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, 2009, Compared to the Same Period of 2008

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $1.7 million during the third quarter of 2009, compared to $2.0 million during the same quarter of 2008. Lower per-unit prices during the third quarter of 2009, which were caused primarily by weakness in the Polish zloty from the prior year's quarter, offset higher production volumes. Production volumes were 33% higher during the third quarter of 2009 compared to the prior year's third quarter.

Two new wells began production during the third quarter of 2009. Production commenced at our Roszkow well in late September. As of September 30, 2009, production at the well had reached its plateau of 15 million cubic feet of natural gas per day. We expect this production rate to be sustained for several years. We have a 49% interest in the well. Gas is being sold to the Polish Oil and Gas Company, or POGC, at a contracted rate equal to 95% of the published low-methane tariff. As of September 30, 2009, the net price for gas at the Roszkow well was $5.85 per million cubic feet.

Production also began during the third quarter of 2009 at our Grabowka well. PL Energia, a gas distribution company in Poland, is the purchaser of the gas from the Grabowka field. Under a three well re-entry program, gas will be sold at a fixed rate of approximately $1.62 per million cubic feet (approximately $2.70 per million British thermal units based on 60% methane content). This price, which is lower than the current market price, was agreed upon in order to compensate the buyer for taking on all of the cost and risk of re-entering, completing the wells, and paying for construction of the production facilities. Gas is being compressed and transported by truck. The combination of the purchaser-provided financing of all development costs and the lower than normal gas price effectively creates economic outcome and risk similar to a royalty interest for us.

Production at our Zaniemsyl well continues at approximately 10 million cubic feet of natural gas per day. We have a 24.5% interest in this well.

Production at our Wilga well, despite repeated workover attempts, ceased during the third quarter of 2009. We have impaired the remaining capitalized costs at Wilga, and are planning to dismantle the production facility.

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

                                          For the Quarter Ended September 30,
                                               2009                 2008           Change
Revenues                                        $1,728,000           $1,965,000        -12%
Average price (per thousand cubic feet)              $4.65                $7.00        -34%
Production volumes (thousand cubic feet)           371,800              280,600        +33%

Oil Revenues. Oil revenues were $962,000 for the third quarter of 2009, a 50% decrease from the $1.9 million recognized during the third quarter of 2008. Production from our U.S. properties declined 6% during the third quarter of 2009, and oil production in Poland, all of which came from our Wilga well, decreased by 78%. The most significant factor in the decline in oil revenues, however, was the lower prices received during the third quarter of 2009. Our average oil price during the third quarter of 2009 was $57.83 per barrel, a 45% decrease from $104.68 per barrel received during the same quarter of 2008.

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 quarters ended September 30, 2009 and 2008, is set forth in the following table:

                              For the Quarter Ended September 30,
                                  2009                 2008           Change
Revenues                            $962,000             $1,920,000    -50%
Average price (per barrel)            $57.83                $104.68    -45%
Production volumes (barrels)          16,600                 18,300    -9%

Lease Operating Costs. Lease operating costs were $857,000 during the third quarter of 2009, a decrease of $73,000, or 8%, compared to the same period of 2008. Lower operating costs in the United States resulted from lower production taxes due to lower oil prices. Higher operating costs in Poland, caused by increased workover expenses at our Wilga well, were largely offset by exchange rate differences in Poland from quarter to quarter.

Exploration Costs. Our exploration costs consist of geological and geophysical costs and the costs of exploratory dry holes. Exploration costs were $686,000 during the third quarter of 2009, compared to $3,683,000 during the same period of 2008, a decrease of 81%. Two factors contributed to the quarter-to-quarter decline. First, exchange rate differences reduced the amount of U.S. dollars required to fund 2009 Polish expenditures; second, our level of activity was lower in 2009 than in 2008. Third quarter 2009 exploration costs included approximately $300,000 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. Third quarter 2008 exploration costs included approximately $1.6 million associated with 3-D seismic surveys, and approximately $1.5 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.

DD&A Expense - Exploration and Production. DD&A expense for producing properties was $250,000 for the third quarter of 2009, a decrease of 53%, compared to $528,000 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 third 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 $1.1 million during the third quarter of 2009, a decrease of 8%, compared to $1.2 million for the third quarter of 2008. We drilled seven wells for third parties during the third quarter of 2008, along with additional well service work. During the third quarter of 2009, we drilled 11 wells for third parties; however, nine of these were shallow wells that can be drilled in only two to three days. Oilfield services revenues will continue to fluctuate from period to period based on market demand, weather, the number and type 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 $657,000 during the third quarter of 2009, compared to $815,000 during the same period of 2008. The quarter-to-quarter decrease was primarily due to the nature of our drilling activity in 2009 discussed above. Oilfield services costs will also continue to fluctuate period to period based on market demand, weather, the number and type 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 $155,000 during the third quarter of 2009, compared to $107,000 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 $1.5 million during the third quarter of 2009, compared to $1.5 million during the third quarter of 2008.

Stock Compensation (G&A). For the three-month periods ended September 30, 2009 and 2008, we recognized $449,000 and $622,000, respectively, of stock compensation expense related to the amortization of unexercised options and restricted stock.

Interest and Other Income. Interest and other income was $11,000 during the third quarter of 2009, a decrease of $41,000, compared to $52,000 during the same period of 2008. The decrease was a reflection of lower cash balances available for investment. During the third quarter of 2009, we incurred $141,000 in interest expense, which included $46,000 of amortization of previously incurred loan fees. During the third quarter of 2008, we incurred $138,000 in interest expense, which included $31,000 in quarterly commitment fees in connection with securing the Facility and $46,000 of amortization of loan fees.

Nine Months Ended September 30, 2009, Compared to the Same Period of 2008

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $4.0 million during the first nine months of 2009, compared to $6.0 million during the same period of 2008. Production at our Wilga well continued to decline, with the first nine months of 2009 of production 80% lower than production during the same period of 2008. Lower per-unit prices during the first nine months of 2009, which were caused primarily by weakness in the Polish zloty from the prior year's nine months, combined with lower production volumes to result in lower revenues. Despite the decline at Wilga, production volumes were only 3% lower during the first nine months of 2009 compared to the prior year's first nine months.

Two new wells began production during the third quarter of 2009. Production commenced at our Roszkow well in late September. As of September 30, 2009, production at the well had reached its plateau of 15 million cubic feet of natural gas per day. We expect this production rate to be sustained for several years. We have a 49% interest in the well. Gas is being sold to POGC at a contracted rate equal to 95% of the published low-methane tariff. As of September 30, 2009, the net price for gas at the Roszkow well was $5.85 per million cubic feet.

Production also began during the third quarter of 2009 at our Grabowka well. PL Energia, a gas distribution company in Poland, is the purchaser of the gas from the Grabowka field. Under a three well re-entry program, gas will be sold at a fixed rate of approximately $1.62 per million cubic feet (approximately $2.70 per million British thermal units based on 60% methane content). This price, which is lower than the current market price, was agreed upon in order to compensate the buyer for taking on all of the cost and risk of re-entering, completing the wells, and paying for construction of the production facilities. Gas is being compressed and transported by truck. The combination of the purchaser-provided financing of all development costs and the lower than normal gas price effectively creates economic outcome and risk similar to a royalty interest for us.

Production at our Wilga well, despite repeated workover attempts, ceased during the third quarter of 2009. We have impaired the remaining capitalized costs at Wilga, and are planning to dismantle the production facility.

In addition to our lower year-to-date production volumes in 2009, 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 for each of our wells averaged more than 13% higher during the first nine months of 2009, compared to the first nine months of 2008, average U.S. dollar denominated gas prices related to our Poland production decreased 31% from the first nine months of 2008 to the first nine months of 2009. The average exchange rate during the first nine months of 2008 was 2.26 zlotys per U.S. dollar. The average exchange rate during the first nine months of 2009 was 3.22 zlotys per U.S. dollar, a change of 42%.

                                          For the Nine Months Ended
                                                September 30,
                                            2009            2008        Change
Revenues                                  $3,988,000      $6,017,000     -34%
Average price (per thousand cubic feet)        $4.49           $6.54     -31%
Production volumes (thousand cubic feet)     888,000         920,000      -3%

Oil Revenues. Oil revenues were $2.3 million for the first nine months of 2009, a 57% decrease from the $5.3 million recognized during the first nine months of 2008. Production from our U.S. properties declined 3% during the first nine months of 2009, and oil production in Poland, all of which came from our Wilga well, decreased by 85%. The most significant factor in the decline in oil revenues, however, was the lower prices received during the first nine months of 2009. Our average oil price during the first nine months of 2009 was $47.50 per barrel, a 53% decrease from $101.10 per barrel received during the same period of 2008.

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

                              For the Nine Months Ended September 30,
                                    2009                   2008           Change
Revenues                              $2,298,000             $5,337,000    -57%
Average price (per barrel)                $47.50                $101.10    -53%
Production volumes (barrels)              48,400                 52,800    -8%

Lease Operating Costs. Lease operating costs were $2.4 million during the first nine months of 2009, a decrease of $283,000, or 10%, compared to the same period of 2008. Lower operating costs in the United States resulted from lower production taxes due to lower oil prices. Higher operating costs in Poland, caused by increased workover expenses at our Wilga well, were largely offset by exchange rate differences in Poland from year to year.

Exploration Costs. Our exploration costs consist of geological and geophysical costs and the costs of exploratory dry holes. Exploration costs were $4.1 million during the first nine months of 2009, compared to $10.0 million during the same period of 2008, a decrease of 59%. Two factors contributed to the year-to-year decline. First, exchange rate differences reduced the amount of U.S. dollars required to fund 2009 Polish expenditures; second, our level of activity was lower in 2009 than in 2008. First nine months 2009 exploration costs included approximately $2.8 million associated with our ongoing Fences concession area 3-D seismic surveys, and the remainder associated with 2-D seismic and other costs at both existing and new concessions. 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.

Property Impairments. As discussed above, our Wilga well ceased production during the third quarter of 2009. Accordingly, we impaired the remaining capital costs of approximately $1.9 million as of September 30, 2009.

Accretion Expense. Accretion expense was $24,000 and $63,000 for the first nine months 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 $1.8 million during the first nine months of 2009, a decrease of 44%, compared to $3.2 million for the first nine months of 2008. We drilled 20 wells for third parties during the first nine months of 2008, along with additional well service work, compared to 25 wells during the same period of 2009. All but two of the wells drilled in 2009 were shallow wells that can be drilled in two to three days. Oilfield services revenues will continue to fluctuate from period to period based on market demand, weather, the number and type 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 $1.3 million during the first nine months of 2009, compared to $2.1 million during the same period of 2008. The year-to-year decrease was primarily due to the nature of our drilling activity in 2009 discussed above. Oilfield services costs will also continue to fluctuate period to period based on market demand, weather, the number and type 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 $428,000 during the first nine months of 2009, compared to $282,000 during the same period of 2008. The year-to-year increase was primarily due to new capital additions in 2008 being depreciated.

Nonsegmented Information

G&A Costs. G&A costs were $4.9 million during the first nine months of 2009, compared to $4.9 million during the first nine months of 2008.

Stock Compensation (G&A). For the nine months ended September 30, 2009 and 2008, we recognized $1.3 million and $1.9 million, respectively, of stock compensation expense related to the amortization of unexercised options and restricted stock.

Interest and Other Income. Interest and other income was $50,000 during the first nine months of 2009, a decrease of $277,000, compared to $327,000 during the same period of 2008. The decrease was a reflection of lower cash balances available for investment. During the first nine months of 2009, we incurred $452,000 in interest expense, which included $134,000 of amortization of previously incurred loan fees. During the first nine months of 2008, we incurred $314,000 in interest expense, which included $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.

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 flows from our operations have been providing a portion of our overhead and capital needs for the past 24 months.

While we have not experienced significant impacts from the economic crisis through the first nine months of 2009, the global economy continues to contract. However, the strengthening of the Polish zloty against the U.S. dollar over the past few months will, if it continues, have a positive impact on our U.S. dollar denominated future revenues and operating profit; conversely, any U.S. dollar denominated capital, exploration, and operating costs in Poland will increase at the same rate. Based on current conditions, we presently expect our exploration and development programs will continue in spite of the economic downturn; however, in recognition of the downturn, we plan to match future capital spending with our discretionary cash flow. As of September 30, 2009, we had firm commitments to spend approximately $600,000 of future capital and exploration costs, the bulk of which is not due to be paid until after December 31, 2009, and all of which will be paid from available cash or cash flow generated by our Polish production operations. Apart from those commitments, we have the ability to control the timing and amount of all other future capital and exploration costs.

For the short-term, the primary source of funds will be existing cash balances and cash flow from operations. We expect our Roszkow well in Poland to be a significant contributor to our future operating cash flows. Production commenced at Roszkow in late September of 2009. At current prices, exchange rates, and production rates, we expect the Roszkow well to generate approximately $1.3 million a month in revenues net to us. We are also in discussions with the Royal Bank of Scotland to increase the size of our credit Facility, as well as to extend its maturity dates. Our expected discretionary cash flow combined with our cash resources should enable us to meet our anticipated operating and capital needs in Poland and the United States for more than the next 12 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 September 30, 2009, was $2,693,000, a decrease of $11,272,000 from our working capital at December 31, 2008, of $13,965,000. As of September 30, 2009, our cash, cash equivalents, and marketable securities totaled approximately $2.5 million.

Operating Activities. Net cash used in operating activities was $8,736,000 during the first nine months of 2009, compared to net cash used in operating activities of $8,865,000 during the first nine months of 2008.

Investing Activities. During the first nine months of 2009, we used net cash of $2,832,000 in investing activities. We received proceeds of $4,661,000 from maturities of marketable securities, purchased marketable securities of $11,000, used $4,671,000 for current year capital additions in Poland and $386,000 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 $802,000 for capital additions in our office and drilling equipment. During the first nine months of 2008, we used $8,079,000 from investing activities. We received proceeds of $9,815,000 from maturities of marketable securities, purchased marketable securities of $170,000, used $15,614,000 for current year capital additions in Poland and $899,000 related to our proved properties in the United States, used $428,000 to pay accounts payable related to prior-year capital costs, and used $783,000 for capital additions in our office and drilling equipment.

Financing Activities. During the first nine months of 2009, we paid $2,808,000 toward loans related to auction-rate securities. In addition, option holders exercised 55,000 options that resulted in proceeds to us of $132,000. 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.

New Accounting Pronouncements

As discussed in Note 11 to the financial statements, we have reviewed all recently issued, but not yet adopted, accounting standards in order to determine . . .