Introduction

Our two major operating areas (Poland and the U.S.) have very different characteristics, which are reflected in the following discussion. Our Polish operations are early in their initial exploration and development. Our U.S. operations, which include both oil production and oilfield services, are relatively mature. See "Results of Operations by Business Segment" below.

Results of Operations by Business Segment

Quarter Ended September 30, 2008, Compared to the Same Period of 2007

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $2.0 million during the third quarter of 2008, compared to $2.5 million during the same quarter of 2007. Higher gas prices were offset by lower production volumes, resulting in only a modest decline in gas revenues.

Total gas volumes retreated approximately 40% for the most recent quarter compared to the same period last year. Production from two of our Polish wells, the Zaniemsyl and Kleka wells, continued throughout the quarter at sustained rates. However, as we expected and previously forecasted, production at our Wilga well in Poland declined sharply.

Though gas volumes were down for the period, gas prices were up substantially. A price increase effective May 1, 2008, coupled with the continued strength of the zloty against the U.S. dollar, resulted in higher effective gas prices. Sales prices increased 30% from the third quarter of 2007 to the third quarter of 2008.

A summary of the amount and percentage change, as compared to the respective prior-year period, for gas revenues, average gas prices, and gas production volumes for the quarters ended September 30, 2008 and 2007, is set forth in the following table:

                                          For the Quarter Ended
                                              September 30,
                                            2008         2007      Change
Revenues                                 $1,965,000   $2,501,000     -21%
Average price (per thousand cubic feet)  $     7.00   $     5.37     +30%
Production volumes (thousand cubic feet)    280,561      466,054     -40%

Oil Revenues. Oil revenues were $1.9 million for the third quarter of 2008, a 27% increase over the $1.5 million recognized during the third quarter of 2007. As with our gas production, oil production at Wilga fell dramatically from the third quarter of 2007 to 2008. This well is now and is expected to be a relatively minor contributor to oil production. Conversely, production from our US properties increased by 2% from 2007 levels. The overall production decline, however, was more than offset by higher oil prices. Our average oil price during the third quarter of 2008 was $104.68 per barrel, a 52% increase over $68.74 per barrel received during the same quarter of 2007.

                                     For the Quarter Ended
                                         September 30,
                                       2008         2007      Change
Revenues                            $1,920,000   $1,514,000     +27%
Average price (per barrel of oil)   $   104.68   $    68.74     +52%
Production volumes (barrels of oil)     18,346       22,021     -17%

Lease Operating Costs. Lease operating costs were $930,000 during the third quarter of 2008, compared to $903,000 during the same period of 2007. Lower indirect costs at our non-operated wells in Poland in 2008 were offset by higher production taxes in the United States.

Exploration Costs. Our exploration costs consist of geological and geophysical costs and the costs of exploratory dry holes. Exploration costs were $3,683,000 during the third quarter of 2008, compared to $1,245,000 during the same period of 2007, an increase of 196%. Third quarter 2008 exploration costs included approximately $1.6 million associated with three-dimensional, or 3-D, seismic surveys, and approximately $2.0 million associated with ongoing two-dimensional, or 2-D, seismic and other exploratory projects at our existing prospect areas in Poland. In addition, we also incurred $464,000 associated with two dry holes drilled in Montana. Third quarter 2007 exploration costs included approximately $674,000 associated with 3-D seismic surveys and the remainder associated with 2-D seismic and other exploratory projects at our prospects in Poland.

DD&A Expense - Exploration and Production. DD&A expense for producing properties was $528,000 for the third quarter of 2008, an increase of 17% compared to $452,000 during the same period of 2007. The 2007 year-end negative reserve revision at the Wilga well resulted in higher DD&A costs, as the remaining undepleted costs for that well are allocated to smaller reserve and production volumes.

Accretion Expense. Accretion expense was $21,000 and $20,000 for the third quarter of 2008 and 2007, respectively. Accretion expense is related entirely to our Asset Retirement Obligation.

Oilfield Services Segment

Oilfield Services Revenues. Oilfield services revenues were $1,211,000 during the third quarter of 2008 compared to $1,229,000 for the third quarter of 2007. We drilled six wells for third parties during the third quarter of 2008, along with additional well service work, compared to five wells during the same period of 2007. Oilfield services revenues will continue to fluctuate from period to period based on market demand, weather, the number and depth of wells drilled, downtime for equipment repairs, the degree of emphasis on utilizing our oilfield servicing equipment on our Company-owned properties, and other factors.

Oilfield Services Costs. Oilfield services costs were $815,000 during the third quarter of 2008, compared to $648,000 during the same period of 2007. The quarter-to-quarter increase was primarily due to increased drilling activity and higher drilling materials costs in 2008. Oilfield services costs will also continue to fluctuate period to period based on market demand, weather, the number of wells drilled, downtime for equipment repairs, the degree of emphasis on utilizing our oilfield servicing equipment on our Company-owned properties, and other factors.

Nonsegmented Information

G&A Costs. G&A costs were $1,974,000 during the third quarter of 2008, compared to $1,270,000 during the third quarter of 2007, an increase of $704,000. Higher compensation, legal, accounting, and foreign exchange costs were the primary cause of the year-to-year increase.

Stock Compensation (G&A). As discussed above, we adopted the provisions of SFAS No. 123R on January 1, 2006, using the modified prospective method. For the three-month periods ended September 30, 2008 and 2007, we recognized $622,000 and $657,000, respectively, of stock compensation expense related to the amortization of unexercised options and unvested restricted stock awards.

Interest and Other Income (Expense). Interest and other income (expense) was $(86,000) during the third quarter of 2008, compared to interest and other income of $219,000 during the same period of 2007. The change was a reflection of interest expense on long-term debt being accrued for the first time during the 2008 third quarter. We had no long-term debt during 2007. During the 2008 third quarter, we incurred $62,000 in interest expense, $31,000 in quarterly commitment fees and $46,000 related to the amortization of capitalized fees, all of which are associated with our credit facility. These costs offset interest income of $53,000. During the third quarter of 2007, we incurred $83,000 in commitment fees and amortization charges related to the credit facility, which were offset by $302,000 of interest income.

Nine Months Ended September 30, 2008, Compared to the Same Period of 2007

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $6.0 million during the first nine months of 2008, compared to $7.1 million during the same period of 2007. As we expected, production at our Wilga well declined sharply. Consequently, company-wide gas production for the first nine months of 2008 was 33% lower than first nine months 2007 production. Conversely, a price increase effective May 1, 2008, coupled with the continued strength of the zloty against the US dollar, resulted in higher effective gas prices which increased 27% from the first nine months of 2007 to the first nine months of 2008.

A summary of the amount and percentage change, as compared to the respective prior-year period, for gas revenues, average gas prices, and gas production volumes for the nine months ended September 30, 2008 and 2007, is set forth in the following table:

                                          For the Nine Months Ended
                                                September 30,
                                             2008            2007       Change
Revenues                                   $6,017,000      $7,050,000     -15%
Average price (per thousand cubic feet)    $     6.54      $     5.16     +27%
Production volumes (thousand cubic feet)      919,982       1,365,769     -33%

A summary of the amount and percentage change, as compared to the respective prior-year period, for oil revenues, average oil prices, and oil production volumes for the nine months ended September 30, 2008 and 2007, is set forth in the following table:

                                     For the Nine Months Ended
                                           September 30,
                                        2008            2007       Change
Revenues                              $5,337,000      $4,217,000     +27%
Average price (per barrel of oil)     $   101.10      $    60.02     +68%
Production volumes (barrels of oil)       52,794          70,261     -25%

Lease Operating Costs. Lease operating costs were $2,698,000 during the first nine months of 2008, a decrease of $13,000 compared to the same period of 2007. Lower operating costs in 2008 are attributable to lower indirect costs at our non-operated wells in Poland.

Exploration Costs. Our exploration costs consist of geological and geophysical costs and the costs of exploratory dry holes. Exploration costs were $9,960,000 during the first nine months of 2008, compared to $6,973,000 during the same period of 2007, an increase of 43%. First nine months 2008 exploration costs included approximately $4.5 million associated with seismic surveys on our 100% owned acreage, approximately $3.0 million associated with 3-D seismic surveys, and approximately $2.0 million associated with ongoing 2-D seismic and other exploratory projects at our existing prospect areas in Poland. In addition, we also incurred $464,000 associated with two dry holes drilled in Montana. First nine months 2007 exploration costs included approximately $4.0 million associated with seismic surveys, with the remainder being spent on ongoing 2-D seismic surveys and other exploratory projects in Poland.

DD&A Expense - Exploration and Production. DD&A expense for producing properties was $1.7 million for the first nine months of 2008, an increase of 26% compared to $1.4 million during the same period of 2007. The 2007 year-end negative reserve revision at the Wilga well resulted in higher DD&A costs, as the remaining undepleted costs for that well are allocated to smaller reserve and production volumes.

Accretion Expense. Accretion expense was $63,000 and $59,000 for the first nine months of 2008 and 2007, respectively. Accretion expense is related entirely to our Asset Retirement Obligation.

Oilfield Services Revenues. Oilfield services revenues were $3,162,000 during the first nine months of 2008, an increase of 19% compared to $2,665,000 for the first nine months of 2007. We drilled 20 wells for third parties during the first nine months of 2008, along with additional well service work, compared to 12 wells during the same period of 2007. Oilfield services revenues will continue to fluctuate from period to period based on market demand, weather, the number and depth of wells drilled, downtime for equipment repairs, the degree of emphasis on utilizing our oilfield servicing equipment on our Company-owned properties, and other factors.

Oilfield Services Costs. Oilfield services costs were $2,091,000 during the first nine months of 2008, compared to $1,680,000 during the same period of 2007. The year-to-year increase was primarily due to increased drilling activity and higher drilling materials costs in 2008. Oilfield services costs will also continue to fluctuate period to period based on market demand, weather, the number of wells drilled, downtime for equipment repairs, the degree of emphasis on utilizing our oilfield servicing equipment on our Company-owned properties, and other factors.

DD&A Expense - Oilfield Services. DD&A expense for oilfield services was $282,000 during the first nine months of 2008, compared to $186,000 during the same period of 2007. The year-to-year increase was primarily due to new capital additions in 2007 being depreciated.

Nonsegmented Information

G&A Costs. G&A costs were $5,218,000 during the first nine months of 2008, compared to $4,121,000 during the first nine months of 2007, an increase of $1,097,000. Higher compensation, legal, accounting, and foreign exchange costs were the primary cause of the year-to-year increase.

Stock Compensation (G&A). As discussed above, we adopted the provisions of SFAS No. 123R on January 1, 2006, using the modified prospective method. For the nine-month periods ended September 30, 2008 and 2007, we recognized $1,866,000 and $2,132,000, respectively, of stock compensation expense related to the amortization of unexercised options and restricted stock purchase rights.

Interest and Other Income. Interest and other income was $13,000 during the first nine months of 2008, compared to interest and other income of $255,000 during the same period of 2007. The change was partially due to interest expense on long-term debt being accrued for the first time during the first nine months of 2008. We had no long-term debt during 2007. During the first nine months of 2008, we incurred $62,000 in interest expense, $111,000 in quarterly commitment fees and $137,000 related to the amortization of capitalized fees, all of which are associated with our credit facility. These costs offset interest income of $323,000. During the third quarter of 2007, we incurred $273,000 in commitment fees and amortization charges related to the credit facility, which were offset by $528,000 in interest income.

To date, we have financed our operations principally through the sale of equity securities, issuance of debt securities, and agreements with industry participants that funded our share of costs in certain exploratory activities in return for an interest in our properties. In addition, cash flow from our production operations has been providing a portion of our capital needs for the past 18 months. As of September 30, 2008, we have classified approximately $5,558,000 of auction-rate securities as Level 3 financial assets. See Note 7 to these financial statements for additional information concerning fair value accounting for our investments. The settlement plan announced by UBS will allow us to convert all remaining auction-rate securities to cash within our normal operating cycle.

While we have not experienced significant impacts from the economic crisis through the third quarter of 2008, the global economy is slowing. The recent strengthening of the U.S. dollar will, if it continues, have a negative impact on our fourth quarter revenue and operating profit; conversely, our U.S. dollar denominated capital costs in Poland will decrease at the same rate. We expect our exploration and development programs will continue in spite of the economic downturn. Our company's operating cash flow combined with our cash resources, marketable securities and funds available under our existing credit facility as of September 30, 2008 should more than enable us to meet our capital needs in the United States and Poland for the next 12 months without significant modifications to our existing exploration and drilling plans.

We may seek to obtain additional funds for future capital expenditures from the sale of additional securities, project financing, sale of partial property interests, or other arrangements, all of which may dilute the interest of our existing stockholders or our interest in the specific project financed. We will allocate our existing capital as well as funds we may obtain in the future among our various projects at our discretion. We may change the allocation of capital among the categories of anticipated expenditures depending upon future events. For example, we may change the allocation of our expenditures based on the actual results and costs of future exploration, appraisal, development, production, property acquisition and other activities.

Working Capital (current assets less current liabilities). Our working capital, including the $5.6 million of auction-rate securities classified as Level 3 financial assets, was $11,822,000, a decrease of $3,552,000 from our working capital at December 31, 2007, of $15,374,000. As of September 30, 2008, our cash and cash equivalents and marketable securities totaled approximately $16.6 million. As of September 30, 2008, we had $11 million in outstanding long-term debt. As discussed previously, the outstanding balance of our long-term debt is interest-bearing only until December 31, 2010.

Operating Activities. Net cash used in operating activities was $8,865,000 during the first nine months of 2008, compared to net cash provided by operating activities of $234,000 during the first nine months of 2007. The increase in cash used was due primarily to higher exploration costs, higher receivables due to higher oil and gas prices, as well as a significant reduction in our current liabilities during 2008.

Financing Activities. During the first nine months of 2008, warrant holders exercised warrants for a total of 2,575,593 shares, resulting in proceeds of approximately $9,364,000. As discussed previously, we also borrowed $11 million during this time period under our credit facility, and subsequent to September 30, 2008, borrowed the remaining $14 million available under the facility to fund a portion of our capital needs for the next 12 months. During the first nine months of 2007, option and warrant holders exercised options and warrants for a total of 441,114 shares, resulting in proceeds of $1,689,000. We also received $2.8 million from the exercise of options and warrants subsequent to September 30, 2008.

New Accounting Pronouncements

In October 2008 the FASB issued Staff Position ("FSP") SFAS No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." This FSP clarifies the application of SFAS No. 157 in an inactive market and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective October 10, 2008 and must be applied to prior periods for which financial statements have not been issued. The application of this FSP did not have a material impact to our consolidated financial statements.

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

Critical Accounting Policies

A summary of our significant accounting policies is included in Note 1 of our Consolidated Financial Statements contained in our annual report on Form 10-K for the year ended December 31, 2007. We believe the application of these accounting policies on a consistent basis enables us to provide financial statement users with useful, reliable and timely information about our earnings results, financial condition and cash flows.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Our management reviews these estimates and assumptions, which are based on historical experience, changes in business conditions, and other relevant factors that it believes to be reasonable under the circumstances. In any given reporting period, actual results could differ from the estimates and assumptions used in preparing our financial statements.

Forward-Looking Statements

This report contains statements about the future, sometimes referred to as "forward-looking" statements. Forward-looking statements are typically identified by the use of the words "believe," "may," "could," "should," "expect," "anticipate," "estimate," "project," "propose," "plan," "intend" and similar words and expressions. We intend that the forward-looking statements will be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements that describe our future strategic plans, goals or objectives are also forward-looking statements.

Readers of this report are cautioned that any forward-looking statements, including those regarding us or our management's current beliefs, expectations, anticipations, estimations, projections, proposals, plans or intentions, are not guarantees of future performance or results of events and involve risks and uncertainties, such as the future timing and results of drilling individual wells and other exploration and development activities; future variations in well performance as compared to initial test data; future events that may result in the need for additional capital; the prices at which we may be able to sell oil or gas; fluctuations in prevailing prices for oil and gas; our ability to complete the acquisition of targeted new or expanded exploration or development prospects; uncertainties of certain terms to be determined in the future relating to our oil and gas interests, including exploitation fees, royalty rates and other matters; future drilling and other exploration schedules and sequences for various wells and other activities; uncertainties regarding future political, economic, regulatory, fiscal, taxation and other policies in Poland; the cost of additional capital that we may require and possible related restrictions on our future operating or financing flexibility; our future ability to attract strategic participants to share the costs of exploration, exploitation, development and acquisition activities; and future plans and the financial and technical resources of strategic participants.

The forward-looking information is based on present circumstances and on our predictions respecting events that have not occurred, that may not occur, or that may occur with different consequences from those now assumed or anticipated. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. The forward-looking statements included in this report are made only as of the date of this report. We disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.