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 March 31, 2009, Compared to the Same Period of 2008

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $1.2 million during the first quarter of 2009, compared to $1.8 million during the same quarter of 2008. Production at our Wilga well continued to decline, with first quarter 2009 production some 63% lower than first quarter 2008 production. Production at both our Zaniemsyl and Kleka wells was slightly higher during the 2009 quarter. In addition to the Wilga production decline, period-to-period weakness in the Polish zloty against the U.S. dollar resulted in lower U.S. dollar denominated gas revenues. Although the amount of Polish zlotys received per thousand cubic feet of production was approximately 25% higher during the first quarter of 2009 compared to the first quarter of 2008, average U.S. dollar denominated gas prices related to our Poland production decreased 25% from the first quarter of 2008 to the first quarter of 2009. The average exchange rate during the first quarter of 2008 was 2.39 zlotys per U.S. dollar. The average exchange rate during the first quarter of 2009 dropped to 3.45 zlotys per U.S. dollar, a change of 45%.

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 March 31, 2009 and 2008, is set forth in the following table:

                                          For the Quarter Ended March 31,
                                              2009               2008         Change
Revenues                                      $1,219,000         $1,840,000    -34%
Average price (per thousand cubic feet)            $4.32              $5.76    -25%
Production volumes (thousand cubic feet)         282,000            319,000    -12%

Oil Revenues. Oil revenues were $543,000 for the first quarter of 2009, a 62% decrease from the $1.4 million recognized during the first quarter of 2008. As with our gas production, oil production at Wilga also declined from the first quarter of 2008 to 2009. Production from our U.S. properties, however, increased slightly during the first quarter of 2009. The most significant factor in the decline in oil revenues were the lower prices received during the first quarter of 2009. Our average oil price during the first quarter of 2009 was $33.83 per barrel, a 61% decrease from $86.10 per barrel received during the same quarter of 2008.

                               For the Quarter Ended March 31,
                                  2009               2008          Change
Revenues                           $543,000           $1,431,000    -62%
Average price (per barrel)           $33.94               $86.10    -61%
Production volumes (barrels)         16,000               16,600    -4%

Lease Operating Costs. Lease operating costs were $747,000 during the first quarter of 2009, a decrease of $130,000, or 15%, compared to the same period of 2008. Lower operating costs in 2009 were due primarily to exchange rate differences from quarter to quarter. In addition, operating costs at our Wilga well, specifically those related to chemicals, decreased significantly with the drop in oil production.

Exploration Costs. Our exploration costs consist of geological and geophysical costs and the costs of exploratory dry holes. Exploration costs were $2,120,000 during the first quarter of 2009, compared to $4,051,000 during the same period of 2008, a decrease of 48%. Two factors contributed to the quarter-to-quarter decline. First, exchange rate differences reduced the amount of U.S. dollars required to fund 2009 expenditures; second, our level of activity was lower in 2009 than in 2008. First quarter 2009 exploration costs included approximately $1,600,000 associated with our ongoing Fences concession area three-dimensional, or 3-D, seismic surveys, and the remainder associated with two-dimensional, or 2-D, seismic and other costs at both existing and new concessions. First quarter 2008 exploration costs included approximately $2,800,000 associated with 2-D seismic surveys on our 100% owned acreage, approximately $700,000 associated with our Winna Gora 3-D seismic project, and the remaining costs associated with 2-D seismic and other costs at our existing project areas.

DD&A Expense - Exploration and Production. DD&A expense for producing properties was $227,000 for the first quarter of 2009, a decrease of 62% compared to $593,000 during the same period of 2008. The 2008 year-end negative reserve revision due to low year-end oil prices, and subsequent impairment of capital costs, at our U.S. properties resulted in lower DD&A costs, as the bulk of the capital costs in the U.S. were removed from our depletion base.

Accretion Expense. Accretion expense was $8,000 and $21,000 for the first quarter of 2009 and 2008, respectively. Accretion expense is related entirely to our Asset Retirement Obligation.

Oilfield Services Segment

Oilfield Services Revenues. Oilfield services revenues were $20,000 during the first quarter of 2009, a decrease of 98% compared to $954,000 for the first quarter of 2008. We drilled seven wells for third parties during the first quarter of 2008, along with additional well service work. Conversely, during the first quarter of 2009, we performed only minimal well service work for third parties. Instead, we spent much of the first quarter of 2009 refurbishing our rig and other service equipment in preparation for starting a 28 well drilling program for a third party during the second quarter of 2009. Oilfield services revenues will continue to fluctuate from 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 $124,000 during the first quarter of 2009, compared to $82,000 during the same period of 2008. The quarter-to-quarter increase was primarily due to new capital additions in 2008 being depreciated.

Nonsegmented Information

G&A Costs. G&A costs were $1,732,000 during the first quarter of 2009, compared to $1,706,000 during the first quarter of 2008, an increase of $26,000. Higher legal and insurance costs were the primary cause of the period-to-period increase.

Stock Compensation (G&A). As discussed in the footnotes to the financial statements, we adopted the provisions of SFAS No. 123R on January 1, 2006, using the modified prospective method. For the three-month periods ended March 31, 2009, and March 31, 2008, we recognized $439,000 and $626,000, 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 $30,000 during the first quarter of 2009, a decrease of $79,000 compared to $109,000 during the same period of 2008. The decrease was a reflection of lower cash balances available for investment. During the first quarter of 2009, we incurred $165,000 in interest expense, which included $46,000 of amortization of previously incurred loan fees. During the first quarter of 2008, we incurred $40,000 in quarterly commitment fees in connection with securing the Facility, and $46,000 of amortization of loan fees, both of which were charged to interest expense.

Foreign Exchange Loss. As discussed in footnote 10 to the financial statements, during the first quarter of 2009, we recorded foreign currency transaction losses of approximately $20.5 million, principally attributable to increases in the amount of Polish zlotys necessary to satisfy outstanding intercompany dollar-denominated loans and unpaid interest to FX Energy, Inc.

Liquidity and Capital Resources

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. With the establishment of proved reserves in Poland, in November 2006, we established a $25.0 million Senior Credit Facility with the Royal Bank of Scotland to fund infrastructure and development costs in Poland. As of December 31, 2008, we had drawn down the full $25.0 million available under this facility. In addition, cash flow from our production operations has been providing a portion of our capital needs for the past 24 months.

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 at March 31, 2009, was $7,883,000, a decrease of $6,082,000 from our working capital at December 31, 2008, of $13,965,000. As of March 31, 2009, our cash and cash equivalents and marketable securities totaled approximately $9.1 million.

Operating Activities. Net cash used in operating activities was $6,606,000 during the first three months of 2009, compared to net cash used in operating activities of $4,549,000 during the first three months of 2008. The increase in cash used was due primarily to a significant reduction in our current liabilities during 2009.

Investing Activities. During the first three months of 2009, we had cash provided of $883,000 from investing activities. We received proceeds of $3,798,000 from maturities of marketable securities, purchased marketable securities of $10,000, used $726,000 for current year capital additions in Poland and $123,000 related to our proved properties in the United States, used $1,623,000 to pay accounts payable related to prior-year capital costs, and used $433,000 for capital additions in our office and drilling equipment. During the first quarter of 2008, we received $2,381,000 from investing activities. We received proceeds of $3,500,000 from maturities of marketable securities, purchased marketable securities of $68,000, used $7,000 for current year capital additions in Poland and $308,000 related to our proved properties in the United States, used $428,000 to pay accounts payable related to prior-year capital costs, and used $308,000 for capital additions in our office and drilling equipment.

Financing Activities. During the first quarter of 2009, we paid $2,408,000 toward loans related to auction rate securities. During the first quarter of 2008, warrant holders exercised warrants for a total of 1,990,000 shares, resulting in proceeds of approximately $7,169,000. There were no similar transactions during the first quarter of 2009.

As discussed in Note 1 to the 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, 2008. 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.

Critical accounting policies are those that may have a material impact on our financial statements and also require management to exercise significant judgment due to a high degree of uncertainty at the time the estimate is made. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates, and the disclosures set forth below with the Audit Committee of our Board of Directors. We believe our critical accounting policies include those addressing the recoverability and useful lives of assets, the retirement obligations associated with those assets, and the estimates of oil and gas reserves.

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

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.