlementFundof$0.1millionand$0.8millionrespectively,areincludedintheaboveroyaltyfigures.TheincreaseinroyaltiesonanabsolutebasisisduetoincreasedoilproductionandrevenueentitlementpaymentsaspertheEntitlementFundagreement.

OPERatInG ExPEnSES

($000)


2009 2008 % change 2009 2008 % change

Total 562 238 136 1,531 756 103

Perboe 9.68 6.70 44 5.37 6.93 (23)

OperatingexpensesforthethreeandtwelvemonthsendedMarch31,2009were$0.5million($9.68perboe)and$1.5million($5.37perboe)comparedto$0.2million($6.70perboe)and$0.8million($6.93perboe)inthecomparativeperiodsintheprioryear.Theincreaseinoperatingcostsonanabsolutebasisisduetoansignificantincreaseinproductionvolumes.Thedecreaseinoperat-ingexpensesperboeforthetwelvemonthsendedisduetofixedcostsbeingspreadoverhigherproductionvolumesandoperationalimprovements.Theincreaseinoperatingcostsforthethreemonthsendedisduetonon-recurringrepairsandmaintenancechargesandaninsuranceadjustmentrelatedtooperatedwells.TheCompanycontinuestobecommittedtobeingalowcostproducerinNorthEastIndia.

dEPLEtIOn, dEPREcIatIOn and accREtIOn ExPEnSE

($000)


2009 2008 % change 2009 2008%

change

Total 1,270 907 40 5,850 3,591 63

Perboe 21.87 25.56 (14) 20.51 32.90 (38)

ForthethreeandtwelvemonthsendedMarch31,2009depletion,depreciationandaccretion(“DD&A”)was$1.3millionand$5.9millioncomparedto$0.9millionand$3.6millioninthecomparativeperiodsintheprioryear.ThedecreaseintheDD&ArateperboeisduetotheadditionofprovenreservesfromthesuccessfuldrillingatAmguri14,increasedprovenreservesassignedtoA-6,A-10BandA-11duetoadditionalwellperformanceinformationobtainedduringtheyearoffsetbyahighercapitalbasis.TheincreaseinDD&Aonanabsolutebasisisduetotheincreaseinproduction.

SURENDRA SINGH - NOIDA SWEETY TAMULY - JORHAT TOM LOCH - CALGARY UTPAL BORA - JORHAT UZZAL GOGOI - JORHAT VIJAY PAL KANOJIA - NOIDA


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caPItaL ExPEndItuRES

TheCompany’stotalcapitalexpendituresduringthethreemonthsandtwelvemonthsendedMarch31,2009amountedto$3.8millionand$30.0millioncomparedto$5.4millionand$13.7millionforthecomparativeperiodsintheprioryear.Thesignificantincreaseincapitalisduetohighercostsofservicesresultingfromrecordoilprices,additionaldrillingactivityandsignificantcostoverrunsatAmguri12.DuringtheyeartheCompanydrilledsixwells(3.7net)witha32percentsuccessratebasedonnetwellscomparedtothreewells(2.4net)intheprioryear.TheCompany’sexplorationanddevelopmentexpenditureswerefinancedthroughacombinationofcashonhandandfundsgeneratedfromoperations.TheCompanyisintheprocessofre-evaluatingitsassetbasewithaconcertedeffortto reduceexploration riskandhaveabalancedportfolioofdevelopmentandexplorationopportunities.Work isproceedingon thePre-StackDepthMigration(“PSDM”)re-processingandre-interpretationofAmguri3Dseismicdatawithinitialresultsexpectedinthesecondhalfofthecalendaryear.

During the year, Canoro relinquished the Assam portion of the AA-ON/7 block. Canoro is currently pursuing a new PSC to beestablishedontheNagalandportionoftheAA-ON/7blockwhichhadanexplorationlicensegrantedinAugust2006.TherearenoguaranteestheCompanywillbegrantedanewPSC.

coRpoRAte

IntERESt IncOmE

DuringthethreeandtwelvemonthsendedMarch31,2009,theCompanyearnedinterestincomeof$0.05and$0.2millioncomparedto$0.4millionand$0.9millioninthecomparativeperiodsintheprioryear.Thedecreaseininterestincomeisduetoloweraveragecashbalances,lowerinterestratesandtheCompanyholdingthecashonhandinanoperatingaccountinordertohaveunrestrictedaccesstothefunds.

GEnERaL and admInIStRatIvE ExPEnSES

Generalandadministrative(“G&A”)costsforthethreeandtwelvemonthsendedMarch31,2009were$1.5millionand$6.9millioncomparedto$1.7millionand$4.9millioninthecomparativeperiodsintheprioryear.Overall,G&AcostsincreasedcommensuratewithincreasedstaffingandactivitylevelsasevidencedbyCanorospendingapproximately$30.0milliononexplorationanddevelopmentactivitiesintheyear.Specifically,G&Acostsincreaseddueto:

• increasedofficespaceinbothCalgaryandDelhi;

• strengtheningoftheCanadiandollar,asmanyoftheemployee’sarepaidinCanadiandollars;

• increasedtechnicalandoperatingpersonnel,includingfouradditionalexpatriatestaff;and

• asignificantinvestmentindevelopingandimplementingcontrolsandprocedurestobuildastrongfoundationtogrowtheCompanyasitmovestoadevelopmentandproductioncompany.

Withthedecreaseinactivityprojectedfor2009/10,theCompanyduringthefourthquarterbegantoreduceitspersonnelandmadeitamandatetoallemployees,contractorsandsupplierstoreducecosts.Asignificantportionofthecostsincurredin2008/09wereonetimeset-upcostsanddevelopmentcostsandwillbenon-recurringin2009/2010.CanoroisforecastingG&Acostsfor2009/10beap-proximately$4.0–$4.8million,areductionofapproximately41percentto29percentfrom2008/09levels.

CanorobelievesithasassembledthenecessarypersonneltotaketheCompanyfromanexplorationcompanytoanexplorationandproductioncompanywiththeabilitytosignificantlyincreasereservesandproduction.

StOck baSEd cOmPEnSatIOn ExPEnSE

Stock-basedcompensationexpenseistheamortizationoverthevestingperiodofthefairvalueofstockoptionsgrantedtoemployees,directorsandkeyconsultantsoftheCompany.ThefairvalueofalloptionsgrantedisestimatedusingtheBlack-Scholesoptionpricingmodel.Thenon-cashcompensationexpenseforthethreemonthsandtwelvemonthsendedMarch31,2009,was$0.2millionand$1.2millioncomparedto$1.5millionand$2.7millioninthecomparativeperiodsintheprioryear.Thedecreaseinstockbasedcompensationexpenseisprimarilyduetoaloweraverageoptionpriceresultingfromloweraveragemarketpricesatthetimeofgrantandadecreaseintheamountofoptionsgrantedduringtheyear.

Canorobelievesthatprovidingemployeeswithstockoptionseffectivelyalignstheemployees’goalswiththeshareholdersandhelpsretainkeyemployees.DuringtheyeartheCompanyre-priced1.6millionstockoptionsheldbyemployeesrepresentingapproximately15percentofthetotaloptionsoutstanding.TheCompanydidnotre-priceanystockoptionsheldbyOfficersorDirectorsoftheCompany.

SURENDRA SINGH - NOIDA SWEETY TAMULY - JORHAT TOM LOCH - CALGARY UTPAL BORA - JORHAT UZZAL GOGOI - JORHAT VIJAY PAL KANOJIA - NOIDA


nEt LOSS

ForthethreeandtwelvemonthsendedMarch31,2009,Canororecordedanetlossof$2.7millionand$6.3millioncomparedtoanetlossof$1.0millionand$7.1millioninthecomparativeperiodsintheprioryear.Earningsforthethreeandtwelvemonthsendedwereadverselyaffectedbynon-cashitemssuchasdepletion,depreciation,accretion,unrealizedforeignexchange,unrealizedinvestmentlossandstock-basedcompensation.

LIquIdIty and caPItaL RESOuRcES

share capital

AtMarch31,2009,theCompanyhad113,708,941commonsharesoutstanding(March31,2008–112,992,273).ThecommonsharesofCanorotradeontheTSXVentureExchangeunderthesymbolCNS.ThefollowingtablesummarizesoutstandingsharedataforthethreeandtwelvemonthsendedMarch31,2009.

Three months ended Twelve months ended

March 31, 2009 March 31, 2009

Weightedaveragesharesoutstanding

Basic 113,708,941 113,565,580

Options(1) – –

Diluted 113,708,941 113,565,580

TradingStatistics

High 0.36 1.64

Low 0.07 0.07

Averagedailyvolume 511,729 315,113

(1) Anti-dilutive incremental options are excluded from the weighted average diluted shares outstanding.

AtJuly27,2009,theCompanyhad113,708,941sharesoutstandingand10,262,000optionsoutstanding.

capital resources

AtMarch31,2009,theCompanyhad$7.0millionofnetworkingcapital,includingcashandcashequivalentsof$5.5millionandnodebt.

Asaresultofthecurrentglobalfinancialcrisis,theavailabilityofbothequityanddebthastightenedsignificantly.ManagementanticipatestheCompanywillhaveadequateliquidityandcapitalresourcestofunditscapitalexpendituresthroughacombinationofcashflowfromoperationsandcashonhand.Intheeventthatdebtandequitymarketscontinuetobedifficultorathereisaprolongeddownturnincommodityprices, theCompanywouldconsiderstrategicalternatives includingbutnot limitedtoastrategicmerger,dispositionofassets,orreductionincapitalprogram.FailuretoobtainsuchfinancingonatimelybasiscouldcausetheCompanytoforfeititsinterestincertainpropertiesandreduceorterminateoperations.

contractual obligations, commitments and contingencies

Pursuanttocurrentproductionsharingcontracts(“PSC’s”)theCompanyisrequiredtoperformminimumexplorationactivitiesthatincludeacquisitionsandprocessingofseismicdataanddrillingofexplorationwells.TheCompanyplanstofundthesecostswithexistingcashbalancesandcashflowfromoperations.Theseobligationshavenotbeenprovidedforinthefinancialstatements.

TheCompanyhasofficeleasecommitmentsinNoidaandJorhatinIndiaandCalgary,Canada.

Thefollowingaretheanticipatedpaymentsunderthecontracts:

PSCs Office leases Total

2009 $2,746 $656 $3,402

2010 6,300 556 6,856

2011 3,394 247 3,641

2012 2,100 164 2,264

Total $14,540 $1,623 $16,163

OnSeptember20,2007theCompanyenteredintoanagreementwithaprivatefundbasedinJersey,ChannelIslands,wherebythefundprovidedlimited-recoursefundingof$10.0millionforappraisalanddevelopmentdrillingintheCompany’sAmguriFieldinAssam,India.Thefundshavebeenexpended.


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Thefunddoesnothaveaparticipatinginterestinthefield,norisitresponsibleforfuturecapitalcosts.ThefundonlyreceivespaymentsbasedontheCompany’s60percentshareofgrossrevenuefromtheAmguriFieldrangingfromsevenpercentbeforerecoveryoftheoriginal$10.0millionand3.5percentthereafter.TheagreementprovidesthattheCompanyshallhaveaterminationoptionbetweenSeptember20,2010, the third anniversaryof the agreement, andDecember31,2012 tobuyback the fund’s entitlement for$15.0millionbeforerecovery,orfor$12.8millionafterrecoveryofthefund’sinitial$10.0million.IfthisterminationoptionisexercisedbytheCompany,thefundwillbegranted,subjecttoTSXapproval,5.0millionwarrantstoacquire5.0millioncommonsharesoftheCompany,exercisablewithinninemonthsfromthedateofissueatanexercisepriceofCdn$2.00percommonshare.IftheCompanydeclinestoexercisetheterminationoptionwithinthestatedtimeperiod,thefundwillretainitsrevenueentitlementtotheAmgurifield.

SubSEquEnt EvEntS

OnJune1,2009,HighArticEnergyServicesL.P.(HAES)filedastatementofclaimintheCourtofQueen’sBenchofAlbertaagainsttheCompanyfortheamountof$1.3millionrelatingtoinvoicessubmittedtotheCompany.OnJune30,2009theCompanyfiledadefencetotheHAESclaimaswellasacounterclaimfordamagesof$5million,anOrder foranaccountingofthecostsandexpensesinvoicedtotheCompanybyHAES,pre-judgmentinterestandcosts.OnJuly22,2009HAESfiledadefencetotheCompany’scounterclaim.Aslegalproceedingshaveonlyrecentlybeencommenced,andasnoexaminationsfordiscoveryhaveyettakenplace,thelikelihoodofsuccessoftheclaimorcounterclaimisnotyetdeterminable.

On July24,2009,Canoroannounced it entered intoanagreementwith, aprivate fund(“Fund”)based in Jersey,Channel Islands,wherebytheFundwillprovidelimited-recoursefundingofUS$4millionforthepurchaseandinstallationofthegascompressionunitsaspartofdevelopmentoperationsintheAmguriFieldinAssam,India.TheFundwillnotearnaparticipatinginterestinthefield,norwillitberesponsibleforfuturecapitalcosts.TheFundwillonlybeentitledtoreceiverepaymentsbasedonCanoro’s60%shareofgrossrevenuefromtheAmguriFieldrangingfrom8%beforerecoveryoftheoriginalUS$4million,decliningto4%thereafter.

TheagreementalsoprovidesthatCanoroshallhavetheoptionbetweenJuly2012andDecember31,2012aftertheFund’srecoveryofitsinitialinvestment,tobuybacktheFund’sentitlementforUS$5.1million.IfsuchoptionisexercisedbyCanoro,theFundwillbegranted,subjecttoTSXVentureapproval,warrantstosubscribefortwomillioncommonsharesoftheCompany,exercisablewithinsixmonthsfromthedateofissueatasubscriptionpriceofCDN$0.20pershare.

SuMMARy oF QuARteRly ReSultS

($ thousands, except per share amounts)

2009 2008

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Petroleumand naturalgassales 1,386 1,500 4,012 4,201 1,715 1,091 1,253 748

Cashflowfrom/(used)inoperatingactivities 1,405 (2,422) 4,406 (1,700) (3,220) (3,327) 276 77

NetLoss (2,663) (2,678) (582) (381) (755) (1,974) (1,438) (2,921)

Pershare– basicanddiluted (0.02) (0.02) (0.01) – (0.01) (0.02) (0.02) (0.03)

Capitalexpenditures 3,829 11,685 7,898 6,588 5,445 3,253 138 4,871

Totalboe/day 645 651 923 904 390 287 295 267

TotalAssets 88,786 92,842 90,604 91,704 90,364 90,098 67,732 59,974

Thefluctuationsinpetroleumandnaturalgassalesoverthepasteightquartersisduetothevolatilityinoilpricesandincreasedproductionvolumesinfiscal2009overfiscal2008.TheCompanyhasreportedalossoverthepasteightquartersprimarilyduetonon-cashchargessuchasdepletionandstock-basedcompensation.Duringthe fourthquarterof2009, theCompany’scapitalexpendituresdecreasedsignificantlyasaresultofbothdrillingrigsbeingreleasedattheendofDecember2008.Thedecreaseinproductionvolumesoverthepasttwoquartersisduetodecreasedseasonaldemandintheregionandprudentreservoirmanagement.Totalassetshaveremainedrelativelyflatsincethethirdquarterof2008.Thelargeincreaseintotalassetsinthethirdquarterof2008isduetothefinancingthatclosedinDecember2007.


RISk and uncERtaIntIES

financial resources

TheCompany’scashflowfromoperationsmaynotbesufficienttofunditsongoingactivitiesandimplementitsbusinessplans.FromtimetotimetheCompanymayenter intotransactionstoacquireassetsorthesharesofothercompanies.Dependingonthefutureexplorationanddevelopmentplans,theCompanymayrequireadditionalfinancing,whichmaynotbeavailableor,ifavailable,maynotbeavailableonfavorableterms.FailuretoobtainsuchfinancingonatimelybasiscouldcausetheCompanytoforfeititsinterestincertainproperties,misscertainacquisitionopportunitiesandreduceor terminateoperations. If the revenues fromtheCompany’s reservesdecreaseasaresultofloweroilandnaturalgaspricesorotherwise,itwilleffectitsabilitytoexpendthenecessarycapitaltoreplaceitsreservesortomaintain itsproduction.Ifcashflowfromoperationsarenotsufficienttosatisfycapitalexpenditurerequirements,therecanbenoassurancethatadditionaldebt,equity,orassetdispositionswillbeavailabletomeettheserequirementsoravailableonacceptableterms.Inaddition,cashflowisinfluencedbyfactorswhichtheCompanycannotcontrol,suchascommodityprices,exchangerates,interestratesandchangestoexistinggovernmentregulationsandtaxpolicies.

exploration and development

Theexplorationanddevelopmentofoilandgasdepositsinvolveanumberofuncertaintiesthateventhoroughevaluation,experienceandknowledgeoftheindustrycannoteliminate.ItisimpossibletoguaranteethattheexplorationprogramsoftheCompany’spropertieswillgenerateeconomicallyrecoverablereserves.Thecommercialviabilityofanewhydrocarbonpoolisdependentuponanumberoffactorsthatareinherenttoreserves,suchasthecontentandtheproximityofinfrastructure,aswellasoilandgasprices,whicharesubjecttoconsiderablevolatility,regulatoryissuessuchaspriceregulation,taxes,royalties,importandexportofoilandgasandenvironmentalprotectionissues.Theindividualimpactgeneratedbythesefactorscannotbepredictedwithanycertainty,butoncecombined,mayresultinnon-economicreserves.TheCompanyremainssubjecttonormalrisksinherenttotheoilandgasindustrysuchasunusualandunexpectedgeologicalchangesintheparametersandvariablesofthepetroleumsystemandoperations.

operating hazards and risks

Explorationfornaturalresourcesinvolvesmanyrisks,whichevenacombinationofexperience,knowledgeandcarefulevaluationmaynotbeabletoovercome.OperationsinwhichtheCompanyhasadirectorindirectinterestwillbesubjecttoallthehazardsandrisksnormallyincidentaltoexploration,developmentandproductionofresources,anyofwhichcouldresultinworkstoppages,damagestopersonsorpropertyandpossibleenvironmentaldamage.

AlthoughtheCompanyhasobtainedliabilityinsuranceinanamountitconsidersadequate,thenatureoftheserisksissuchthatliabilitiesmightexceedpolicylimits,theliabilitiesandhazardsmightnotbeinsurable,ortheCompanymightnotelecttoinsureitselfagainstsuchliabilitiesduetohighpremiumcostsorotherreasons,inwhicheventtheCompanycouldincursignificantcoststhatcouldhaveamaterialadverseeffectuponitsfinancialcondition.

reserve estimates

DespitethefactthattheCompanyhasreviewedtheestimatedfiguresrelatedtopotentialreserveevaluationandprobabilitiesattachedtheretoandisoftheopinionthatthemethodsusedtoappraisetheseestimatesareadequate,thesefiguresremainestimates,eventhoughtheyhavebeencalculatedorvalidatedbyindependentappraisers.ThereservesdisclosedbytheCompanyshouldnotbeinterpretedasassurancesofpropertylifeortheprofitabilityofcurrentorfutureoperationsgiventhattherearenumerousuncertaintiesinherentintheestimationofeconomicallyrecoverableoilandgasreserves.

fluctuating prices

Revenuesfromoilandgassalesvaryaccordinglytotheexistenceofcostrecoverypoolbalances.TheCompany’srevenues,ifany,areexpectedtobeinlargepartderivedfromtheextractionandsaleofoilandgas.Thepriceofoilhasfluctuatedwidely,particularlyinrecentyears,andisaffectedbynumerousfactorsbeyondtheCompany’scontrol,includinginternationaleconomicandpoliticaltrends,expectationsofinflation,war,currencyexchangefluctuations,interestrates,globalorregionalconsumptivepatterns,speculativeactivitiesandincreasedproductionduetonewextractiondevelopmentsandimprovedextractionandproductionmethods.Theeffectofthesefactorsonthepriceofoil,andthereforetheeconomicviabilityofanyoftheCompany’sexplorationprojects,cannotbeaccuratelypredicted.


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environmental factors

AllphasesoftheCompany’soperationsaresubjecttoenvironmentalregulationinIndia.Environmentallegislationisevolvinginamannerwhich requires stricter standards and enforcement, increased fines, and penalties for non-compliance, more stringent environmentalassessmentsofproposedprojectsandaheighteneddegreeofresponsibilityforcompaniesandtheirofficers,directorsandemployees.Thecurrent exploration,development andproductionactivitiesof theCompany require certainpermits and licenses from theDirectorateGeneralHydrocarbonsandothergovernmentalagenciesandsuchoperationsare,andwillbe,governedbylawsandregulationsgoverningexploration,developmentandproduction,laborlaws,wastedisposal,landuse,safety,andothermatters.TherecanbenoassurancethatalllicensesandpermitsthattheCompanymayrequiretocarryoutexplorationanddevelopmentofitsprojectswillbeobtainableonreasonabletermsoronatimelybasis,orthatsuchlawsandregulationwouldnothaveanadverseeffectonanyprojectthattheCompanymayundertake.

political risk

TheCompany’s projects are located inNortheast India and consequently theCompany is subject to certain risks, including currencyfluctuationsandpossiblepolitical,economicciviland/orlabourunrestwhichmayresultinthedisruptionofexplorationanddevelopmentactivities.ThestatesofAssam,NagalandandArunachalPradesharehometostrongindependencemovements.Overthepastseveralyears,varyingdegreesofsocialupheavalandcriminalactivityhasoccurredintheregionsrelatedtotheseindependencemovements.WhilethesituationispresentlystableintheareasinwhichtheCompanyoperatesandtheCompanybelievesthatithasgoodrelationshipsintheseareas,therecanbenoguaranteethattheCompanywillnotbeaffectedinthefuture.Additionally,thecontinuedperceptionthatthesituationhasnotstabilizedorimprovedmayhindertheCompany’sabilitytoaccesscapitalinatimelyorcosteffectivemanner.

retention of Key employees

TheCompany isdependenton retaining the servicesof a small numberof keypersonnelof the appropriate caliber as its businessdevelops.ThesuccessoftheCompanyis,andwillcontinuetobetoasignificantextent,dependentontheexpertiseandexperienceofthedirectorsandseniormanagementandthelossofoneormorecouldhaveamateriallyadverseeffectontheCompany.

exchange rate volatility

To the extent revenues and expenditures denominated in, or strongly linked to, theUS dollar and the IndianRupee (Rs) are notequivalent; theCompany isexposed toexchange rate risk. In India, theCompany isexposed to theextent thatUSdollar revenuesfor crudeoil salesdonot equalUSdollar expenditures and thatRs revenues fromnatural gas salesdonot equalRs expenditures. TheCompanyisnotcurrentlyusingexchangeratederivativestomanageexchangeraterisk.

repatriation of earnings

CurrentlytherearenorestrictionsontherepatriationfromIndiaofearningstoforeignentities.However,therecanbenoassurancethoserestrictionsonrepatriationofearningsfromIndiawillnotbeimposedinthefuture.

disruptions in production

Other factorsaffectingtheproductionandsaleofoilandgasthatcouldresult indecreases inprofitability include:(i)expirationorterminationofpermitsor licenses,or salesprice redeterminationsor suspensionofdeliveries; (ii) future litigation; (iii) the timingandamountofinsurancerecoveries;(iv)workstoppagesorotherlabordifficulties;(v)changesinthemarketandgeneraleconomicconditions,monsoonconditions,equipmentreplacementorrepair,fires,civilunrestorotherunexpectedgeologicalconditionsthatcanhaveasignificantimpactonoperatingresults.

financial risk management

TheCompanyisexposedtofinancialrisksduetothenatureofitsbusinessandthefinancialassetsandliabilitiesitholds.Thefollowingdiscussionreviewsmaterialfinancialrisks,quantifiestheassociatedexposures,andexplainshowtheserisks,andtheCompany’scapital,aremanaged.AdditionalinformationinrespectoftheCompany’srisksmaybefoundintheAnnualInformationForm.

a) Market Risk

ChangesincommoditypricesandforeigncurrencyexchangeratescanhaveanimpactontheCompany’searningsandvalueoffinancialassetsandliabilities.

Commodity price risk – Commoditypriceriskistheriskthatthefairvalueorfuturecashflowswillfluctuateasaresultofchangesincommodityprices.TheCompanyisexposedtocommoditypriceriskduetothenatureofitsbusiness.Oilandnaturalgaspricesare impactedbyglobalsupplyanddemand,aswellaspoliticalandotherforces.Forthemajorityofnaturalgasproduction,theCompanyreceivesafixedpriceof3,840rupees(Rs)per1000m3,approximately$2.73mcf.TheCompanyalsohasacontractforthelifeofproductionsharingcontracttosell12,000m3/d(approximately340mcfperday)at2,304Rsper1000m³,(approxi-mately$1.64permcf).TheCompanyispaidinrupeesandissubjecttoforeignexchangefluctuationsontheaveragepricereceivedonchangesbetweentherupeeandUS$.AlthoughtheCompanyisnotdirectlyimpactedbyfluctuationsinnaturalgaspricesdue


tothenatureoftheircontracts,aspricesaroundtheworldincreasefornaturalgasthereiscontinuedmarketpressurestoincreasetheprice received fornaturalgas in Indiawhichwouldbenefit theCompany.TheCompanyreceivesworldoilprices for itsoilproductionandissubjecttopricefluctuations.Thepricereceivedforcrudeoilisveryvolatileandcanundergosignificantchangesinrelativelyshorttimeperiods.Thehighestmonthlyaveragepriceduringtheyearwas$137.96inthemonthofJulycomparedtolowestmonthlyaverageofpricereceivedof$44.37inthemonthofDecember.AsatMarch31,2009theCompanydidnothaveanyderivativecommoditypricecontractsinplacehowever,inthefuture,theCompanymayenterintosuchcontractsinordertomanageitscommoditypricerisk.BasedonactualsalesvolumesrecordedfortheyearendedMarch31,2009,aUS$1.00perbarrelincrease(decrease) inoilpriceswouldhave increased(decreased)net earningsby$0.1million.As theCompanycontinues to increaseproduction,earningswillbecomemoreimpactedbycommodityprices,primarilyoil.

Foreign currency exchange rate risk – Foreignexchangerateriskistheriskthatthefairvalueoffuturecashflowswillfluctuateasaresultofchangesinforeignexchangerates.ThereportingcurrencyoftheCompanyisUnitedStatesdollars.SubstantiallyalloftheCompany’soperationsareinforeignjurisdictionsandasaresult,theCompanyisexposedtoforeigncurrencyexchangerateriskonsomeofitsactivitiesprimarilyonexchangefluctuationsbetweentherupeeandtheUS$.OilrevenuesaredenominatedinUS$,whilenaturalgasrevenuesaredenominatedinIndianrupees.Operatingandcapitalexpendituresareincurredinvariouscurrencies,including,USdollars,IndianrupeesandCanadiandollars.ThemajorityofcapitalexpendituresareincurredinUS$andoilrevenuesarereceivedinUS$thereforetheCompany’sexposuretoforeignexchange isminimal.TheCompanymayenter intoderivativeforeigncurrencycontractsinordertomanageforeigncurrencyexchangeraterisk,buthasnotdonesotodate.

ThetablebelowshowstheCompany’sexposuretoforeigncurrenciesforitsfinancialinstruments:

ASATMARCH31,2009

Total US$ Rs CAD

per FS (1) US$ Equivalent

Cashandcashequivalents 5,456 5,314 142 –

Accountsreceivable 10,400 9,903 485 12

Accountspayable (9,789) (9,430) (174) (185)

Balancesheetexposure 6,067 5,787 453 (173)(1) denotes Financial statements

TheCompanybelievesathreepercentchangeintheUS$againsttheseforeigncurrencieswouldbereasonablypossiblewithinthenextthreemonthreportingperiod.AthreepercentstrengtheningoftheUS$wouldresultinachangeinearningsasfollows(anequalbutoppositeimpacttoearningswouldresultiftheUS$weakenedbythreepercent):

ASATMARCH31,2009

Rs CAD

US$ Equivalent

Decreaseinearnings 14 (5)

b) Credit Risk

Creditriskistheriskofafinancial losstotheCompanyifacustomerorcounterpartytoafinancial instrumentfailstomeetitscontractualobligationandarisesprincipallyfromjointventurepartnersandnaturalgasandoilmarketers.TheCompanyisexposedtocreditriskinrespecttoitscashandcashequivalentsandaccountsreceivables.CashandcashequivalentsareheldinoperatingaccountswithhighlyratedCanadianbanksandthereforetheCompanyconsiderstheseassetstohavenegligiblecreditrisk.VirtuallyalloftheCompany’saccountsreceivablearefromcounterparties intheoilandgas industryandaresubjecttonormal industrycreditrisks.TheCompany’sproductionbaseisentirelyintheAssamstateinNorthEastIndia.ForboththeAmguriandAAON/7productionsharingcontracts,theCompanyhasthesamejointpartnerforbothcontractstherebysignificantlyconcentratingtheexposuretocreditriskfortheCompany.TheCompanybelievescreditriskfromitsjointventurepartnerismitigatedbythedefaultprovisionswithintheproductionsharingcontracts.Thedefaultprovisionsareverypunitivetothepartyindefaultandcanincludeadditionalworkinginterestrevertingtotheoperatorifcertainconditionsarenotmetbythedefaultingparty.RevenuereceivablesarefrombothgovernmentagenciesinIndiaandlargeinternationaloilandgascompanies.ThecarryingamountofcashandcashequivalentsandaccountsreceivablerepresentstheCompany’smaximumcreditexposure.

AsatMarch31,2009,theCompany’saccountsreceivableisagedasfollows:

Current(lessthan90days) $ 8,793

Pastdue(morethan90days) 1,607

Total $ 10,400


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c) Liquidity Risk

TheCompanymanagesitsriskofnotmeetingitsfinancialobligationsthroughmanagementofitscapitalstructure,annualbudgetingofitsrevenues,expendituresandcashflows.Onamonthlybasis,internalreportingofactualresultsiscomparedtothebudgetinordertomodifybudgetassumptions, ifnecessary,toensureliquidityismaintained.TheCompanybelievesithasadequatecashflowsandcashonhandtodischargeitsfinancialobligations.IntheeventthattheCompany’sreceivablesarenotcollectedfromitsjointventurepartner,theCompanymayberequiredtoseekotheralternativesoffinancingwhichmaybeunavailableonreasonabletermsorcurtailcapitalexpenditurestosatisfyoutstandingobligations.

d) Capital Management

TheCompanydefinesitscapitalasshareholder’sequity.TheCompany’sobjectiveistomaintainastrongcapitalpositioninordertoexecute itsbusinessplanandmaximizevalue toshareholders.Availabilityofcapital iscritical for futuresuccessandassuch,theCompanystrives tomaintainstrongrelationshipswith thecapital investmentcommunity.Methodsemployedtoadjust theCompany’scapitalstructurecouldincludeany,all,oracombinationofthefollowingactivities:

• Repurchasesharespursuanttoanormalcourseissuerbid;

• Issuenewsharesthroughapublicofferingorprivateplacement;

• Issueequitylinkedorconvertibledebt;

• Raisefixedorfloatingratedebt.

TheCompanyisnotsubjecttoanyexternallyimposedcapitalrequirements.

cRItIcaL accOuntInG POLIcIES / cRItIcaL accOuntInG EStImatES

Canoro’s financial statements have been prepared in accordance with Canadian general accepted accounting principles. Certainaccountingpoliciesrequiremanagementtomakedecisionswithrespecttotheformulationofestimatesandassumptionsthataffectthereportedamountsofassets,liabilities,revenuesandexpenses.Canoro’smanagementreviewstheirestimatesfrequently;however,theemergenceofnewinformationandchangedcircumstancesmayresultinactualresultsorchangestoestimatedamountsthatdiffermaterially fromcurrentestimates.Canoroattempts tomitigate this riskbyemploying individualswith theappropriate skill setandknowledgetomakereasonableestimates;developinginternalreportingsystems;andcomparingpastestimatestoactualresults.

petroleum and natural gas reserves

AllofCanoro’spetroleumandnaturalgasreservesareevaluatedandreportedonbyindependentpetroleumengineeringconsultantsinaccordancewithCanadianSecuritiesAdministrators’NationalInstrument51-101.Theevaluationofreservesisasubjectiveprocess.Forecastsarebasedonengineeringdata,projectedfutureratesofproduction,commoditypricesandthetimingoffutureexpenditures,allofwhicharesubjecttonumerousuncertaintiesandvariousinterpretations.TheCompanyexpectsthatitsestimatesofreserveswillchangetoreflectupdatedinformation.Reserveestimatescanberevisedupwardordownwardbasedontheresultsoffuturedrilling,testing,productionlevelsandchangesincostsandcommodityprices.

depletion expense

TheCompanyusesthefullcostmethodofaccountingforexplorationanddevelopmentactivitieswherebyallcostsassociatedwiththeseactivitiesarecapitalized,whethersuccessfulornot.Theaggregateofcapitalizedcosts,netofcertaincostsrelatedtounprovedproperties,andestimatedfuturedevelopmentcapitalisamortizedusingtheunit-of-productionmethodbasedonestimatedprovedreserves.Changesinestimatedprovedreservesorfuturedevelopmentcapitalhaveadirectimpactondepletionexpense.

Certaincostsrelatedtounprovedpropertiesandmajordevelopmentprojectsmaybeexcludedfromcostssubjecttodepletionuntilprovedreserveshavebeendeterminedortheirvalueisimpaired.Thesepropertiesarereviewedquarterlytodetermineifprovedreservesshouldbeassigned,atwhichpointtheywouldbeincludedinthedepletioncalculation,orforimpairment,forwhichanywrite-downwouldbechargedtodepletionanddepreciationexpense.

full cost accounting ceiling test

Thecarryingvalueofproperty,plantandequipmentisreviewedatleastannuallyforimpairment.Impairmentoccurswhenthecarryingvalueoftheassetsisnotrecoverablebythefutureundiscountedcashflows.Thecostrecoveryceilingtestisbasedonestimatesofprovedreserves,productionrates,petroleumandnaturalgasprices,futurecostsandotherrelevantassumptions.Bytheirnature,theseestimatesaresubjecttomeasurementuncertaintyandtheimpactonthefinancialstatementscouldbematerial.Anyimpairmentwouldbechargedasadditionaldepletionexpense.

asset retirement obligations

Theassetretirementobligationisestimatedbasedonexistinglaws,contractsorotherpolicies.Thefairvalueoftheobligationisbasedonestimatedfuturecostsforabandonmentsandreclamationsdiscountedatacreditadjustedriskfreerate.Theliabilityisadjustedeachreportingperiodtoreflectthepassageoftime,withtheaccretionchargedtoearningsandforrevisionstotheestimatedfuturecashflows.Bytheirnature,theseestimatesaresubjecttomeasurementuncertaintyandtheimpactonthefinancialstatementscouldbematerial.


Income Taxes

The determination of the Company’s income and other tax assets or liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions including Canada and India. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax asset or liability may differ significantly from that estimated and recorded.

Guarantees and off-balance sheet arranGements

Canoro has not entered into any off-balance sheet arrangements except for certain lease agreements entered into in the normal course of operations. All leases are operating leases with lease payments charged to operating expenses or general and administrative expenses according to the nature of the lease.

recent accountinG Pronouncements

The following accounting pronouncements have been issued by the Canadian Accounting Standards Board, but were not in effect at the date of the current financial statements. These pronouncements may have an impact on the Company’s future financial reporting.

Goodwill and Intangible Assets

Effective April 1, 2009, the Company will be required to adopt this standard, which replaces GAAP sections 3062 and 3450 and provides guidance relating to the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The Company is currently assessing the impact of this standard.

Convergence of Canadian GAAP with International Financial Reporting Standards (“IFRS”)

In February of 2008, the Canadian Accounting Standards Board confirmed January 1, 2011 as the effective date for the requirement to report under International Financial Reporting Standards (“IFRS”) with comparative 2010 periods converted as well. The Company has developed a high level changeover plan to assess in detail all aspects of the changeover to IFRS, including appropriate changes to accounting policies and financial disclosures, effects on information systems and processes, changes to internal controls over financial reporting and business activities, in order to complete the transition to IFRS by April 1, 2011. The project will be managed by an in-house team of accounting profes-sionals who have attended and will continue to attend training session’s specific to IFRS adoption. The Corporations auditors will be involved throughout the process to access whether the Corporations policies are in accordance with these new standards. Canoro will update its IFRS changeover plan to reflect new and amended accounting standards issued by the International Accounting Standards Board. As IFRS is expected to change prior to 2011, the effect on the Company’s consolidated financial statements is not reasonably determinable at this time.

2009/10 OutlookStrategy

Canoro is engaged in the acquisition, development and exploration for, and production and marketing of petroleum and natural gas in India. Presently, the Company holds two properties or Production Sharing Contracts (PSC) in the States of Assam and Arunachal Pradesh, India.

The Company strives to create shareholder value through the acquisition, exploration and development of prospective oil and gas areas in India and elsewhere. The Company has achieved competitive advantages in India by focusing on relationships, experience, technology and good international oilfield practices. While the competition for attractive development properties is intense, the Company believes that this strategy is viable and offers an attractive risk-reward ratio for shareholders. The Company focuses on areas where the management has long-standing experience and above-average relationships.

2009/10 Capital Spending

The Company is forecasting capital expenditures of approximately of approximately $9.0 to $11.0 million over the next 12-18 months primarily on the gas compression project.

2009/10 Production Guidance

For fiscal 2010, the Company is forecasting average production of 700 boe/d to 900 boe/d and an exit rate of in excess of 1,000 boe/d. The exit production is not significantly higher than the average production for fiscal 2010, however, the commissioning of the compression project is projected to change the production mix of the Company from approximately 70 percent natural gas and 30 percent condensate to greater than 60 percent condensate by year end. The impact on cash flow from operations will be significant as the Company received approximately $13.07 per boe for natural gas production and $95.76 per bbl for oil during the year.

sedar filinGs

Additional information about Canoro is available on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com and at the Company’s website at www.canoro.com.

Management’s Report

TheaccompanyingconsolidatedfinancialstatementsofCanoroResourcesLtd.,andallotherfinancialandoperatinginformationcontainedinthisreportaretheresponsibilityofmanagement.TheconsolidatedfinancialstatementshavebeenpreparedinaccordancewiththeaccountingpoliciesdetailedinthenotestotheconsolidatedfinancialstatementsandinaccordancewithgenerallyacceptedaccountingprinciplesinCanada.

TheCompany’ssystemsofinternalcontrolhavebeendesignedandmaintainedtoprovidereasonableassurancethatassets areproperly safeguarded and that thefinancial records are sufficientlywellmaintained toprovide relevant,timelyandreliableinformationtomanagement.

Externalauditors,appointedbytheshareholders,haveindependentlyexaminedtheconsolidatedfinancialstatementsinaccordancewithgenerallyacceptedauditingstandards inCanada.Theyhaveperformedsuchtestsas theyhavedeemednecessarytoenablethemtoexpressanopinionontheseconsolidatedfinancialstatements.

AnAuditCommitteeoftheBoardofDirectorshasreviewedtheseconsolidatedfinancialstatementswithmanagementandtheexternalauditors.TheBoardofDirectorshasapprovedtheconsolidatedfinancialstatementsontherecom-mendationoftheAuditCommittee.

Les Kondratoff S. Brian Gieni

PresidentandChiefExecutiveOfficer SeniorVicePresident,ChiefFinancialOfficer andCountryManager

July27,2009


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Auditors’ Report

Wehave audited the consolidated balance sheets ofCanoroResources Ltd., as atMarch 31, 2009 and 2008 and the consolidatedstatementsofoperations anddeficit, comprehensive income, andcashflows for theyears thenended.These consolidatedfinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressandopinionontheseconsolidatedfinancialstatementbasedonouraudit.

WeconductedourauditsinaccordancewithCanadiangenerallyacceptedauditingstandards.Thosestandardsrequirethatweplanandperformanaudittoobtainreasonableassurancewhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingthe accountingprinciplesused and significant estimatesmadebymanagement, aswell as evaluating theoverall financial statementpresentation.

Inouropinion,theseconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionoftheCompanyasatMarch31,2009and2008andtheresultsofitsoperationsanditscashflowsfortheyearsthenendedinaccordancewithCanadiangenerallyacceptedaccountingprinciples.

KPMGLLPCharteredAccountants

July27,2009


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FOR THE YEARS ENDED MARCH 31, 2009 AND 2008

Consolidated Balance Sheets

ASATMARCH31 2009 2008

(Thousands of United States dollars)

ASSETS

Currentassets

Cashandcashequivalents 5,456 23,993

Restrictedcash(Note 8) – 9,741

Investment 28 80

Accountsreceivable 10,400 8,323

Inventory 113 401

Prepaidexpensesanddeposits 781 767

16,778 43,305

Property,plantandequipment(Note 4) 72,008 47,059

TotalAssets 88,786 90,364

LIABILITIES AnD SHAREHOLDER S’ EquIT y

Currentliabilities

Accountspayableandaccruedliabilities 9,789 7,760

Assetretirementobligations (Note 5) 859 513

Shareholders’equity

Commonshares(Note 7) 86,883 85,597

Contributedsurplus(Note 7) 14,051 12,986

Accumulatedothercomprehensiveincome 8,332 8,332

Deficit (31,128) (24,824)

78,138 82,091

TotalLiabilitiesandShareholders’Equity 88,786 90,364

Future operations (Note 1)

Entitlement fund (Note 6)

Contingent liabilities (Note 11)

Contractual obligations and commitments (Note 12)

Subsequent events (Note 14)

See accompanying notes to the consolidated financial statements.

ApprovedbytheBoard:

DouglasR.Martin RobertS.Wynne Director Director

Consolidated Statements of Operations and Deficit

YEARSENDEDMARCH31 2009 2008


Revenues

Petroleumandnaturalgassales 11,099 4,817

Royalties (1,142) (363)

Investmentgain – 26

Interestincomeandother 247 870

10,204 5,350

Expenses

Operating 1,531 756

Generalandadministrative 6,929 4,917

Stock-basedcompensation 1,247 2,668

Foreignexchangeloss 899 123

Unrealizedinvestmentloss 52 383

Depletion,depreciationandaccretion 5,850 3,591

16,508 12,438

Netloss (6,304) (7,088)

Deficit,beginningofperiod (24,824) (17,736)

Deficit,endofperiod (31,128) (24,824)

Basicanddilutedlosspershare(Note 7) (0.06) (0.06)

Consolidated Statements of Comprehensive income (Thousands of United States dollars)


Netloss (6,304) (7,088)

Othercomprehensiveincome:

Foreignexchangeadjustmentonchangeinreportingcurrency – 12,283

Comprehensiveincome/(loss) (6,304) 5,195




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OPER ATInG ACTIvITIES

Netloss (6,304) (7,088)

Noncashitems

Depletion,depreciationandaccretion 5,850 3,591

Unrealizedforeignexchange(gain)/loss 1,124 (847)

Unrealizedinvestmentloss 52 383

Gainonsaleofinvestment – (26)

Stock-basedcompensation 1,247 2,668

Netchangeinnon-cashworkingcapital (280) (4,876)

1,689 (6,195)

FInAnCInG ACTIvITIES

Issuanceofcommonshares,netofcosts 689 31,684

689 31,684

InvESTInG ACTIvITIES

Additionstoproperty,plantandequipment(net) (30,000) (13,708)

Proceedsonsaleofinvestments – 708

Restrictedcash 9,741 (3,365)

Changeinnon-cashworkingcapital (1,556) 280

(21,815) (16,085)

Neteffectofforeignexchangeoncashdenominatedinforeigncurrencies 900 1,577

net change in cash and cash equivalents (18,537) 10,981

Cashandcashequivalents,beginningofperiod 23,993 13,012

Cash and cash equivalents, end of period 5,456 23,993

Cash flow supplemental information:

Interestreceived 222 881



Notes to Consolidated Financial StatementsFORTHEYEARSENDEDMARCH31,2009AND2008

(All tabular amounts are expressed in thousands of United States dollars, except per share amounts or otherwise noted)

1. FutuRE OPERatIOnS

Thesefinancial statementshavebeenpreparedbymanagementon thebasisof accountingprinciples applicable to a goingconcern,whichassumes that theCompanywill continue inoperation for the foreseeable futureandwillbeable to realizeitsassetsanddischargeitsobligationsinthenormalcourseofoperations.AsatMarch31,2009,theCompanyhadworkingcapitalof$7.0millionandhadincurredanetlossof$6.3millionandgenerated$1.7millionofcashfromoperatingactivitiesfortheyearendedMarch31,2009.SeeNote12fordetailsoncontractualobligationsandcommitmentsoftheCompany.TheapplicationofthegoingconcernconceptisdependentupontheCompany’sabilitytogeneratefutureprofitableoperations.ManagementregularlymonitorsfundingrequirementsalongwiththeCompany’sassetportfolio,operationalactivities,andmarketconditionstoensuretheyareappropriatelybalancedbyeitherrevisingtheCompany’sfinancingplans,makingchangestooperationalactivities, realizingassetsor raisingcapitalas required.Suchchangesmaypossibly include the realizationofassetsorsettlingofliabilitiesotherthaninthenormalcourseofbusinessatamountsthatmaybedifferenttothosestatedinthefinancialstatements.Managementbelievesthegoingconcernassumptiontobeappropriateforthesefinancialstatements.Ifthegoingconcernassumptionisnotappropriate,adjustmentsmightbenecessarytothecarryingvaluesofassetsandliabilities,reportedrevenuesandexpenses,andthebalancesheetclassificationsusedintheconsolidatedfinancialstatements.

2. SIGnIFIcant accOuntInG POLIcIES

(a) Basis of presentation:

Theseconsolidatedfinancialstatements includetheaccountsof theCompanyanditssubsidiaries,allofwhicharewholly–owned.Theauditedconsolidatedfinancial statementshavebeenprepared inaccordancewithCanadiangenerallyacceptedaccountingprinciples.Thepreparationof financial statements in accordancewithCanadiangenerally accepted accountingprinciplesrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenueandexpensesduringthereportingperiod. Actualresultsmaydifferfromtheseestimates.Certainofthecomparativeamountshavebeenreclassifiedtoconformtocurrentperiodpresentation.

(b) Petroleum and natural gas properties:

(i) Capitalizedcosts

TheCompany follows the fullcostmethodofaccounting for itspetroleumandnaturalgasproperties.Underthismethod,allcostsrelatedtotheexplorationfor,anddevelopmentof,petroleumandnaturalgasreservesarecapitalizedincostcentersonacountry–by–countrybasis.Costsincludeleaseacquisitioncosts,geologicalandgeophysicalexpenses,overheaddirectlyrelatedtoexplorationanddevelopmentactivities,andcostsofdrillingbothproductiveandnon–productivewells.Proceedsfromthesaleofpropertiesareappliedagainstcapitalizedcosts,withoutanygainorlossbeingrealized,unlesssuchsalewouldsignificantlyaltertherateofdepletionanddepreciationby20percentormore.

(ii) Depletionanddepreciation

Depletion of petroleum and natural gas properties and depreciation of production equipment is providedusingtheunit–of–productionmethodbaseduponestimatedprovenpetroleumandnaturalgasreserves,beforeroyalties,onacostcentrebasis.Thecostsofsignificantunevaluatedpropertiesandmajordevelopmentprojectsareexcludedfromcostssubjecttodepletion.Fordepletionanddepreciationpurposes,relativevolumes,beforeroyalties,ofpetroleumandnaturalgasproductionandreservesareconvertedattheenergyequivalentconversionrateofsixthousandcubicfeetofnaturalgastoonebarrelofcrudeoil.

(iii) Impairmenttests

Infollowingthefullcostmethod,animpairmentlossisrecognizedwhenthecarryingamountofthepetroleumandnaturalgaspropertiesofacostcentreisnotrecoverableandexceedsitsfairvalue.Thecarryingamountsareassessed tobeunrecoverablewhen the sumof theundiscountedcashflowsexpected from theproductionofprovedreserves,thelowerofcostandmarketvalueofunprovedpropertiesandthecostofmajordevelopment


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projects are less then the carrying amountof the cost centre. Indetermining the amountof impairment, thecarryingamountofoilandgaspropertiescapitalizedinacostcentreiscomparedtothefairvalueoftheassociatedprovedandprobablereservesandthelowerofcostandmarketvalueofanyunprovedpropertieswhicharesubjecttoaseparatetestforimpairment.Indeterminingthefairvalueoftheprovedandprobablereserves,theCompanyusescashflowsbaseduponoilandgaspricesasquotedinthefuturesmarketwhereobtainable,adjustedforqualitydifferences, transportation, foreignexchangeandother relevant factors.Thesecashflowsare thendiscountedusingarisk–freeinterestrate.Ifthecarryingvalueoftheoilandgaspropertiesisinexcessofitsfairvalue(the“ceilingtest”),theexcessischargedagainstearningsasadditionaldepletionanddepreciation.

(iv) Jointactivities

TheCompanyconductssubstantiallyallofitsoilandgasexplorationandproductionactivitiesonajointbasis.ThesefinancialstatementsreflectonlytheCompany’sproportionateinterestinsuchactivities.

(c) Asset retirement obligations

TheCompany recognizes the liabilityassociatedwith futureabandonmentandsite restorationcosts in thefinancialstatements at the time the liability is incurred, normally when the related asset is purchased or developed.Whenincurred,theliabilitywillbemeasuredatitsfairvaluewithacorrespondingincreasetoproperty,plantandequipmentand,overtime,willbeaccreteduptotheactualexpectedcashoutlaytoperformtheabandonmentandreclamation.ThisaccretiontotheliabilitywillbeexpensedthroughtheCompany’sconsolidatedstatementofoperations.Theincreasetoproperty,plantandequipment,knownasthe“assetretirementcost”,resultsinanincreasetodepletionexpenseoverthelifeoftheCompany’sprovenreserves.

(d) Office furniture and equipment

Depreciationofofficefurnitureandequipmentisbasedonestimatesofusefullivesandiscalculatedusingthedecliningbalancemethodatratesrangingfrom20percentto100percentperannum.

(e) Foreign currency translation

TheCompany translates foreign currencydenominatedmonetary assets and liabilities at the exchange rate in effectatthebalancesheetdateandnon–monetaryassetsandliabilitiesaretranslatedathistoricalexchangerates.Revenuesandexpenses are translated at transactiondate exchange rates exceptdepletionanddepreciationexpenses,which istranslatedatthesamehistoricalexchangeratesastherelatedassets.Exchangegainsorlossesareincludedinthedetermi-nationofnetincomeasforeignexchangeloss.

(f) Revenue recognition

Revenuesassociatedwiththesaleofcrudeoilandnaturalgasisrecordedwhentitlepassestothecustomer.RevenuesfromcrudeoilandnaturalgasproductionfrompropertiesfromwhichtheCompanyhasaninterestwithotherproducersisrecognizedonthebasisoftheCompany’snetworkinginterest.

(g) Inventory

Inventoriesofpetroleumproducts, comprisingof crudeoil and condensate, are valued at the lowerof cost andnetrealizablevalues.Costisdeterminedbaseduponactualoperating,transportationanddepletioncosts.

(h) Income taxes

TheCompanyfollowstheassetand liabilitymethodofaccounting for incometaxes.Under thismethod, temporarydifferencesarisingfromthedifferencebetweenthetaxbasisofanassetorliabilityanditscarryingamountonthebalancesheetareusedtocalculatefutureincometaxliabilitiesorassets.Futureincometaxliabilitiesorassetsarecalculatedusingsubstantivelyenactedtaxratesanticipatedtoapplyintheperiodsthatthetemporarydifferencesareexpectedtoreverse.Avaluationallowanceisrecordedagainstanyfutureincometaxassetsifitismorelikelythannotthattheassetswillnotberealized.

(i) Per share data

Basicpershareamountsarecomputedbydividingnetlossfromoperationsbytheweightedaveragenumberofcommonsharesoutstandingfortheperiod.Dilutedpershareamountsreflectthepotentialdilutionthatcouldoccurifsecuritiesorothercontractstoissuecommonshareswereexercisedorconvertedtocommonshares.Thetreasurystockmethodisusedtodeterminethedilutiveeffectofstockoptionsandotherdilutiveinstruments.Underthetreasurystockmethod,onlyoptionsforwhichtheexercisepriceislessthanthemarketvalueimpactthedilutioncalculations.


(j) Cash and cash equivalents

Cashandcashequivalentsarecomprisedofcash,termdepositsandotherhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlessatthetimeofpurchase.

(k) Stock–based compensation

TheCompanyusesthefairvaluemethodforvaluingstockoptionsgrantedasstock–basedcompensation.Underthefairvaluemethod,acompensationcostismeasuredatfairvalueforstockoptionsgrantedatthegrantdateandexpensedoverthevestingperiodwithacorrespondingincreasetocontributedsurplus. Upontheexerciseofthestockoptions,consider-ationpaidtogetherwiththeamountpreviouslyrecognizedascontributedsurplus,isrecordedasanincreasetosharecapital.

(l) Management estimates

The preparation of the financial statements in conformity with Canadian generally accepted accounting principlesrequiresmanagement tomake estimates and assumptions that affect the reported amounts of assets and liabilitiesandthedisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsof revenues and expenses during the reporting periods. Actual results could differ from those estimates.ThemostsignificantestimatesrelatetodeterminingthecostrecoverabilityoftheCompany’sproperty,plantandequipmentandtheprovisionsfordepletion,depreciationandaccretion,whicharebaseduponsuchestimatesasprovenreservesandfuturedevelopmentandabandonmentcosts.

(m) Financial instruments

Allfinancial instrumentsare recorded initiallyatestimated fairvalueon thebalance sheetandclassified intooneoffivecategories:heldfortrading,heldtomaturity,availableforsale,loansandreceivablesandotherliabilities.Cashandcashequivalents,restrictedcashandinvestmentsareclassifiedasheldfortradingandmeasuredatestimatedfairvalue.Accountsreceivableareclassifiedasloansandreceivablesandmeasuredatamortizedcost.Accountspayableisclassifiedasotherliabilitiesandmeasuredatamortizedcost.

TheCompanymayenterintoderivativecontracts(commodityprice,interestrateorforeigncurrency)inordertomanagerisk.Derivativecontractsaremarked–to–marketateachreportingperiodwiththechangeinestimatedfairvaluerecordedasgainorlossinearnings.TheCompanydoesnotutilizederivativecontractsforspeculativepurposes,hasnotdesignatedanyderivativecontractsashedges,andhasnotrecordedanyassetsorliabilitiesasaresultofembeddedderivatives.

The estimated fair value of cash and cash equivalents, restricted cash, accounts receivable and accounts payableapproximatetheircarryingamountsduetotheirshorttermstomaturity.

3. cHanGES In accOuntInG POLIcIES

(a) Change in functional currency

EffectiveApril1,2008,theCompany’sfunctionalcurrencychangedfromCanadiandollarstoUS$asaresultofincreasedsignificanceoftheUS$totheCompany’scashflows.Amongstotherthings,theincreasedsignificanceoftheUS$isaresultofincreasedcapitalexpendituresbeinginUS$andanincreasedproportionofrevenuesbeingearnedinUS$.AsboththefunctionalandreportingcurrenciesoftheCompanyareinUS$,therearenotranslationgainsandlossesthatwillimpactaccumulatedothercomprehensiveincome.

MonetaryassetsandliabilitiesoftheCompanythataredenominatedincurrenciesotherthanUS$aretranslatedintoitsfunctioncurrencyattheratesofexchangeineffectattheperiodenddate.Anygainsandlossesarerecordedinearnings.

(b) upcoming accounting pronouncements

ThefollowingaccountingpronouncementshavebeenissuedbytheAcSB,butwerenotineffectatthedateofthecurrentfinancialstatements.ThesepronouncementsmayhaveanimpactontheCompany’sfuturefinancialreporting.

Goodwill and Intangible Assets

EffectiveApril 1, 2009, theCompanywill be required to adopt this standard,which replacesCICAStandards andprovides guidance relating to the recognition,measurement, presentation anddisclosureof goodwill and intangibleassets.TheCompanydoesnotexpectthestandardtohaveanimpactonthefinancialstatements.

Convergence of Canadian GAAP with International Financial Reporting Standards (“IFRS”)

EffectiveApril1,2011,theCompanywillberequiredtoprepareitsconsolidatedfinancialstatementsInaccordancewithIn-ternationalFinancialReportingStandards(IFRS),withappropriatecomparativefiguresfortheprioryear.TheCompanyiscurrentlyassessingthedifferencesbetweenCanadianGAAPandIFRSandtheaffectontheconsolidatedfinancialstatements.


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4. PROPERty, PLant and EquIPmEnt:

March 31, 2009

Cost

Accumulated Depletion and

Depreciation Net Book Value

Petroleum and natural gas properties

India $ 81,955 $ 12,576 $ 69,379

Office furniture and equipment

Canada 1,652 374 1,278

India 1,784 433 1,351

3,436 807 2,629

$ 85,391 $ 13,383 $ 72,008

March 31, 2008

Cost

Accumulated Depletion and

Depreciation Net Book Value

Petroleum and natural gas properties

India $ 52,846 $ 7,124 $ 45,722

Office furniture and equipment

Canada 787 175 612

India 896 171 725

1,683 346 1,337

$ 54,529 $ 7,470 $ 47,059

AtMarch31,2009, expenditures associatedwith theCompany’sunprovenproperties totaling$5.0million(2008–$11.2million)havebeenexcludedfromdepletion.Estimatedfuturedevelopmentcostsof$13.3million(2008–$15.7million)havebeenincludedincostssubjecttodepletion.DuringtheyearendedMarch31,2009,directoverheadcoststotaling$1.1million(2008–$1.2million)werecapitalizedrelatingtotheCompany’sexplorationanddevelopmentprogramsinIndia.

TheCompanyperformedaceilingtestcalculationatMarch31,2009toassesstherecoverablevalueoftheproperty,plantandequipment.Thepriceof crudeoil isbaseduponNigerianBonnyLightas forecastedby independent reservoir consultantsadjusted for quality differential. Based on these assumptions, the value of the undiscounted future net revenues from theCompany’sprovedreservesexceededthecarryingvalueofproperty,plantandequipmentatMarch31,2009.

Thefollowingtablesummarizesthebenchmarkpricesusedintheceilingtestcalculation.

Year ended March 31 Oil (US$/Barrel) Gas (US$/mcf)

2010 48.10 2.13

2011 53.89 2.20

2012 58.80 2.31

2013 73.78 2.43

2014 79.56 2.55

Escalatethereafter 2.0%perannum 2.0%perannum


5. aSSEt REtIREmEnt ObLIGatIOnS

Thefollowing table represents the reconciliationof thebeginningandendingaggregatecarryingamountof theobligationassociatedwiththeretirementofoilandgasassetsasatMarch31,2009:

Assetretirementobligations,beginningofyear $ 513

Obligationsincurred 275

Accretionexpense 71

Assetretirementobligations,endofyear $ 859

TheCompany’sassetretirementobligationresultsfromitsobligationsforabandonmentofwellsites.TheCompanyestimatesthetotalundiscountedamountofcashflowsrequiredtosettleitsassetretirementobligationsisapproximately$1.2milliontobeincurredintheyears2025and2028.Acreditadjustedriskfreerateof10percentandaninflationrateofsevenpercenthavebeenusedtodeterminethefairvalueoftheassetretirementobligation.

6. EntItLEmEnt Fund

OnSeptember20,2007theCompanyenteredintoanagreementwithaprivatefundbasedinJersey,ChannelIslands,wherebythefundprovidedlimited–recoursefundingof$10.0millionforappraisalanddevelopmentdrillingintheCompany’sAmguriFieldinAssam,India.Thefundshavebeenexpended.

Thefunddoesnothaveaparticipatinginterestinthefield,norisitresponsibleforfuturecapitalcosts.Thefundonlyreceivespayments based on theCompany’s 60 percent share of gross revenue from theAmguri Field ranging from seven percentbeforerecoveryoftheoriginal$10.0millionand3.5percentthereafter.TheagreementprovidesthattheCompanyshallhaveaterminationoptionbetweenSeptember20,2010,thethirdanniversaryoftheagreement,andDecember31,2012tobuybackthefund’sentitlementfor$15.0millionbeforerecovery,orfor$12.8millionafterrecoveryofthefund’sinitial$10.0million.IfthisterminationoptionisexercisedbytheCompany,thefundwillbegranted,subjecttoTSXapproval,5.0millionwarrantstoacquire5.0millioncommonsharesoftheCompany,exercisablewithinninemonthsfromthedateofissueatanexercisepriceofCDN$2.00percommonshare.IftheCompanydeclinestoexercisetheterminationoptionwithinthestatedtimeperiod,thefundwillretainitsrevenueentitlementtotheAmgurifield.

7. SHaRE caPItaL

(a) Authorized

Unlimitedvotingcommonshares,withoutnominalorparvalue; Unlimitedsharepurchasewarrants;and Unlimitednon–votingpreferredshareswithoutnominalorparvalue.

(b) Commonsharesissued

(000’s) Number Amount

Balance,beginningofyear 112,992 $ 85,597

Exerciseofstockoptions 717 689

Transferfromcontributedsurplus – 597

Balance,endofyear 113,709 $ 86,883


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(c) Stock options

ThefollowingtablesetsforthareconciliationofthestockoptionplanactivityfortheyearendedMarch31,2009:

(000’s) NumberWeighted average

exercise price (CAD)

Outstandingoptions,beginningofyear 9,942 1.47

Granted 2,775 0.36

Exercised (717) 0.96

Forfeited (1,548) 1.34

Expired (125) 0.75

Outstandingoptions,endofyear 10,327 1.07

Optionsexercisable,endofyear 7,793 1.24

DuringtheyeartheCompanyrepriced1.6millionstockoptionsheldbyemployees.TheCompanydidnotrepriceanystockoptionsheldbyOfficersorDirectorsoftheCompany.

Exercise Price (CAD)

Outstanding atMarch 31, 2009

WeightedAverage

RemainingContractual Life

(years)Exercisable at

March 31, 2009

WeightedAverage

RemainingContractual Life

Exercise Price

$0.16to$0.50 3,881 4.0 2,104 3.5

$0.51to$1.00 1,050 1.7 1,033 1.6

$1.01to$1.50 3,186 2.6 2,846 2.5

$1.51to$2.00 1,525 2.4 1,125 1.8

$4.34 685 0.9 685 0.9

10,327 2.9 7,793 2.4

(d) Contributed surplus

Thefollowingtablesetsforthareconciliationofthecontributedsurplusbalance:

Balance,beginningofyear $ 12,986

Grantofoptionsexpensed,netofforfeiture 1,247

Capitalizedstockbasedcompensation 415

Transfertosharecapital (597)

1,065

Balance,endofyear $ 14,051

(e) Stock based compensation

TheCompanyhasestablishedastockoptionplanunderwhichithasgrantedoptionstoacquirecommonsharestoofficers,directors,employeesandkeyconsultants.TheplanprovidesforthegrantingofoptionsequaltotenpercentoftheissuedandoutstandingcommonsharesoftheCompany.Optionsissuedundertheplanhaveatermoffiveyearsandvestoveratwoyearperiodstartingonthedateofthegrant.

Theweighted–averagefairvalueofstockoptionsissuedduringtheyearendedMarch31,2009was$0.32peroption.(March31,2008–$1.11)usingtheBlack–Scholesoption–pricingmodelwiththefollowingassumptions:


Weightedaveragefairvalueofawards $0.32 $1.11

Expectedvolatility(range) 103% to 108% 88%to106%

Riskfreerateofreturn 1.71% to 2.88% 2.85%to4.55%

Expectedoptionlife(range) 5 years 5years

Forfeiturerate 7% 14%


f) Loss per share

Netlosspershareiscomputedusingthefollowingweightedaveragecommonshares:


Basic 113,566 98,801

Diluted(1) 113,566 98,801

(1)Anti–dilutiveincrementaloptionsareexcludedfromtheweightedaveragedilutedsharesoutstanding.

8. REStRIctEd caSH

Fromtimetotime,theCompanyisrequiredtopostguaranteeswiththeGovernmentofIndiaandlettersofcredittoitssuppliersofgoodsandservices.AsatMarch31,2009,noneoftheCompany’scashwasrestricted.

9. FutuRE IncOmE taxES

Theprovisionforincometaxesdiffersfromtheresult,whichwouldhavebeenobtainedbyapplyingthecombinedfederalandprovincialincometaxratestotheCompany’slossbeforeincometaxes.Thisdifferenceresultsfromthefollowingitems:

2009 2008

Combinedfederalandprovincialincometaxrate 29.25% 31.47%

Expectedtaxrecovery: (1,844) (2,231)

Increase(decrease)resultingfrom:

Stock–basedcompensation 366 840

Nontaxablelossonsale – 44

Other 474 (177)

Expirationofnon–capitallosses – 177

Foreignexchange 1,283 –

Reductioninfutureincometaxrate 314 1,160

Netincreaseinvaluationallowance (593) 187

– –

Thecomponentscomprisingthefutureincometaxesareasfollows:

2009 2008

Taxassets:

Non–capitallosscarryforwards 2,866 2,356

Investments 37 56

Unrealizedforeignexchange (367) –

Shareissuecosts 636 996

Inventory (11) (30)

Property,plantandequipment 1,960 2,387

Assetretirementobligations 181 130

5,302 5,895

Less:valuationallowance (5,302) (5,895)

Futureincometaxasset $ – $ –

AtMarch31,2009,theCompanyhadapproximately$14.2million(2008–$9.5million)oflossesavailabletoreducefuturetaxableincomeinCanada,expiringintheyears2009to2026.


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10. GEOGRaPHIc SEGmEntatIOn

TheCompanyhasacorporateofficeinCanadaandoperationsinIndia.Setoutbelowissegmentedinformationonageographicbasis.

FORTHEYEARENDEDMARCH31,2009 Canada India Consolidated

Petroleumandnaturalgassales $ – $ 11,099 $ 11,099

Interestincomeandother 222 25 247

Netloss 4,651 1,653 6,304

Capitalexpenditures 865 29,135 30,000

AsatMarch31,2009

Totalassets $ 5,385 $ 83,401 $ 88,786

FORTHEYEARENDEDMARCH31,2008 Canada India Consolidated

Petroleumandnaturalgassales $ – $ 4,817 $ 4,817

Interestincomeandother 843 27 870

Netloss 4,755 2,333 7,088

Capitalexpenditures 591 13,117 13,708

AsatMarch31,2008

Totalassets $ 35,402 $ 54,696 $ 90,098

11. cOntInGEnt LIabILItIES

TheCompanyissubjecttolegalproceedingsandactionsarisinginthenormalcourseofbusiness.Managementbelievesthatanyliabilities,whichmightarisepertainingtosuchmatters,wouldnotbeexpectedtohaveamaterialeffectontheCompany’sconsolidatedfinancialposition.

12. cOntRactuaL ObLIGatIOnS and cOmmItmEntS

Pursuant to current production sharing contracts (“PSC’s”) the Company is required to perform minimum explorationactivitiesthatincludeacquisitionsandprocessingofseismicdataanddrillingofexplorationwells.TheCompanyplanstofundthesecostswithexistingcashbalancesandcashflowfromoperations.Theseobligationshavenotbeenprovidedfor inthefinancialstatements.

TheCompanyhasofficeleasecommitmentsinNoidaandJorhatinIndiaandCalgary,Canada.

Thefollowingaretheanticipatedpaymentsunderthecontracts:

PSC’s Office leases Total

2009 $ 2,746 $ 656 $ 3,402

2010 6,300 556 6,856

2011 3,394 247 3,641

2012 2,100 164 2,264

Total $ 14,540 $ 1,623 $ 16,163

TheCompanyhasanobligationtopayarevenueentitlementasdescribedinNote6.


13. FInancIaL RISk manaGEmEnt

TheCompanyisexposedtofinancialrisksduetothenatureofitsbusinessandthefinancialassetsandliabilitiesitholds.Thefollowingdiscussionreviewsmaterialfinancialrisks,quantifiestheassociatedexposures,andexplainshowtheserisks,andtheCompany’scapital,aremanaged.

AdditionalinformationinrespectoftheCompany’srisksmaybefoundintheAnnualInformationForm.

a) Market Risk

ChangesincommoditypricesandforeigncurrencyexchangeratescanhaveanimpactontheCompany’searningsandvalueoffinancialassetsandliabilities.

Commodity price risk – Commoditypriceriskistheriskthatthefairvalueorfuturecashflowswillfluctuateasaresultofchanges incommodityprices.TheCompany isexposedtocommoditypriceriskdueto thenatureof itsbusiness.Oilandnaturalgaspricesareimpactedbyglobalsupplyanddemand,aswellaspoliticalandotherforces.Forthemajorityofnaturalgasproduction,theCompanyreceivesafixedpriceof3,840rupees(Rs)per1000m3,approximately$2.73perthousandcubicfeet(mcf).TheCompanyalsohasacontractforthelifeofproductionsharingcontracttosell12,000m3/d(approximately340mcfperday)at2,304Rsper1000m³(approximately$1.64permcf).TheCompanyispaidinrupeesandissubjecttoforeignexchangefluctuationsontheaveragepricereceivedonchangesbetweentherupeeandUS$.AlthoughtheCompanyisnotdirectlyimpactedbyfluctuationsinnaturalgaspricesduetothenatureoftheircontracts,aspricesaroundtheworldincreasefornaturalgasthereiscontinuedmarketpressurestoincreasethepricereceivedfornaturalgasinIndiawhichwouldbenefittheCompany.TheCompanyreceivesworldoilpricesforitsoilproductionandissubjecttopricefluctuations.Thepricereceivedforcrudeoilisveryvolatileandcanundergosignificantchangesinrelativelyshorttimeperiods.Thehighestmonthlyaveragepriceduringtheyearwas$137.96 inthemonthofJulycomparedto lowestmonthlyaverageofpricereceivedof$44.37 inthemonthofDecember.AsatMarch31,2009theCompanydidnothaveanyderivativecommoditypricecontractsinplacehowever,inthefuture,theCompanymayenterintosuchcontractsinordertomanageitscommoditypricerisk.

BasedonactualsalesvolumesrecordedfortheyearendedMarch31,2009,aUS$1.00perbarrel increase(decrease)inoilpriceswouldhave increased (decreased)net earningsby$0.1million.As theCompany continues to increaseproduction,earningswillbecomemoreimpactedbycommodityprices,primarilyoil.

Foreign currency exchange rate risk –Foreignexchangerateriskistheriskthatthefairvalueoffuturecashflowswillfluctuateas a resultof changes in foreignexchange rates.The reportingcurrencyof theCompany isUnitedStatesdollars.Substan-tiallyalloftheCompany’soperationsareinforeignjurisdictionsandasaresult,theCompanyisexposedtoforeigncurrencyexchangerateriskonsomeofitsactivitiesprimarilyonexchangefluctuationsbetweentherupeeandtheUS$.OilrevenuesaredenominatedinUS$,whilenaturalgasrevenuesaredenominatedinIndianrupees.Operatingandcapitalexpendituresareincurredinvariouscurrencies,including,USdollars,IndianrupeesandCanadiandollars.ThemajorityofcapitalexpendituresareincurredinUS$andoilrevenuesarereceivedinUS$thereforetheCompany’sexposuretoforeignexchangeisreduced.

TheCompanymayenterintoderivativeforeigncurrencycontractsinordertomanageforeigncurrencyexchangeraterisk,buthasnotdonesotodate.

ThetablebelowshowstheCompany’sexposuretoforeigncurrenciesforitsfinancialinstruments:

ASATMARCH31,2009

Total US$ Rs CAD

per FS (1) US$ Equivalent US$ Equivalent

Cashandcashequivalents 5,456 5,314 142 –

Accountsreceivable 10,400 9,903 485 12

Accountspayable (9,789) (9,430) (174) (185)

Balancesheetexposure 6,067 5,787 453 (173)

(1) denotes Financial statements


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TheCompanybelievesathreepercentchangeintheUS$againsttheseforeigncurrencieswouldbereasonablypossiblewithinthenextthreemonthreportingperiod.AthreepercentstrengtheningoftheUS$wouldresultinachangeinearningsasfollows(anequalbutoppositeimpacttoearningswouldresultiftheUS$weakenedbythreepercent):

ASATMARCH31,2009

Rs CAD

US$ Equivalent

Decreaseinearnings 14 (5)

b) Credit Risk

CreditriskistheriskofafinanciallosstotheCompanyifacustomerorcounterpartytoafinancialinstrumentfailstomeetitscontractualobligationandarisesprincipallyfromjointventurepartnersandnaturalgasandoilmarketers.TheCompanyisexposedtocreditriskinrespecttoitscashandcashequivalentsandaccountsreceivable.

Cash and cash equivalents are held in operating accounts with highly ratedCanadian banks and therefore theCompanyconsiderstheseassetstohavenegligiblecreditrisk.

VirtuallyalloftheCompany’saccountsreceivablearefromcounterpartiesintheoilandgasindustryandaresubjecttonormalindustrycreditrisks.TheCompany’sproductionbaseisentirelyintheAssamstateinNorthEastIndia.ForboththeAmguriandAAON/7productionsharingcontracts,theCompanyhasthesamejointpartnerforbothcontractssignificantlyconcen-tratingtheexposuretocreditriskfortheCompany.TheCompanybelievescreditriskfromitsjointventurepartnerismitigatedby thedefault provisionswithin theproduction sharing contracts.Thedefault provisions are verypunitive to theparty indefaultandcanincludeadditionalworkinginterestrevertingtotheoperatorifcertainconditionsarenotmetbythedefaultingparty.RevenuereceivablesarefrombothgovernmentagenciesinIndiaandlargeinternationaloilandgascompanies.

ThecarryingamountofcashandcashequivalentsandaccountsreceivablerepresentstheCompany’smaximumcreditexposure.

AsatMarch31,2009,theCompany’saccountsreceivableisagedasfollows:

Current(lessthan90days) $8,793

Pastdue(morethan90days) 1,607

Total $10,400

c) Liquidity Risk

TheCompanymanages its riskofnotmeeting itsfinancialobligations throughmanagementof itscapital structure,annualbudgetingofitsrevenues,expendituresandcashflows.Onamonthlybasis,internalreportingofactualresultsiscomparedtothebudgetinordertomodifybudgetassumptions,ifnecessary,toensureliquidityismaintained.

TheCompanybelievesithasadequatecashflowsandcashonhandtodischargeitsfinancialobligations.IntheeventthattheCompany’sreceivablesarenotcollectedfromitsjointventurepartner,theCompanymayberequiredtoseekotheralternativesoffinancingwhichmaybeunavailableonreasonabletermsorcurtailcapitalexpenditurestosatisfyoutstandingobligations.

d) Capital Management

TheCompanydefinesitscapitalasshareholder’sequity.TheCompany’sobjectiveistomaintainastrongcapitalpositioninordertoexecuteitsbusinessplanandmaximizevaluetoshareholders.Availabilityofcapitaliscriticalforfuturesuccessandassuch,theCompanystrivestomaintainstrongrelationshipswiththecapitalinvestmentcommunity.MethodsemployedtoadjusttheCompany’scapitalstructurecouldincludeany,all,oracombinationofthefollowingactivities:

• repurchasesharespursuanttoanormalcourseissuerbid; • issuenewsharesthroughapublicofferingorprivateplacement; • issueequitylinkedorconvertibledebt; • raisefixedorfloatingratedebt.

TheCompanyisnotsubjecttoanyexternallyimposedcapitalrequirements.


14. SubSEquEnt EvEntS

OnJune1,2009,HighArticEnergyServicesL.P.(HAES)filedastatementofclaimintheCourtofQueen’sBenchofAlbertaagainst theCompanyfortheamountof$1.3millionrelatingto invoicessubmittedtotheCompany.OnJune30,2009theCompanyfiledadefencetotheHAESclaimaswellasacounterclaimfordamagesof$5million,anOrderforanaccountingofthecostsandexpensesinvoicedtotheCompanybyHAES,pre-judgmentinterestandcosts.OnJuly22,2009HAESfiledadefencetotheCompany’scounterclaim.Aslegalproceedingshaveonlyrecentlybeencommenced,andasnoexaminationsfordiscoveryhaveyettakenplace,thelikelihoodofsuccessoftheclaimorcounterclaimisnotyetdeterminable.

OnJuly24,2009,Canoroannounced itentered intoanagreementwith,aprivate fund(“Fund”)based in Jersey,ChannelIslands,wherebytheFundwillprovidelimited-recoursefundingofUS$4millionforthepurchaseandinstallationofthegascompressionunitsaspartofdevelopmentoperationsintheAmguriFieldinAssam,India.TheFundwillnotearnaparticipat-inginterestinthefield,norwillitberesponsibleforfuturecapitalcosts.TheFundwillonlybeentitledtoreceiverepaymentsbasedonCanoro’s60%shareofgrossrevenuefromtheAmguriFieldrangingfrom8%beforerecoveryoftheoriginalUS$4million,decliningto4%thereafter.

TheagreementalsoprovidesthatCanoroshallhavetheoptionbetweenJuly2012andDecember31,2012aftertheFund’srecoveryofitsinitialinvestment,tobuybacktheFund’sentitlementforUS$5.1million.IfsuchoptionisexercisedbyCanoro,the Fundwill be granted, subject toTSXVenture approval, warrants to subscribe for twomillion common shares of theCompany,exercisablewithinsixmonthsfromthedateofissueatasubscriptionpriceofCDN$0.20pershare.


Corporate informationbOaRd OF dIREctORS

Douglas R. Martin BoardChair;Chair,AuditCommittee;Member,CompensationCommittee Calgary,Alberta,Canada

D. nolan Blades Chair,ReservesCommittee Calgary,Alberta,Canada

John BoydMember,AuditCommittee;Member,ReservesCommittee Calgary,Alberta,Canada

Jeff Clarke Member,CorporateGovernanceCommittee Allen,Texas,USA

Harley Winger Chair,CorporateGovernanceCommittee Calgary,Alberta,Canada

Les B. Kondratoff Member,CompensationCommittee BraggCreek,Alberta,Canada

James n. Smith Member,ReservesCommittee;Member,CorporateGovernanceCommittee Reading,England,UnitedKingdom

Robert S. Wynne Member,AuditCommittee;Chair,CompensationCommittee Calgary,Alberta,Canada

co

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AtIon


ExEcutIvE OFFIcERS

Les B. Kondratoff, BSc, MBA,PresidentandChiefExecutiveOfficer

S. Brian Gieni, BComm, CMA,SeniorVicePresident,ChiefFinancialOfficerandCountryManager

Robert S. Wynne, BSc, MBA,ManagingDirectorandChiefOperatingOfficer

Doug uffen, BSc, P.Geoph,VicePresident–Geoscience

Ryan Ellson, CA, VicePresidentFinance

canORO’S OFFIcE LOcatIOnS

Canada

700,7177thAvenueSW

Calgary,Alberta,CanadaT2P0Z3

Tel:+1(403)543-5747

Fax:+1(403)543-5740

www.canoro.com

India

2ndFloor,GHCLBuilding

B-38,Sector-1

Noida201301,India

Tel:+91-120-4270210/4270211

Fax:+91-120-4270220

StOck ExcHanGE LIStInG

TSXVentureExchange

Symbol:CNS

REGIStRaR and tRanSFER aGEnt

ComputershareTrustCompanyofCanada

Calgary,Alberta,Canada

IndEPEndEnt EnGInEERS

SprouleAssociatesLimited


audItORS

KPMGLLP


InvEStOR RELatIOnS cOntact

RobertWynne

Tel:+1(403)592-6295

Fax:+1(403)543-5740

[email protected]

abbREvIatIOnS

bbl/d barrelsofoilperday

bcf billioncubicfeet

boe barrelofoilequivalent

boe/d barrelofoilequivalentperday

mbbl thousandbarrels

mboe thousandbarrelsofoilequivalent

mcf thousandcubicfeet

mcf/d thousandcubicfeetperday

mmbbl millionbarrels

mmboe millionbarrelsofoilequivalent

mmcf millioncubicfeet

mmcf/d millioncubicfeetperday

PSC Productionsharingcontract

www.canoro.com

canoro-oil & gas

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