2007 Results Announcement

Gulf Keystone Petroleum Ld
08 May 2008



                          GULF KEYSTONE PETROLEUM LTD
                       ("Gulf Keystone" or the "Company")


                           2007 RESULTS ANNOUNCEMENT



Gulf Keystone Petroleum Limited (AIM: GKP), an independent oil and gas
exploration company operating in Algeria and Kurdistan, today announces its
results for the year ended 31 December 2007.


Highlights

-      In January 2007, BG farmed into the HBH licence in Algeria.


-      In 2007 Gulf Keystone acquired 2,047 kilometres of 2D seismic and 533
       square kilometres of 3D seismic on the HBH licence area.  In 2008, the 
       Company and its partners will drill six wells on the HBH licence in 
       Algeria.


-      In November 2007, Gulf Keystone entered into two production sharing
       contracts in the Kurdistan Region of Northern Iraq.


-      In 2008, Gulf Keystone acquired 170 kilometres of 2D seismic in Kurdistan


-      In January 2008 ALNAFT (the Hydrocarbon National Agency in Algeria)
       approved the proposed Development Plan for the GKN and GKS oil fields 
       following the Declaration of Commerciality in June 2007.



Todd Kozel, Chairman and Chief Executive Officer said:


"2007 was a year of significant challenges for Gulf Keystone Petroleum from
which I believe the Company has emerged both operationally and strategically
stronger.  Entering into two production sharing contracts in Kurdistan,
entitlement to production from the GKN-1 oil field and continuing exploration
activity in Algeria has ensured the shape of Gulf Keystone, and as such our
future prospects, has improved considerably over the past year."


Christopher Garrett, the Company's Vice President of Operations, who has over 29
years relevant experience within the sector and who has been involved with this
project for over 2 years has reviewed and approved the technical information
contained in this announcement.  Mr Garrett is a Fellow of the Geological
Society, a member of the Petroleum Exploration Society of Great Britain, and a
Certified Petroleum Geologist (American Association of Petroleum Geologists).
He meets the criteria of a qualified person under the AIM guidance note for
mining, oil and gas companies.




Enquiries


Gulf Keystone Petroleum
[phone]
Todd Kozel, Chairman and Chief Executive Officer


RBC Capital Markets
[phone]
Sarah Wharry


Tristone
[phone]
Simon Ashby-Rudd


Citigate Dewe Rogerson
[phone]

Media: Martin Jackson
Analysts: George Cazenove


or visit: www.gulfkeystone.com

Executive Chairman & Chief Executive Officer's Statement


Overview

The year began well with approval by the Algerian Council of Ministers for the
introduction of BG Group into the Hassi Ba Hamou ("HBH") Contract in the
Timimoun Basin / Allal High area in central Algeria, with its formal
ratification by an announcement in the Official Journal of Algeria.  This was,
for Gulf Keystone, a strategically important transaction which significantly
enhanced our financial position and brought in a strong partner as operator.


The Declaration of Commerciality by the Joint SONATRACH / Gulf Keystone
Management Committee in June 2007 for the GKN and GKS oil fields, located in
Block 126a, South East Constantine Basin, North Algeria, was followed by
confirmation in January 2008 of approval by ALNAFT (the Hydrocarbon National
Agency) of the Field Development Plan.  This triggered an entitlement to a share
of production revenues from the GKN and GKS fields effective from 10 October
2007, which are a first for Gulf Keystone marking our evolution into an
exploration and production company.


In November 2007, we were delighted, in partnership with MOL Hungarian Oil & Gas
Public Company Limited ("MOL"), to be awarded interests in two blocks in
Kurdistan.  This was an important first step in the diversification of Gulf
Keystone's asset portfolio and extended our relationships with major
international energy companies.


We have made a good start to the current year.  Two wells have been completed
and preparations are advanced for the commencement of a third well of a six well
campaign to be drilled by our operating partner BG Group on the HBH Permit,
Algeria.  2D seismic on the Shaikan Block, Kurdistan, has been completed and
seismic on the Akri-Bijeel Block, Kurdistan, has begun.


I would like to thank all of the Company's employees who have contributed
enormously to the strong position that we now enjoy.


Management

A number of directors decided to leave the Company after termination of the RAK
Petroleum proposal and the Company then embarked on a major restructuring
initiative.


I assumed the role of Chairman and Chief Executive and co-founder Mr. Ali
Al-Qabandi assumed one of the vacant Director positions.


In January 2008, I was delighted to welcome Mr. Jeremy Asher and Mr. Mehdi Varzi
as Non-Executive Directors of the Company.  Jeremy Asher has considerable oil
and gas and business management experience and Mehdi Varzi, a joint Iranian and
British national, has considerable experience in the international oil and gas
industry.  Both have significantly strengthened our Board.


I was also delighted to welcome Mr. Ewen Ainsworth who joined the Board in
January 2008, as Finance Director.  Ewen Ainsworth has over 20 years experience
of finance roles within the oil and gas industry, including as Finance Director
of a publicly listed oil and gas company.


Operating Review


Algeria


Hassi Ba Hamou ("HBH") Permit


The HBH Permit, awarded to Gulf Keystone in May 2005, comprises five blocks
within an area of 18,380 square kilometres in the Timimoun Basin / Allal High
area in central Algeria.  The HBH Permit contains the significant HBH gas field
that was discovered by SONATRACH in 1965.


Following approval by the Algerian Council of Ministers, the introduction of BG
Group ("BG") into the HBH Contract was formally ratified in January 2007 by an
announcement in the Official Journal of Algeria.  This completed the transaction
between Gulf Keystone and BG, first announced in August 2006, in which BG
acquired a 36.75% interest in the HBH Concession, with Gulf Keystone retaining a
38.25% interest and SONATRACH a 25% interest.


The 3D seismic programme shot over 533 square kilometres of the HBH gas field,
which began in July 2007, has been completed on plan and the results have been
evaluated giving the partners a greater understanding of the gas discovery.


The HBH Permit wide 2D seismic programme was completed on 4 December 2007 with
2,047 kilometres of seismic having been acquired to fulfil the 2,000 kilometre
commitment.  Early indications from the data interpretation are that promising
leads and prospects have been identified over the HBH Permit, three of which the
partners agreed to prioritise as drill targets in the six well campaign
currently underway.  The six well drilling programme planned for the HBH Licence
Area consists of three exploration wells and three development wells which will
satisfy the contractual commitment for Period 1 of the Exploration Licence.


Spudded on 16 December 2007, HBH-4, an appraisal well on the HBH gas field, the
first of the six well campaign, was successfully drilled to a total depth of
1,011 metres and tested.  A production test, completed on reservoirs of Devonian
age, achieved a stabilised flow rate of 12,800 cubic metres per hour (10.8
mmscfg per day) through an 88/64-inch choke.


The drill rig then moved to well HBHN-1, an exploration well to the north of the
HBH gas field, which was spudded on 21 February 2008.  The well completed
drilling in April 2008 but failed to find commercial quantities of hydrocarbons
and it was abandoned.


The rig has now moved to prepare for drilling of the third well of the six well
commitment, exploration well RM-1.

Blocks 108 and 128a


Formal ratification in the Official Journal of Algeria of The Council of
Ministers of the award of the Ben Guecha Blocks (108 and 128a), which Gulf
Keystone signed in April 2005, occurred in January 2007, marking the start of
the first three year period of exploration on the contract.


Gulf Keystone immediately commenced exploration and appraisal activities on the
Blocks.  On Block 108, we completed the processing and preliminary
interpretation of 156 square kilometres of 3D seismic acquired over the
producing Ras Toumb field. The inventory of potential prospects has been
reviewed and the risks and rewards are currently being assessed.


The remaining work commitment covering the blocks includes the drilling of one
appraisal well on the Ras Toumb field and the drilling of one exploration well.

Block 126


SONATRACH and Gulf Keystone reached final agreement on all aspects of the field
development plans for the GKS and GKN oil fields, located in Block 126a, South
East Constantine Basin, North Algeria on 25 June 2007, the joint Management
Committee for the 126a Block unanimously approved the declaration of
commerciality for both fields.


The Development Plan was then submitted to ALNAFT (the Hydrocarbon National
Agency) for approval which was received in January 2008.  Approval conferred on
Gulf Keystone entitlement to its first producing revenues effective from 10
October 2007.


The GKN-1 well is currently producing at approximately 1,000 bopd gross and the
Development Plan envisages bringing the GKS-2 well on stream as soon as
practicable.  SONATRACH and Gulf Keystone intend to build a pipeline to connect
GKS-2 to the existing evacuation pipeline so that this well can begin
production.  The GKS-2 well produced at a rate equivalent to 4,586 bopd and 4.61
mmcfgd when it was tested in 2005.


The two fields will then be developed in a staged process through the
acquisition of a 3D seismic survey and a development drilling programme jointly
conducted by SONATRACH and Gulf Keystone.  In addition, it is intended that the
existing facilities will be upgraded to handle c3,000 bopd (gross).


Block 129


Early in 2007, the environmental impact assessment was completed and the work
programme and budget finalised to include the testing of one of the two
discovery wells Hassi El Kerma-1 ("HEK-1") and Hassi El Kerma-3 ("HEK-3"), the
acquisition of additional 2D seismic and the processing of 412 square kilometres
of 3D seismic acquired over the DDN discovery.


In April 2007, Gulf Keystone commenced workover operations on well HEK-3, an oil
and gas discovery well drilled by SONATRACH in 2004.  At that time, the well was
tested over the Cretaceous, Coniacian limestone interval and achieved, post
acidisation, a flow rate of 184 barrels of oil over a 4 hour period, prior to
the well being suspended.  Gulf Keystone re-entered the well and tested the same
zone, over the measured interval 2,439 to 2,446 metres, employing an acid
fracturing technique to improve connectivity between the reservoir and the
wellbore.  After cleaning up the well, a stabilised flow rate of 1,040 barrels
per day of 31 degrees API oil was achieved through a 32/64 inch choke. The well
was flowed through a separator for a total of 4.5 days and over 3,500 barrels of
oil were produced during this period. The crude contained little entrained gas
and has an estimated gas/oil ratio of 93 standard cubic feet per barrel. The
well is presently suspended.


A large amount of good quality engineering data was collected during the test
programme which, combined with the produced volume of oil and the long flow and
shut in periods, is providing valuable data for reservoir evaluation and field
development study purposes.  SONATRACH and Gulf Keystone are evaluating the
potential for the commercial development of the HEK discovery.


Kurdistan


Gulf Keystone was delighted in November 2007 to be awarded interests in two
Production Sharing Contracts ("PSC's") covering the Shaikan Block and the
Akri-Bijeel Block and also to be in partnership in these PSC's with MOL, through
its subsidiary Kalegran, and Texas Keystone Inc. ("Texas Keystone").


Shaikan Block


The Shaikan Block is situated approximately 90 kilometres North-West of Erbil
and covers an area of 283 square kilometres.  The interests under the PSC are
Gulf Keystone 75% (operators), Kalegran 20% and Texas Keystone 5%.  Gulf
Keystone will carry Texas Keystone's 5% share of initial costs and expenses
prior to drilling the first well.


Acquisition of 2D seismic on the Shaikan Block began on 2 March 2008 and was
completed on 19 April 2008.  A total of 171 kilometres was acquired utilising
both vibrator and dynamite sources.  The 2D seismic is now being processed.

Akri-Bijeel Block


In consideration for introducing Kalegran into the Shaikan partnership, Gulf
Keystone received a 20% interest, on a ground floor basis, in the Kalegran
operated PSC covering the Akri-Bijeel Block. The Akri-Bijeel Block is adjacent
to the Shaikan Block.  The interests in this PSC are Kalegran 80% (operator) and
Gulf Keystone 20%.


The partners expect to begin an extensive 2D seismic programme on the
Akri-Bijeel Block in the second quarter of 2008 to assess the exploration
potential of the Block.


The commercial terms of the PSC are in line with the terms and conditions
published by the Kurdistan Regional Government ("KRG") on its website.  Both the
PSCs are of a 25 year duration with an initial 3 year exploration phase.  Gulf
Keystone's expected total expenditure for these two blocks over the next three
years, given its current interests, is approximately US$53 million, the majority
of which is expected to have been incurred during the initial six month period.


Financial Review

The Company reports a loss after taxation of US$30.0m (2006: profit US$46.3m)
for the year ended 31 December 2007.  This loss is after a charge of US$20.6m as
a result of an impairment test on Block 126a following the failure to find
commercial levels of hydrocarbons in GRJ.


Net cash generated for the period of $28.9m (2006: $7.9m), reflected the
collection of $55m from the partial disposal of HBH in the prior year, which
added significantly to the group's cash reserve. Net cash used in operating
activities for the period was $11.4m (2006:$11.3m).


In common with many exploration companies, the Group raises finance for its
exploration and appraisal activities in discrete tranches to finance its
activities for specific periods. The directors actively monitor the cash
requirements of the business, and further funding is raised as and when
required.  The group's existing cash reserves, which stood at $88.3m at 31
December 2007 (2006: $59.3m), along with the expected production revenue from
the GKN and GKS fields, are considered to be sufficient to cover known work
commitments on existing projects.  A successful outcome from these work
commitments will require additional financing for these projects as they move
into appraisal and/or development.


Outlook

The shape of Gulf Keystone, and as such our future prospects, has improved
considerably over the past year.


Gulf Keystone is now entitled to its first production revenues from Block 126
and it is anticipated that this will allow the development of these fields to be
self financing.  The Gulf Keystone / SONATRACH Joint Venture is focused on
increased production from the GKN and GKS fields and the prudent future
development of these fields.


The work programme on the HBH Permit is progressing at a steady pace.  Operator,
BG North Sea Holdings, is currently preparing to drill the third well of a six
well programme while the partners, SONATRACH / Gulf Keystone / BG, continue to
evaluate the economic potential of the HBH discovery and further exploration
upside.


Our 2D seismic survey on the Shaikan Block in the Kurdish Region of Iraq has
been completed and it is intended to drill an exploration well on the Shaikan
structure as soon as a drilling rig and services can be contracted.  Our
partner, MOL, has brought forward their planned 400 kilometre 2D seismic
programme on the Akri-Bejeel Block in Kurdistan, its process to acquire seismic
began in April 2008.  The results of that survey will be used to plan an
exploration drilling programme on the Block. The progress being made on both
blocks in Kurdistan is outstanding.


I am confident that 2008 will prove to be a year of historically unparalleled
activity and potential for Gulf Keystone.




TF Kozel

Executive Chairman & Chief Executive Officer





Directors' Report


The directors present their annual report and the consolidated financial
statements of Gulf Keystone Petroleum Limited (the "Group") for the year ended
31 December 2007.


Gulf Keystone Petroleum Limited is a public company, incorporated in Bermuda,
and quoted on the Alternative Investment Market of the London Stock Exchange.


Principal Activities

The principal activity of the Group during the year was that of oil and gas
exploration operating in the Republic of Algeria and the Kurdistan Region of
Northern Iraq.


Results and Dividends

The Group's net loss after tax for the year was $30.0 million (2006: net profit
of $46.3 million).  The directors do not recommend a dividend for the year
(2006: $ nil).


Capital Structure

Details of the authorised and issued share capital, together with movements in
the Company's issued share capital during the year are shown in Note 15.


There are no specific restrictions on the size of a holding nor on the transfer
of shares, which are both governed by the general provisions of the Company's
bye-laws and prevailing legislation.  The Directors are not aware of any
agreements between holders of the company's shares that may result in
restrictions on the transfer of securities or on voting rights.


Details of the employee share scheme are set out in Note 21.


No person has any special rights of control over the Company's share capital and
all issued shares are fully paid.


With regard to the appointment and replacement of directors, the Company is
governed by its bye-laws, the Companies Act (Bermuda) and related legislation.


Review of the Business and Future Developments

A review of the business is given on pages 3 to 6 of this document.


Post Balance Sheet Events

On 10 January 2008, ALNAFT (the Hydrocarbon National Agency in Algeria) approved
the proposed Development Plan for the GKN and GKS oil fields located in Northern
Algeria.  The Field Development Plan envisages producing oil from the GKN-1 well
(currently producing at approximately 1,000 bopd gross) and bringing the GKS-2
well on stream as soon as practicable.


Under the terms of the Development Plan, the Group is entitled to an approximate
30% to 49% share of production from the GKN-1 well effective from 10 October
2007. As a result, oil production revenue of $5.4 million and cost of sales of
$3.3 million has been recorded for the year ended 31 December 2007.


Directors

The following directors have held office during the year.



TF Kozel - Executive Chairman & Chief Executive Officer (2)

JW Guest - President (resigned 23 July 2007)

RW Parsons - Chairman (resigned 23 July 2007) (1)

Sheikh Sultan Bin Saqr Al-Qassimi - Non-Executive Director (resigned 23 July
2007) (1)

AA Al-Qabandi - Executive Vice President (appointed 23 July 2007) (2)

JR Cooper - Finance Director (resigned 23 January 2008)

M Varzi - Non-Executive Director (appointed 7 January 2008) (3)

J Asher - Non-Executive Director (appointed 21 January 2008) (3)

KE Ainsworth - Finance Director (appointed 24 January 2008)



(1) Member of the audit committee, remuneration and appointments committee and
directors' remuneration committee up to 23 July 2007.

(2) Member of the audit committee, remuneration and appointments committee and
directors' remuneration committee from 23 July 2007 to 21 January 2008.

(3) Member of the audit committee, remuneration and appointments committee and
directors' remuneration committee from 22 January 2008.



Directors' Report continued


Directors' Interests in Shares and Options

Directors' interests in the shares of the Company, including family interests,
were as follows:


                                                             At 31 December 2007        At 1 January 2007
                                                                       Number of                Number of

                                                                   common shares            common shares
TF Kozel                                                              20,050,000               20,050,000
RW Parsons                                                                   n/a                  300,000
JW Guest                                                                     n/a                  698,614
JR Cooper                                                                    n/a                  126,533
AA Al-Qabandi                                                          5,500,000                5,500,000


In addition to the above interests, TF Kozel and AA Al-Qabandi are shareholders
in Gulf Keystone Petroleum Company LLC which owns 40,000,000 Common Shares.


On 15 February 2008, Agile Energy purchased 250,000 ordinary shares in the
Company at a price of 31.50p. Agile Energy is a Channel Islands company owned by
the Asher Family Trust, of which J Asher is the settlor and lifetime
beneficiary.


Directors' interests in share options of the Company, including family
interests, as at 31 December are disclosed on Page 12.


Substantial Shareholdings

Other than the directors' interests shown above, the Company has been notified
of the following substantial interests as at 14 April 2008:


                                                      Number of Common Shares  Percentage of issued share
                                                                                                  capital

Chase Nominees Ltd                                                  37,999,296                      13.64%
Credit Suisse Client Nominees (UK) Ltd                              20,984,862                       7.54%
Gibca Ltd                                                           20,000,000                       7.18%
Appollo Nominees Ltd                                                19,530,605                       7.01%
Credit Suisse Securities (Europe) Ltd                               16,850,920                       6.05%
HSBC Global Custody Nominee (UK) Ltd                                10,553,000                       3.79%
Evolution Securities Nominees Ltd                                   10,436,000                       3.75%


Going Concern

The Directors have considered the factors relevant to support a statement on
going concern. They have a reasonable expectation that the Group will continue
in operational existence for the foreseeable future and have therefore used the
going concern basis in preparing the financial statements.


In common with many exploration companies, the Group raises finance for its
exploration and appraisal activities in discrete tranches to finance its
activities for specific periods. The directors actively monitor the cash
requirements of the business, and further funding is raised as and when
required.  The group's existing cash reserves, which stood at $88.3m at 31
December 2007 (2006: $59.3m), along with the expected production revenue from
the GKN and GKS fields, are considered to be sufficient to cover known work
commitments on existing projects.  A successful outcome from these work
commitments will require additional financing for these projects as they move
into appraisal and/or development.


Annual General Meeting 2008

The resolutions to be proposed at the Annual General Meeting ("AGM") to be held
on 10 June 2008 are set out in the Notice of the AGM which can be found on Page
46.


By order of the board



TF Kozel

Executive Chairman & Chief Executive Officer

7 May 2008



Corporate Governance Statement



Principles of Corporate Governance

Although not required to, the policy of the Board is to manage the affairs of
the Group in accordance with the principles underlying the Combined Code on
Corporate Governance insofar as is appropriate given the circumstances of the
Group.


The Board

The Group is led and controlled by a Board comprising the Executive Chairman and
Chief Executive Officer, two Non-Executive Directors and two Executive
Directors.


There are no matters specifically reserved to the Board for its decision,
although board meetings are held on a regular basis, outside of the UK, and
effectively no decision of any consequence is made other than by the directors.
All directors participate in the key areas of decision-making, including the
appointment of new directors, through the Remunerations and Appointments
Committee.


The Board is responsible to shareholders for the proper management of the Group.
A statement of directors' responsibilities in respect of the financial
statements is set out on Page 14.  The Non-Executive Directors have a particular
responsibility to ensure that the strategies proposed by the Executive Directors
are fully considered.


To enable the Board to discharge its duties, all Directors have full and timely
access to all relevant information.


There is no agreed formal procedure for the Directors to take independent
professional advice at the Group's expense, however, independent professional
advice is made available where considered appropriate.


All Directors submit themselves for re-election at the Annual General Meeting at
regular intervals.  There are no specific terms of appointment for Non-Executive
Directors.


During 2007, 13 scheduled board meetings were held. Eight meetings took place in
continental Europe, five of which were in countries outside of the EU; four in
North America and one in the Middle East.


Board Committees

The following committees, which have written terms of reference, deal with
specific aspects of the Group's affairs.  As a result of Board changes during
2007, Todd Kozel and Ali Al-Qabandi were required to sit on several committees
as an interim measure until two non-executive directors were appointed.  Whilst
this is not considered to be best practice, the Company made every effort to
appoint several non-executive directors to rectify this situation and on 22
January 2008, Mehdi Varzi and Jeremy Asher were appointed as members of the
Remuneration and Appointments Committee and the Audit Committee.


The Remuneration and Appointments Committee

The Remuneration and Appointments Committee is responsible for making
recommendations to the Board on the Company's framework of Executive
remuneration and its cost.  The Committee determines the contract terms,
remuneration and other benefits for each of the Executive Directors and for
other senior members of management and is advised, as necessary, by a leading
firm of recruitment consultants.  The Committee comprised Roger Parsons and
Sheikh Sultan Bin Saqr Al-Qassimi up to their resignation on 23 July 2007, Todd
Kozel and Ali Al-Qabandi to 21 January 2008 and has comprised Mehdi Varzi and
Jeremy Asher since that date.  Details of the Directors' remuneration are set
out on Pages 11 to 13.


The Audit Committee

The Audit Committee comprised Roger Parsons and Sheikh Sultan Bin Saqr
Al-Qassimi up to their resignation on 23 July 2007, Todd Kozel and Ali
Al-Qabandi up to 21 January 2008 and has comprised Mehdi Varzi and Jeremy Asher
since that date.  Its primary tasks are to review the half-yearly and annual
accounts before they are presented to the Board, focusing in particular on
accounting policies and areas of management judgement and estimation. The
Committee is responsible for monitoring the controls which are in force to
ensure the integrity of the information reported to the shareholders. The
Committee acts as a forum for discussion of internal control issues and
contributes to the Board's review of the effectiveness of the Group's internal
control and risk management systems and processes. It advises the Board on the
appointment of external auditors and on their remuneration for both audit and
non-audit work, and discusses the nature and scope of the audit with the
external auditors. The Committee assesses the performance of the external
auditors as well as their independence and objectivity.


The external auditors confirm their independence each year in writing to the
Committee.


The Committee, which meets at least three times per year, provides a forum for
reporting by the Group's external auditors.  Meetings are also attended, by
invitation, by the Finance Director and CEO.


Internal Control

The Board acknowledges its responsibility for establishing and monitoring the
Group's systems of internal control.  Although no system of internal control can
provide absolute assurance against material misstatement or loss, the Group's
systems are designed to provide the Directors with reasonable assurance that
problems are identified on a timely basis and dealt with appropriately.


The key procedures that have been established and which are designed to provide
effective control are as follows:


-       Management Structure: The Board meets regularly to discuss all issues
        affecting the Group; and



-       Investment Appraisal: The Group has a clearly defined framework for
        investment appraisal and approval is required by the Board where 
        appropriate.


The Board regularly reviews the effectiveness of the systems of internal control
and considers the major business risks and the control environment.  No
significant control deficiencies have come to light during the year and no
weakness in internal financial control has resulted in any material losses,
contingencies or uncertainties which would require disclosure as recommended by
the guidance for directors on reporting on internal financial control.


The Board considers that in light of the control environment described above,
there is no current requirement for a separate internal audit function.


Relations with Shareholders

The Executive Chairman and Chief Executive Officer and Finance Director are the
Company's principal spokespeople with investors, fund managers, the press and
other interested parties.  Each of the Non-Executive Directors are available to
attend meetings with major shareholders (without the Executive Directors
present), if requested by such major shareholders. At the Annual General
Meeting, private investors are given the opportunity to question the Board.


This year's AGM will be held on 10 June 2008.



Report of the Remuneration and

Appointments Committee



Remuneration and Appointments Committee

The Remuneration and Appointments Committee comprised Roger Parsons and Sheikh
Sultan Bin Saqr Al-Qassimi up to their resignation on 23 July 2007, Todd Kozel
and Ali Al-Qabandi up to 21 January 2008 and has comprised Mehdi Varzi and
Jeremy Asher since that date.


The Committee was provided with information supplied by Opus Executive Partners
("Opus"), a specialist recruitment Company, with regard to structuring
Directors' remuneration packages and searching for suitable candidates.  Opus
did not provide any other services to the Group.


Details of the remuneration of each director are set out below.


Remuneration Policy

The policy of the Committee is to reward Executive Directors in line with the
current remuneration of Directors in comparable businesses, taking into
consideration the advice of independent benefit consultants in order to recruit,
motivate and retain high quality executives within a competitive market place.


There are two main elements of the remuneration packages for Executive Directors
and Senior Management:


•         basic annual salary (including Directors' fees) and benefits; and

•         share option and bonus share incentives.


There are no pension arrangements in the Group.


The Directors have share options granted to them under the terms of the Share
Option Scheme which is open to other qualifying employees. The exercise of
options under the Scheme is based upon the satisfaction of conditions relating
to the share price and length of employment. The conditions vary from grant to
grant.


Directors' Contracts

It is the Company's policy that Executive Directors should have contracts with
an indefinite term providing for a maximum of one year's notice. In the event of
early termination, the Directors' contracts provide for compensation up to a
maximum of basic salary for the notice period.


Todd Kozel, Ali Al-Qabandi and Ewen Ainsworth have service contracts with the
Company.  These can be terminated by either side on twelve months' notice for
Todd Kozel, six months for Ewen Ainsworth and one week for Ali Al-Qabandi.


Non-Executive Directors

The fees of Non-Executive Directors are determined by the Board as a whole
having regard to the commitment of time required and the level of fees in
similar companies.



Directors' Emoluments

                                                           Bonus                        2007          2006
                                            Salary        Shares          Fees         Total         Total
                                                 $             $             $             $             $

TF Kozel                                   675,000             -             -       675,000       675,000
RW Parsons                                       -             -        47,379        47,379       141,000
JW Guest                                   330,808       416,634             -       747,442     1,316,406
Sheikh Sultan Bin Saqr Al-Qassimi                -             -        26,322        26,322        45,000
JR Cooper                                  360,662       164,322             -       524,984       434,584
CA Brown                                         -             -             -             -       220,062
AA Al-Qabandi                              119,096             -             -       119,096             -

                                         1,485,566       580,956        73,701     2,140,223     2,832,052



Directors' Interests in Options

Directors' interests in share options of the Company, including family
interests, as at 31 December 2007 and for the comparative period, were as
follows:


                                     Date of grant     Number of       Exercise    Option exercise period
                                                    options over          Price
                                                          common (Great British
                                                          shares        Pence)
2007
TF Kozel                                 20 Aug 05     2,650,000         48.00p     20 Aug 05 - 19 Aug 14
AA Al-Qabandi                            20 Aug 05       500,000         48.00p     20 Aug 05 - 19 Aug 14

2006
TF Kozel                                 20 Aug 05     2,650,000         48.00p     20 Aug 05 - 19 Aug 14
AA Al-Qabandi                            20 Aug 05       500,000         48.00p     20 Aug 05 - 19 Aug 14
RW Parsons                               20 Aug 05        50,000         48.00p     20 Aug 05 - 19 Aug 14
JW Guest                                 20 Aug 05        50,000         48.00p     20 Aug 05 - 19 Aug 14
JW Guest                                  5 Jan 06     2,100,000         66.00p      5 Jan 06 - 30 Dec 15
Sheikh Sultan Bin Saqr Al-Qassimi        20 Aug 05       500,000         48.00p     20 Aug 05 - 19 Aug 14
JR Cooper                                29 Sep 06     1,200,000         59.75p     29 Sep 06 - 28 Sep 09
CA Brown                                 11 May 06       400,000         60.50p  14 May 06  -    5 Oct 07



For the above Directors, the exercise of an option is subject to the following
vesting conditions being satisfied:


(a)       on or after the share price of Common Shares reaches 96p, an option
shall be exercisable in respect of one-third of total shares under option;


(b)       on or after the price of the Common Shares reaches 144p, an option
shall be exercisable in respect of a further third of total shares under option;
and


(c)       on or after the price of the Common Shares reaches 192p, an option
shall be exercisable in respect of 100 per cent of the shares under option.


There were no share options exercised during the year.


On 15 February 2008, KE Ainsworth was granted 1,000,000 options over common
shares and M Varzi and J Asher were each granted 100,000 options over common
shares with an exercise price of 30p.  The options will become exercisable in
full after a period of three years from the date of grant provided the Company's
closing share price on any day after the Date of Grant is at a level which is no
less than 133% of the option price that is 39.9p.



Upon a change of control the above conditions fall away for all options and all
options become exercisable.


There have been no other changes in Directors' interests in share options in the
year other than the lapse of CA Brown, JW Guest, RW Parsons, Sheik Sultan
Al-Qassimi and JR Cooper's options.



Bonus shares

The Group granted bonus share payments to certain employees pursuant to Gulf
Keystone's Executive Bonus Scheme, subject to continuing employment. These bonus
shares are awarded over a period of three years but measured at fair value at
the date of grant. JW Guest was the one exception to this as in 2006 his grant
was awarded over a two year period. The number and value of shares granted are
as follows:


Directors' Bonuses

                                                   2007             2007             2006             2006
                                                 Number            Total           Number            Total
                                              of shares                $        of shares                $

JW Guest                                        684,019          416,634          678,614          806,221
JR Cooper                                       253,065          164,322          126,533          150,326

                                                937,084          580,956          805,147          956,547



The awards are included in the directors' emoluments on Page 12.


JW Guest's award includes entitlement for both 2006 and 2007 and certain other
contractual rights, including a percentage of salary to be taken in shares
instead of cash.


The market price of the shares at 31 December 2007 and 31 December 2006 was
32.3p and 70p respectively and the range during 2007 was 25.5p to 72.5p.




Approved





TF Kozel

Executive Chairman & Chief Executive Officer



7 May 2008





Directors' Responsibilities in the

Preparation of Financial Statements


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


The Directors have elected to prepare the group financial statements under
International Financial Reporting Standards ("IFRSs").


International Accounting Standard 1 requires that financial statements present
fairly for each financial year the Company's financial position, financial
performance and cash flows.  This requires the faithful representation of the
effects of transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and
expenses set out in the International Accounting Standards Board's 'Framework
for the Preparation and Presentation of Financial Statements'.  In virtually all
circumstances, a fair presentation will be achieved by compliance with all
applicable IFRSs.  Directors are also required to:


•      properly select and apply accounting policies;


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


•      provide additional disclosures when compliance with the specific
       requirements in IFRSs is insufficient to enable users to understand the 
       impact of particular transactions, other events and conditions on the 
       entity's financial position and financial performance.


The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company, for safeguarding assets and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.


The Directors are responsible for the maintenance and integrity of the corporate
and financial information included on the Company's website.


Legislation in Bermuda governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.





Independent Auditors' Report to the members

of Gulf Keystone Petroleum Limited


We have audited the Group financial statements of Gulf Keystone Petroleum
Limited for the year ended 31 December 2007 which comprise the Consolidated
Income Statement, Consolidated Balance Sheet, Statement of Changes in Equity,
Consolidated Cash Flow Statement, Summary of Significant Accounting Policies and
the related notes 1 to 25.


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


Respective responsibilities of directors and auditors

The directors' responsibilities for preparing the Annual Report and the
financial statements in accordance with applicable law and International
Financial Reporting Standards (IFRSs) are set out in the Statement of Directors'
Responsibilities.


Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and International Standards on
Auditing (UK and Ireland).


We report to you our opinion as to whether the financial statements give a true
and fair view and whether the financial statements have been properly prepared
in accordance with the accounting policies as set out in the Summary of
Significant Accounting Policies.


In addition we report to you if, in our opinion, the Company has not kept proper
accounting records or if we have not received all the information and
explanations we require for our audit.


We read other information contained in the Annual Report and consider whether it
is consistent with the audited financial statements.  The other information
comprises only the Directors' Report, the Report of the Remuneration and
Appointments committee, the Chairman's and the Chief Executive Officer's
Statement and the Corporate Governance Statement. We consider the implications
for our report if we become aware of any apparent misstatements or material
inconsistencies with the financial statements.  Our responsibilities do not
extend to any other information.



Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing
(UK and Ireland) issued by the Auditing Practices Board.  An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements.  It also includes an assessment of the
significant estimates and judgements made by the directors in the preparation of
the financial statements, and of whether the accounting policies are appropriate
to the Group's circumstances, consistently applied and adequately disclosed.


We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error.  In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.



Opinion

In our opinion:


•      the financial statements give a true and fair view, in accordance with
       IFRSs, of the state of the Group's affairs as at 31 December 2007 and of 
       its loss for the year then ended;

•      the financial statements have been properly prepared in accordance with
       the accounting policies set out in the Summary of Significant Accounting
       Policies; and

•      the information given in the Directors' Report is consistent with the
       financial statements.



Deloitte and Touche LLP

Chartered Accountants and Registered Auditors

London, United Kingdom

7 May 2008



Consolidated Income Statement

for the year ended 31 December 2007


                                                                   Notes              2007              2006
                                                                                     $'000             $'000


Continuing Operations

Revenue                                                                5            5,414                 -

Cost of sales                                                                      (3,257)                -

Gross profit                                                                        2,157                 -



Other income/(expense)

Gain on sale of assets                                                24                -            61,103

Impairment of intangible exploration assets                            9          (20,585)                -
General and administrative expenses                                               (16,172)          (16,589)
(Loss)/profit from operations                                          3          (34,600)           44,514


Interest revenue                                                       5            5,183             2,160
Finance costs                                                                        (101)             (229)

(Loss)/profit before tax                                                          (29,518)           46,445



Tax expense                                                            6             (377)             (136)

(Loss)/profit after tax for the year                                              (29,895)           46,309


(Loss)/profit per share (cents)
Basic                                                                  7           (10.79)            17.69
Diluted                                                                7           (10.79)            16.74



Consolidated Balance Sheet

as at 31 December 2007



                                                                   Notes             2007             2006
                                                                                    $'000            $'000


Non-current assets

Property, plant and equipment                                          8           24,097           26,782
Intangible assets                                                      9           41,996           19,955
Financial asset                                                       12            6,155            5,597
                                                                                   72,248           52,334
Current assets
Inventories                                                           11            5,526            4,711
Trade and other receivables                                           12            6,047           59,999
Cash and cash equivalents                                             12           88,286           59,328
                                                                                   99,859          124,038
Total assets                                                                      172,107          176,372




Current liabilities

Trade and other payables                                              13           36,684           10,835
Tax liabilities                                                        6              377              136
Provisions                                                            14            1,054            2,050
Total liabilities                                                                  38,115           13,021




Net assets                                                                        133,992          163,351

Equity
Share capital                                                         15            1,853            1,853
Share premium account                                                 15          159,076          159,063
Share option reserve                                                  16            3,988            3,535
Exchange translation reserve                                          16               27              (43)
Accumulated losses                                                    17          (30,952)          (1,057)
Total equity                                                                      133,992          163,351



The financial statements were approved by the Board of Directors and authorised
for issue on 7 May 2008 and are signed on its behalf by:




TF Kozel

Executive Chairman & Chief Executive Officer





KE Ainsworth

Finance Director




Consolidated Statement of Changes in Equity

for the year ended 31 December 2007


                                                             Attributable to equity holders of the Group
                                                     Share     Share     Share    Accumulated     Exchange       Total
                                                                        option         losses  translation
                                                   capital   premium   reserve                     reserve      equity
                                                             account
                                                     $'000     $'000     $'000          $'000        $'000       $'000

Balance as at 1 January 2006                         1,638   135,349       502       (47,366)         (57)     90,066

Share based payment expense                              -         -     3,033             -            -       3,033
Exchange differences arising on translation of           -         -         -             -           14          14
overseas operations
Share conversion and issue                             215    23,714         -             -            -      23,929
Net profit for the year                                  -         -         -        46,309            -      46,309
Balance at 1 January 2007                            1,853   159,063     3,535        (1,057)         (43)    163,351

Share based payment expense                              -         -       453             -            -         453
Exchange differences arising on translation of           -         -         -             -           70          70
overseas operations
Share conversion and issue                               -        13         -             -            -          13
Net loss for the year                                    -         -         -       (29,895)           -     (29,895)
Balance at 31 December 2007                          1,853   159,076     3,988       (30,952)          27     133,992





Consolidated Cash Flow Statement

for the year ended 31 December 2007


                                                                                      Notes         2007       2006
                                                                                                   $'000      $'000

Operating activities
Cash used in operations                                                                  18      (15,916)  (13,418)
Tax paid                                                                                            (136)        -
Interest received                                                                                  4,625     2,160
Net cash used in operating activities                                                            (11,427)  (11,258)

Investing Activities
Proceeds from prior year sale of assets                                                           55,000         -
Purchase of intangible assets                                                                     (9,184)   (3,166)
Purchase of property, plant and equipment                                                           (455)   (1,401)
Net cash generated by / (used in) investing activities                                            45,361    (4,567)

Financing activities
Interest paid                                                                                          -      (229)
Repayment of loan                                                                                 (5,000)        -
Proceeds on issue of share capital                                                                    13    23,929
Net cash (used in) / generated by financing activities                                            (4,987)   23,700

Net increase in cash and cash equivalents                                                         28,947     7,875
Cash and cash equivalents at beginning of year                                                    59,328    51,439
Effect of foreign exchange rate changes                                                               11        14

Cash and cash equivalents at end of the year being bank balances and cash on hand        12       88,286    59,328

                                                                                         





Consolidated Financial Statements

Summary of Significant Accounting Policies



General information


The Company is incorporated in Bermuda and it is quoted on the Alternative
Investment Market of the London Stock Exchange. The Company serves as the
holding Company for the Group, which is engaged in oil and gas exploration and
production, operating in the Republic of Algeria and the Kurdistan Region of
Northern Iraq.


Adoption of new and revised accounting standards


In the current year the Group has adopted IFRS 7 Financial Instruments:
Disclosures which is effective for annual reporting periods beginning on or
after 1 January 2007 and the related amendment to IAS 1 Presentation of
Financial Statements.  The impact of the adoption of IFRS 7 and the changes to
IAS 1 has been to expand the disclosures provided in these financial statements
regarding the Group's financial instruments and management of capital (see Note
23).


Four Interpretations issued by the International Financial Reporting
Interpretations Committee became effective for the current period.  These are:
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies; IFRIC 8 Scope of IFRS 2; IFRIC 9 Reassessment of
Embedded Derivatives; and IFRIC 10 Interim Financial Reporting and Impairment.
The adoption of these Interpretations has not led to any changes in the Group's
accounting policies.


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


IAS 23 (revised)                       Borrowing Costs

IAS 27 (revised)                       Consolidated and Separate Financial
                                       Statements

IFRS 3 (revised)                       Business Combinations

IFRS 8                                 Operating Segments

IFRIC 11                               IFRS 2 Group and Treasury Share
                                       Transactions

IFRIC 12                               Service Concession Arrangements

IFRIC 13                               Customer Loyalty Programmes

IFRIC 14                               IAS 19 The Limit on a Defined Benefit
                                       Asset, Minimum Funding Requirements and 
                                       their Interaction


The Directors anticipate that the adoption of these Standards and
Interpretations in future periods will have no material impact on the financial
statements of the Group except for revised segment disclosures when IFRS 8 comes
into effect for periods commencing on or after 1 January 2009.


Basis of accounting


The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRSs").


The financial statements have been prepared under the historical cost basis,
except for the valuation of share options and contingent deferred consideration,
and on a going concern basis. The principal accounting policies adopted are set
out below.


Basis of consolidation


The consolidated financial statements incorporate the financial statements of
the Company and enterprises controlled by the Company (its subsidiaries) made up
to 31 December each year. The Group uses the purchase method of accounting for
the acquisition of subsidiaries.



Consolidated Financial Statements

Summary of Significant Accounting Policies continued



Basis of consolidation (continued)

The results of subsidiaries acquired or disposed of during the year are included
in the consolidated income statement from the effective date of acquisition or
up to the effective date of disposal, as appropriate.  Where necessary,
adjustments are made to the financial statements of subsidiaries to bring the
accounting policies used into line with those of the Group.


All intra-group transactions, balances and unrealised gains on transactions
between Group companies are eliminated on consolidation.  Unrealised losses are
also eliminated unless the transaction provides evidence of an impairment of the
asset transferred.


Revenue


Revenue is recognised to the extent that it is probable that economic benefits
will flow to the Group and the revenue can be reliably measured.  Revenue is
measured at the fair value of consideration received or receivable and reflects
actual sales value in respect of petroleum production in the normal course of
business, net of sales related taxes.  Petroleum sales are recorded when goods
are delivered and title has passed.


Interest income is accrued on a time basis, with reference to the principal
outstanding and at the effective rate of interest applicable, which is the rate
that exactly discounts estimated future cash receipts through the expected life
of the financial asset to that asset's net carrying amount.


Leasing


Rentals payable under operating leases are charged to the income statement on a
straight-line basis over the term of the relevant lease.


Benefits received and receivable as an incentive to enter into an operating
lease are also spread on a straight-line basis over the shorter of the period to
the next rent review date and the lease term.


Foreign currencies


The functional and presentation currency of the Company, and the presentation
currency of the Group, is US Dollars.


Transactions in currencies other than US Dollars are recorded at the rates of
exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies
are retranslated at the rates prevailing on the balance sheet date. Non-monetary
assets and liabilities carried at fair value that are denominated in foreign
currencies are translated at the rates prevailing at the date when the fair
value was determined. Gains and losses arising on retranslation are included in
the income statement for the year.


On consolidation, the assets and liabilities of the Group's operations which use
functional currencies other than the US Dollar are translated at exchange rates
prevailing on the balance sheet date. Income and expense items are translated at
the average exchange rates for each month in the year. Exchange differences
arising, if any, are classified as equity and transferred to the Group's
translation reserve. Such translation differences are recognised as income or as
expenses in the period in which the operation is disposed of.



Consolidated Financial Statements

Summary of Significant Accounting Policies continued



Taxation


The tax expense represents the sum of tax currently payable and deferred tax.


The tax currently payable is based on taxable profit for the year earned in the
United Kingdom by the Group's subsidiary. Taxable profit differs from net profit
as reported in the income statement because it excludes items of income or
expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Group's liability for current
tax is calculated by using tax rates that have been enacted or substantively
enacted by the balance sheet date.


Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from the initial recognition of goodwill or from the initial
recognition of other assets and liabilities in a transaction that affects
neither the tax profit nor the accounting profit.


Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates and interests in joint
ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future.


The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that is no longer probable that sufficient
taxable profits will be available to allow all or part assets to be recovered.


Deferred tax is calculated at the tax rates that are expected to apply in the
year when the liability is settled or the asset is realised using rates that
have been enacted or substantially enacted by the balance sheet date. Deferred
tax is charged or credited in the income statement, except when it relates to
items charged or credited directly to equity, in which case the deferred tax is
also dealt with in equity.


Property, plant and equipment other than oil and gas interests


Property, plant and equipment are stated at cost less accumulated depreciation
and any accumulated impairment losses.  Depreciation is provided at rates
calculated to write each asset down to its estimated residual value evenly over
its expected useful life as follows:


Fixtures and equipment                  -        20% straight-line


Intangible assets other than oil and gas


Intangible assets, other than oil and gas assets, have finite useful lives and
are measured at cost and amortised over their expected useful economic lives as
follows:


Computer software                       -        33% straight-line



Consolidated Financial Statements

Summary of Significant Accounting Policies continued



Intangible and tangible non-current assets - oil and gas interests


The Group adopts the full cost method of accounting for its oil and gas
interests.  Under the full cost method of accounting all costs relating to the
exploration for and development of oil and gas exploration and evaluation
interests, whether productive or not, are accumulated and capitalised as
non-current assets within geographic cost pools. Exploration and evaluation
costs are generally classified as intangible non-current assets during the
exploration and evaluation phase and are carried forward where activities in an
area have not yet reached a stage which permits reasonable assessment of the
existence of economically recoverable reserves, and subject to there being no
impairment.


Costs dealt with in this way include seismic data, licence acquisition costs,
technical work, exploration and appraisal drilling, general technical support
and directly attributable administrative and overhead costs.


Exploration and evaluation costs are transferred to property, plant and
equipment upon declaration of commerciality and amortised, together with
development costs and decommissioning costs capitalised, over the life of the
area, generally the field.


Upon cessation of exploration on each licence, or otherwise when an impairment
of an exploration and evaluation asset arises, an impairment test is performed
for the pool and any balance of unsuccessful exploration and evaluation costs
carried forward in the pool is amortised over the life of the pool.


Depreciation, depletion and amortisation is provided under the unit of
production method which uses the estimated remaining commercial reserves and the
net book value and any further anticipated costs to develop such reserves.


Impairment of tangible and intangible non-current assets


At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset, or group of assets, is estimated in order
to determine the extent of the impairment loss (if any). For exploration and
evaluation assets, the group of assets considered is the pool. For other assets
where the asset does not generate cash flows that are independent from other
assets, the Group estimates the recoverable amount of the cash-generating unit
to which the asset belongs, generally the field.


Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset for which the estimates of future cash flows have been adjusted.


If the recoverable amount is estimated to be less than its carrying amount, the
carrying amount is reduced to its recoverable amount. An impairment loss is
recognised as an expense immediately.


Disposals of oil and gas interests


The difference between the fair value of the consideration receivable and the
carrying value of the relevant proportion of the oil and gas asset disposed of
is first applied to reduce any unsuccessful exploration and evaluation cost
carried in the pool, with any excess gain recognised in the income statement.


Carry of expenditures and farm-in arrangements


Where the Group enters into a commercial agreement which includes carry of
expenditures or a farm-in, the arrangement is accounted for according to its
commercial substance. Generally, in the case of a farm-in, the substance is that
the counterparty has acquired a share, or a greater share, of the underlying oil
and gas reserves and the arrangement is treated as a partial disposal. Where the
substance is that the counterparty has acquired a right, or a conditional right
to be reimbursed by the Group out of future production, a liability is
recognised at the time the obligation arises. In the case of a carry, a
liability is recognised when the obligation is probable and is no longer
conditional upon factors under the Group's control.


Inventories


Inventories relate to materials acquired for use in exploration activities.
These are valued at the lower of cost and net realisable value.


Capitalisation of interest


Any interest payable on funds borrowed for the purpose of obtaining a qualifying
asset will be capitalised as a cost of that asset.  However, any associated
interest charge from funds borrowed principally to address a short-term cash
flow shortfall during the suspension of development activities shall be expensed
in the year.


Financial instruments


The Group's financial instruments comprise of cash and borrowings together with
various items such as other receivables and trade payables, which arise directly
from its operations.  The main purpose of these financial instruments is to
provide working capital.


Financial assets and financial liabilities are recognised on the Group's balance
sheet when the Group has become a party to the contractual provisions of the
instrument.


Impairment of financial assets

Financial assets, other than those valued at fair value through the profit and
loss, are assessed for indicators of impairment at each balance sheet date.
Financial assets are impaired where there is objective evidence that, as a
result of one or more events that occurred after the initial recognition of the
financial asset, the estimated future cash flows of the investment have been
impacted.



Objective evidence of impairment could include:

•      significant financial difficulty of the issuer or counterparty; or

•      default or delinquency in interest or principal payments; or

•      it becoming probable that the borrower will enter bankruptcy or financial
       reorganisation.


For certain categories of financial asset, such as trade receivables, assets
that are assessed not to be impaired individually are subsequently assessed for
impairment on a collective basis.  Objective evidence of impairment for a
portfolio of receivables could include the Group's past experience of collecting
payments, an increase in the number of delayed payments in the portfolio past
the average credit period, as well as observable changes in local or national
economic conditions that correlate with default on receivables.


The carrying amount of the financial asset is reduced by the impairment loss
directly for all financial assets.  If in a subsequent period, the amount of the
impairment loss decreases and the decrease can be related objectively to an
event occurring after the impairment was recognised, the previously recognised
impairment loss is reversed through profit or loss to the extent that the
carrying amount of the investment at the date the impairment is reversed does
not exceed what the amortised cost would have been had the impairment not been
recognised.


Trade receivables

Trade receivables do not carry any interest and are stated at their nominal
value as reduced by appropriate allowances for estimated irrecoverable amounts.


Contingent deferred consideration

Contingent deferred consideration embedded in certain asset sale contracts is
treated as a financial instrument and recognised immediately at its fair value
and then reviewed on a periodic basis until the contractual rights to the cash
flows from the financial asset expire. Movements in the fair value are taken to
the income statement.


Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into.  An equity instrument is
any contract that evidences a residual interest in the assets of the Group after
deducting all of its liabilities.


Borrowings

Interest-bearing loans and overdrafts are recorded at the proceeds received, net
of direct issue costs. Finance charges, including premiums payable on settlement
or redemption, are accounted for on an accrual basis and are added to the
carrying amount of the instrument to the extent that they are not settled in the
year in which they arise.


Trade payables

Trade payables are not interest bearing and are stated at their nominal value.


Cash and cash equivalents

Cash and cash equivalents comprise of cash on hand and demand deposits and other
short-term highly liquid investments that are readily convertible to a known
amount of cash and are subject to an insignificant risk of changes in value.


Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received,
net of direct issue costs.


Provisions


Provisions are recognised when the Group has a present obligation as a result of
a past event which it is probable will result in an outflow of economic benefits
that can be reliably estimated.


Decommissioning provision


The decommissioning provision represents management's best estimate of the
Group's liability for restoring the sites of drilled wells to their original
status, discounted where the effect is material.


Share-based payments


The Group has applied the requirements of IFRS 2 to bonus shares and share
option schemes allowing certain employees within the Group to acquire or receive
shares of the Company.  For all grants of bonus shares and share options, the
fair value as at the date of grant is calculated using an appropriate option
pricing model and the corresponding cost is recognised over the expected life of
the option.


The fair value of the bonuses granted is recognised as an employee expense with
a corresponding increase in equity to the extent that company performance
conditions are expected to be met. The fair value of the bonuses granted is
measured using the standard methodology applied by the Company taking into
account the terms and conditions upon which the bonuses were granted. To the
extent that previous estimates relating to the satisfaction of performance
conditions change, a corresponding adjustment is recognised in the income
statement.


Critical accounting estimates and judgements


Estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.


The Group makes estimates and assumptions concerning the future. The resulting
accounting estimates and assumptions will, by definition, seldom equal related
actual results. The estimates and assumptions that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are discussed below.


Impairment review of GKN and GKS

An impairment test of the Group's producing pools requires a comparison of the
carrying value of the assets of the pool with the estimated discounted net cash
flows from future production to measure any impairment charge. The future net
cash flows from production reflect estimates of reserves, productive rates,
future oil and gas prices and costs, all of which are inherently uncertain,
together with the application of an appropriate discount rate. Management uses a
set of assumptions as at the date of the test which it considers to be
collectively reasonable in its judgement, and employs an economist to assist in
performing the tests. However, because of these uncertainties the actual future
cash flows could materially differ from those estimated.


Contingent deferred consideration from HBH sale

As part of the HBH agreement with the BG group ("BG"), if gas reserves of the
HBH field are agreed (in accordance with the agreement) to be greater than 800
bcf BG will pay the Group an additional $4m for every 100 bcf over 800 bcf from
a minimum of 900 bcf up to a maximum of 1,300 bcf. The Group estimates, based on
a previous independent review of potential reserves that the Group will receive
$8m contingent deferred income, which discounted to money of the day at 10% per
annum results in an estimated receivable contingent deferred income of $6.2m at
31 December 2007 (2006: $5.6m).


Carrying value of intangible exploration and evaluation assets

The outcome of ongoing exploration, and therefore whether the carrying value of
intangible exploration and evaluation assets will ultimately be recovered, is
inherently uncertain. Management makes the judgements necessary to implement the
Group's policy with respect to exploration and evaluation assets and considers
these assets for impairment at least annually with reference to indicators in
IFRS 6.


Decommissioning costs

The Group has estimated that decommissioning costs for wells will be
approximately $850,000 per well based on recent experience. It has provided for
its share of this amount for GKN-1, GKS-2 and GKS-3. The total amount provided
in the balance sheet as at 31 December 2007 at net present value is $1.1m.


Estimating revenue recognised

The production revenue recognised by the Group is calculated using the monthly
average Sahara Blend oil price between 10 October and 31 December 2007 as the
final sales price at which the revenue will be calculated had not been agreed
with SONATRACH at the date of signing this report.  The average Sahara Blend oil
price for this period totalled $89.46 per barrel.



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007


1.    Presentation of financial statements


The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRSs").


These financial statements are presented in US Dollars since that is the
currency in which the majority of the Group's transactions are denominated.


2.    Business and geographical segments


Business and geographical segments


For management purposes, the Group is currently organised into three legal
entities - Gulf Keystone Petroleum Limited and its subsidiaries Gulf Keystone
Petroleum International Limited and Gulf Keystone Petroleum (UK) Limited.


Geographical segments


For the purposes of segmental reporting, the primary segment reporting format is
determined to be geographical segments.  The Group's main exploration and
production activities take place in Algeria and the Kurdistan region of Northern
Iraq with corporate support functions in Bermuda and the United Kingdom.


Business segments


The secondary segment reporting format is business segments of which the Group
has one segment being the exploration and production of oil and gas.


Segment information for each geographical location is presented below:


2007                                                     United

                              Algeria    Kurdistan      Kingdom      Bermuda    Eliminations       Total
                                 2007         2007         2007         2007            2007        2007
                                $'000        $'000        $'000        $'000           $'000       $'000

Revenue                        5,414            -            -            -               -       5,414
Inter-segment sales                -            -        6,639            -          (6,639)          -
Total revenue                  5,414            -        6,639            -          (6,639)      5,414

Cost of sales
Production costs              (3,257)           -            -            -               -      (3,257)
Gross profit                   2,157            -        6,639            -          (6,639)      2,157

Impairment of intangible     (20,585)           -                                               (20,585)
exploration assets
                                                             -            -               -
General and                   (1,902)      (1,289)      (7,423)     (11,647)          6,089     (16,172)
administration expenses

Segment result               (20,330)      (1,289)        (784)     (11,647)           (550)    (34,600)

Interest revenue                                                                                  5,183
Finance costs                                                                                      (101)
Loss before tax                                                                                 (29,518)
Tax                                                                                                (377)
Loss after tax                                                                                  (29,895)



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



2.    Business and geographical segments continued


2007 continued                                           United
                                                        Kingdom
                              Algeria    Kurdistan                    Bermuda    Eliminations        Total
                                 2007         2007         2007          2007            2007         2007
                                $'000        $'000        $'000         $'000           $'000        $'000

OTHER INFORMATION
Capital additions             17,509       25,836           57             -               -       43,402
Depreciation and               2,487            3                                                   2,632
amortisation
                                                           183             -             (41)
Impairment losses             20,585            -            -             -               -       20,585
recognised

BALANCE SHEET
Assets
Segment assets                71,179       31,633        3,611       144,947         (79,263)     172,107

Liabilities
Segment liabilities          (73,845)     (32,916)      (1,522)       (5,347)         75,515      (38,115)



2006                                                    United

                             Algeria    Kurdistan      Kingdom     Bermuda   Eliminations       Total
                                2006         2006         2006        2006           2006        2006
                               $'000        $'000        $'000       $'000          $'000       $'000

Revenue                           -             -           -           -              -           -
Inter-segment sales               -             -       4,276           -         (4,276)          -
Total revenue                     -             -       4,276           -         (4,276)          -

Cost of sales
Production costs                  -             -           -           -              -           -
Gross profit                      -             -       4,276           -         (4,276)          -

Gain on sale of assets       61,103             -           -           -              -      61,103
Impairment of intangible          -             -           -           -              -           -
exploration assets
General and                  (5,517)            -      (4,024)    (11,412)         4,364     (16,589)
administration expenses

Result
Segment result               55,586             -         252     (11,412)            88      44,514

Interest revenue                                                                               2,160
Finance costs                                                                                   (229)
Profit before tax                                                                             46,445

Tax                                                                                             (136)
Profit after tax                                                                              46,309




Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



2. Business and geographical segments continued


2006 continued                                             United
                                                          Kingdom
                               Algeria    Kurdistan                   Bermuda   Eliminations       Total
                                  2006         2006          2006        2006           2006        2006
                                 $'000        $'000         $'000       $'000          $'000       $'000

OTHER INFORMATION
Capital additions               4,726             -           65           -              -       4,791
Depreciation and                  106             -                        -              -         276
amortisation
                                                             170

BALANCE SHEET
Assets
Segment assets                 61,225             -        1,459     173,441        (59,753)    176,372

Liabilities
Segment liabilities           (66,742)            -         (873)     (2,258)        56,852     (13,021)



3.    Profit / (loss) from operations


                                                                                 2007             2006

                                                                                $'000            $'000

Profit/(loss) from operations has been arrived at after charging:
Depreciation of property, plant and equipment
- owned assets                                                                  2,568              212
Amortisation of intangible assets                                                  64               64
Impairment of intangible exploration assets                                    20,585                -
Staff costs (see Note 4)                                                        7,539            8,160
Auditors' remuneration for audit services (see below)                             120              105
Operating lease rentals (see Note 20)                                             413              610
Exchange loss                                                                     229              157



Amounts payable to Deloitte & Touche LLP, and the previous auditors, in respect
of both audit and non-audit services were:

                                                                                              
                                                            2007                       2006
                                                   $'000             %         $'000             %

Audit services
- Annual statutory audit of the  Group               106           63%            94           53%
- Annual statutory audit of UK subsidiary             14            8%            11            6%
                                                     120           71%           105           59%
Other services pursuant to legislation
- Interims                                            32           19%            24           13%

Tax services
- Compliance services                                 16           10%            49           28%
                                                     168          100%           178          100%


Other assurance services payable in respect of the interims for 2006 were to
Baker Tilly.


Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued


4.    Staff costs


The average monthly number of employees (including executive directors) for the
year was as follows:

                                                                               2007              2006

                                                                             Number            Number

Office and management                                                            14                14
Exploration staff                                                                40                35
                                                                                 54                49

Their aggregate remuneration comprised:
                                                                               2007              2006

                                                                              $'000             $'000

Wages and salaries                                                            3,628             3,823
Social security costs                                                         3,458             1,304
Share based payment (see note 21)                                               453             3,033
                                                                              7,539             8,160


5.    Revenue

                                                                               2007              2006

                                                                              $'000             $'000

Sale of goods                                                                 5,414                 -

Interest revenue
- Interest on bank deposits                                                   4,625             2,160
- Unwinding of discount on contingent income                                    558                 -
                                                                              5,183             2,160


6.    Tax expense

                                                                               2007              2006

                                                                              $'000             $'000

Provision for current UK corporation tax                                        313                60
Provision for deferred UK corporation tax                                        64                76
Tax attributable to the Company and its subsidiaries                            377               136


Under current Bermuda laws, the Group is not required to pay taxes in Bermuda on
either income or capital gains.  The Group has received an undertaking from the
Minister of Finance in Bermuda exempting it from any such taxes at least until
the year 2016.


Any corporate tax liability in Algeria is settled out of SONATRACH's share of
oil under the terms of the Production Sharing Contracts and is therefore not
reflected in the tax charge for the year. In December 2006 the Algerian
Government announced the introduction of a windfall tax. The tax applies to all
foreign operators in Algeria producing hydrocarbons (gas or liquids) in
association with SONATRACH. The tax is only applied to any profits generated
when the average price of a barrel of oil is greater than $30 in the month
concerned. In GKP's forecast production range the windfall tax will only be
applied at 5% of GKP's share of production from Algeria.



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



6.       Tax expense continued


In Kurdistan, the Group is subject to corporate income tax on its income from
petroleum operations.  The rate of corporate income tax is currently 40% for all
taxable profits in excess of nine million Iraqi Dinar (equivalent to $7,359 at
the 31 December 2007 exchange rate). However, any corporate income tax arising
from petroleum operations will be paid from the Kurdistan Regional Government of
Iraq's share of petroleum profits.


The tax currently payable is based on taxable profit for the year earned in the
United Kingdom by the Group's subsidiary. UK corporation tax is calculated at
30% of the estimated assessable profit for the year of the UK subsidiary.


Deferred tax is provided for due to the temporary differences which give rise to
such a balance in jurisdictions subject to income tax.  During the current
period no taxable profits were made in respect of the group's Kurdistan PSCs. As
a result, no corporate income tax has been provided in the period.


The charge for the year can be reconciled to the profit/(loss) per the income
statement as follows:

                                                                               2007              2006

                                                                              $'000             $'000

Profit/(loss) before tax                                                   (29,518)           46,445

Tax at the Bermudan tax rate of 0% (2006: 0%)                                    -                 -
Effect of different tax rates of subsidiaries operating in other
jurisdictions
                                                                              (377)             (136)
Tax expense for the year                                                      (377)             (136)



7.       Earnings / (loss) per share


The calculation of the basic and diluted earnings / (loss) per share is based on
the following data:

                                                                               2007              2006

                                                                              $'000             $'000

Earnings / (loss)

(Loss)/profit for the purposes of basic and diluted loss per               (29,895)            46,309
share


                                                                              2007               2006

                                                                            Number             Number

Number of shares


Weighted average number of ordinary shares for the purposes of         276,963,270        261,769,050
basic earnings/(loss) per share

Adjustments for:
-bonus shares                                                                  n/a          1,669,707
-share options                                                                 n/a         13,240,500

Weighted average number of ordinary shares for the purposes of         276,963,270        276,679,257
diluted earnings/(loss) per share
                                                                                          



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



8.       Property, plant and equipment


                                                            Oil & Gas        Fixtures &

                                                           Properties         Equipment             Total

                                                                $'000             $'000             $'000
     At 1 January 2006

     Cost                                                     24,849               923            25,772
     Accumulated depreciation                                      -              (178)             (178)
     Net book value                                           24,849               745            25,594

     Year ended 31 December 2006

     Opening net book value                                   24,849               745            25,594
     Additions                                                 1,233               167             1,400
     Depreciation charge                                           -              (212)             (212)
     Closing net book value                                   26,082               700            26,782

     At 31 December 2006

     Cost                                                     26,082             1,090            27,172
     Accumulated depreciation                                      -              (390)             (390)
     Net book value                                           26,082               700            26,782

     Year ended 31 December 2007

     Opening net book value                                   26,082               700            26,782
     Additions                                                   460               255               715
     Adjustment to prior year transfer                          (904)                -              (904)
     Depreciation charge                                      (2,304)             (264)           (2,568)
     Foreign currency translation differences                      -                72                72
     Closing net book value                                   23,334               763            24,097

     At 31 December 2007

     Cost                                                     25,638             1,417            27,055
     Accumulated depreciation                                 (2,304)             (654)           (2,958)
     Net book value                                           23,334               763            24,097



The depreciation charge of $2,304,000 on oil and gas properties (2006: $nil) has
been included in cost of sales and the depreciation charge of $264,000 on
fixtures and equipment (2006: $212,000) has been included in general and
administrative expenses.


The adjustment to prior year transfer relates to a transfer between intangible
assets and property, plant and equipment (see Note 9).



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



9.       Intangible assets


                                                         Exploration &  Computer software              Total

                                                      evaluation costs              $'000              $'000

                                                                 $'000
    At 1 January 2006

    Cost                                                       16,722                156             16,878

    Accumulated amortisation                                        -                (27)               (27)
    Net book value                                             16,722                129             16,851


    Year ended 31 December 2006

    Opening net book value                                     16,722                129             16,851
    Additions                                                   3,330                 61              3,391
    Disposal of HBH                                              (223)                 -               (223)
    Amortisation charge                                             -                (64)               (64)
    Closing net book value                                     19,829                126             19,955


    At 31 December 2006

    Cost                                                       19,829               217            20,046
    Accumulated amortisation                                        -               (91)              (91)
    Net book value                                             19,829               126            19,955

    Year ended 31 December 2007

    Opening net book value                                     19,829               126            19,955
    Additions                                                  41,738                45            41,783
    Adjustment to prior year transfer (see Note 8)                904                 -               904
    Impairment write off                                      (20,585)                -           (20,585)
    Amortisation charge                                             -               (64)              (64)
    Foreign currency translation differences                        -                 3                 3
    Closing net book value                                     41,886               110            41,996

    At 31 December 2007

    Cost                                                       41,886               265            42,151
    Accumulated amortisation                                        -              (155)             (155)
    Net book value                                             41,886               110            41,996



The net book value at 31 December 2007 is made up of intangible assets relating
to HBH $7.5m; Block 108 $3.2m; Block 129 $5.6m; and Kurdistan $25.7m.


During 2007, an impairment loss was recognised in respect of intangible
exploration assets relating to Block 126a following the failure to find
commercial levels of hydrocarbons in GRJ.


The additions to oil & gas exploration and evaluation costs in the year relate
to the simulation and testing of GRJ-2, which has been subsequently written off
in the year; drilling of the HBH-4 appraisal well and the acquisition of HBH 2D
and 3D seismic.


The amortisation charge of $64,075 (2006: $64,452) has been included in general
and administrative expenses.



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued


10.   Subsidiary


Details of the Company's subsidiaries at 31 December 2007 are as follows:


Name of subsidiary                     Place of Proportion of Proportion of                Principal
                                  incorporation     ownership  voting power
                                                     interest          held                 activity

                                                            %             %
Gulf Keystone Petroleum (UK)      Great Britain           100           100  Geological, geophysical
Limited                                                                     and engineering services


Gulf Keystone Petroleum                 Bermuda           100           100          Exploration and
International Limited                                                       evaluation activities in
                                                                                           Kurdistan



11.   Inventories

                                                                                  2007              2006

                                                                                 $'000             $'000


Exploration materials                                                            5,526             4,711



12.   Financial Assets


Non-current financial asset

This balance represents $6.2m (2006: $5.6m) of contingent deferred consideration
from the HBH agreement with BG that is required to be recorded at fair value in
accordance with IAS 39. This amount is recorded as a financial asset and
represents the estimated fair value of potential future "bonus" payments in
respect of the approved commercial reserves attributable to the HBH field upon
development. The timing of payment of this amount is uncertain but it has been
included in non-current assets.


Trade and other receivables
                                                                              2007               2006

                                                                             $'000              $'000

Disposal of HBH                                                                  -             55,000
Recoverable from BG                                                              -              2,014
Trade receivables                                                            4,269                  -
Prepayments for inventories                                                      -              1,175
Other receivables and prepayments                                            1,778              1,810
                                                                             6,047             59,999


The $4.3m trade receivable owing from SONATRACH relates to production revenue
from the GKN-1 well for the period from 10 October to 31 December 2007.


Included within other receivables and prepayments is an amount of $458,000
(2006: $458,000) being the deposit for the UK office which is receivable after
more than one year.

The directors consider that the carrying amount of trade and other receivables
approximates to their fair value and no amounts are provided against them.


Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued


12.   Financial Assets continued


Cash and cash equivalents


Cash and cash equivalents comprise of cash and short-term deposits held by the
Group. The carrying amount of these assets approximates to their fair value.
Certain restrictions relating to cash balances are explained in Note 19.


13.   Trade and other payables


Trade and other payables principally comprise amounts outstanding for trade
purchases and ongoing costs.



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


                                                                               2007              2006

                                                                              $'000             $'000

Due within one year:
Trade payables                                                                  226             1,483
Amounts owed to related parties                                                   -             5,050
Accrued expenses                                                             36,458             4,302
                                                                             36,684            10,835



14.   Provisions

                                                                                  Decommissioning

                                                                                        Provision

                                                                                            $'000

At 1 January 2007                                                                           2,050
Decrease due to revision of estimate                                                         (687)
Utilisation of provision                                                                     (410)
Unwinding of discount                                                                         101
At 31 December 2007                                                                         1,054



Of this provision for well abandonment for three wells, the expenditure is
expected to be incurred over the next five to 10 years.



15.   Share capital

                                                                               2007              2006

                                                                              $'000             $'000
Authorised



500,000,000 Common shares of $0.01 each                                       5,000             5,000

50,000,000 Non-voting shares $0.01 each                                         500               500

60,000 Series A Preferred shares of $1,000 each                              60,000            60,000

                                                                             65,500            65,500


Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



15.   Share capital continued


                                                          Common shares         Share         Share

                                                   Shares        Amount       Capital       Premium

                                                       No         $'000         $'000         $'000

Issued and fully paid



Balance 1 January 2006                        253,732,140       136,987         1,638       135,349



Share issue August 2006                        21,600,000        23,929           215        23,714

Bonus scheme shares October 2006                  148,000             -             -             -

Bonus scheme shares December 2006                                     -             -             -
                                                1,274,968
Balance 31 December 2006                      276,755,108       160,916         1,853       159,063



Retention scheme shares October 2007              652,832             6             -             6

Retention scheme shares November 2007              71,098             1             -             1

Bonus scheme shares December 2007                 561,518             6             -             6



Balance 31 December 2007                      278,040,556       160,929         1,853       159,076



In October and November 2007, 723,930 new shares were issued as part of a
one-off retention scheme.


In December 2007, 561,518 new shares were issued as part of the Company's bonus
share scheme (2006: 1,422,968 new shares).


In August 2006, 21.6m new common shares were placed at £0.62 per common share to
finance continuing exploration and development activities.


Rights attached to share capital

The holders of the common shares have the following rights:


The holders of the common shares (subject to the other provisions of the
bye-laws) are:


(i)        entitled to one vote per share;


(ii)       entitled to receive notice of, and attend and vote at, general
           meetings of the Company;


(iii)      entitled to dividends or other distributions; and


(iv)       in the event of a winding-up or dissolution of the Company, whether
           voluntary or involuntary or for a reorganisation or otherwise or upon
           a distribution of capital, entitled to receive the amount of capital
           paid up on their Common Shares and to participate further in the 
           surplus assets of the Company only after payment of the Series A 
           Liquidation Value (as defined in the Bye-laws) on the Series A 
           Preferred Shares.



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



16.   Other reserves


                                                                       Share option          Exchange

                                                                            reserve       translation

                                                                              $'000           reserve

                                                                                                $'000

Balance at 1 January 2006                                                       502              (57)
Currency exchange difference                                                      -               14
Employee share bonus and share options charge                                 3,033                -
Balance at 31 December 2006                                                   3,535              (43)

Currency exchange difference                                                      -               70
Employee share bonus and share options charge                                   453                -
Balance at 31 December 2007                                                   3,988                27


17.   Accumulated losses

                                                                                                 $'000

Balance at 1 January 2006                                                                     (47,366)

Net profit for the year                                                                        46,309
Balance at 31 December 2006                                                                    (1,057)

Net loss for the year                                                                         (29,895)
Balance at 31 December 2007                                                                   (32,221)


18.   Reconciliation of profit / (loss) from operations to net cash used in
operating activities

                                                                             2007              2006

                                                                            $'000             $'000

(Loss) / profit from operations                                           (34,598)           44,514
Adjustments for:
Depreciation of property, plant and equipment                               2,568               212
Amortisation of intangible assets                                              64                64
Impairment of intangible exploration assets                                20,585                 -
Stock written off                                                             249                 -
Foreign exchange loss                                                         229                 -
Share based payment expense                                                   453             3,033
(Increase) in inventories                                                  (1,064)           (1,239)
Decrease in provisions                                                       (996)                -
Decrease / (increase) in receivables                                       (1,050)          (56,613)
(Increase) in non-current financial assets                                      -            (5,597)
(Decrease) / increase in payables                                          (2,356)            2,208
Net cash used in operating activities                                     (15,916)          (13,418)



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



19.   Guarantees


Cash backed guarantees

As part of the contractual terms of the Algerian contracts, the Group has given
bank guarantees to SONATRACH of $21.6 million. These are cash backed guarantees
which effectively reduce the free cash available that the Group has on its
balance sheet. The $21.6 million total is comprised of $6 million for the
Bottena ("129 Contract") work programme and $15.6 million for the Ben Guecha ("
108/128b Contract") work programme. These guarantees are for the exploration and
evaluation work programmes stipulated in the contracts and are reduced as the
work programmes are completed.


Other guarantees

The Group has provided a guarantee of $3.75 million to the Federal Government of
the Republic of Iraq to state it will meet the minimum financial commitment and
/ or the minimum exploration obligations as required under the terms of the PSC.
The guarantee is reduced as the work programme is completed.


20.   Operating lease arrangements


The Group as a lessee
                                                                                    2007              2006

                                                                                   $'000             $'000

Minimum lease payments under operating leases recognised as                          413               610
expense for the year


At the balance sheet date, the Group had outstanding total commitments under
non-cancellable operating leases, which fall due as follows:
                                                                                    2007               2006

                                                                                   $'000              $'000

Within one year                                                                      418                531
In the second to fifth years inclusive                                                46                805
                                                                                     464              1,336

Operating lease payments represent rentals payable by the Group for certain of
its office properties in the UK and Algeria and residential properties in
Algeria.  The UK lease is for ten years from February 2005 with a break clause
at year 5 which is January 2010. The Algerian properties are leased for two
years or less.



21.   Share based payments

                                                                              2007               2006

                                                                             $'000              $'000
Bonus shares (credit)/charge                                                   (57)             2,184
Share options charge                                                           510                849
                                                                               453              3,033


Equity settled share option plan

The Group plan provides for a grant price equal to the closing market price of
the Group shares on the date of grant.  The vesting period is generally 10 years
for options granted before August 2006 and 3 years for options granted after
that. If options remain unexercised after a period of 10 years from the date of
grant, the options expire.  Furthermore, options are forfeited if the employee
leaves the Group before the options vest.


Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



21.   Share based payments continued


The weighted average contractual life relating to the share options outstanding
at the year end was 7 years (2006: 7 years).


                                                      2007                            2006
                                         Number of Weighted average       Number of        Weighted
                                                     exercise price
                                     share options                    share options         average
                                                         (in pence)
                                              '000                             '000  exercise price

                                                                                         (in pence)

Outstanding at 1 January                   13,241             57.2p          6,992            53.8p
Granted during the year                     1,850             33.8p          7,249            61.5p
Forfeited during the year                  (6,100)            60.3p         (1,000)           65.6p
Outstanding at 31 December                  8,991             50.3p         13,241            57.2p

Exercisable at 31 December                  1,581             51.9p          1,997            51.9p



The inputs into the stochastic (Monte-Carlo) valuation model are as follows:

                                                                                2007               2006


Weighted average share price on date of grant (in pence)                       33.8p              61.5p

Weighted average exercise price of options granted in the year (in pence)      33.8p              61.5p



Expected volatility was determined by using the average of a peer group of
similar oil and gas companies over a seven year period for grants before 2006
and over a five year period after that. This was thought more instructive given
the limited nature of the Company's history.


The expected volatility was calculated as 43.5%/43.1% for September 2006 and
October 2006 and 36.0% for all grants in 2007.


The expected term of the September 2006 and October 2006 grants were five to
nine years. The 2007 grants have been calculated using an expected term of four
to five years.  The risk free rate was 4.2% and 4.3% for the September 2006 and
October 2006 grants respectively and 4.9%, 5.0% and 4.5% for the September,
October and December 2007 grants.


The Company has made no dividend payments to date and as there is no expectation
of making payments in the immediate future, therefore the dividend yield
variable has been set at zero for all grants.


Share options outstanding at the end of the year have the following expiry date
and exercise prices:


                                                   Exercise price                     Options ('000)

Expiry date                                               (pence)             2007              2006



19 August 2014                                               48.0            4,250             5,100

05 October 2007                                              60.5                -               400

29 September 2015                                            85.0              492               492

30 December 2015                                             66.0                -             2,100

29 September 2009                                            59.8            2,049             4,799

18 October 2009                                              59.0              350               350

17 September 2010                                            31.0            1,050                 -

11 October 2010                                              39.5              550                 -

05 December 2010                                             33.0              250                 -

                                                                             8,991            13,421


Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



21.   Share based payments continued


Bonus Shares

The Group issues bonus shares to certain employees for a nominal consideration.
Bonuses are generally granted over three years and are vested in three equal
tranches during those years subject to continued employment. These share-based
payments are measured at fair value at the date of grant. The fair value of the
shares granted is recognised as an employee expense with a corresponding
increase in equity. The fair value of the shares granted is the market price on
the date of the award and is charged to the income statement over the vesting
period taking into account the terms and conditions upon which the shares were
granted.

                                                                                 Bonus Shares ('000)
                                                                                2007             2006

As at 1 January                                                               3,093                 -
Issued during the year                                                          783             3,093
Lapsed during the year                                                          (38)                -
Sold during the year                                                         (1,153)                -
As at 31 December                                                             2,685             3,093


22.   Related party transactions



Transactions with related parties

Transactions between the Company and its subsidiaries are disclosed below.



During the year the parent Company entered into the following transactions with
its subsidiary, Gulf Keystone Petroleum (UK) Ltd:


                                                                               2007              2006

                                                                              $'000             $'000

Purchases of services in year                                                 6,639             4,276
Amounts owed to related parties at year end                                     597                 -



These amounts relate to the provision of geological, geophysical and engineering
services by Gulf Keystone Petroleum (UK) Limited.


On 9 June 2006 the Group signed loan agreements with GIBCA Limited and Falcon
Partners Trust, both related parties, to provide an unsecured debt facility
drawn down in aggregate by US$5 million at an interest rate of 7% and for a term
of 12 months.  Sheikh Sultan Al-Qassimi is a shareholder in GIBCA Limited and Mr
Todd Kozel has a relationship with Falcon Partners Trust.  On 13 January 2007
the Group repaid in full these loans on the completion of the BG deal.  The
interest expense paid and accrued for in the year was nil (2006: $228,693).



Texas Keystone Inc.

Texas Keystone Inc is a related party of the Group because Mr Todd Kozel, a
director of the Company, is also a director of Texas Keystone, Inc. ("TKI").


On 21 December 2007, the Company entered into a Joint Operating Agreement ("the
Agreement") for the Shaikan Block in Kurdistan in which TKI holds a 5%
participating interest.  TKI initially led the pursuit of opportunities in the
Kurdistan region and participated in the successful signature of the Production
Sharing Contract for the Shaikan Block.  In return for this and TKI's continuing
participation, Gulf Keystone Petroleum International Limited will be liable and
pay for TKI's share of the costs of the Exploration Work Programme and all costs
ancillary to the Joint Operations.



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



22.   Related party transactions continued


No guarantees have been given or received.  No provisions have been made for
doubtful debts in respect of the amounts owed by related parties.


Remuneration of key management personnel

The remuneration of the directors and officers, the key management personnel of
the Group, is set out below in aggregate for each of the categories specified in
IAS 24 Related Party Disclosures.  The names and positions held by those
directors and employees identified as key management personnel are as follows:


TF Kozel - Executive Chairman & Chief Executive Officer

JW Guest - President (resigned 23 July 2007)

RW Parsons - Chairman (resigned 23 July 2007)

Sheikh Sultan Bin Saqr Al-Qassimi - Non-Executive Director (resigned 23 July
2007)

AA Al-Qabandi - Executive Vice President (appointed 23 July 2007)

JR Cooper - Finance Director (resigned 23 January 2008)

I Patrick - Director of Commercial & Legal Affairs (Gulf Keystone Petroleum (UK)
Ltd)

IA Al-Khaldi - Chief Operating Officer

C Garrett - Vice President Operations

D Mackertich - Executive Vice President Exploration & Technical


Further information about the remuneration of individual directors is provided
in the Report of the Remuneration and Appointments Committee on pages 11 to 13.


                                                                              2007               2006

                                                                             $'000              $'000

Short-term employee benefits                                                 3,206              3,462
Share based payment - options                                                  510                849
Share based payment - bonus shares                                             (57)             2,184
                                                                             3,659              6,495


23.   Financial instruments


Capital Risk Management

The Group manages its capital to ensure that the entities within the Group will
be able to continue as going concerns while maximising the return to
stakeholders through the optimisation of the debt and equity balance. The Group
is not subject to externally imposed capital requirements. The capital structure
of the Group consists of cash and cash equivalents and equity attributable to
equity holders of the parent, comprising issued capital, reserves and
accumulated losses as disclosed in Notes 15, 16 and 17.



Gearing Ratio

The Group's Board of Directors reviews the capital structure on a regular basis.
As part of this review, the Board considers the cost of capital and the risks
associated with each class of capital.

Given the current stage of development of the Group's assets, it is the Group's
policy to finance its business by means of internally generated funds and
external share capital. As a result, there was no debt at 31 December 2007.



Significant Accounting Policies

Details of the significant accounting policies and methods adopted, including
the criteria for recognition, the basis of measurement and the basis on which
income and expenses are recognised, in respect of each class of financial asset,
financial liability and equity instrument are disclosed in the Summary of
Significant Accounting Policies.



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



23.   Financial instruments continued



Categories of Financial Instruments
                                                                             Carrying Value
                                                                          2007            2006

                                                                         $'000           $'000
Financial assets
Fair value through profit and loss (designated at recognition)           6,155           5,597
Loans and receivables (including cash and cash equivalents)             94,333         119,327

Financial liabilities
Amortised cost                                                          36,684          10,835



Financial Risk Management Objectives

The Group's management monitors and manages the financial risks relating to the
operations of the Group. These financial risks include market risk (including
currency and fair value interest rate risk), credit risk, liquidity risk and
cash flow interest rate risk.


The Group does not presently hedge against these risks as the benefits of
entering into such agreements is not considered to be significant enough as to
outweigh the significant cost and administrative burden associated with such
hedging contracts.


The risks are closely reviewed by the Board on a regular basis and steps are
taken where necessary to ensure these risks are minimised.


Market risk

The Group's activities expose it primarily to the financial risks of changes in
foreign currency exchange rates and changes in interest rates in relation to the
Group's cash balances.


The operating currencies of the Group are Great British Pounds (GBP), US Dollars
(USD), Algerian Dinars (DZD) and Iraqi Dinars (IQD).  The Group does not hedge
against the effects of movement in exchange rates. The risks are monitored by
the Board on a regular basis.


During the financial year the Group diversified its operations into Kurdistan in
Northern Iraq, exposing the Group to an additional foreign currency risk arising
from the use of Iraqi Dinars. This additional exposure is being managed in the
same manner as the Group's other foreign currency risks.


There have been no other changes to the Group's exposure to market risks or the
manner in which it manages and measures the risk.


Foreign currency risk management

The Group undertakes certain transactions denominated in foreign currencies,
being any currency other than the functional currency of the Group subsidiary
concerned. Hence, exposures to exchange rate fluctuations arise.



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



23.   Financial instruments continued


The carrying amounts of the Group's significant foreign currency denominated
monetary assets and monetary liabilities at the reporting date are as follows:


                                       Assets                       Liabilities
                                2007          2006            2007            2006

                                $'000         $'000           $'000           $'000

Great British Pounds            1,160         998             (43)            (342)
Algerian Dinars                 397           (454)           (300)           (573)



Foreign currency sensitivity analysis

The Group is mainly exposed to the currency of the United Kingdom (Great British
Pounds), Algeria (Algerian Dinars) and Iraq (Iraqi Dinars).


The following table details the Group's sensitivity to a 10% increase and
decrease in the US dollar against the relevant foreign currencies. 10% is the
sensitivity rate that represents management's assessment of the reasonably
possible change in foreign exchange rates.


The sensitivity analysis includes only outstanding foreign currency denominated
monetary items as at the balance sheet date, and adjusts their translation at
the year end for a 10% change in foreign currency rates. The sensitivity
analysis includes external loans as well as loans to foreign operations within
the Group where the denomination of the loan is in a currency other than the
currency of the lender or the borrower.


A positive number below indicates an increase in profit and net assets where the
dollar weakens 10% against the relevant currency. For a 10% strengthening of the
dollar against the relevant currency, there would be an equal and opposite
impact on the profit and other equity, and the balances below would be negative.


                 GBP Currency Impact        DZD Currency Impact        IQD Currency Impact
                      2007         2006            2007        2006         2007         2006

                     $'000        $'000           $'000       $'000        $'000        $'000

Profit or              116          100              40          41            -            -
loss


The Group's sensitivity to foreign currency has decreased during the current
year, particularly in relation to GBP denominated monetary assets, as there has
been a decrease in the value of GBP bank balances and GBP accounts receivable in
2007.


Interest rate risk management

The Group's policy on interest rate management is agreed at Board level and is
reviewed on an ongoing basis. The current policy is to maintain a certain amount
of funds in the form of cash for short-term liabilities and have the rest on
relatively short term deposits, usually one month notice to maximise returns and
accessibility.


Interest rate sensitivity analysis

The sensitivity analysis below has been determined based on the exposure to the
interest rates for cash and cash equivalents at the balance sheet date. A 0.5%
increase or decrease is used as it represents management's assessment of the
reasonably possible changes in interest rates.

Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued


23.   Financial instruments continued

If interest rates increased by 0.5% and all other variables were held constant,
the Group's profit for the year ended 31 December 2007 would increase by
$441,430 per annum (2006: increase by $296,640).

If interest rates decreased by 0.5% and all other variables were held constant,
the Group's profit for the year ended 31 December 2007 would decrease by
$441,430 per annum (2006: decrease by $296,640).

The Group's sensitivity to interest rates has remained relatively constant
during the current period due to the fairly constant cash balance for the
majority of the current financial year.

Credit risk management

Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Group. The Group has
a non-current financial asset totalling $6.2m (2006: $5.6m) which represents the
estimated fair value of potential future "bonus" payments payable by BG to the
Group in respect of the size of the ultimately approved commercial reserves
attributable to the HBH field upon development.


In addition to this non current financial asset, trade and other receivables
outstanding from the BG Group at balance date totalled $462,810 (2006: $57.0m).
The credit risk in relation to the BG receivables is considered to be minimal.


The Group also had a trade receivable outstanding from SONATRACH, Algeria's
national oil development enterprise, totalling $4.3m at 31 December 2007.


The group has no other major counterparties.


Liquidity risk management

Ultimate responsibility for liquidity risk management rests with the board of
directors. It is the Group's policy to finance its business by means of
internally generated funds and external share capital. In common with many
exploration companies, the Group raises finance for its exploration and
appraisal activities in discrete tranches to finance its activities for limited
periods.  Further funding is raised as and when required.  When any of the
Group's projects move to the development stage, specific financing, including
debt, may be required to enable development to take place.


Liquidity and interest risk tables

The following tables detail the Group's remaining contractual maturity for its
non-derivative financial liabilities. The tables have been drawn up based on the
undiscounted cash flows of financial liabilities based on the earliest date on
which the Group can be required to pay.


                       Weighted           Less than 1        1 to 3             Total
                       Average            month              months
                       Effective
                       Interest Rate
2007                   %                  $'000              $'000              $'000

Non-interest bearing   n/a                25,200             11,484             36,684

2006
Non-interest bearing   n/a                10,835             -                  10,835



Notes to the Consolidated Financial Statements

For the year ended 31 December 2007 continued



23.   Financial instruments continued


The following table details the Group's expected maturity for its non-derivative
financial assets.


                              Weighted    Less than 1        1 to 3        1 to 5         Total
                               Average          month        months         years
                             Effective
                         Interest Rate
2007                                 %          $'000         $'000         $'000         $'000
Non-interest bearing               n/a              -         6,047         6,155        12,202
Variable interest
rate instruments
                                 5.25%         88,286             -             -        88,286
2006
Non-interest bearing               n/a         55,000         4,999         5,597        65,596
Variable interest
rate instruments
                                 3.64%         59,328             -             -        59,328


The undiscounted value of those non-interest bearing assets with cash flows
expected in the one to five year bracket is $8 million (2006: $8 million).  For
all other financial assets the book value equals the undiscounted value of the
asset.


24.   Gain on sale of assets

The gain on sale of assets recorded in 2006 was principally comprised of funds
received from the farm in deal with BG for a 36.75% interest in the HBH block of
$55m. Against that consideration the cost of sales (the amount previously
invested by Gulf Keystone on HBH) were calculated as $657,583 (the carrying
value of that interest in the Group's balance sheet, of $222,899 and costs
incurred of $434,683).

Additionally, Gulf Keystone recorded a contingent deferred consideration of
$5.6m in 2006 which due to the unwinding of the discount rate, has increased to
$6.2m in 2007 (refer to Note 12). The remainder of the gain recorded in 2006 was
for the sale of surplus stock ($163,735) and the temporary loan to a third party
of a drilling rig under contract to Gulf Keystone ($1m).


25.   Subsequent events


On 10 January 2008, ALNAFT (the Hydrocarbon National Agency in Algeria) approved
the proposed Development Plan for the GKN and GKS oil fields located in Northern
Algeria.  The field Development Plan envisages producing oil from the GKN-1 well
(currently producing at approximately 1,000 bopd gross) and bringing the GKS-2
well on stream as soon as practicable.


Under the terms of the Development Plan, the Group is entitled to a 30% to 49%
share of production from the GKN-1 well effective from 10 October 2007. As a
result, oil production revenue of $5.4m and cost of sales of $3.3m has been
recorded for the year ended 31 December 2007.


                        GULF KEYSTONE PETROLEUM LIMITED

                                (the "Company")


                        NOTICE OF ANNUAL GENERAL MEETING


To the holders of common shares


Notice is hereby given that the 2008 annual general meeting of the Company will
be held at the Khanzad Hotel and Resort, Salahaldeen Road, Bastora, Erbil,
Kurdistan, Iraq on Tuesday 10 June 2008 at 10am (local time) for the following
purposes:


To consider and, if thought fit, to approve the following resolutions:


1.         THAT the Directors' Report and statutory financial statements of the
Company in respect of the financial period ended 31 December 2007 together with
the Auditor's Report thereon be received and approved.


2.         THAT Mr Ali Al-Qabandi, who is required to retire by rotation in
accordance with the Company's bye-laws, be and is hereby appointed as a
Director.


3.         THAT Mr Mehdi Varzi, who was appointed as a Director by the Board of
Directors on 22 January 2008 to fill a vacancy, be and is hereby elected as a
Director.


4.         THAT Mr Jeremy Asher, who was appointed as a Director by the Board of
Directors on 22 January 2008 to fill a vacancy, be and is hereby elected as a
Director.


5.         THAT Mr Kristian Ewen Ainsworth, who was appointed as a Director by
the Board of Directors on 22 January 2008 to fill a vacancy, be and is hereby
elected as a Director.


6.         THAT Deloitte & Touche LLP, be re-appointed as the Company's auditors
until the close of the Company's next annual general meeting of the members of
the Company and that the Board of Directors be authorised to determine the
Auditor's remuneration.


7.         THAT in accordance with Bye-law 51 of the Company's Bye-laws the
Directors of the Company be and are hereby authorised to reduce the issued share
capital of the Company by way of a repurchase of shares, and THAT pursuant to
Bye-law 52 of the Company's Bye-laws the Directors of the Company be authorised
in their absolute discretion to determine by resolution of the Directors the
terms and dates of such repurchases as well as the amount of shares to be
repurchased, and THAT such authorities shall remain in place unless and until
the members of the Company resolve otherwise.




By Order of the Board
T F Kozel, Director
Milner House
18 Parliament Street
Hamilton  HMFX
Bermuda


7 May 2008


Note

Every member entitled to attend and vote at the meeting may appoint another
person as his/her proxy to attend and vote thereat instead of him/her and such
proxy need not be a member. Forms appointing proxies must be deposited at the
Company's Branch Registrar in Jersey, Channel Islands (for the attention of
Sophie de Freitas, Registry Manager, Computershare Investor Services (C)
Limited, Ordinance House, 31 Pier Road, St Helier, Jersey JE4 8PW, Channel
Islands) not less than 48 hours before the time appointed for holding the said
meeting or any adjourned meeting.  A record of the minutes of the last annual
general meeting of the members of the Company will be available for inspection
at the meeting.



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