Nature of operations

TransAtlantic Petroleum Ltd. (together with its subsidiaries, "we," "us," "our," the "Company" or "TransAtlantic") is an international oil and gas company engaged in acquisition, exploration, development and production. We hold interests in developed and undeveloped oil and gas properties in Turkey, Bulgaria and Romania. As of November 1, 2011, approximately 42% of our outstanding common shares were beneficially owned by N. Malone Mitchell, 3rd, our chief executive officer and chairman of the board of directors.

Significant events and transactions which have occurred since January 1, 2011 include the following:

Basis of presentation

Our consolidated financial statements are expressed in U.S. Dollars and have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), and reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods, on a basis consistent with the annual audited consolidated financial statements. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. All amounts in these notes to the consolidated financial statements are in U.S. Dollars unless otherwise indicated. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews estimates, including those related to fair value measurements associated with acquisitions, the impairment of long-lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

The consolidated financial statements include the accounts of the Company and all controlled subsidiaries. All significant inter-company balances and transactions have been eliminated on consolidation.

These unaudited consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern. These principles assume that we will be able to realize our assets and discharge our obligations in the normal course of operations for the foreseeable future.

We incurred a net loss of $41.3 million during the nine months ended September 30, 2011, which includes a net loss from discontinued operations of $31.3 million. At September 30, 2011, the outstanding principal amount of our debt was $165.7 million, of which $6.6 million is held for sale. Excluding assets held for sale of $129.4 million and total liabilities held for sale of $19.9 million, we had a working capital deficit of $39.0 million. Of our outstanding debt, $73.0 million under the Dalea credit agreement is due the earlier of (i) March 31, 2012 or (ii) the sale of Viking International and Viking Geophysical. We forecast that we will need to extend the maturity date of the Dalea credit agreement, consummate the sale of assets or raise additional debt or equity financing to fund our repayment of the Dalea credit agreement and to fund our operations, including our planned exploration and development activities. To obtain these funds, we have engaged a financial advisor to assist with the sale, transfer or other disposition of our oilfield services business and are considering the issuance of common shares, public debt or private debt. However, there is no assurance that our forecast will prove to be accurate or our efforts to raise additional debt or equity financing or consummate the sale of assets will prove to be successful. Should we be unable to consummate the sale of assets or raise additional financing, we will not have sufficient funds to continue operations beyond March 31, 2012. As a result, there is significant doubt regarding our ability to continue as a going concern. The continuing application of the going concern assumption is dependent upon our continuing ability to obtain the necessary financing to discharge our existing obligations, fund ongoing exploration, development and operations and ultimately achieve profitable operations.

Management believes the going concern assumption to be appropriate for these financial statements. If the going concern assumption was not appropriate, adjustments would be necessary to the carrying values of assets and liabilities, reported revenues and expenses and in the balance sheet classifications used in these consolidated financial statements.

In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-06, Improving Disclosures about Fair Value Measurements ("ASU 2010-06"). The update provides amendments to Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures ("ASC 820") that require more robust disclosures about: (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. Disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on our financial statements.

In December 2010, FASB issued ASU No. 2010-28 Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts ("ASU 2010-28"). ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The update is effective for interim and annual reporting periods beginning after December 15, 2010. This update is considered on an interim and annual basis when we review and perform our goodwill impairment test. The adoption of ASU 2010-28 did not have a material impact on our financial statements.

In December 2010, FASB issued ASU No. 2010-29 Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations ("ASU 2010-29"). ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The update is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 did not have a material impact on our financial statements.

In May 2011, FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"). ASU 2011-04 amends ASC 820, providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 will be effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a material effect on our financial statements, but may require certain additional disclosures.

In June 2011, FASB issued ASU 2011-05, Presentation of Comprehensive Income ("ASU 2011-05"). ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 is not expected to have a material effect on our financial statements, but may require a change in the presentation of our comprehensive income from the notes of the financial statements, where it is currently disclosed, to the face of the financial statements.

We have reviewed other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our consolidated results of operations, financial position and cash flows. Based on that review, we believe that none of these pronouncements will have a significant effect on current or future earnings or operations.

TBNG

On June 7, 2011, TransAtlantic Worldwide acquired TBNG in exchange for cash consideration of $10.5 million and the issuance of 18.5 million of our common shares (at a deemed price of $2.05 per common share). Of the $10.5 million cash consideration, $10.0 million was paid in November 2010 as an option fee and applied to the purchase price. We engaged independent valuation experts to assist in the determination of the fair value of the assets and liabilities acquired in the acquisition. The following tables summarize the consideration paid in the acquisition and the preliminary recognized amounts of assets acquired and liabilities assumed that have been recognized at the acquisition date:

Consideration:

Acquisition-Related Costs:

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed at Acquisition:

As of the date of acquisition, the fair value of the accounts receivable that were acquired was $24.4 million, consisting of a gross amount of $27.9 million, of which $3.5 million is not expected to be collected.

The fair value of identifiable assets acquired and liabilities assumed are preliminary and subject to changes which may be material on the finalization of the properties and other equipment valuation reports and final determination of valuation amounts. The results of operations of TBNG are included in our consolidated results of operations beginning June 7, 2011, the closing date of the acquisition. The amounts of revenues and loss of TBNG included in our consolidated statement of operations and comprehensive income (loss) for the nine months ended September 30, 2011 are shown below:

Direct

On February 18, 2011, TransAtlantic Worldwide acquired Direct Morocco and Anschutz, and TransAtlantic Cyprus acquired Direct Bulgaria, for cash consideration of $2.4 million and the issuance of 8.9 million of our common shares (at a deemed price of $3.15 per common share) to Direct in a private placement, for total consideration of $34.5 million. At the time of the acquisition, Direct Morocco and Anschutz owned a 50% working interest in the Ouezzane-Tissa and Asilah exploration permits in Morocco and Direct Bulgaria owned 100% of the working interests in the A-Lovech and Aglen exploration permits in Bulgaria.

The following tables summarize the consideration paid in the acquisition of Direct Morocco, Anschutz and Direct Bulgaria and the preliminary recognized amounts of assets acquired and liabilities assumed which have been recognized at the acquisition date:

Consideration:

If certain post-closing milestones are achieved, we will issue additional consideration to Direct equal to: (i) $10.0 million worth of our common shares if the Deventci-R2 well in Bulgaria is a commercial success and (ii) $10.0 million worth of our common shares if Direct Bulgaria receives a production concession for a specified area in Bulgaria. As part of the agreement, $5.0 million would be due if we have not commenced drilling the Deventci-R2 well by November 18, 2011, and $5.0 million would be due if we have not cored the Etropole formation by February 18, 2012. The fair value of this contingent liabilities represents our best estimate of the amounts to be paid for each of the milestones, based on the probability of commercial success. Subsequent changes in the fair value of the liability will be recorded in earnings. As of September 30, 2011, we had determined that the likelihood of payment for the failure to timely drill the Deventci-R2 well had increased. As a result, we recorded an additional $1.3 million, which is included under the caption "Revaluation of contingent consideration" on the consolidated statements of operations and comprehensive income (loss).

Acquisition-Related Costs:

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed at Acquisition:

The fair value of identifiable assets acquired and liabilities assumed are preliminary and subject to changes which may be material upon the receipt of final oil and gas properties valuation reports and tax records. The results of operations of Direct Morocco, Anschutz and Direct Bulgaria are included in our consolidated results of operations beginning February 18, 2011, the closing date of the acquisition.

The amounts of revenue and loss of Direct Morocco, Anschutz and Direct Bulgaria included in our consolidated statement of operations and comprehensive income (loss) for the nine months ended September 30, 2011 are shown below:

Amity and Petrogas

On August 25, 2010, TransAtlantic Worldwide acquired all of the shares of Amity and Petrogas in exchange for total cash consideration of $96.5 million. Through the acquisition of Amity and Petrogas, TransAtlantic Worldwide acquired interests ranging from 50% to 100% in 18 exploration licenses, one production lease and equipment. We funded $66.5 million of the purchase price from borrowings under our credit agreement with Dalea and $30.0 million of the purchase price from borrowings under our former short-term secured credit agreement with Standard Bank.

We engaged independent valuation experts to assist in the determination of the fair value of the assets and liabilities acquired in the acquisition. The following tables summarize the consideration paid in the Amity and Petrogas acquisition and the final recognized amounts of assets acquired and liabilities assumed that have been recognized at the acquisition date:

Consideration:

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed at Acquisition:

After receiving the final valuation report, we determined that certain proved properties were reclassified between fields and between reserve categories. These changes resulted in lower values of the properties that were acquired. Additionally, unproved properties increased due to higher valuations on certain licenses. These changes reduced proved properties by $7.1 million, increased unproved properties by $7.0 million and decreased deferred income taxes by $0.1 million. Under ASC 805, a change to the initial purchase price allocation is recast as if the final valuations had been recorded on the date of the acquisition. Due to the change in proved properties, our depletion expense decreased by $1.4 million, net of tax in 2010 and by $2.2 million, net of tax in 2011.

Pro forma results of operations

The following table presents the unaudited pro forma results of operations as though the acquisitions of Amity, Petrogas, Direct Morocco, Anschutz, Direct Bulgaria and TBNG had occurred as of January 1, 2010 (in thousands, except per share amounts):

In June 2011, we decided to discontinue our operations in Morocco. We intend to sell our existing Moroccan interests and operations and transfer our oilfield services equipment from Morocco to Turkey. All revenues and expenses associated with the Moroccan operations for the three and nine months ended September 30, 2011 and 2010 have been included in discontinued operations.

In September 2011, we engaged a financial advisor to assist us with the sale of our oilfield services business. We anticipate completing the bid process for the sale of this business in the fourth quarter of 2011 and expect to consummate the sale by the end of the first quarter of 2012. Upon consummation of a sale, we will no longer have an oilfield services segment. As such, we classified our oilfield services segment as discontinued operations at September 30, 2011. All revenues and expenses associated with our oilfield services segment for the three and nine months ended September 30, 2011 and 2010 have been included in discontinued operations.

The summary operating results for our Moroccan and oilfield services operations are as follows:

The assets and liabilities of discontinued operations presented under the captions "Assets held for sale", "Liabilities held for sale" and "Liabilities held for sale – related party" on the consolidated balance sheet at September 30, 2011 are valued at the lower of cost or fair value less the estimated cost of selling. At September 30, 2011, our assets and liabilities held for sale consisted of the following:

At September 30, 2011 and December 31, 2010, we excluded $5.7 million and $11.7 million, respectively, from the depletion calculation for proved development wells currently in progress.

At September 30, 2011, our oil and gas properties were comprised of $72.0 million relating to acquisition costs of proved properties, which are being amortized by the unit-of-production method using total proved reserves, and $72.9 million relating to exploratory well costs and additional development costs, which are being amortized by the unit-of-production method using proved developed reserves.

At December 31, 2010, our oil and gas properties were comprised of $92.4 million relating to acquisition costs of proved properties, which are being amortized by the unit-of-production method using total proved reserves, and $37.3 million relating to exploratory well costs and additional development costs, which are being amortized by the unit-of-production method using proved developed reserves.

During the nine months ended September 30, 2011, we incurred approximately $9.4 million in exploratory drilling costs, of which $6.2 million was charged to earnings (included in exploration, abandonment and impairment expense) and $3.2 million remained capitalized at September 30, 2011. We reclassified $0.4 million of our exploratory well costs to proved properties during the nine months ended September 30, 2011. No amount of our exploratory well costs as of September 30, 2011 had been capitalized for a period of greater than one year after completion of drilling.

The recovery of the costs noted above are dependent upon us obtaining government approvals, obtaining and maintaining licenses in good standing and achieving commercial production or sale.

We classify our materials and supply inventory, including steel tubing and casing, as long-term assets because such materials will ultimately be classified as long-term assets when the material is used in the drilling of wells.

At September 30, 2011, we excluded $1.8 million of gas gathering system and facilities, $0.2 million of other equipment and $22.3 million of inventory from depreciation, as the facilities, equipment and inventory had not been placed into service.

At December 31, 2010, we excluded $0.4 million of other equipment and $37.6 million of inventory from depreciation, as the equipment and inventory had not been placed into service.

We use collar derivative contracts to economically hedge against the variability in cash flows associated with the forecasted sale of a portion of our future oil production. We have not designated the derivative financial instruments to which we are a party as hedges for accounting purposes, and accordingly, we record the contracts at fair value and recognize changes in fair value in earnings as they occur.

Our commodity derivative contracts are carried at their fair value on our consolidated balance sheet under either the caption "Derivative liabilities" or "Derivative assets." All of our oil derivative contracts are settled based upon Brent oil pricing. We recognize unrealized and realized gains and losses related to these contracts on a fair value basis in our consolidated statements of operations and comprehensive income (loss) under the caption "Gain (loss) on commodity derivative contracts." Settlements of derivative contracts are included in operating activities on our consolidated statements of cash flows.

For the three months ended September 30, 2011, we recorded a net gain on commodity derivative contracts of approximately $6.5 million, consisting of a $7.8 million unrealized gain related to changes in fair value and a $1.3 million realized loss for settled contracts. For the nine months ended September 30, 2011, we recorded a net loss on commodity derivative contracts of $2.7 million, consisting of a $1.2 million unrealized gain related to changes in fair value and a $3.9 million realized loss for settled contracts.

For the three and nine months ended September 30, 2010, we recorded a net unrealized loss and a net unrealized gain on commodity derivative contracts of $3.0 million and $0.6 million, respectively.

At September 30, 2011 and December 31, 2010, we had outstanding contracts with respect to our future oil production as set forth in the tables below:

Fair Value of Derivative Instruments as of September 30, 2011

Fair Value of Derivative Instruments as of December 31, 2010

The following table summarizes the changes in our asset retirement obligations at the dates indicated:

Our third-party debt consisted of the following at the dates indicated:

Amended and restated credit facility

On May 18, 2011, DMLP, Ltd. ("DMLP"), TransAtlantic Exploration Mediterranean International Pty. Ltd. ("TEMI"), Talon Exploration, Ltd. ("Talon Exploration"), TransAtlantic Turkey, Ltd. ("TAT") and Petrogas (collectively, and together with Amity, the "Borrowers") entered into the amended and restated senior secured credit facility with Standard Bank and BNP Paribas (the "amended and restated credit facility"). Each of the Borrowers are our wholly owned subsidiaries. In July 2011, Amity executed a joinder agreement and became a borrower under the amended and restated credit facility. The amended and restated credit facility is guaranteed by us and each of TransAtlantic Petroleum (USA) Corp. and TransAtlantic Worldwide (collectively, the "Guarantors").

The amount drawn under the amended and restated credit facility may not exceed the lesser of (i) $250.0 million, (ii) the borrowing base amount at such time, (iii) the aggregate commitments of all lenders at such time, and (iv) any amount borrowed from an individual lender to the extent it exceeds the aggregate amount of such lender's individual commitment. At September 30, 2011, the lenders had aggregate commitments of $120.0 million, with individual commitments of $60.0 million each. On the last day of each fiscal quarter commencing September 30, 2012 and at the maturity date, the lenders' commitments are subject to reduction by 6.25% of their commitments existing on such commitment reduction date.

The borrowing base is re-determined semi-annually on April 1st and October 1st of each year prior to September 30, 2012 and quarterly on January 1st, April 1st, July 1st and October 1st of each year after September 30, 2012. Following our semi-annual borrowing base redetermination on October 1, 2011, our borrowing base is currently $81.4 million.

The amended and restated credit facility matures on the earlier of (i) May 18, 2016 or (ii) the last date of the borrowing base calculation period that immediately precedes the date that the semi-annual report of Standard Bank and the Borrowers determines that the aggregate amount of hydrocarbons to be produced from the borrowing base assets in Turkey are less than 25% of the amount of hydrocarbons to be produced from the borrowing base assets shown in the initial report prepared by Standard Bank and the Borrowers. The amended and restated credit facility bears various letter of credit sub-limits, including among other things, sub-limits of up to (i) $10.0 million, (ii) the aggregate available unused and uncancelled portion of the lenders' commitments or (iii) any amount borrowed from an individual lender to the extent it exceeds the aggregate amount of such lender's individual commitment.

Loans under the amended and restated credit facility accrue interest at a rate of three-month London Interbank Offered Rate ("LIBOR") plus 5.50% per annum.

The Borrowers are also required to pay (i) a commitment fee payable quarterly in arrears at a per annum rate equal to (a) 2.75% per annum of the unused and uncancelled portion of the aggregate commitments that is less than or equal to the maximum available amount under the amended and restated credit facility, and (b) 1.65% per annum of the unused and uncancelled portion of the aggregate commitments that exceed the maximum available amount under the amended and restated credit facility, (ii) on the date of issuance of any letter of credit, a fronting fee in an amount equal to 0.25% of the original maximum amount to be drawn under such letter of credit and (iii) a per annum letter of credit fee for each letter of credit issued equal to the face amount of such letter of credit multiplied by (a) 1.0% for any letter of credit that is cash collateralized or backed by a standby letter of credit issued by a financial institution acceptable to Standard Bank or (b) 5.50% for all other letters of credit.

The amended and restated credit facility is secured by a pledge of (i) the local collection accounts and offshore collection accounts of each of the Borrowers, (ii) the receivables payable to each of the Borrowers, (iii) the shares of each Borrower, and (iv) substantially all of the present and future assets of the Borrowers.

The Borrowers are required to comply with certain financial and non-financial covenants under the amended and restated credit facility, including maintaining the following financial ratios during the four most recently completed fiscal quarters occurring on or after March 31, 2011:

At September 30, 2011, the Borrowers had borrowed $78.0 million and were in compliance with all covenants under the amended and restated credit facility.

If an event of default shall occur and be continuing, all loans under the amended and restated credit facility will bear an additional interest rate of 2.00% per annum. In the case of an event of default upon bankruptcy or insolvency, all amounts payable under the amended and restated credit facility become immediately due and payable. In the case of any other event of default, all amounts due under the amended and restated credit facility may be accelerated by the lenders or the administrative agent. Borrowers have certain rights to cure an event of default arising from a violation of the fixed charge coverage ratio or the interest coverage ratio by obtaining cash equity or loans from us.

Short-term secured credit agreement

On August 25, 2010, TransAtlantic Worldwide entered into a short-term secured credit agreement with Standard Bank pursuant to which TransAtlantic Worldwide borrowed $30.0 million from Standard Bank. The short-term secured credit agreement was guaranteed by us and each of TransAtlantic Petroleum (USA) Corp., Amity and Petrogas. TransAtlantic Worldwide used the proceeds of the short-term secured credit agreement to finance a portion of the purchase price for the shares of Amity and Petrogas. Borrowings under the short-term secured credit agreement accrued interest at a rate of LIBOR plus the applicable margin. The applicable margin equaled 3.75% for interest that accrued before November 23, 2010, 4.00% for interest that accrued on or after November 23, 2010 and before February 20, 2011 and 4.25% for interest that accrued on or after February 20, 2011 and before May 25, 2011. In addition, TransAtlantic Worldwide paid an arrangement fee of $750,000.

The short-term secured credit agreement was scheduled to mature on May 25, 2011. TransAtlantic Worldwide repaid the loan in full on May 24, 2011, at which time the short-term secured credit agreement was terminated.

TBNG credit agreements

TBNG is a party to unsecured credit agreements with a Turkish bank. During September 2011, we repaid the outstanding balance of approximately $4.1 million, on one of the agreements. At September 30, 2011, there were outstanding borrowings of approximately 15.0 million New Turkish Lira (approximately $8.1 million) under the remaining credit agreement. Borrowings under the credit agreement bear interest at a rate of 11.65% per annum, and interest is payable quarterly. The credit agreement matures on March 13, 2012 and may be renewed for an additional period on the same terms.

Viking International equipment loan

In 2010, Viking International entered into a secured credit agreement with a Turkish bank to fund the purchase of vehicles. The credit agreement has a term of 48 months, matures on July 20, 2014, bears interest at an annual rate of 3.84% and is secured by the vehicles purchased with the proceeds of the loan. There is no further availability under the credit agreement. As of September 30, 2011, the outstanding balance under the secured credit agreement was $2.4 million and the secured credit agreement was included in "Liabilities held for sale" in our consolidated balance sheets.

Related party debt consisted of the following: