The following discussion and analysis should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report. It contains forward looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, market prices for natural gas and oil, economic and competitive conditions, regulatory changes, estimates of proved reserves, potential failure to achieve production from development drilling projects, capital expenditures and other uncertainties, as well as those factors discussed below, all of which are difficult to predict and which expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. In light of these risks, uncertainties and assumptions, the forward looking events discussed may not occur. We do not have any intention or obligation to update forward-looking statements included in this report after the date of this report, except as required by law.

Executive Summary

We are a global oil and gas exploration and production company committed to acquiring and developing primarily unconventional natural gas and oil prospects that we believe have a reasonable probability of economic success. As of December 31, 2008, we owned properties in Rio Blanco and Garfield County, Colorado, Bear Creek County, Montana, and Northern Territory, Australia. We have drilled five wells on our 20,000-acre Buckskin Mesa property located in Rio Blanco County, Colorado. All five wells are drilled and cased and three of the five are shut in and awaiting completion of a gathering system. In the Southern Piceance Basin, we own 1,074 gross acres and 402 net acres located in Garfield County, Colorado. During the period ended December 31, 2008, we sold our working interests in eight wells which were operated by EnCana Oil & Gas USA ("EnCana") with an effective date of December 1, 2008. Subsequent to the sale we continue to hold an interest in proved undeveloped acreage in Garfield County. In Montana, we currently hold a 15,991 net undeveloped acres in the Bear Creek area. In Australia we have an undivided 50% working interest in four exploration permits that comprise 7.0 million gross acres. We have drilled one test well on our property in the Northern Territory and plan to undertake a work program in the area during 2009 and future periods.

Results of Operations

The financial information with respect to the three months ended December 31, 2008 and 2007 that is discussed below is unaudited. In the opinion of management, such information contains all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for such periods. The results of operations for interim periods are not necessarily indicative of the results of operations for the full fiscal years.

Industry Overview for the three months ended December 31, 2008

The three months ended December 31, 2008 saw moderately weaker natural gas prices. The index price prevailing in the locale of our Piceance Basin project in Colorado, as quoted in Gas Daily as of December 31, 2008, was $6.19 per Mcf versus $7.82 per Mcf as of December 31, 2007 (assuming a BTU factor of 1.1). Natural gas prices have been very volatile during 2008 year to date due to supply concerns earlier in the year, and more recently due to recession concerns arising from the current worldwide financial crisis.

In the future we may need to raise capital, and due to the global credit crisis and downturn in the stock market, funds may not be available, or if available, may be on unfavorable terms. Exploratory and development drilling is scheduled during 2009 and future periods on our undeveloped properties. It is anticipated that these exploration activities together with others that may be entered into will impose financial requirements which will exceed our existing working capital. We may raise additional equity and/or debt capital, and we may farm-out certain of our projects to finance our continued participation in planned activities. However, if additional financing is not

available, we may be compelled to reduce the scope of our business activities. If we are unable to fund planned expenditures, it may be necessary to:

1. forfeit our interest in wells that are proposed to be drilled;

2. farm-out our interest in proposed wells;

3. sell a portion of our interest in prospects and use the sale proceeds to fund our participation for a lesser interest; and

4. reduce general and administrative expenses.

Company Overview for the three months ended December 31, 2008

Our net loss for the three months ended December 31, 2008 was $15.5 million. We received only nominal revenues from our oil and natural gas activities while incurring substantial acquisition and exploration costs and overhead expenses which have resulted in an accumulated deficit through December 31, 2008 of $165.0 million. Effective December 1, 2008 we sold our revenue producing assets.

Comparison of the results of operations for the three months ended December 31, 2008 and December 31, 2007

Oil and Gas Revenue. For the three months ended December 31, 2008, oil and gas revenue was $0.1 million as compared to $0.5 million for the corresponding period in 2007. The decrease in revenue relates to the sale of 8 producing wells effective December 1, 2008, as well as the natural production decline in the wells. In the period ended December 31, 2008, 8 producing wells produced and sold 42,791 Mcf, and in the corresponding prior period 8 wells produced and sold 93,824 Mcf of natural gas and 20bbls of oil.

Costs and Expenses

Lease Operating Expenses. For the three months ended December 31, 2008, lease operating expenses increased to $0.4 million from $0.1 million for the corresponding period in 2007. This increase was primarily attributable to compressor rental charges in the Buckskin Mesa.

General and Administrative. During the three months ended December 31, 2008, general and administrative expenses decreased by $0.2 million as compared to the corresponding period in 2007. The following table highlights the areas with the most significant changes ($ in thousands):

                                   December 31,
                                 2008        2007        Change
Payroll                        $   815     $   552     $     263
Consulting fees                    281         174           107
Stock based compensation           481         624          (143 )
Legal                               94         136           (42 )
Travel                              22          51           (29 )
Investor relations                  12          13            (1 )
IT Maintenance & support            27          41           (14 )
Audit fees                         167         224           (57 )
Insurance                          130          60            70
Office operations                   98         104            (6 )
Other miscellaneous expenses       173         339          (166 )
Overhead recovery                 (182 )         -          (182 )

Total                          $ 2,118     $ 2,318     $    (200 )

Impairment of Oil and Gas Properties. Costs capitalized for properties accounted for under the full cost method of accounting are subjected to a ceiling test limitation to the amount of costs included in the cost pool by geographic cost center. Costs of oil and gas properties may not exceed the ceiling which is an amount equal to the present value, discounted at 10%, of the estimated future net cash flows from proved oil and gas reserves plus the cost, or estimated fair market value, if lower, of unproved properties. Should capitalized costs exceed this ceiling, impairment is recognized. During the three months ended December 31, 2008 we recognized impairment expense of $10.3 million as compared to $0.0 million during the corresponding period in 2007.

Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion, amortization and accretion expense ("DD&A") was $0.1 million in 2008 as compared to $0.3 million in 2007.

Interest Expense. During the quarter ended December 31, 2008, interest expense was $2.5 million, as compared to $2.8 million during the same period last year. Interest expense for the quarters ended December 31, 2008 and 2007 consisted of the following ($ in thousands):

                                                                  Three Months Ended
                                                                      December 31,
                                                                     2008           2007
Interest expense related to credit facility, convertible
notes and other notes                                          $    1,474      $   1,510
Amortization of debt discounts, deferred financing costs              999          1,169
Interest on vendor obligations and other                               11            106
Total                                                          $    2,484      $   2,785

We expect that interest expense will decrease during the remainder of the fiscal year ending September 30, 2009, due to the fact that the interest rates on the majority of our debt portfolio are linked to indices that continue to benefit and enjoy lower interest rates as a result of the global credit crisis. In addition, issuances of our stock purchase warrants in connection with penalties and defaults will continue to yield lower interest expense as the value of our stock has continued to drop.

Net Loss. During the quarter ended December 31, 2008, we incurred a net loss of $15.5 million as compared to a net loss of $16.8 million during the quarter ended December 31, 2007.

Going Concern

The report of our independent registered public accounting firm on the financial statements for the year ended September 30, 2008, includes an explanatory paragraph relating to the uncertainty of our ability to continue as a going concern. We have an accumulated deficit of $165.0 million and have a working capital deficit of approximately $10.2 million as of December 31, 2008. We are not in compliance with the covenants of several loan agreements, and have significant capital expenditure commitments. We require significant additional funding to sustain our operations and satisfy our contractual obligations for our planned oil and gas exploration and development operations. We are in default on certain obligations. Our ability to establish the Company as a going concern is dependent upon our ability to obtain additional funding in order to finance our planned operations.

Plan of Operation

Colorado
In fiscal year 2009 we will focus on completing our five wells, and connecting them to the gathering system, followed by drilling nine additional obligation wells, which must be commenced by December 31, 2009. Completion of the gathering system and central facility for the Buckskin Mesa Project will also enable us to recomplete and hook-up one or more of the six additional shut-in gas wells acquired with the properties in 2006.

Australia
We plan to explore and develop portions of our undivided 50% working interest in our 7.0 million acre position in four exploration permits in the Beetaloo Basin project area located in the northern territory of Australia. During calendar year 2009, we plan to drill eight wells in the exploration permit blocks and shoot 800 kilometers of seismic. We anticipate that costs related to seismic acquisition, development of operational infrastructure, and the drilling and completion of wells over the nine months, will aggregate approximately $18.5 million relating to our 50% working interest.

Liquidity and Capital Resources

Our most recent quarter ended December 31, 2008 continued to be a period of transition for us. We disposed of our only revenue generating assets, and our cash flows from operations were not sufficient for us to meet our operating commitments. Our cash flows from operations continue to be, and are expected to continue to be, insufficient to meet our operating commitments throughout the remainder of the fiscal year ending September 30, 2009.

On November 10, 2008, we closed the sale of an undivided 25% interest in five wells drilled in Buckskin Mesa, in exchange for a $5.3 million cash work commitment to complete certain of these wells. In addition, in December 2008, we completed the sale of our working interests in our eight producing wells operated by EnCana Oil & Gas (USA), Inc., for net cash proceeds of $2.3 million. As of December 31, 2008, we had a working capital deficit of $10.2 million.

In addition, as part of the Purchase and Sale Agreement with Falcon relating to our Buckskin Mesa property, Falcon obtained an option to acquire up to a 50% interest in our entire Buckskin Mesa Project, for total consideration of $28.5 million in cash or shares of Falcon common stock, and an $18.0 million work commitment ($9.0 million of which would be a carried interest for us). Further, Falcon may elect to become the operator of the Buckskin Mesa Project for an additional payment of $3.5 million. Falcon will have 60 days to determine whether it wishes to exercise the option after we have completed our testing program. As of December 31, 2008, we have not been able to ascertain the likelihood as to whether or not Falcon will choose to exercise this option.

In October 2008, we and Global Project Finance AG ("Global") agreed that under certain circumstances, we may reduce the outstanding balance under the credit facilities with Global by up to $20.0 million in exchange for securities in Falcon and our common stock. If Falcon exercises its option to acquire a 50% interest in the Buckskin Mesa project and pays up to $10.0 million of the purchase price in Falcon convertible securities, we will assign to Global up to $10.0 million of such Falcon convertible securities, and pay the balance, if any, in cash, so that the total of the assigned Falcon securities and any cash payment equals $10.0 million. Global has agreed to treat this assignment and payment as payment of $10.0 million against amounts owed under the Credit Facilities. In addition, upon exercise of the option, we would issue to Global shares of our common stock valued at $10.0 million as payment of an additional $10.0 million against amounts owed under the credit facilities.

Working Capital. Working capital is the amount by which current assets exceed current liabilities. Our working capital is impacted by changes in prices of oil and gas along with other business factors that affect our net income and cash flows. Our working capital is also affected by the timing of operating cash receipts and disbursements, borrowings of and payments of debt, additions to oil and gas properties and increases and decreases in other non-current assets.

As of December 31, 2008, we had a working capital deficit of $10.2 million and unrestricted cash of $1.8 million, while at September 30, 2008 we had a working capital deficit of $3.9 million and cash of $1.0 million. The decreases in working capital are primarily attributable to minimal revenues from operations, continued expenses incurred related to drilling and exploration, as well as the increasing difficulty we have experienced in raising capital. In addition during the fiscal year ended September 30, 2008, we had completed several property

conveyances that temporarily reduced our working capital deficit. We do not expect our working capital deficit to decrease or cash balance to increase in the near future.

Cash Flow. Net cash used in or provided by operating, investing and financing activities for the three months ended December 31, 2008 and 2007 were as follows ($ in thousands):

                                                            Three Months Ended
                                                               December 31,
                                                             2008          2007

    Net cash used in operating activities                 $   (6,585 )   $ (3,678 )
    Net cash provided by (used in) investing activities   $    2,189     $   (486 )
    Net cash provided by financing activities             $    5,207     $  4,506

Net Cash Used in Operating Activities. The changes in net cash used in operating activities are attributable to our net income adjusted for non-cash charges as presented in the consolidated statements of cash flows and changes in working capital as discussed above.

Net Cash Provided by (Used in) Investing Activities. Net cash provided by investing activities for the three months ended December 31, 2008 was primarily related to net proceeds of $2.3 million received from the sale of our 8 producing "Jolley" wells. Net cash used in investing activities for three months ended December 31, 2007 related to cash received from the sale of oil and gas properties of $7.5 million, offset by cash used for additions to oil and gas properties of $7.9 million.

Net Cash Provided by Financing Activities. Net cash provided by financing activities for the three months ended December 31, 2008 was comprised primarily of proceeds received related to the $5.0 million note payable associated with our Beetaloo transaction and the receipt of $0.3 million in borrowings from related parties. Net cash provided by financing activities for the three months ended December 31, 2007 was primarily comprised of borrowings of $8.8 million net of repayments of debt in the amount of $4.3 million.

Capital Requirements.
Uses of Cash for 2009 will be primarily for our drilling programs in the
Piceance Basin and Australia. The following table summarizes our minimum
drilling commitments for fiscal 2009 ($ in thousands)

                                                         Aggregate        Our Working
 Activity                         Prospect               Total Cost        Interest         Our Share
Drill and complete 4 wells        Buckskin Mesa         $      9,200               100 %   $     9,200
Drill and complete 4 wells (a)    Piceance II                  6,400              37.5 %         2,400
Drill and complete 4 wells (b)    Beetaloo                    13,800                50 %         6,900
Total                                                   $     29,400                       $    18,500

(a) Our proportionate share of the total commitment assumes our working interest partners pay their proportionate share. Should we not drill these wells we will incur a penalty of $.03 million.

(b) Represents our obligation related to our undivided 50% interest.

Financing. During the quarter ended December 31, 2008, we entered into the following financing arrangements:

In October 2008, we entered into a secured loan agreement with Falcon, whereby Falcon agreed to advance to us up to $5.0 million. During October and November 2008, we received advances aggregating $5.0 million. The loan is secured by 14.5 million shares of Falcon common stock we received in consideration for our sale of a 50% working interest in four exploration permits in Australia. These shares have been pledged to Falcon under a pledge and security agreement. The loan carries interest at 10% payable in monthly installments and is due in full on April 30, 2009. Funds were used to satisfy various vendor obligations.

In December 2008, we issued $0.2 million in convertible debentures to three related parties. The debentures bore interest at interest at 15%. The debenture holders were issued 0.5 million warrants to purchase our common stock. Funds borrowed were used to fund the operations.

The continuation and future development of our business will require substantial additional capital expenditures. Meeting capital expenditure, operational, and administrative needs for the fiscal year ending September 30, 2009 will depend on our success in farming out or selling portions of working interests in our properties for cash and/or funding of our share of development expenses, the availability of debt or equity financing, and the results of our activities. To limit capital expenditures, we may form industry alliances and exchange an appropriate portion of our interest for cash and/or a carried interest in our exploration projects using farm-out arrangements. We may need to raise additional funds to cover capital expenditures. These funds may come from cash flow, equity or debt financings, a credit facility, or sales of interests in our properties, although there is no assurance additional funding will be available or that it will be available on satisfactory terms. The global credit crisis may impact our ability to raise additional funds. If we are unable to raise capital through the methods discussed above, our ability to execute our development plans will be greatly impaired. See the Going Concern section above.

Off-Balance Sheet Arrangements

We do not have off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared by management in accordance with U.S. GAAP. We refer you to the corresponding section in Part II Item 7 and the notes to the consolidated financial statements of our Annual Report on Form 10K for the year ended September 30, 2008 for the description of critical accounting policies and estimates.

Recently Issued Accounting Pronouncements

The FASB issued Statement No. 141 (revised 2007), Business Combinations, and No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No.141 R is effective for fiscal years beginning after December 15, 2008. The Company does not believe that SFAS No. 141 R will have any impact on its financial statements.

The FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements Statement No.160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way-as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS No.160 is effective for fiscal years beginning after December 15, 2008. The Company does not believe that SFAS No. 160 will have any impact on its financial statements.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company beginning January 1, 2009. Management believes that, for the foreseeable future, this Statement will have no impact on the financial statements of the Company once adopted.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with