The following discussion and analysis of our financial condition and results of operations should be read 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 ("2007 Annual Report"), the financial statements and related notes in this Quarterly Report, the risk factors contained herein and in our 2007 Annual Report, and all of the other information contained elsewhere in this report. The terms "we," "us," "our" and "our company" refer to Far East Energy Corporation and its subsidiaries, unless the context suggests otherwise.

Overview. During the third quarter of 2008, we continued our efforts to explore and develop coalbed methane ("CBM") gas in Shanxi Province in northern People's Republic of China ("PRC" or "China") and in Yunnan Province in southern PRC. We continued to employ numerous safety precautions to ensure the safety of our employees and independent contractors. We also conducted our operations in accordance with various laws and regulations concerning the environment, occupational safety and health.

During the nine months ended September 30, 2008, we incurred exploration expenditures of $10.5 million, of which $5.7 million were capitalized. Although we believe the results of our exploration activities in Shanxi and Yunnan Provinces have been favorable, we will need to complete more wells to achieve commercial viability in these provinces, which will require additional capital expenditures. In order to continue to operate, explore and develop our projects in China, we will need to obtain additional funding during the first quarter of 2009. The general capital markets have recently experienced disruption. Continuing volatility in these markets may impair our ability to access these markets or increase costs associated with obtaining additional funds. Management intends to seek to obtain funds by entering into a strategic relationship or transaction, such as a joint venture or farmout, and/or obtain debt or equity financing. We are currently in exploratory discussions with several companies, including major integrated oil and gas companies, that have expressed an interest in our CBM projects. However, there can be no assurance that we will be able to enter into any strategic relationship or transaction or that we will be successful in obtaining funds through debt or equity financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt or equity financing are uncertain and we cannot predict the timing, structure or other terms and conditions of any such arrangements. There are many risks and uncertainties involved in early stages of exploring and attempting to develop a new CBM gas field and we cannot make any assurances that our efforts will be successful.

Total Exploration Expenditures. The table below sets out components of total exploration and development expenditures, both capitalized and expensed (in thousands):

                                                                  Nine months ended
                                                                    September 30,
                                                                 2008          2007
Additions to Unevaluated
   Oil and Gas Properties
     Shanxi Province                                           $   5,692     $   6,018
     Yunnan Province                                                   -           228
                                                                   5,692         6,246
Exploration Costs (1)                                              4,820         2,127
                                                               $  10,512     $   8,373

(1) Exploration costs shown are different from those in the Consolidated Statements of Operations as they are net of prior year unevaluated exploratory well costs charged to expense of $1,415,000 and $64,000 for the nine-month periods ended September 30, 2008 and 2007, respectively.

Shouyang Block, Shanxi Province. At this time, our goal for the pilot area of the Shouyang Block is to maximize water production to attempt to reach critical desorption pressure as soon as possible in order to achieve commercial quantities of gas production. Mindful that severe winter weather will likely force us to slow down our drilling activities in the fourth quarter of 2008 and first quarter of 2009, we increased our drilling activities considerably during the later portion of the second quarter and through the third quarter of 2008. At one point during the third quarter, company-wide, we managed six drilling rigs, a workover rig, a wireline logging and perforating team and a full fracturing crew.

We have gained insights over time as to situations where cavitation or hydraulic fracture stimulation may improve our dewatering efficiency in the pilot area. Hydraulic fracturing is a stimulation method successfully used in other gas shale and coalbed reservoirs to improve wellbore productivity by providing channels that extend beyond any formation damage done to the wellbore during the drilling process. This allows for water and gas to more easily flow into the wellbore and then be produced.

During the second quarter of 2008, we performed hydraulic fracturing operations on three vertical wells. Two of the wells were existing wells, and the fracturing operations increased their volume of water production. It should be noted that vertical wells that are fracture-stimulated can be completed relatively inexpensively.

To further increase water production, we drilled three deviated wells in the third quarter of 2008 to increase the amount of productive wellbores in the coal face. Once drilled to the coal seam, the wells were fracture stimulated. The last one of the three wells was fracture stimulated in late October. These deviated wells also represent another phase in the process of reducing costs. These are essentially vertical wells but drilled at a very high angle from an existing well pad and location. Utilizing an existing well location allows more than one well to be drilled from the same pad, consequently reducing land and pad construction costs, as well as reducing environmental impact.

Based on the knowledge and experience we have gained in this area, we believe short-reach horizontal wells may further enhance water production of the area. During June 2008, we spudded a short-reach horizontal well, which we plan to drill to less than 1,000 meters in the coal seam. In the third quarter, based on new geological data obtained during drilling of the vertical portion, we decided to deploy a different drilling rig in an effort to enhance the probability of success. We expect drilling of the well to be completed in late fourth quarter of 2008.

During the third quarter of 2008, we also drilled a parameter well approximately ten kilometers away from the FCC-HZ01 well area to gather additional information on the coal seam characteristics of the #3, #9 and #15 coal seams, all of which are potential CBM producers on the Shouyang Block. We plan to use the data in any potential overall development program study for the area that may be submitted to CUCBM.

Qinnan Block, Shanxi Province. During the third quarter of 2008, we completed the drilling of our first horizontal well in the area, with 3,000 meters drilled in the #3 coal seam. The #3 coal seam is the object of much development by other parties in the area near the southern end of Shanxi Province where over ten successful horizontal wells have been drilled to test and produce the #3 coal seam. Our testing of the well to-date has demonstrated that the coal seam has low permeability of approximately one to two millidarcies, which we expected, and that the wellbore formation has been damaged during the drilling process. We continue to test the well through production.

To expand our exploration effort and understanding of the potential of the Qinnan Block, in the third quarter of 2008, we successfully drilled three of four planned parameter wells on the southern end of the Qinnan Block to test the coal seams for permeability, reservoir pressure, coal thickness and gas content. Although it is still early in the core analyses for gas content, based on preliminary results, we believe that all three wells have demonstrated high gas content of 300 to 500 standard cubic feet of natural gas per ton of coal. These measurements are similar to those obtained from previous testing of wells on the Qinnan Block. In addition, we are in the process of drilling and testing the fourth well, and the tests of the first three parameter wells have provided valuable information on the continuity of the coal seam on the southern end of the Qinnan Block. We plan to use the information gathered in discussions with CUCBM when determining the size of any potential overall development program for the area.

Enhong-Laochang Area, Yunnan Province. During the third quarter of 2008, we completed drilling the third and the fourth deviated wells in a five well pattern to test the #7, #8, #13 and #19 coal seams in Yunnan. These wells were directionally drilled to provide a close pattern of wells to test the coal seams and to provide valuable information on how best to exploit this area in 2009. As a result of our testing, we anticipate that these coal seams will have low permeability and that we will need to fracture multiple zones to fully test these wells. We believe these wells will provide us with more geological and reservoir information about the area.

Production Sharing Contracts. Our operations in the Shouyang and Qinnan Blocks in Shanxi Province and the Enhong-Laochang area of Yunnan Province are conducted under three separate Production Sharing Contracts ("PSCs"). The two Shanxi PSCs and the Yunnan PSC will expire on July 1, 2032 and January 1, 2033, respectively, subject to the existence of commercially productive reserves and unless extended or otherwise amended. Our participating shares are 70% for the two Shanxi Province PSCs and 60% for the Yunnan PSC. CUCBM is the participant with respect to the remaining shares of the PSCs. The three PSCs are divided into three periods: exploration, development and production. All three PSCs are currently in the exploration period, which expires on June 30, 2009, unless extended or otherwise amended. During this period, all expenditures are funded by us. Expenditures in the development and production periods are funded in proportion to the respective participating share of the participants in the PSC. Qualified project costs incurred by us can be recovered from the value of the first 75% of gross production of CBM for the two Shanxi Province PSCs and 70% of gross production of CBM for the Yunnan PSC. Participants will pay their proportionate share of the value added tax of 5% and a royalty to the Chinese government of up to 3%. For the Shouyang and Qinnan PSCs, our company must pay ConocoPhillips, Inc. a 3.5% royalty on production.

Results of Operations


Three Months Ended September 30, 2008 vs. Three Months Ended September 30,
2007(in thousands):

                                 Three months ended September 30,
                                   2008                     2007
Exploration costs            $          2,297         $            511
Lease operating expense                   521                      560
General and Administrative              1,551                    1,450
    Total                    $          4,369         $          2,521

Exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether they have discovered proved commercial reserves. For more information on capitalized drilling costs, see "Overview-Total Exploration Expenditures."

The table below sets out components of exploration costs for the three months ended September 30, 2008 and September 30, 2007 (in thousands):

                                          Three months ended September 30,
                                              2008                    2007
Technical personnel compensation       $              160         $         90
Contract drilling & related expenses                2,137                  421
    Total                              $            2,297         $        511

Exploration costs in the third quarter of 2008 increased $1,716,000 due primarily to higher contract drilling and related expenses as a result of increased drilling activities.

Lease operating expense ("LOE") for the third quarter of 2008 was comprised of costs pertaining to the dewatering efforts of 15 wells in the Shouyang Block and 1 well in the Qinnan Block, which are both located in Shanxi Province. Both Blocks presently have sustained low rates of small gas production. To date, the production is not at commercial levels and the data obtained is not sufficient to project when or if the wells will achieve commercial gas production rates and what those rates may be. LOE for the third quarter of 2008 decreased primarily due to a decrease in workovers of $96,000, partially offset by increase in pumping related costs of $58,000. The table below sets out components of LOE expense for the three months ended September 30, 2008 and September 30, 2007 (in thousands):

                            Three months ended September 30,
                             2008                      2007
Workovers               $           122           $           218
Pumping Related Costs               324                       266
Supervision                          75                        76
    Total               $           521           $           560

General and administrative ("G&A") expenses for the three months ended September 30, 2008 were not materially different compared to those expenses incurred in the same period a year ago.

Nine Months Ended September 30, 2008 vs. Nine Months Ended September 30, 2007 (in thousands):

                                     Nine months ended September 30,
                                      2008                     2007
            Exploration costs   $           6,235         $         2,191
            LOE                             2,247                   1,392
            G&A                             5,282                   5,110
                Total           $          13,764         $         8,693

The table below sets out components of exploration costs for the nine months ended September 30, 2008 and September 30, 2007 (in thousands):

                                                 Nine months ended September 30,
                                                  2008                     2007
Capitalized well costs charged to expense   $          1,415         $             64
Seismic data acquisition                                  84                        -
Technical personnel compensation                         576                      302
Contract drilling & related expenses                   4,160                    1,825
    Total                                   $          6,235         $          2,191

During the nine months ended September 30, 2008, we determined that $1,415,000 of capitalized costs incurred previously in the Yunnan Province and the Qinnan Block in Shanxi Province no longer met the requirements for continued capitalization. Accordingly, we charged this amount to exploration costs. Comparable charges in the nine months ended September 30, 2007 were $64,000. Exploration costs also increased due to the cost of the acquisition of seismic data in the Qinnan Block of $84,000, higher contract drilling and related expenses of $2,335,000 as a result of increased drilling activities, and higher employee compensation of technical personnel of $274,000, also related to increased drilling activities and consisting primarily of non-cash share-based compensation.

LOE for the nine months ended September 30, 2008 was comprised of costs pertaining to the dewatering efforts in the Shouyang Block in Shanxi Province, which presently have sustained low rates of small gas production. To date, the production is not at commercial levels and the data obtained is not sufficient to project when or if the wells will achieve commercial gas production rates and what those rates may be. LOE for the nine months ended September 30, 2008 increased primarily due to an increase in workovers of $636,000 and an increase in pumping related costs of $180,000. The table below sets out components of LOE expense for the nine months ended September 30, 2008 and September 30, 2007 (in thousands):

                             Nine months ended September 30,
                              2008                     2007
Workovers               $          1,174         $            538
Pumping Related Costs                784                      604
Supervision                          289                      250
    Total               $          2,247         $          1,392

G&A expenses for the nine months of 2008 were not materially different compared to those expenses incurred in the same period a year ago.

Capital Resources and Liquidity. We have funded our exploration and development activities primarily through the sale and issuance of common stock. During the second quarter of 2008, we completed a transaction for the sale of 24 million shares of our common stock and warrants to purchase up to 8.4 million shares of our common stock for total net proceeds of $11.8 million. The offering price for the transaction was $0.50 per share, with a number of warrants equal to 35 percent of the shares issued at an exercise price of $1.00 per share. The warrants have a five-year term and may be called or redeemed after May 30, 2009 if our stock price has equaled or exceeded $2.00 per share over a specified period of time. As of September 30, 2008, the amount available under our filed registration statement with the Securities and Exchange Commission ("SEC") for the offer and sale from time to time of our common stock, preferred stock, depositary shares, debt securities, warrants, stock purchase contracts and units totaled $87.1 million. The general capital markets have recently experienced disruption. Continuing volatility in these markets may impair our ability to obtain, or may increase our costs associated with obtaining, additional funds through the issuance of securities under our filed registration statement. We have not established a source of revenue and are not able to accurately predict the timing of our first revenue. The sole source of income we have is interest income derived from our cash accounts at banks.

Following the completion of the second quarter of 2008 stock offering, we expanded our work plan for 2008 in an effort to accelerate our dewatering efforts. Based on funds currently available to us, we believe that we have adequate cash resources to fund our required operations and exploration and development operations in China through the early part of 2009 (see Note 5 to our consolidated financial statements for a description of our commitments in 2008). However, to continue to operate, explore and develop our projects in China, we will need to obtain additional funds during the first quarter of 2009. In order to continue to operate, explore and develop our projects in China, we will need to obtain additional funds during the first quarter of 2009. The general capital markets have recently experienced disruption. Continuing volatility in these markets may impair our ability to access these markets or increase costs associated with obtaining additional funds. Management intends to seek to obtain funds by entering into a strategic relationship or transaction, such as a joint venture or farmout, and/or obtain debt or equity financing. We are currently in exploratory discussions with several companies, including major integrated oil and gas companies, that have expressed an interest in our CBM projects. However, there can be no assurance that we will be able to enter into any strategic relationship or transaction or that we will be successful in obtaining funds through debt or equity financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt or equity financing are uncertain and we cannot predict the timing, structure or other terms and conditions of any such arrangements. No assurance can be given that we will be able to obtain financing on favorable terms, if at all, particularly in light of recent disruptions in the general capital markets, which may impair our ability to obtain additional funds.

As of September 30, 2008, we had unevaluated exploratory well costs totaling $37.0 million, of which $29.0 million have been capitalized for a period greater than one year. Such costs, which relate primarily to the Shouyang Block in Shanxi Province, were initially capitalized under successful efforts accounting, pending a determination of whether we have found sufficient quantities of economically recoverable proved reserves. We make periodic assessments of whether these costs qualify for continuing capitalization, based on whether we are making sufficient progress in assessing the reserves and determining the economic and operating viability of the project, as more fully discussed in note 3 to the consolidated financial statements.

In addition to these periodic assessments, we also assess whether we have a reasonable expectation of recovering these costs through future net cash flows from the project, if we are successful in establishing proved reserves. During the first quarter of 2008, we received the report of an independent engineering firm, which was commissioned to study the various technical aspects of the current pilot project in the Shouyang Block. The study indicated that significant gas content is present in the pilot area and that the coal in the area has relatively high permeability, based on production data available from the first seven wells (four horizontal and three vertical) drilled in the pilot area. The report also indicated that we have made progress in lowering the field pressure to a level which appears to be approaching the critical desorption pressure

necessary for CBM gas production. Although there are many uncertainties associated with our exploration and dewatering efforts, we believe the results of the study provide the company with a reasonable basis for the long-term viability and economic success of this project, and support the continued capitalization of our unevaluated capitalized exploratory well costs in the project while we are continuing to evaluate the field.

The report noted that the initial seven pilot wells evaluated by the independent engineering firm had suffered varying degrees of wellbore damage while being drilled. Without taking into consideration future planned wells, the report also indicates that the seven pilot wells appear insufficient to properly confine the area for dewatering purposes. As such, the report indicates that we are unlikely to produce meaningful quantities of gas from these initial seven wells without drilling additional wells and/or conducting remedial activities on the seven wells. Subsequent to the drilling of the seven wells included in the engineering report, we have drilled ten additional vertical wells as of September 30, 2008. Our immediate plans for this area involve completing drilling of a short-reach horizontal well. If these wells produce sufficient water and are cost effective, additional horizontal, deviated and/or vertical drilling efforts are likely. However, there are many risks and uncertainties involved in early stages of exploring and attempting to develop a new CBM gas field, and we cannot make any assurances that our efforts will be successful in making the pilot area commercially viable. In the event we are not successful, we may be required to write off some or all of these unevaluated exploratory well costs.

Our ability to continue as a going concern depends upon our ability to obtain substantial funds for use in our development activities and upon the success of our planned exploration and development activities. There can be no guarantee of future fundraising or exploration success or that we will realize the value of our unevaluated exploratory well costs. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management believes that we will continue to be successful in obtaining the funds necessary to continue as a going concern.

Our capital resources and planning can be impacted by fluctuations in the U.S. Dollar and China RMB exchange rate as well as inflation in these countries. For further discussion of these risks, see "Part I Item 3. Quantitative and Qualitative Disclosures About Market Risk."

Cash Flow. As of September 30, 2008, our balance in cash and cash equivalents was $13.8 million, a decrease of $3.1 million from the balance of $16.9 million as of December 31, 2007, reflecting a cash inflow of $11.8 million from the second quarter 2008 offering of shares of our common stock and cash outflows related to field operations of approximately $11.0 million and G&A expenditures of approximately $4.0 million.

Cash used in operating activities for the nine months ended September 30, 2008 was $9.1 million as compared to cash used in operating activities for the same period in 2007 of $8.7 million. The increase in cash used in operating activities was due primarily to higher cash exploration costs of $2.7 million, and LOE of $1.0 million, partially offset by a favorable change in working capital of $3.4 million and a decrease of $0.3 million in interest.

Cash used in investing activities for the nine months ended September 30, 2008 was $5,873,000 as compared to $6,499,000 for the same period in 2007. The decline was primarily due to a decrease in additions to unevaluated oil and gas properties of $554,000.

Cash provided by financing activities for the nine months ended September 30, 2008 was $11,808,000 as a result of the sale of 24 million shares of our common stock and warrants to purchase up to 8.4 million shares of our common stock. Cash provided by financing activities for the nine months ended September 30, 2007 was $15,091,000. Financing activities for the first nine months of 2007 included net proceeds from the issuance of shares to International Finance Corporation of $14,812,000 pursuant to a stock subscription agreement and exercises of options.

Forward-Looking Statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future . . .