Three Months Ended                Nine Months Ended
                                                        September 30,                     September 30,
                                                     2008             2007             2008             2007
Oil production (million barrels)                       1.5             1.3               3.9             4.2
Natural gas production (billion cubic feet)            2.8             3.5               9.1            10.1
Barrels of oil equivalent (million barrels)            2.0             1.9               5.5             5.9
Operating expense ($millions)                         20.1            10.6              53.3            29.7
Capital expenditures ($millions)                       9.1             4.4              18.5             6.0

Crude oil delivered from the Petrodelta fields to Petroleos de Venezuela, S.A. ("PDVSA") is priced with reference to Merey 16 published prices, weighted for different markets and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference price and prevailing market conditions. Market prices for crude oil of the type produced in the fields operated by Petrodelta averaged approximately $107.92 and $96.88 a barrel, $85.21 and $82.66 net of the impact of the Law of Special Contribution to Extraordinary Prices at the Hydrocarbons International Market ("original Windfall Profits Tax") implemented by the Venezuelan government, for the three and nine months ended September 30, 2008. Market prices averaged approximately $61.74 and $53.11 a barrel for the three and nine months ended September 30, 2007. The activity from April 1, 2006 to December 31, 2007 was recorded in the three months ended December 31, 2007. The price for natural gas per the sales contract is $1.54 per thousand cubic feet.
Petrodelta commenced drilling operations with one rig in the Uracoa field on April 21, 2008. As of September 30, 2008, Petrodelta had drilled and completed four successful wells. The first drilling rig will continue to drill in the Uracoa field. Petrodelta has contracted two additional drilling rigs, one of which commenced drilling at the end of October 2008 and the other is being assembled and is expected to begin drilling during the fourth quarter of 2008.
In October 2008, Petrodelta paid an advance dividend of $51.9 million, $20.8 million net to HNR Finance ($16.6 million net to our 32 percent interest), which represents Petrodelta's net income as reported under International Financial Reporting Standards ("IFRS") for the six months ended June 30, 2008. We expect to receive future advances of dividends from Petrodelta; however, we expect the amount of any future advance dividends to be much lower over the next several years as Petrodelta reinvests more of its earnings into the company in support of its drilling and exploration activities.
On April 15, 2008, the Venezuelan government published in the Official Gazette the original Windfall Profits Tax. The original Windfall Profits Tax was based on prices for Brent crude, and, as instructed by CVP, Petrodelta applied the original Windfall Profits Tax to net production after deduction for royalty barrels. On July 10, 2008, the Venezuelan government published an amendment to the Windfall Profits Tax ("amended Windfall Profits Tax") to be calculated on the Venezuelan Export Basket ("VEB") of prices as published by the Ministry of the People's Power for Energy and Petroleum ("MENPET"). The amended Windfall Profits Tax was made retroactive to April 15, 2008, the date of the original Windfall Profits Tax. As instructed by CVP, Petrodelta has applied the amended Windfall Profits Tax to gross oil production delivered to PDVSA since April 15, 2008 when the tax was enacted.
The amended Windfall Profits Tax established a special 50 percent tax to the Venezuelan government when the average price of the VEB exceeds $70 per barrel. In a similar manner, the percentage is increased from 50 percent to 60 percent when the average price of the VEB exceeds $100 per barrel. The amended Windfall Profits Tax is reported as a reduction in the price per barrel received by Petrodelta from PDVSA and, consequently, is deductible for Venezuelan tax purposes. Petrodelta reduced oil sales revenue for the three and nine months ended September 30, 2008 by $34.1 million and $56.2 million, respectively, for the amended Windfall Profits Tax.
Certain actions by PDVSA during 2008 have raised contractual questions as to certain operational and financial issues relating to Petrodelta. Operationally, Petrodelta has not received all information regarding production during the conversion period for Temblador in order to invoice all volumes produced in that field during that period. As Temblador production is handled in PDVSA's system, PDVSA has allocated only partial, estimated production to Petrodelta. As a result, Petrodelta has not received full credit for the Temblador production. Although we believe the amount of production and related revenue to be immaterial to Petrodelta, Petrodelta has not

received full payment. Discussions are ongoing to settle figures, and Petrodelta is working to segregate completely Temblador's production.
Financially, the Conversion Contract and related documents state that Petrodelta will issue invoices monthly to PDVSA Petroleo S.A. ("PPSA"), a 100 percent owned subsidiary of PDVSA, for hydrocarbon sales, and payment is due from PPSA within 30 days of invoicing. Petrodelta has invoiced PPSA for 2006 and 2007 hydrocarbon sales, but PPSA has not made payment against the invoices. The Conversion Contract and related documents also state that PDVSA is to submit invoices to Petrodelta for services and materials rendered to Petrodelta. PDVSA has not been issuing invoices. Since Petrodelta has not received payments from PPSA on the hydrocarbon sales invoices issued for 2006 and 2007, in April 2008, Petrodelta began accruing interest on late payment of invoices under the Conversion Contract provisions. PDVSA has been netting revenues and expenses and advancing funds to Petrodelta sufficient to pay Petrodelta's operating expenses, capital expenditures and dividends distribution requirements according to financial statements. It is our understanding that PDVSA considers all 2006 and 2007 receivables and payables settled with the payment of the dividend in May 2008. The Conversion Contract also states that the selection of auditor for Petrodelta is a decision of Petrodelta's board; however, PDVSA has issued correspondence indicating that they will have final approval of the auditor selected.
In September 2008, Petrodelta received communication from CVP that the amended Windfall Profits Tax was to be calculated on gross production. Since Petrodelta pays MENPET its royalty in-kind ("royalty barrels'), the royalty barrels are not included in Petrodelta's production numbers, but Petrodelta is being required to pay amended Windfall Profits Tax on the royalty barrels. Our position is that the amended Windfall Profits Tax should only be calculated on the net barrels produced. Based on legal advice, we believe that the amended Windfall Profits Tax should not be calculated on gross barrels. This is not a contractual issue, but it is a point of interpretation that requires discussion.
We have raised all of these issues with appropriate representatives of Petrodelta, CVP and PDVSA. While we continue our discussions to resolve these issues, there currently can be no assurances that CVP and PDVSA will comply with all the applicable contracts and governing documents' provisions.
See the notes accompanying the financial statements in Item 1 Financial Statements of this Quarterly Report on Form 10-Q, and Item 1 Business, Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007 for a complete description of the situation in Venezuela and other matters.
United States Operations
We have initiated a domestic exploration program in two different basins. We will be the operator of both exploration programs and have complemented our existing personnel with the addition of highly experienced management and technical personnel and with the acquisition of our 45 percent equity interest in Fusion in 2007. Each of the exploration programs are located in highly competitive lease acquisition areas. In order to maximize our lease position, we elected to complete the lease acquisition phase prior to disclosure of the prospect locations or the announcement of our drilling objectives.

Gulf Coast
We executed an Area of Mutual Intent ("AMI") agreement with a private third party for the upper Gulf Coast Region of the United States. The AMI covers the coastal areas from Nueces County, Texas to Cameron Parish, Louisiana, including state waters. We will be the operator and have an initial working interest of 55 percent in the AMI. The private third party contributed two prospects, including the leases and proprietary 3-D data sets, and numerous leads generated over the last three decades of regional geological focus. We will fund the first $20 million of new lease acquisitions, geological and geophysical studies, seismic reprocessing and drilling costs. All subsequent costs will be shared pursuant to the terms of the AMI. The parties have identified two prospects for evaluation and have completed nearly all leasing of each prospect area. The other party is obligated to evaluate and present additional opportunities at their sole cost. As each prospect is accepted it will be covered by the AMI. Our commitment for 2008 on the first prospect is to complete the lease acquisition, seismic acquisition, reprocess well site seismic and drill the initial exploratory well. Our commitment for 2008 on the second prospect is to acquire leases and re-process seismic data in preparation for drilling.
The exploratory well on the first prospect in the AMI, the Harvest Hunter #1, was spud September 10, 2008. The well was drilling at September 30, 2008 and reached total depth on October 23, 2008. Evaluation of results from the well is in progress. The estimated drilling budget for this well is $6.5 million.
In July 2008, we and our partner in the AMI acquired 6,510 acres of offshore leases representing all or part of 12 separate tracts from the State of Texas General Land Office for a total gross cost of $2.7 million. This lease acquisition completes lease acquisition in the area and covers the Bay prospect, which is the second exploratory prospect in the AMI. Operational activities on this area during the three months ended September 30, 2008 included re-processing of 3-D seismic, site surveying and preparation of engineering documents which will be integrated into permit applications for the project. Other United States
We have entered into an agreement with a private party to pursue a lease acquisition program and drilling program on a project in another United States basin. The leasing program is ongoing, and, for competitive purposes, the prospect area will not be disclosed prior to the completion of leasing. We will be the operator and have a working interest of 50 percent in the project. The other party is obligated to assemble the lease position on the project. We will earn our 50 percent working interest in the project by compensating the other party for leases acquired in accordance with terms defined in the agreement, and by drilling one test well at Harvest's sole expense. Our commitment for 2008 is to complete the lease acquisition program and initiate preparations to acquire seismic data over a portion of the prospect area. Initial drilling on the prospect will likely occur in 2009.
In September 2008, we hired our first two employees in the basin, and these employees are based in the field operations office. In October 2008, we leased a field operations office in the basin to support the leasing program, preparations for initial drilling and other project development activities in the area. The office lease is a two year lease for approximately 6,800 square feet at a cost of approximately $6,000 per month.
Remaining 2008 net expenditures on our currently identified U.S. exploration programs are expected to be $10.0 million, inclusive of that portion the costs associated with the drilling of the Harvest Hunter No. 1 well that will be incurred after September 30, 2008. Indonesia
In February 2008, Indonesia's oil and gas regulatory authority, BP Migas, approved the assignment to us of a 47 percent interest in the Budong-Budong production sharing contract ("Budong PSC"). Final government approval from the Ministry of Energy and Mineral Resources, Migas, was received in April 2008. The Budong PSC is located onshore West Sulawesi, Indonesia. We acquired our 47 percent interest in the Budong PSC by committing to fund the first phase of the exploration program including the acquisition of 2-D seismic and drilling of the first two exploration wells. This commitment is capped at $17.2 million. Prior to drilling the first exploration well, subject to the estimated cost of that well, our partner will have a one-time option to increase the level of the carried interest to $20.0 million, and as compensation for the increase, we will increase our participation to a maximum of 54.65 percent. The Budong PSC includes a ten-year exploration period and a 20-year development

phase. For the initial three-year exploration phase, which began January 2007, we are in the process of acquiring, processing and interpreting approximately 550 kilometers of 2-D seismic and plan to drill two exploration wells. Significant progress was made on the 2-D seismic acquisition during the three months September 30, 2008. The 2-D seismic acquisition is scheduled to be completed during the three months ending December 31, 2008. Our partner will be the operator through the exploration phase as required by the terms of the Budong PSC. We will have control of major decisions and financing for the project with an option to operate in the development and production phase if approved by BP Migas. Our remaining 2008 budget is approximately $2.3 million. Gabon
In April 2008, we completed the purchase of a 50 percent interest in the production sharing contract related to the Dussafu Marin Permit offshore Gabon in West Africa ("Dussafu PSC') for $4.5 million. In September 2008, we completed the purchase of an additional 16.667 percent interest in the Dussafu PSC for $1.5 million. This acquisition brings Harvest's total interest in the PSC to 66.667 percent. We are the operator of the Dussafu PSC. Located offshore Gabon, adjacent to the border with the Republic of Congo, the Dussafu PSC contains 680,000 acres with water depths up to 1,000 feet. In the Dussafu PSC, we are committed to perform geological, geophysical and engineering studies and to shoot 500 kilometers of 2-D seismic.
A seismic vessel was mobilized during the three months ended September 30, 2008 to perform 675 kilometers of 2-D seismic acquisition. The seismic acquisition was completed during October 2008. In addition, during the three months ended September 30, 2008, we commenced the processing of 1,076 square kilometers of existing 3-D seismic. The estimated net budget for this activity in 2008 is approximately $2.8 million.
Capital Resources and Liquidity
Working Capital. Our capital resources and liquidity are affected by the ability of Petrodelta to pay dividends. In May 2008, Petrodelta declared and paid a dividend of $181 million, $72.5 million net to HNR Finance ($58 million net to our 32 percent interest), which represents Petrodelta's net income as reported under International Financial Reporting Standards ("IFRS") for the period of April 1, 2006 through December 31, 2007. In October 2008, Petrodelta paid an advance dividend of $51.9 million, $20.8 million net to HNR Finance ($16.6 million net to our 32 percent interest), which represents Petrodelta's net income as reported under IFRS for the six months ended June 30, 2008. We expect to receive future advances of dividends from Petrodelta; however, we expect the amount of any future advance dividends to be much lower over the next several years as Petrodelta reinvests more of its earnings into the company in support of its drilling and exploration activities. See Item 1 Business, Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007 for a complete description of the situation in Venezuela and other matters.
Our current cash and cash equivalents include money market funds and short term certificates of deposits with original maturity dates of less than three months. While we can give no assurance, we currently believe that Petrodelta will fund its own operations and that our cash on hand will provide sufficient capital resources and liquidity to fund our exploration and business development expenditures for the next 12 months.
The net funds raised and/or used in each of the operating, investing and financing activities are summarized in the following table and discussed in further detail below:

                                                                       Nine Months Ended September 30,
                                                                        2008                     2007
                                                                               (in thousands)
Net cash provided by (used in) operating activities               $         44,595         $        (14,254 )
Net cash provided by (used in) investing activities                        (11,611 )                 28,178
Net cash used in financing activities                                      (35,540 )                (54,181 )

Net decrease in cash                                              $         (2,556 )       $        (40,257 )

At September 30, 2008, we had current assets of $133.8 million and current liabilities of $15.8 million, resulting in working capital of $118.0 million and a current ratio of 8.5:1. This compares with a working capital of

$111.5 million and a current ratio of 3.6:1 at December 31, 2007. The increase in working capital of $6.5 million was due to the receipt of a $72.5 million dividend net to HNR Finance ($58 million net to our 32 percent interest) from our unconsolidated equity affiliate and payment of advances by PDVSA offset by payments of accounts payable trade, accrued expenses and accounts payable related party.
Cash Flow from Operating Activities. During the nine months ended September 30, 2008, net cash provided by operating activities was $44.6 million. During the nine months ended September 30, 2007, net cash used in operating activities was approximately $14.3 million. The $58.9 million increase was primarily due to the receipt of a $72.5 million dividend net to HNR Finance ($58.0 million net to our 32 percent interest) from our unconsolidated equity affiliate and payment of advances by PDVSA offset by payments of accounts payable trade, accounts payable related party and accrued expenses.
Cash Flow from Investing Activities. During the nine months ended September 30, 2008, we had capital expenditures of approximately $17.2 million related to lease acquisition for our domestic exploration program and drilling of an exploratory well. During the nine months ended September 30, 2007, we had limited production-related expenditures due to the pending formation of Petrodelta. In January 2007, we purchased a 45 percent interest in Fusion for $4.6 million. During the nine months ended September 30, 2008 and 2007, we had $6.8 million and $33.1 million of restricted cash returned to us. We incurred $1.1 million of investigatory costs related to various international and domestic exploration studies during the nine months ended September 30, 2008.
With the conversion to Petrodelta, Petrodelta's capital commitments will be determined by their business plan. Petrodelta's capital commitments are expected to be funded by internally generated cash flow. Our budgeted capital expenditures for Gabon, Indonesia and United States operations will be funded through our existing cash balances and dividends received from Petrodelta's operations.
Cash Flow from Financing Activities. During nine months ended September 30, 2008, Harvest Vinccler repaid 20 million Venezuelan Bolivars Fuerte ("Bolivars") (approximately $9.3 million) of its Bolivar denominated debt, and we redeemed the 20 percent minority interest in our Barbados affiliate. We also incurred $0.9 million in legal fees associated with prospective financing. During the nine months ended September 30, 2007, Harvest Vinccler repaid 81 million Bolivars (approximately $37.7 million) of its Bolivar denominated debt.
In June 2007, we announced that our Board of Directors had authorized the purchase of up to $50 million of our common stock from time to time through open market transactions. This repurchase program was completed in June 2008. Under this program, we repurchased 4.6 million shares at an average cost of $10.93 per share, including commissions.
In July 2008, our Board of Directors authorized the purchase of up to $20 million of our common stock from time to time through open market transactions. We continue to believe that Harvest stock remains undervalued and that the investment in the shares of our Company represents an attractive alternative to holding cash in excess of our near-term needs. Given our cash balances and our expectation that Petrodelta will internally fund its activities, we believe we have sufficient cash to undertake this buyback program as well as to fund an active development and exploration program in other countries. As of September 30, 2008, 1.1 million shares of stock have been purchased at an average cost of $10.60 per share for a total cost of $11.2 million of the $20 million authorization. Results of Operations
You should read the following discussion of the results of operations for the three and nine months ended September 30, 2008 and 2007 and the financial condition as of September 30, 2008 and December 31, 2007 in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007 . . .