The following discussion explains the significant factors that have affected our results of operations for the three-month and nine-month periods ended September 30, 2008, compared to the three-month and nine-month periods ended September 30, 2007, and our financial condition since December 31, 2007. These financial statements should be read in conjunction with the financial statements, the summary of significant accounting policies and notes included in our most recent Annual Report on Form 10-K.

Third Quarter 2008 vs. Third Quarter 2007

Our third quarter 2008 net income was $5.7 million compared to $8.9 million in the prior year period. The $3.2 million decrease in net income was caused by increased costs and expenses and lower equity income from Argentine investments which combined to more than offset an increase in operating revenues.

Nine Months 2008 vs. Nine Months 2007

Net income for the first nine months of 2008 was $19.4 million compared to $25.0 million in the prior year period. Net income decreased year-over-year as increased costs and expenses and lower equity income from Argentine investments more than offset increases in production of all of our products and higher prices for oil and plant products.

For a detailed discussion of the factors affecting net income for the three and nine-month periods ending September 30, 2008 see "Comparative results of operations for the three months ended September 30, 2008 vs. September 30, 2007" and "Comparative results of operations for the nine months ended September 30, 2008 vs. September 30, 2007" in Results of Operations.

GENERAL OVERVIEW

Entre Lomas

During the third quarter, the Company and its Entre Lomas partners continued executing the drilling campaign budgeted for the year. Four wells spudded during the second quarter were completed and put into production. Twelve wells were drilled during the third quarter, of which nine wells were completed and put into production, and three wells that commenced drilling during the quarter were completed and put into production during the month of October. For the nine month period, we completed and put into production four wells that commenced drilling in 2007 and drilled 29 of 40 wells programmed for the year. Twenty-six of the 29 wells were put into production, and, as described above, three of the 29 were put into production in October. To date, our drilling program in Entre Lomas has achieved a 100 percent success rate.

One of the wells put into production in 2008 which commenced drilling in 2007 is a successful Tordillo formation exploration well. During the third quarter, another successful exploration well was drilled with positive results. These wells represent the seventh and eighth consecutive successful exploration wells drilled on structures of limited size that are being drilled in the southeast sector of the concession utilizing a geologic model that to date has proven to be an excellent predictor of trapped hydrocarbons. For background information, please refer to the section "Exploration" on pages 3 and 4 of the Company's 2007 Annual Report on Form 10-K.

Agua Amarga

During the third quarter of 2008, exploration drilling continued in the Agua Amarga area. The third well drilled year-to-date, the Charco del Palenque x-1004 ("ChdP.x-1004"), is located 3.5 kilometers from the ChdP.x-1001 discovery well that was completed in early 2008. The ChdP.x-1004, the third exploration well drilled in Agua Amarga, targeted a similar fault structure to the west of the original discovery well. It reached a total depth of 10,614 feet, and is being completed and tested during October. Electric log interpretations and initial formation test results indicate hydrocarbon productive potential on this previously undrilled structure. A fourth well, the Charco del Palenque e-1005 ("ChdP.e-1005"), commenced drilling before the end of September. It is located about 600 meters northwest of the ChdP.x-1001 discovery well on the same geologic structure.

The well was drilled to a total depth of 9,678 feet and confirms Tordillo formation productive potential of this structure toward the northwest. The well is currently being completed and tested. The Charco del Palenque e-1006 ("ChdP.e-1006") commenced drilling in late October. After the balance of the capital expenditures planned for 2008 in Agua Amarga are completed in the fourth quarter of 2008, the remaining value of the work commitment to be completed in the area is estimated to be $1.3 million net to our direct interest. The investments which will fulfill the remaining commitment are planned to be completed in 2009 and 2010.

Bajada del Palo

During the third quarter, the Company and its partners continued the well reactivation program which started in March of 2008. By the end of the third quarter, seven workovers had been completed and put into production. Three more workovers are planned before the end of the year. The workovers have yielded increased production volumes.

Additional activity during the quarter included processing and interpretation of approximately 200 square kilometers of 3D seismic images over the northeast sector of the concession immediately to the west of the Borde Mocho field situated in the southeast region of the Entre Lomas concession. Based on our preliminary interpretation, we anticipate these new 3D seismic images will reveal prospective exploration drilling locations on structural closures that may be analogous to Borde Mocho and to other structures that have recently been successfully drilled in Entre Lomas.

In June 2008, the Company and its partners initiated the 2008 development and exploration drilling campaign in the Bajada del Palo concession. During the third quarter, the first of five development wells planned to be drilled in the Borde Montuoso field was drilled and completed. During testing, the well produced 300 barrels of oil per day and it was put on production in September. A second development well which commenced drilling in September was completed and put on production in October. Volumes from the second well have not yet stabilized, but the well is oil productive. A third development well commenced drilling in October. It is expected that three 3D seismic based exploration wells will be drilled over the northeast sector of the concession before the end of 2008.

When the concession was acquired in late 2007, gross production from the area was averaging 200 barrels of oil per day. During September 2008, gross production averaged just under 900 barrels of oil per day.

Tierra del Fuego

During the third quarter, we continued the development and exploration drilling campaign which commenced in the second half of 2007. The quarter's activity consisted of the drilling of three oil wells and one gas well. Of the four wells drilled during the quarter, one oil well was put on production, one gas well is under evaluation, one oil well was not productive, and one oil well will be completed and tested in the fourth quarter. In September, we completed and put on production as an oil well the Angostura Sur x-1001 drilled in the second quarter of 2008. This exploration discovery represents the first well drilled on the Angostura concession since the partners acquired the property in early 2005. During the first nine months of the year, the Company participated in the drilling of 13 wells. A fourteenth well commenced drilling in October.

Also during October, two gas wells drilled in the second quarter of 2008 were completed and tested. One of the wells, the Los Flamencos 1010 that tested 10 million cubic feet per day, extended the Los Flamencos Springhill reservoir to the west of the previously drilled Los Flamencos 1005 that tested 8 million cubic feet per day. Wells from the western sector of the Los Flamencos field are expected to be put on production before mid-2009.

In July of 2008, the Company and its partners acquired 136 square kilometers of 3D seismic information in the Angostura and Las Violetas concessions. Processing and interpretation of the information is currently underway and is expected to be completed in the fourth quarter.

Additional activity in the quarter included ongoing investments to increase treating, compression, and transportation capacity. In September, our production facilities were connected directly to the San Martín pipeline, giving our joint venture a physical outlet for transportation of gas from the island of Tierra del Fuego to continental Argentina, where higher prices may be realized. Deliveries to the continent began in late September and will increase incrementally as compression facilities are completed in stages before the end of the year.

Upon completion of the remaining facilities expansion, total gross production from the Tierra del Fuego concessions should increase from the current rate of approximately 20 million cubic feet per day to a range of between 31 and 34 million cubic feet per day by the end of 2008. Although the new pipeline will provide the Company and its partners total gas deliverability capacity up to 60 million cubic feet per day, additional drilling, treatment facilities, flow lines and compression will be required to obtain these capacity volumes. Investments for additional flow lines are planned over the balance of 2008 and early 2009 to enable us to increase gross daily gas production to approximately 42 million cubic feet per day by the middle of 2009 with a corresponding increase in condensate volumes.

In October of 2008, the operator of the Tierra del Fuego concessions, ROCH S.A., informed the drilling contractor of the joint venture's decision to release the drilling rig within the 60 day early termination period provided for in the contract. This decision was made because the wells drilled to date enable us to deliver the quantities of gas required by our gas sales contracts. The expected early release timetable could be postponed for an additional 30 days with the consent of the contractor should ongoing interpretation of 3D seismic reveal potential drilling locations in oil-prone areas of the Las Violetas concession.

It is our plan to conduct another drilling campaign in the future in order to drill additional development and exploration wells needed to achieve production volumes equivalent to the full capacity of production facilities expected to be completed by the end of the year.

The government of Argentina is currently leading plans to construct a second gas pipeline crossing the Straight of Magellan that separates the island of Tierra del Fuego from continental Argentina. This planned pipeline should provide more physical capacity to transport natural gas from the island, where non producing gas reserves are plentiful, to the Argentine continent, where there is a shortage of natural gas. The pipeline is expected to be placed in service in 2010, and should provide the Company with greater access to markets on the continent and to higher priced industrial markets.

Acambuco

In October the Acambuco partners performed a drill stem test ("DST") of the Cerro Tuyunti x-2 ("CT x-2") well which had reached a total depth of 19,324 feet and found the objective Huamampampa formation. The well produced water with a small quantity of gas during the DST. The results of this test are considered definitive and the well was declared non productive and will be abandoned. This is the second non productive well to be drilled on this structure. As of September 30, 2008, the cumulative net cost to Apco of the CT x-2 well is $1.2 million which was charged to exploration expense during the third quarter of 2008.

Cañadón Ramirez

During the third quarter, plans to test the three exploration wells that were drilled in the second quarter pursuant to the farm-out agreement with CanAmericas Energy ("CanAmericas") were delayed due to rig availability. We expect to test and, if merited, complete the wells in the fourth quarter of 2008.

When the current budget for testing and completion of the three wells is taken into consideration, the total cost of this drilling program is expected to equal $5.15 million or $650 thousand more than the CanAmericas commitment. Any excess over the committed amount will be shared by Apco based on its post farm-out participation interest. As a result of the CanAmericas farm-out, our participation over the area of mutual interest will diminish from 81.82 percent to 41.73 percent. The Company is the operator of the Cañadón Ramirez concession.

Concession Contracts in Argentina

As mentioned in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, our right to conduct exploration and production activities in Argentina is generally derived from participation in concessions granted by the government which have a finite term. The term of a concession is generally 25 years, and may be extended for 10 years with the consent of the Argentine government. Substantially all of our concessions have terms ending in 2016. In the second quarter of 2008, the province of Neuquén, in which approximately 50 percent of the surface area of the Entre Lomas concession is located, and in which the Bajada del Palo concession is located, published minimum requirements and an estimated timetable for concession holders to negotiate their respective concession extensions.

The basic requirements as published by the province are that concession holders negotiate, among other things, a cash bonus payment and increased provincial production taxes. Concession holders must also propose a future investment program. The province intends for the negotiations to be completed by the end of 2008, with executive and legislative approval expected in early 2009. In October of 2008, the province of Neuquén announced that terms had been agreed to and approved by the provincial governor and legislature to extend the concessions held by the largest producer in the province. Negotiations are currently underway with the other large Neuquén province producers.

Petrolera Entre Lomas S.A., "Petrolera," on behalf of the Entre Lomas and Bajada del Palo joint venture partners, has initiated the formal negotiation process with the province of Neuquén. For the Entre Lomas concession, which is located in both the provinces of Neuquén and Río Negro, we expect similar negotiations to take place with the province of Río Negro in 2009. Should we agree to mutually acceptable terms with the Neuquén province, we expect to have the concession extensions for the western portion of the Entre Lomas concession, and the Bajada del Palo concession approved by mid-2009.

The Tierra del Fuego concessions partners have begun discussions with the province of Tierra del Fuego regarding the extension of our three concessions, but the province has not yet formally initiated a process similar to that announced by the province of Neuquén.

Business Development

Although Argentina is where all of our assets are currently located, future growth plans include diversification into other countries, and as such, we are evaluating exploration and production opportunities in other countries in South America. We have increased the number of employees dedicated to our strategy to build core areas outside of Argentina, either through drilling farm-in opportunities or acquisitions, which will provide the Company with opportunity for production and reserve growth on favorable economic terms.

Consistent with this strategy, in July 2008, a subsidiary of the Company, Apco Properties Ltd., a Cayman Island company, opened a branch in Colombia, Apco Properties Sucursal de Colombia. The Company has retained a legal representative in Colombia, and is actively searching for strategic partners and investment opportunities in the country. In December 2008, the government of Colombia will accept bids for the assignment of certain exploration properties in a process known as "ANH Miniround 2008." The Company has purchased the technical information related to the areas and has filed required documentation to participate in the bidding process.

FINANCIAL CONDITION

We have historically funded capital programs and past property acquisitions with our internally generated cash flow. We have not relied on other sources of capital, such as debt or equity, due to the turmoil that has periodically affected Argentina's economy making financing difficult to obtain at reasonable terms and because the Entre Lomas concession, our primary source of liquidity, has had the ability to fund the Company's development and exploration expenditures. The turmoil affecting world credit markets today is not expected to impact the ability of the Company to fund its planned capital programs. When the current tightening in credit markets eases, the Company may seek financing if it is judged that financial leverage would improve our capital efficiency.

Although we have interests in several oil and gas properties in Argentina, our direct participation in the Entre Lomas concession and our equity interest in Petrolera generate most of our cash flow. We believe we have the financial resources and liquidity necessary to meet future requirements for working capital, capital investment expenditures, and cash bonus payments that may be negotiated for concession extensions, if any, while maintaining a sufficient level of liquidity to reasonably protect against unforeseen circumstances requiring the use of funds. Assuming that sales prices for our products remain at current levels, we expect to fund planned capital expenditures, dividends, if any, and working capital requirements through cash flow from operations as well as cash and cash equivalents on hand as needed.

Since July of 2008, oil prices have declined from a record above $147 a barrel to as low as $62 per barrel. Given the way prices for our products are calculated in Argentina, Apco has not been affected by this decline in oil prices. As reflected in the "Volume, Price and Cost Statistics" table in "Results of Operations," our average sales price for crude oil, including our consolidated and equity interests, averaged $46.80 and $45.79 per barrel for the three and nine months ended September 30, 2008, respectively. However, should world benchmark prices for oil continue to decline to levels that would affect oil price realizations in Argentina, such declines could lower our cash flow from operations and affect our current level of planned investments.

In 2007, Petrolera arranged for a $50 million bank line of credit at market terms to enable Petrolera to fund its share of the acquisition cost for the Bajada del Palo concession and to provide credit for a portion of Petrolera's capital expenditures. As of September 30, 2008, Petrolera had borrowed the full $50 million thereby using the entire line of credit with the bank. The principal of each disbursement made under the line of credit will be repaid in 15 quarterly installments beginning 18 months after the receipt of each disbursement. Principal payments are scheduled to begin in the first quarter of 2009 and will end in the first quarter of 2013.

As of September 30, 2008, we had cash and cash equivalents of $39.4 million, compared to a balance of $46.0 million at December 31, 2007. The following table summarizes the change in cash and cash equivalents for the periods shown.

                                                               Nine months ended September
Sources (Uses) of Cash                                                     30,
                                                                  2008             2007
                                                                       (Thousands)
Net cash provided (used) by:
Operating activities                                           $   22,111       $   22,498
Investing activities                                              (20,962 )        (12,393 )
Financing activities                                               (7,734 )         (7,740 )
Increase / (decrease) in cash and cash equivalents             $   (6,585 )     $    2,365

Operating Activities

Our net cash provided by operating activities totaled $22.1 million for the nine months ended September 30, 2008, or was slightly lower compared with the same period in 2007, as lower net income was partially offset by positive variations in working capital and greater non-cash charges for depreciation, depletion and amortization. Additionally, the excess of Equity income over Dividends from Argentine investments for the first nine months of 2008 was lower than the comparable period in 2007, resulting in a $1.6 million positive variation in cash flow on a year-to-year basis.

Investing Activities

During the first nine months of 2008, capital expenditures totaled $22.1 million, most of which was invested in exploration and development drilling. In the first nine months of 2007, capital expenditures totaled $12.4 million. The year-to-year increase in capital expenditures is the primary driver of our year-to-date decrease in cash and cash equivalents and is primarily the result of exploration and development drilling in the Bajada del Palo concession and the Agua Amarga exploration permit.

Financing Activities

During the first nine months of 2008 and 2007, $7.7 million was paid to the Company's shareholders in the form of dividends.

RESULTS OF OPERATIONS

The following table reflects our sales volumes, average sales prices, and our
average production costs per unit for the periods presented:

Volume, Price and Cost Statistics                          Periods Ending September 30
                                                  Three Months                     Nine Months

                                              2008            2007            2008            2007

Sales Volumes (1):
Consolidated interests
Crude oil and condensate (bbls)                315,839         283,235         903,401         852,748
Gas (mcf)                                    1,201,912       1,202,729       3,591,697       3,463,233
LPG (tons)                                       2,374           2,302           7,085           6,698
Barrels of oil equivalent (boe)                544,019         510,699       1,585,156       1,508,552
Equity interests (4)
Crude oil and condensate (bbls)                356,412         329,021       1,036,263         971,197
Gas (mcf)                                      517,648         475,123       1,418,142       1,488,959
LPG (tons)                                       2,790           2,378           7,488           6,798
Barrels of oil equivalent (boe)                475,424         436,111       1,360,490       1,299,128
Total volumes
Crude oil and condensate (bbls)                672,251         612,256       1,939,664       1,823,945
Gas (mcf)                                    1,719,560       1,677,853       5,009,839       4,952,192
LPG (tons)                                       5,164           4,679          14,572          13,496
Barrels of oil equivalent (boe)              1,019,442         946,809       2,945,646       2,807,680


Average Sales Prices (2):
Consolidated interests
Oil (per bbl)                              $     46.58     $     46.28     $     45.47     $     43.04
Gas (per mcf)                                     1.17            1.35            1.30            1.48
LPG (per ton)                                   529.87          422.47          484.57          423.47
Equity interests (4)
Oil (per bbl)                              $     47.00     $     45.09     $     46.07     $     41.85
Gas (per mcf)                                     0.68            1.32            0.99            1.69
LPG (per ton)                                   508.09          408.03          454.93          419.38
Total
Oil (per bbl)                              $     46.80     $     45.64     $     45.79     $     42.41
Gas (per mcf)                                     1.02            1.34            1.21            1.54
LPG (per ton)                                   518.15          415.13          469.33          421.41


Average Production Costs (3):
Oil, gas, and LPG operating expense per
boe                                        $      8.49     $      6.40     $      7.51     $      5.65

Oil, gas, and LPG depreciation expense
per boe                                    $      5.65     $      4.95     $      5.72     $      4.63

(1) Volumes presented in the above table represent those sold to customers and have not been reduced by the 12 percent provincial production tax that is paid separately and is accounted for as an expense by the Company. In calculating provincial production tax payments, Argentine producers are entitled to deduct gathering, storage, treatment, and compression costs.
(2) Average sales prices reflect actual prices received for the periods shown above.
(3) Average production costs including oil inventory fluctuation expense and depreciation costs are calculated using total costs divided by consolidated interest sales volumes expressed in barrels of oil equivalent ("boe"). Six mcf of gas are equivalent to one barrel of oil equivalent and one ton of LPG is equivalent to 11.735 barrels of oil equivalent.
(4) The equity interest presented above reflects our 40.724% equity interest in Petrolera's sales volumes and average sales prices for the periods presented. The revenues resulting from the equity interest sales volumes and prices are not consolidated within the Company's revenues. See the interim financial statements and Note 1 and Note 3 of Notes to Consolidated Financial Statements for additional explanation of the equity method of accounting for our investment in Petrolera.

Product Volumes

During the three months ended September 30, 2008, oil sales volumes, net to our consolidated and equity interests, increased by 10 percent compared with the prior year period. The increase is due to greater sales volumes from the Entre Lomas, Tierra del Fuego and Acambuco concessions, and sales volumes contributed by the Bajada del Palo and Agua Amarga areas. These same factors resulted in a six percent increase in oil sales volumes net to our consolidated and equity interests for the first nine months of 2008 compared to the same period in 2007.

Natural gas sales volumes, net to our consolidated and equity interests, increased by two percent compared with the third quarter of 2007. Increased volumes from Entre Lomas and Acambuco were partially offset by decreased volumes in Tierra del Fuego. We expect gas volumes to increase in the remainder of 2008 as completion of production facility enhancements in Tierra del Fuego come on line. For the first nine months of 2008, natural gas sales volumes net to our consolidated and equity interests increased by one percent compared with 2007.

LPG sales volumes, net to our consolidated and equity interests, increased by 10 percent compared to the third quarter of 2007. For the first nine months of 2008, LPG sales volumes net to our consolidated and equity interests increased by eight percent compared to 2007.

Average Sales Prices

As mentioned in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, the Argentine government issued Resolution 394/2007 in . . .