General

The following discussion provides information on the results of operations for the periods ended September 30, 2008 and 2007 and our financial condition, liquidity and capital resources as of September 30, 2008 and June 30, 2008. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.

The profitability of our operations in any particular accounting period will be directly related to the realized prices of oil and gas sold, the type and volume of oil and gas produced and the results of development, exploitation, acquisition, and exploration activities, and the other factors set forth in this report and in our report on Form 10-KSB for the year ended June 30, 2008. The realized prices for natural gas will fluctuate from one period to another due to regional market conditions and other factors, while oil prices will be predominantly influenced by world supply and demand. The aggregate amount of oil and gas produced may fluctuate based on the success of development and exploitation of oil and gas reserves pursuant to current reservoir management. Since we have not drilled any wells during the current fiscal year to replace any reserves produced, our production volumes are decreasing in accordance with the decline curves typically associated with our existing wells. Accordingly, our results of operations may fluctuate from period to period based on the foregoing principal factors, among others.

Overview

Aspen Exploration Corporation was organized in 1980 for the purpose of acquiring, exploring and developing oil and gas properties. Since 1996, we have focused our efforts on the exploration, development and operation of natural gas properties in the Sacramento Valley of northern California, and in 2007 we acquired interests in oil properties in Montana. Our business activities are primarily focused in two separate aspects of the oil and gas industry:

(1 ) holding and acquiring operating interests in oil and gas properties where we act as the operator of oil and gas wells and properties; and (2 ) holding non-operating interests in oil and gas properties.

We are currently the operator of 67 gas wells in the Sacramento Valley of northern California. Additionally, we have a non-operated interest in 26 gas wells in the Sacramento Valley of northern California and non-operating working interest in approximately 37 oil wells in Montana. When appropriate we may engage in business activities related to the exploration and development of other minerals and resources. We recompleted eight wells in September 2008 in an effort to improve their productivity and extended the terms of two leases. At the present time, we are not engaged in any drilling operations or acreage acquisition programs nor have we drilled any new wells in our current fiscal year.

In the past, where possible we attempted to be the operator of each property in which we invest. Currently, we are operating 67 gas wells using the services of a consultant. As operator, the other working interest owners are obligated to pay us fees pursuant to the "overhead reimbursement" provisions of the COPAS Accounting Procedures which are included as an attachment to the operating agreements. These accounting procedures define the overhead expenses that are charged to the joint accounts and permit us to charge some expenses (such as "salaries, wages and Personal Expenses of Technical Employees directly employed on the Joint Property" and drilling expenses) directly to the joint interest owners. In almost all cases, Aspen also charges a general monthly producing overhead rate per well. We do not recognize these fees received from the joint interest owners as revenues; rather they are offset against (and are a deduction from) our general and administrative expenses as reflected in our statement of operations. During the three months ended September 30, 2008, these administrative charges to the properties helped cover approximately 40% of our selling, general and administrative expenses as compared to 47% for the same period of the 2007

As announced in September 2008, our board of directors has decided to investigate strategic alternatives for Aspen, including the possibility of selling our assets or considering another appropriate merger or acquisition transaction for several reasons, including:

º the disproportionate cost of Aspen's general and administrative expenditures required as a result of compliance with the Securities Exchange Act of 1934, as amended (including the requirements of the Sarbanes-Oxley Act of 2002) when compared to Aspen's revenues and net income;
º the board of directors' belief that the market price of Aspen common stock does not adequately reflect the inherent value of Aspen's producing oil and gas assets and undeveloped acreage, and thus the board of directors does not believe that a transaction based on the value of Aspen's common stock would be in the best interest of Aspen's shareholders; and
º the likelihood that Aspen's president will be unable to resume his former role and responsibilities and oversee Aspen's day-to-day operations due to the effects of the stroke he suffered in January 2008;

We opened a data room in Santa Barbara, California, at which persons interested in acquiring our assets or Aspen itself are able to review a significant amount of information about Aspen and its properties. Aspen retained Brian Wolf, a California-licensed mineral, oil and gas broker and consulting geologist, to assemble and operate the data room for Aspen. A number of companies have reviewed the information in the data room, but no company has made any offer for an asset acquisition, merger, or other business combination. We cannot offer any assurance that it will receive an acceptable offer from any person for an asset acquisition, merger, or other business combination. Further, Aspen may later determine that it is in the best interest of its shareholders to investigate other forms of business alternatives or to continue and expand existing business operations with existing or new management. In the meantime, Aspen has been carrying on its business operations in the normal course, although we have not commenced or completed any drilling operations and, therefore, our reserve base is depleting.

Outlook and Trends

Total production for the year depends on a variety of factors set forth herein and in our Form 10-KSB for the year ended June 30, 2008. Over the past five years we have been able to replace the majority of our produced reserves and maintain our yearly natural gas production through the drilling of new wells and the acquisition of producing properties which have offset the oil and gas we produce although we were not able to do so during our 2008 fiscal year due to significantly less discoveries than in recent years. We have suspended our oil and gas drilling and acquisition activity due to our efforts to investigate the sale of our assets or another business combination.

Management uses the measurement of our produced reserves to help measure the success of our exploration and development activity. Where reserves are replaced in an amount greater than production, it is a sign that we are continuing our exploration and development activity successfully. A one-year decline (as occurred during our fiscal 2008) or increase may not be important to investors, but seeing a decline or increase over a several year period is a trend worthy of noting, both internally by management and externally by investors. Management expects that the decline will continue through at least the first half of our fiscal 2009 (which ends December 31, 2008) as management continues its investigation of a sale of our assets or completing another business combination. If we decide not to pursue an asset sale or business combination (if any is proposed), we will have to consider recommencing our oil and gas activities during the second half of our fiscal year 2009. If we pursue this alternative course, this will require that we reconstitute our management team or expand our use of consultants.

Our ability to replace reserves, dissipated through production or recalculation, will depend largely on how successful our drilling and acquisition efforts will be in the future. While we cannot predict the future, our historic success drilling ratio over the past seven years has been 84%. With the use of 3-D seismic and well control data, interpreted by our geological and geophysical consultants, we feel we can manage our dry hole risk adequately. However, as noted above, we have suspended our oil and gas exploration and acquisition activities except that we did extend the terms of two of our existing leases.

The prices that we receive for the oil and natural gas (including natural gas liquids) produced are impacted by many factors that are outside of our control. Historically, these commodity prices have been volatile and we expect them to remain volatile. Prices for oil and natural gas are affected by changes in market demands, overall economic activity, weather, pipeline capacity constraints, inventory storage levels, the world political situation, basis differentials and other factors. As a result, we cannot accurately predict future natural gas and NGL (natural gas liquids) prices, and therefore, we cannot determine what effect increases or decreases in production volumes will have on future revenues. The average price we received during the first quarter of 2009 for our natural gas was approximately $8.33 per MMBTU as compared to $6.22 per MMBTU during the same period of the prior year. In order to reduce the risk of natural gas price fluctuations, we have entered into a series of gas sales contracts with Enserco and Calpine as described below under "Contractual Obligations."

On regulatory and operational matters, we actively manage our exploration and production activities. We value sound stewardship and strong relationships with all stakeholders in conducting our business. We attempt to stay abreast of emerging issues to effectively anticipate and manage potential impacts to our operations.

Liquidity and Capital Resources

We have historically financed our operations with internally generated funds and limited borrowings from banks and third parties, and farmout arrangements, which permit third parties (including some related parties) to participate in our drilling prospects. During the year ended June 30, 2007, we borrowed $600,000 to purchase an interest in the Poplar Field and became obligated for $375,000 indebtedness as part of that purchase.

Our principal uses of cash are for operating expenses, the acquisition, drilling, completion and production of prospects, the acquisition of producing properties, working capital, servicing debt and the payment of income taxes.

To illustrate the changes in our cash flows for the period, all amounts presented are approximate. During the first three months of our 2009 fiscal year, we increased our cash by $153,500 from our operating, investing and financing activities as compared to using $907,500 during the same period of our 2008 fiscal year. In part this increase was due to higher prices received for the sales of our oil and gas production and due to the fact that we did not commence any drilling operations during the period.

We generated cash of $268,500 from operations for the three months ended September 30, 2008, as compared to $1.08 million in cash generated from operating activities for the three months ended September 30, 2007. This decrease of approximately $800,000 was primarily due to a decrease in income from operations of approximately $38,000 (as discussed below in results of operations), and a use of cash to retire current liabilities which decreased $918,500 in the current period compared to an increase of $662,500 during the period ending September 30, 2007 . The decrease in current liabilities during the period impacts cash flows immediately in that more cash was used in the period to satisfy those liabilities. In addition, there was an increase in current assets of $515,500 in 2008 compared to a decrease of $455,500 in 2007.

Our financing activities consist of retirement of long-term debt of $71,820 for the period ending September 30, 2008 compared to $62,500 in the same period of the prior year.

Our working capital surplus (current assets less current liabilities) at September 30, 2008, was $1.5 million, which reflects a $193,000 increase from our working capital at June 30, 2008. As detailed above, this increase was due primarily to our positive cash flow and lack of any significant drilling operations during our 2009 fiscal year. In prior years, Aspen would have finished a drilling program during the period for April - November, which generally would require larger expenditures classified as investing activities. Normally Aspen would not be engaging in significant drilling operations during the November - March period. Nevertheless, Aspen expects that it will continue to receive production revenues during the remaining months in our 2009 fiscal year whether or not we accomplish any drilling operations and, therefore, Aspen expects that its cash position and working capital will increase. This has historically been the pattern of Aspen's available cash resources.

Future Commitments

The Company has not commenced any drilling operations since June 30, 2008. Since the beginning of our 2009 fiscal year, the Company has recompleted eight wells with mixed results. In addition, the Company has extended two leases (one at Denverton Creek and one at West Grimes), and has obtained permits to drill four wells in Colusa County, California and in the West Grimes/Strain Ventures area. The Company has contemplated drilling two wells in its West Grimes gas field, but has not retained a drilling rig to do so. The cost of drilling, completing, and equipping wells in the West Grimes gas field is approximately $1.2 million per well (approximately $468,000 net to Aspen's 39% working interest, assuming the other working interest owners participate). Although the Company has a number of oil and gas leases that are not held by production, the Company has no obligation to drill any wells. If the Company does not drill any wells, certain of our leases may expire commencing in January 2009 unless we renew or extend those leases.

If our drilling efforts are successful, the anticipated increased cash flow from the new gas discoveries, in addition to our existing cash flow, should be sufficient to fund our share of planned future completion and pipeline costs.

Results of Operations

September 30, 2008 Compared to September 30, 2007

The following table sets forth certain items from our Condensed Consolidated
Statements of Operations as expressed as a percentage of total revenues, shown
for the three months of fiscal 2009 and 2008:

                                  For the Three Months Ended
                                September 30,     September 30,
                                    2008              2007

Total Revenues                         100.0%            100.0%

Oil and Gas Production Costs            31.3%             21.7%

Gross Profit                            68.7%             78.3%

Cost and Expenses
  Depreciation and depletion               41.2%     54.3%
   Selling, general and administrative    16.0%      13.5%

Total Cost and Expenses                   88.4%      67.8%

Income from Operations                    11.6%      10.5%

Other Income and Expenses                  0.1%       4.7%

Income Before Income Taxes                11.7%      15.2%

Provision for Income Taxes                -2.8%      -2.9%

Net Income                                 8.9%      12.3%

To facilitate discussion of our operating results for the three months ended September 30, 2008 and 2007, we have included the following selected data from our Condensed Consolidated Statements of Operations: