Summary of PETRO RESOURCES CORP

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Industry terms used in this report are defined in the Glossary of Oil and Natural Gas Terms located at the end of this Item

In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "should" or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by our officers or other representatives to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from operators, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

There are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, are included in our filings with the SEC, including the risk factors set forth in our annual report on Form 10-K for our 2007 fiscal year filed with the SEC on March 31, 2008 and our subsequently filed reports.

General

Petro Resources Corporation and subsidiaries ("we," "our" or "the Company") is an independent exploration and production company engaged in the acquisition of exploratory leases and producing properties, secondary enhanced oil recovery projects, exploratory drilling, and production of oil and natural gas in the United States.

Our business strategy is designed to create and maximize shareholder value by combining and leveraging the knowledge and expertise of our management team with that of our industry partners to grow our diversified portfolio of oil and natural gas producing projects and prospects. Since our inception in 2005, we have established a balanced portfolio which includes producing properties, secondary enhanced oil recovery projects, and exploration prospects both onshore and offshore. We believe our current portfolio has provided a solid base of production with multiple opportunities for organic growth in both production and reserves for years into the future. We target low to medium risk projects that are expected to provide meaningful reserve, production and cash flow growth. We have focused our acquisition and exploration pursuits on oil and natural gas properties principally located in North Dakota, Texas, Louisiana, and New Mexico.

In July 2005, we acquired our initial interest in drilling prospects and commenced drilling activities in November 2005. In the first quarter of 2007, we acquired oil and gas producing assets in the Williston Basin area of North Dakota. As of September 30, 2008, we held interests in approximately 200 producing wells in Texas, Louisiana and North Dakota. We also have exploratory drilling prospects located in Texas, North Dakota, Louisiana, New Mexico, and Kentucky. In December 2005, we commenced production operations from our first oil and gas prospects and received our first revenues from oil and gas production in February 2006. During 2007, we produced more than 120,000 boe and exited the year with a daily production exit rate of approximately 400 boe per day. During the first nine months of 2008 we have produced approximately 148,188 boe.

We recognize the value of entering into derivative and physical contracts for the sale of hydrocarbons to stabilize cash flow from production. During the second and third quarters of 2008, we entered into three separate hedging agreements. During June 2008, we purchased put options for crude oil at a price of $110 per bbl for 100 bbls per day of production during 2009. The cost of the crude oil put options was $363,175. During September 2008, we entered into swap agreements covering 207,400 barrels of crude oil at a price of $105 per bbl for varying amounts of production from October 2008 to December 2011. We incurred no cost in entering these swap agreements. During October 2008, we purchased put options for natural gas at a price of $7.75 per mcf for 658 mcf per day of production during 2009. The cost of the natural gas put options was $200,400.

As of December 31, 2007, our estimated net total proved reserves had grown to approximately 2,716,602 boe (net of production) of which approximately 2,369,600 boe were crude oil reserves and 347,002 boe were natural gas reserves. The increase in net total proved reserves is a result of our Williston Basin acquisition that closed on February 16, 2007, positive results from enhanced oil recovery operations in North Dakota, successful exploratory drilling success in the Williston Basin and in our Cinco Terry Field in Crockett County, Texas.

Our executive offices are located at 777 Post Oak Blvd., Suite 910, Houston, TX 77056, and our telephone number is (832) 369-6986. Our web site is www.petroresourcescorp.com. Additional information which may be obtained through our web site does not constitute part of this quarterly report on Form 10-Q. A copy of this quarterly report on Form 10-Q is located at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the SEC's Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

CIT Credit Facility

On September 9, 2008, we entered into a $50 million Credit Agreement (the "Credit Agreement") with certain lenders named in the agreement and CIT Capital USA Inc., as administrative agent for the lenders, and a $15 million Second Lien Term Loan Agreement (the "Second Lien Term Loan Agreement") with certain lenders named in the agreement and CIT Capital USA Inc., as administrative agent for the lenders. All term loans available under the Second Lien Term Loan facility were advanced to us on September 9, 2008 and were used to retire our previously existing credit facility arranged by Petrobridge Investment Management, LLC.

The Credit Agreement provides for a $50 million first lien revolving credit facility, with an initial borrowing base availability of $17 million. The first lien facility may be used for loans and, subject to a $500,000 sublimit, letters of credit. Borrowings under the Credit Agreement may be used to provide working capital for exploration and production purposes, to refinance existing debt, and for general corporate purposes. The maturity date of the Credit Agreement is September 9, 2011.

Borrowings under the Credit Agreement bear interest, at our option, at either a fluctuating base rate or a rate equal to LIBOR plus, in each case, a margin determined based on our utilization of the borrowing base. The Credit Agreement also requires us to satisfy certain financial covenants, including maintaining (A) a ratio of EBITDAX to Interest Expense (as each term is defined in the Credit Agreement) of not less than 2.5:1.0; (B) a ratio of Net Debt (as such term is defined in the Credit Agreement) to EBITDAX of not more than (y) 4.5:1.0 for the fiscal quarters ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, and (z) 3.5:1.0 for each fiscal quarter ending thereafter; and (C) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0:1.0. We are also required to enter into certain swap agreements pursuant to the terms of the Credit Agreement.

The Second Lien Term Loan Agreement provides for a $15 million second lien term loan facility. As noted above, all term loans available under the second lien term loan facility were advanced to the us on September 9, 2008 and were used to retire our previously existing credit facility arranged by Petrobridge Investment Management, LLC. The maturity date of the Second Lien Term Loan Agreement is September 9, 2012. Under certain circumstances, we are permitted to repay the term loans prior to the maturity date; however, any payments made on or prior to September 9, 2009 are subject to a prepayment penalty equal to 2% of the amount prepaid, and any payments made after September 9, 2009 but on or before September 9, 2010 are subject to a prepayment penalty equal to 1% of the amount prepaid.

Borrowings under the Second Lien Term Loan Agreement bear interest, at our option, at either a fluctuating base rate plus 6.50% per annum or a rate equal to LIBOR plus 7.50% per annum. The Second Lien Term Loan Agreement also requires us to satisfy certain financial covenants, including maintaining (1) a ratio of Total Reserve Value to Debt (as each term is defined in the Second Lien Term Loan Agreement) of not less than 1.75:1.0; and (2) a ratio of Net Debt to EBITDAX (as each term is defined in the Second Lien Term Loan Agreement) of not more than (a) 4.5:1.0 for the fiscal quarters ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, and (b) 4.0:1.0 for each fiscal quarter ending thereafter.

If an event of default occurs and is continuing under either the Credit Agreement or the Second Lien Term Loan Agreement, the lenders may increase the interest rate then in effect by an additional 2% per annum. The Credit Agreement and the Second Lien Term Loan Agreement contain covenants that, among others things, restrict our ability to, with certain exceptions: (i) incur indebtedness; (ii) grant liens; (iii) acquire other companies or assets; (iv) dispose of all or substantially all of our assets or enter into mergers, consolidations or similar transactions; (v) make restricted payments; (vi) enter into transactions with affiliates; and (vii) make capital expenditures.

PRC Williston LLC, our wholly-owned subsidiary, has guaranteed the performance of all of our obligations under the Credit Agreement, the Second Lien Term Loan Agreement and related agreements pursuant to a Guaranty and Collateral Agreement and a Second Lien Guaranty and Collateral Agreement each dated as of September 9, 2008. Subject to certain permitted liens, our obligations have been secured by the grant of a first priority lien on no less than 80% of the value of our and PRC Williston's existing and to-be-acquired oil and gas properties and the grant of a first priority security interest in related personal property of ours and PRC Williston. We also granted a first priority security interest in our ownership interest in PRC Williston, subject only to certain permitted liens.

As of November 12, 2008, we have drawn $21.5 million, of which $15.0 million was drawn on the Second Lien Term Loan Agreement and $6.5 million was drawn on the Credit Agreement. We are permitted to use the remaining available funds under the Credit Agreement to finance our capital program and fund general corporate purposes.

Series A Preferred Stock Redemption

On September 26, 2008, we redeemed 2,563,712 shares of our outstanding Series A Preferred Stock at an aggregate redemption price of $7,946,735. The shares were held by investment funds managed by Touradji Capital Management. Pursuant to the terms of the Series A Preferred Stock, we were required to redeem all Series A Preferred Stock no later than October 2, 2008. After giving effect to the redemption, there are no shares of Series A Preferred Stock outstanding.

Sale of Hall-Houston Exploration II, L.P. Partnership Interest

On September 26, 2008, we sold our 5.33% limited partner interest in Hall-Houston Exploration II, L. P. pursuant to a Partnership Interest Purchase Agreement dated September 26, 2008, as amended on September 29, 2008. The interest was purchased by a non-affiliated partnership for a cash consideration of $8.0 million and the purchaser's assumption of the first $1,353,000 of capital calls on the limited partnership interest sold subsequent to September 26, 2008. We have agreed to reimburse the purchaser for up to $754,255 of capital calls on the limited partnership interest sold in excess of the first $1,353,000 of capital calls subsequent to September 26, 2008. We will realize a net gain on the sale of the asset of not less than approximately $1.10 million for the quarter ending September 30, 2008, subject to future upward adjustment to the extent that some or all of the $754,255 is not called. The proceeds of the sale of the limited partnership were used to redeem the Company's outstanding shares of Series A Preferred Stock.

Results of Operations

For the three months ended September 30, 2008 compared to the three months ended September 30, 2007

Our net production for the quarter ended September 30, 2008 included 35,012 barrels of oil, 105,239 mcf of natural gas, and 4,801 barrels of natural gas liquids for a barrel-equivalent total of 57,353 boe compared to 27,760 barrels of oil, 35,720 mcf of natural gas, and 262 barrels of natural gas liquids for a barrel-equivalent total of 33,975 boe for the quarter ended September 30, 2007.

For the quarter ended September 30, 2008, the average daily production was approximately 623 boe per day compared to average daily production of 370 boe per day for the quarter ended September 30, 2007.

We realized average prices for oil and gas during the quarter ended September 30, 2008 of $106.33 per barrel of oil, $7.34 per mcf of natural gas, and $59.82 per barrel of natural gas liquids compared to $66.75 per barrel of oil, $3.08 per mcf of natural gas, and $37.62 per barrel of natural gas liquids during the prior year period.

Revenue for the quarter ended September 30, 2008 totaled $5,964,895, compared to revenue of $1,972,866 for the prior year period. Revenue for the quarter ended September 30, 2008 consisted of $4,782,933 of oil and gas sales compared to oil and gas sales of $1,972,866 for the quarter ended September 30, 2007. The increase in revenue from oil and gas sales was due primarily to increased production as the result of our successful drilling efforts in Crockett County, Texas as well as the increase in oil and gas prices over the same period last year. In addition, during the three months ended September 30, 2008, we realized $1,181,963 of revenue from the gain on the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. P.

Lease operating expenses for the quarter ended September 30, 2008 totaled $1,492,163 compared to lease operating expenses of $890,140 for the prior year period. The increase in lease operating expenses was due primarily to increased operational costs in the Williston Basin properties and an increase in the number of producing wells in our Cinco Terry Field in Crockett County, Texas.

Exploration costs for the quarter ended September 30, 2008 were $2,179,388 compared to $344,722 for the quarter ended September 30, 2007. Exploration costs represent our drilling costs associated with dry holes and the carrying costs of properties. The increase in exploration costs is the result of four unsuccessful exploratory wells drilled in the Williston Basin during the third quarter of 2008.

We incurred no expenses related to the impairment of oil and gas properties in the quarters ended September 30, 2008 or 2007. Impairment expenses represent the write-down of previously capitalized expenses for productive wells. We take an impairment charge for a productive well when there is an indication that we may not receive production payments equal to the net capitalized costs. No wells needed to be written down in either quarter.

Our expenses for depreciation, depletion, and accretion ("DD&A") for the quarter ended September 30, 2008 totaled $718,513 compared to $178,483 for the same period in the prior year. DD&A expenses are a function of production and depletion rates. The increase over the same period last year is the result of our increased production in the Williston Basin and the Cinco Terry Field as well as an increase in our depletion rates.

General and administrative expenses for the quarter ended September 30, 2008 totaled $817,811 compared to general and administrative expenses of $612,321 for the prior year period. General and administrative expenses for the quarters ended September 30, 2008 and September 30, 2007 included expenses of $329,235 and $241,550, respectively, for outstanding common stock shares and common stock options granted under our Stock Incentive Plan. Without giving effect to expenses for common shares and stock options, our general and administrative expenses for the quarters ended September 30, 2008 and September 30, 2007 were $488,576 and $370,771, respectively. General and administrative expenses increased over the same period last year due primarily to an increase in the number of employees and the related expenses.

We incurred income from operations of $757,021 for the quarter ended September 30, 2008 compared to a loss from operations of $52,800 during the same period in the prior year. The increase in net income occurred due to increased production revenues and the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. P.

During the quarter ended September 30, 2008, interest expense totaled $1,066,477 compared to $182,769 for the quarter ended September 30, 2007. This increase in interest expense was due primarily to a reduction in the interest capitalized due to the decreased development activity in North Dakota.

During this quarter, we recognized debt extinguishment losses amounting to $2,790,828 related to the payoff of our Petrobridge credit facility. The majority of this loss was related to the write off of the unamortized note discount and the write off of the deferred financing cost related to this credit facility.

Beginning in March 2007, we have entered into commodity derivative financial instruments for purposes of hedging our exposure to market fluctuations of oil and natural gas prices. During the three months ended September 30, 2008, we incurred a gain on derivative contracts of $2,477,405 compared to a loss of $365,731 for the comparable period in 2007. The gain of $2,477,405 included $625,568 of realized losses related to settled contracts, $448,682 of unrealized gains related to "floors," which are put options we purchased to sell oil at $110 per barrel, and $2,654,291 of unrealized gains related to unsettled swap contracts. Unrealized gains and losses are based on the changes in the fair value of derivative instruments covering positions beyond September 30, 2008.

We incurred a net loss attributable to common shareholders of $535,538 ($0.01 per share) during the quarter ended September 30, 2008, compared to a net loss of $755,801 ($0.04 per share) for the same period in 2007. The decrease in net loss was primarily the result of increased revenues and the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. during the third quarter of 2008, offset by the write off of $2,790,829 of debt extinguishment losses associated with the early repayment of the Petrobridge credit facility.

For the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007

Our net production for the nine months ended September 30, 2008 included 95,869 barrels of oil, 227,762 mcf of natural gas, and 14,358 barrels of natural gas liquids for a barrel-equivalent total of 148,188 boe compared to 65,027 barrels of oil, 107,434 mcf of natural gas, and 915 barrels of natural gas liquids for a barrel-equivalent total of 83,848 boe for the nine months ended September 30, 2007.

For the nine months ended September 30, 2008, the average daily production was approximately 543 boe per day compared to average daily production of 307 boe per day for the nine months ended September 30, 2007.

We realized average prices for oil and gas during the nine months ended September 30, 2008 of $102.23 per barrel of oil, $7.21 per mcf of natural gas, and $53.49 per barrel of natural gas liquids compared to $60.61 per barrel of oil, $3.48 per mcf of natural gas, and $34.44 per barrel of natural gas liquids for the comparable prior year period.

Revenues for the nine months ended September 30, 2008 totaled $13,491,339 compared to revenues of $4,447,303 for the nine months ended September 30, 2007. Revenue for the nine months ended September 30, 2008 consisted of $12,209,376 of oil and gas sales compared to oil and gas sales of $4,347,303 for the nine months ended September 30, 2007. The increase in revenue from oil and gas sales of $7,862,073 consisted of a $3,335,926 increase due to increased oil and gas production as a result of our successful drilling efforts in Crockett County, Texas and a $4,526,147 increase due to increased oil and gas prices over the same period last year. In addition, during the nine months ended September 30, 2008, we realized $1,181,963 of revenue from the gain on the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. P.

Lease operating expenses for the nine months ended September 30, 2008 totaled $4,061,269 compared to lease operating expenses of $2,352,411 for the prior year period. The increase in lease operating expenses was due primarily to the increased number of producing wells in our Cinco Terry Field in Crockett County, Texas and higher costs in the Williston Basin.

Exploration costs for the nine months ended September 30, 2008 were $2,789,552 compared to $518,311 for the nine months ended September 30, 2007. Exploration costs represent our drilling costs associated with dry holes and the carrying costs of properties. The increase in exploration costs is the result of the write off of four exploratory wells in North Dakota.

We incurred no expenses related to the impairment of oil and gas properties in the nine months ended September 30, 2008, compared to $15,712 during the prior year comparable period. Impairment expenses represent the write-down of previously capitalized expenses for productive wells. We take an impairment charge for a productive well when there is an indication that we may not receive production payments equal to the net capitalized costs. The decline in expenses for impairment of oil and gas properties is the result of no wells needing to be written down to net cost.

Our expenses for depreciation, depletion, and accretion, or DD&A, for the nine months ended September 30, 2008 totaled $1,855,706, compared to $488,866 for the same period in the prior year. The increase in DD&A expenses was due to our increased production from the Cinco Terry Field and the Williston Basin as well as an increase in the depletion rates.

General and administrative expenses for the nine months ended September 30, 2008 totaled $3,005,583 compared to general and administrative expenses of $2,031,635 for the prior year period. General and administrative expenses for the nine months ended September 30, 2008 and September 30, 2007 included expenses of $1,220,552 and $876,286, respectively, for outstanding common stock shares and common stock options granted under our Stock Incentive Plan. Without giving effect to expenses for common shares and stock options, our general and administrative expenses for the nine months ended September 30, 2008 and September 30, 2007 were $1,785,031 and $1,155,349, respectively. The increase in general and administrative expenses (other than expenses for options and common shares) between reporting periods was due to increased number of employees, additional office space, professional fees, travel and other related expenses.

We incurred income from operations of $1,779,229 for the nine months ended September 30, 2008 compared to a loss from operations of $959,632 during the same period in the prior year. The increase in income is due primarily to increased revenues and the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. P.

During the nine months ended September 30, 2008, interest expense totaled $2,172,257, compared to $479,087 for the nine months ended September 30, 2007. This increase in interest expense was due primarily to a reduction in the interest capitalized due to the decreased development activity in North Dakota.

During the nine months ended September 30, 2008, we recognized debt extinguishment losses in the amount of $2,790,828 related to the payoff of our Petrobridge credit facility. The majority of this loss was related to the write-off of the unamortized note discount and the write-off of the deferred financing cost related to the credit facility.

Beginning in March 2007, we entered into commodity derivative financial instruments intended to hedge our exposure to market fluctuations of oil prices. During the nine months ended September 30, 2008, we incurred a loss of $986,245 compared to a loss of $1,092,432 for the comparable period in 2007. The loss of $986,245 included $1,837,822 of realized losses related to settled contracts, $345,107 of gains related "floors", which are put options we purchased to sell oil at $110 per barrel, and $506,470 of unrealized gains related to unsettled swap contracts. Unrealized gains and losses are based on the changes in the fair value of derivative instruments covering positions beyond September 30, 2008.

We incurred a net loss attributable to common stockholders of $4,052,569 ($0.11 per share) during the nine months ended September 30, 2008, compared to a net loss of $2,773,838 ($0.13 per share) for the same period in 2007. The increase in net loss was primarily the result of an increase in our cost to extinguish debt, interest expense and dividends, offset by an increase in our income from operations.

During the nine months ended September 30, 2008, cash flow provided by operations totaled $3,608,884 which represents an increase of $3,262,533 from the same period in 2007. The increase in cash flow was primarily due to increased revenues driven by increased production and higher commodity prices realized over the same period last year.

Plan of Operations

Our plan of operations for the next 12 months is to pursue further exploration and development of the oil and natural gas prospects that we currently own, along with obtaining the working capital required to fund such exploration and . . .