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1 FALCON OIL & GAS LTD. FORM 51-102F1 MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 The following management’s discussion and analysis (the “MD&A”) was prepared as at November 27, 2007 and is management’s assessment of Falcon Oil & Gas Ltd.’s (“Falcon” or the “Company”) financial and operating results and should be read in conjunction with the unaudited interim consolidated financial statements for the nine months ended September 30, 2007 and the audited consolidated financial statements for the year ended December 31, 2006 which can be found on SEDAR at www.sedar.com. The information provided herein in respect of Falcon includes information in respect of its wholly-owned subsidiary Makó Energy Corporation (“Makó”), and its directly and indirectly wholly owned subsidiaries: TXM Oil and Gas Exploration Kft., a Hungarian limited liability company doing business as TMX Energy, LLC (“TXM”), TXM Marketing Trading & Service, LLC a Hungarian limited liability company, JVX Energy S.R.L. (“JVX”), a Romanian limited liability company, and CH Holdings, Inc., a Maryland corporation. Additional information related to Falcon, including Falcon’s annual information form for the year ended December 31, 2006 dated April 30, 2007, can be found on SEDAR at www.sedar.com and Falcon’s website at www.falconoilandgas.com. Forward-looking Statements Information provided herein contains estimates and assumptions which management is required to make regarding future events and may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other statements that are not statements of fact. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will be realized. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement. Readers of this MD&A are cautioned not to rely on these forward-looking statements. Falcon is providing this information as at the date hereof and does not undertake any obligation to update any forward-looking statements contained herein as a result of new information, future events or otherwise. Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including the Chief Executive Officer and the Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure. As at the end of the period covered by this MD&A and the date hereof, the Chief Executive Officer, the Chief Financial Officer and other members of management evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Canadian securities laws. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this MD&A and the date hereof, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s annual filings and interim filings (as such terms are defined under Multilateral Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings) and other reports filed or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those laws and that material information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 2 Dollar Amounts All dollar amounts below are in United States dollars, except as otherwise indicated. The Company is an international energy company engaged in the exploration of oil and natural gas, with offices in Vancouver, British Columbia, Denver, Colorado and Budapest, Hungary. The Company’s registered office is located at 810-675 Hastings Street West, Vancouver, British Columbia, Canada V6B 1N2 and the Company’s head office is located at 1875 Lawrence Street, Suite 1400, Denver, Colorado, U.S.A. 80202. The Company’s primary focus is the identification, exploration and development of conventional and unconventional oil and gas projects, including basin centered gas accumulations (“BCGA”) and coalbed methane in Central and Eastern Europe, specifically Hungary and Romania. Hungary The first phase of operations in the Makó Trough has achieved several critical milestones in the last 18 months. The Company has flowed varying amounts of gas from the Szolnok, Endrod and Basal Conglomerate formations proving the presence of a basin centered gas accumulation. In addition to this, the Company has also flowed oil and gas on test from the Endrod formation where it believes it has discovered a potential “basin centered, fracture oil play.” As the Company moves forward to the next project phase of resource evaluation, it will be analyzing all data acquired in order to optimize its forward planning. Operational Overview The milestones achieved to date can be summarized as follows: • Acquired approximately 1149 square kilometres of 3D seismic profile; these data have been merged into a composite data set of 1085 square kilometres covering approximately 80% of Falcon’s long term production license (“Production License”). • Hod Foldeak 3D (2004) 63 square kilometres • Gater 3D (2005) 16 square kilometres • Hod Szikancs 3D (2005) 90 square kilometres • Hod North 3D (2006) 110 square kilometres • Szekkutas/Makó-Kelet 3D (2006-2007) 830 square kilometres • Drilled six exploratory wells. • Testing of Pusztaszer-1 delineated the northwestern extent of the Makó Trough, established the presence of mobile gas in the Szolnok formation, and confirmed the ability to frac at this depth. • The Székkutas-1 well established mobile gas in the northeastern portion of the basin in the objective horizons of the Endröd and Szolnok formations. • With the Makó-6 well, Falcon established the ability to drill and complete at depths of 5,600 metres. The Makó-6 well tested mobile gas from the Basal Conglomerate and established a possible hydrocarbon column of over 2 km in the center basin. 3 • Makó-7 was drilled as a second deep basin test. Petrophysical and mud-log analysis indicated the presence of hydrocarbons in a 2.5 km column in the Szolnok, Endröd and Basal Conglomerate formations. • Makó-4 was drilled to the Szolnok formation and is suspended pending completion of the current geologic review. • As discussed below, results from the Magyarcsanad-1, which tested the southern end of the Makó Trough, flowed gas and oil from fractures in the Endröd formation. • Secured the Production License from the Hungarian government covering all oil and gas in the BCGA resource under the exploration license. Evaluation Period The current focus of operational activity is to analyze drilling results alongside information from the 3D seismic program as part of a technical and operational review period in order to plan and implement the next phase of the project, which will focus on resource development. Over the first quarter of 2008, Falcon intends to focus its activities and operations on tendering for service and products for the next phase of the Company’s program, including tendering for stimulation, drilling and completion services, logging, testing, drilling and completion rigs. Falcon will be re-designing casing and tubing strings with the expectation of slimming down well-bore geometry such that drilling times and cost will be decreased further. Falcon will also be evaluating the constraints and impact of placing more than one well on a single pad to reduce the environmental effect and overall project cost. Further, Falcon intends to continue with its program of continuously evaluating operational competence in areas of cementing, drilling and completions drilling fluids, environmental waste reduction and handling, administrative policies and procedures. No further drilling or testing activity on current exploration wells is to be undertaken as part of this phase as Falcon believes such testing and/or drilling is not required in order to put in place the plan for the next phase of development. Additionally, rigs have been released. In accordance with the requirements of Falcon’s Production License and the Hungarian Mining Law and related regulations, Falcon must submit its development plan to the Hungarian government by the end of 2007 outlining the Company’s 2008 testing and completion program. Technical Evaluation As Falcon moves from the initial resource delineation phase into a resource evaluation phase, Falcon has embarked on a technical evaluation and review of the extensive technical data obtained so far from the drilling and testing of six wells and the total merged acquisition of 1085 square kilometres of contiguous 3D seismic data. Over the next few months of technical evaluation, Falcon intends to complete many of the tasks identified below to lay the foundation for the resource development. Many of the tasks are ongoing and some have yet to be initiated. Some tasks are being run internally by Falcon, while others will be completed by external experts under consulting contracts. The following is a list of the tasks that are expected to be completed and integrated as part of the technical evaluation. Seismic Data Special Processing Falcon has acquired four seismic surveys which collectively cover approximately 72% of the Makó Trough. These surveys have now been merged into one single, contiguous 3D seismic survey covering 1085 square kilometres. Falcon believes this seismic data set is an essential part of the evaluation of the Makó Trough in order to understand the variability in reservoir quality (porosity and permeability and the identification of “sweet spots”), hydrocarbon presence and type and the distribution and variability of the pressure cell. Falcon has engaged eSeis, Inc., to process the data for the following properties: lithology/fluids, amplitude velocity offset (AVO), effective porosity, reservoir quality, absorption, pore pressure and velocity modeling. 4 3D Seismic Fault Modeling Falcon will process the volume for fault or coherency type modeling using a variety of industry algorithms in order to be able to identify fault and fracture distribution and intensity in the 3D seismic. This will be integrated with the fracture and fault analysis detailed below from Formation Micro Imager (FMI) and core. Fault and Fracture Modeling From Wells Various studies at various scales are being undertaken to understand the fault and fracture systems present in the well image logs and core data. Image logs from five wells are being analyzed and processed by external experts on image log analysis, to determine the extent, nature and orientation of the fractures within the well bore. Falcon believes this is critical to the understanding of the development of the tight gas plays and fracture oil plays. In addition, the cores are being analyzed for faults and fractures utilizing petrographic and computer tomographic techniques. Reservoir Properties Analysis Falcon will conduct high resolution analysis to help understand the reservoir properties of potential tight gas plays. This includes the traditional petrographic studies, including X-ray Diffraction and Scanning Electron Microscope analysis from core samples. Core analytical work, including the measuring of porosity, permeability, grain density and capillary pressure will be conducted on all core obtained. Falcon has collected 14 cores from various stratigraphic horizons in the wells drilled to date. Geochemical Analysis Numerous geochemical studies are underway. These include organic carbon (TOC) content and rock-eval pyrolysis to determine organic source rock types and quantity, vitrinite reflectance to determine thermal maturity, basin evaluation for historical maturity and hydrocarbon development timing, gas and liquids analysis, fingerprinting and biomarkers, Hydrogen Sulfide (H2S) and Carbon Dioxide (CO2) typing studies. Sedimentology All cores and image logs are being interpreted for environment of deposition for each of the formations in order to help determine reservoir body size and continuity to help predict long term hydrocarbon deliverability to the well bore. Petrophysics Falcon believes good, high resolution petrophysical analysis is critical to the evaluation of tight resource plays and that such analysis must be calibrated with all available core data to help define reservoir quality in microdarcy rocks. Image logs have indicated a number of thin reservoir beds in the Szolnok and Endrod formations. Net sand measurements may not be fully accounting for these thin beds which are in addition to the thicker sands already identified by conventional petrophysical analysis. In order to properly determine net sand and pay in these intervals, Falcon will undertake a thin bed analysis of the log data. Geological Static Model Build Falcon intends to build a 3D geological static model that incorporates all information available in order to synthesis, analyze and interpret all the wide variety of data sets to enhance the ability to visualize, understand and plan for future work. The 3D model will integrate the seismic processing volumes including lithology, porosity, AVO and pore pressure, the fault and fracture volumes, the stratigraphy, sedimentology the well petrophysical data and the geochemical data. This data will be used both regionally and vertically to identify potential “sweet spots” which will help determine Falcon’s development strategy going forward. 5 Operations Magyarcsanad-1 Fracture Stimulation As part of Falcon’s overall testing program, Falcon executed two fracture stimulations of the Magyarcsanad-1 exploration well at the end of July 2007. To date, results confirmed flowed gas and oil from fractures. The well has yet to fully clean out fracture fluid, therefore, the following are initial indications of flow rates only and are not necessarily indicative of future flow rates. The Pre-Fracture Treatment (natural flow) unstabilized flow through perforations at 4,058-4,062 metres yielded an initial rate of 387 barrels of oil per day (“bopd”) and declined to 63 bopd in 23 days The gas rates over the same period were 665 thousand cubic feet of gas per day (“mcfgd”) and 137 mcfgd, respectively. Additional perforations were added at 4,135-4,137 metres and 3,909-3,910.5 metres and the well was then fractured treated in stages with a total of 329,000 pounds of propant and 9,200 barrels of fluid. We have recovered 60% of the frac volume to date. The Post Fracture Treatment unstabilized flow yielded an initial rate of 91 bopd and declined to 35 bopd in 19 days. The gas rates over the same period were 400 mcfgd and 85 mcfgd, respectively. The well is currently shut-in for bottom hole pressure evaluation and analysis. We are also evaluating the recent inflow production and temperature logs. Falcon is examining all potential future completion techniques to develop this fracture play including the drilling of horizontal wells that might join up multiple fracture sets. The seismic data should help considerably in defining the fault and fracture patterns in this resource, and these options will be examined as part of the near term technical data review period. Makó-6 Status The Makó-6 was the first deep test in the Basin, reaching a total depth of 5692 metres. A test of the Synrift was attempted which proved tight. An interval at the base of the Basal Conglomerate was tested with initial rates of up to 700 mcfgd with associated H2S of 400 parts per million (“ppm”), and diminishing. The details are as follows. The Basal Conglomerate was perforated at 5326-5328 metres. The well was then fracture treated with no difficulties after importing additional HP frac equipment into Hungary. The special HPHT test packer was then placed and tested to meet well-bore conditions. After 38.5 hours into the flow-back test, the Company had gas to surface. This was measured through the Company’s test vessels. Falcon measured Qg= 354 mcfgd, Qoil=zero, Qwater=29bbl/hr. Gas continued to increase. The flowing wellhead pressure was 3000 psi and at 41 Hours into the flow test, gas peaked at 700 mcfgd. From 38.5 hours to 43 hours the gas rates were consistently steady around 500 mcfgd. Shortly after 43 hours into the flow-back the gas rate, the water rate & the FWHP began to drop drastically. This was an indication the well was loading up or a possible plugging problem. After +/-49 hours into the flowback test, the 3-1/2” x 5-1/2” annulus pressure jumped instantaneous from 100 psi to 4400 psi. Flow continued to diminish. Well repair operations commenced immediately to investigate blockage. The tubing was found to be partially blocked above the packer. Well work was suspended to further evaluate the cause and effect. Geological and engineering work is underway to prepare for the Company’s next test in the Upper Basal Conglomerate. Following a planned evaluation program, the Makó-6 could be re-entered for possible testing in the Upper Basal Conglomerate, Endrod and Szolnok formations. The Company has not established a time table for additional work to be performed in the well bore. Makó-4 Status The Makó-4 is currently suspended within the Szolnok formation at a depth of 4011 metres. Based on seismic data and nearby well correlations, there is an additional 250 to 300 metres of Szolnok left to be penetrated. Because of the unexpected results at the Magyarcsanad-1, management elected to defer drilling pending evaluation of Falcon’s recently acquired 3D data. 6 Romania The initial farmout well, the Lupendi Sud-1 well, drilled by Falcon’s wholly owned subsidiary, JVX in the Jiu Valley Concession located in south western Romania, approximately 300 kilometres west of Bucharest, failed to encounter hydrocarbons. The Lupeni Sud-1 was frac tested in mid-December 2006. Despite fraccing and swabbing operations, the well failed to generate a meaningful flow rate. Under a farmout Agreement between Falcon and Pannonian International, Ltd. (“Pannonian”), a wholly owned subsidiary of Galaxy Energy Corporation, the Lupeni Sud-1 is one of two obligation wells Falcon must drill to enable the Company to earn a 75% undivided working interest in the Concession. JVX has plugged and abandoned the well. Falcon and Pannonian are currently assessing a long term plan with respect to other prospects in Romania. Canada Falcon also owns a non-operating working interest in four producing natural gas wells in Alberta, Canada which do not comprise a material portion of Falcon’s assets (the “Hackett Interest”). The Company does not anticipate expanding its operations in Canada beyond the Hackett Interests. Financing As of November 22, 2007, the Company had arranged for an equity financing pursuant to a (preliminary) short form prospectus dated November 21, 2007 (the “Proposed Offering”). Under the terms of the Proposed Offering, a syndicate of underwriters (the “Underwriters”) agreed to purchase an aggregate of 100,000,000 common shares at a price of CDN$0.40 per share (the “Offering Price”) for aggregate gross proceeds of CDN$40,000,000. Additionally, the Underwriters were granted an over-allotment option (the “Over-Allotment Option”) to purchase up to an additional 15,000,000 common shares exercisable up to 30 days following the closing of the Proposed Offering (the “Closing Date”). The Underwriters will receive a cash commission of 6% of the gross proceeds (CDN$2,400,000) and warrants to purchase, at the Offering Price, 6% of the number of common shares sold pursuant to the Proposed Offering, including those issued pursuant to the Over-Allotment Option, for a period of 24 months from the Closing Date. Closing is expected to occur on or about December 11, 2007, and is subject to certain conditions, including but not limited to, receipt of all necessary securities regulatory approvals, including the approval of the TSX Venture Exchange (“TSXV”). Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended September 30, 2007 as Compared to the Three Months Ended September 30, 2006 This review of the results of operations should be read in conjunction with the unaudited interim consolidated financial statements for the three months ended September 30, 2007 and the audited consolidated financial statements for the year ended December 31, 2006. Results of Operations The Company incurred a net loss for the September 2007 quarter of $4,596,000 ($0.010 per share) compared to a net loss of $2,425,000 ($0.006 per share) for the comparative 2006 quarter. In the September 2007 quarter, the Company recognized petroleum revenue of $26,000, of which $10,000 was attributable to initial net revenue from the sale of liquid condensate from initial test production of the Magyarcsanad-1 well. Other than this income from initial test production, the Company has not yet realized any revenue from its planned operations, and has incurred significant expenditures in connection with its exploration for oil and gas. During the September 2007 quarter the Company realized interest income of $324,000 as compared to $1,239,000 for the 2006 quarter. This decrease is attributable to cash received from 2006 common share offerings which was available for short term investment in 2006, and which has been utilized in operations for 2007. 7 Liquidity and Capital Resources Cash and cash equivalents at September 30, 2007 were $28,247,000 a decrease of $114,391,000 from $142,638,000 at December 31, 2006. Working capital at September 30, 2007 decreased to $18,293,000 from $134,563,000 at December 31, 2006. These decreases include utilization of cash for the September 2007 quarter investing activities of $27,152,000 and cash provided by operating activities of $2,251,000. At September 30, 2006 the Company had cash and cash equivalents of $188,983,000 and working capital of $190,688,000. For the September 2006 quarter the Company used $14,451,000 in investing activities and $5,690,000 in operating activities. Included in cash and cash equivalents at September 30, 2007 is $7,079,000 held as security on letters of credit to drilling contractors for Hungarian drilling operations and bank guarantees for Hungarian customs and VAT, as compared to $3,463,000 at September 30, 2006. Accounts payable and accrued expenses at September 30, 2007 were $15,727,000, which includes $13,673,000 for capital expenditures for the Company’s Hungarian drilling operations, as compared to accounts payable of $9,816,000, including amounts for capital expenditures of $7,774,000, at September 30, 2006. The increase is due to increased drilling and exploration activity through September 2007 as compared to September 2006. Amounts receivable at September 30, 2007 includes $4,329,000 due from the Hungarian government as a refund for VAT paid; and prepaids include $789,000 for advance payments to, and refunds due from, Hungarian suppliers. General and Administrative Expenses General and administrative costs for the September 2007 quarter were $4,959,000 as compared to $3,952,000 for the 2006 quarter, an increase of $1,007,000. Overall, general and administrative costs increased due to the Company’s continued expansion of operations in Hungary, resulting in the expansion of the Budapest office and an increase in corporate administration in North America. The significant components of the increase in general and administrative expenses for the September 2007 quarter as compared to the comparable 2006 quarter are as follows: • Depreciation increased to $73,000 from $35,000 for current period acquisition of office and computer equipment in Budapest and Denver. • Consulting fees increased to $648,000 from $528,000 for fees related to financial and business advisory services, and shareholders relations for the Annual General Meeting (AGM) of the Company. • Legal fees increased to $401,000 from $269,000 for services from outside legal firms in Hungary and North America. The increase is related primarily to the AGM of the Company, real estate matters in Hungary, obtaining work permits, consulting contract matters, the Company’s strategic partner initiative, the due diligence process related to the strategic partner initiative, and general corporate matters. • Office and administrative costs decreased to $459,000 from $523,000 as the Company had completed its expansion of offices in Budapest and Denver in the 2006 quarter. • Payroll and related costs increased to $1,018,000 from $181,000 for additional employees in Budapest and Denver as operations expanded from 2006 to 2007, including establishment of a field office in Szeged, Hungary. • Travel and promotion increased to $760,000 from $490,000 for additional travel costs for professional personnel to Hungary as operations expanded from 2006 to 2007, the increased emphasis on financial marketing activities, and costs associated with the AGM. In the September 2007 quarter, directors of the Company and members of the audit committee were paid an aggregate $39,268, and officers of the Company were paid salaries of $245,000, as compared to $34,500 paid to directors and $195,000 paid to officers in the comparable 2006 quarter. 8 Interest Expense The Company did not incur interest expense in either the September 2007 or 2006 quarters. Stock-Based Compensation During the September 2007 quarter, the Company recognized stock based compensation of $874,000 for granted options which vested during the quarter, as compared to $1,680,000 for the 2006 quarter. This decrease is a result of fewer options being granted during the first nine months of fiscal 2007 and the decrease in the fair value of options granted due to fluctuations in the Company’s stock price. Stock-based compensation was calculated utilizing the Black-Scholes option pricing model. Capital Expenditures In the September 2007 quarter, the Company incurred $18,458,000 for additions to its oil and gas properties in Hungary, as compared to $17,297,000 for the comparable 2006 quarter. The primary Capital expenditures for the third quarter of 2007 were the rig down and demobilization of Rig 801 on Makó-4, the continued testing operations on the Magyarcsanad and the rig down and demob of Rig 403, the continued testing operations of the Makó-6, the rig down and demobilization of the 340K snubbing unit, the transportation and disposal cost associated with the fracture treating fluids, the demobilization of high pressure well testing equipment, the ongoing seismic interpretation and geological evaluation programs, and the continued monitoring of temporary suspended well operations. In the September 2006 quarter, the Company incurred seismic costs associated with exploration of its properties and the commencement of drilling of the Makó-7 and Magyarcsanad-1 exploratory wells. As of March 31, 2007, the Company had plugged and abandoned the Romanian Lupeni Sud-1 well and continues to evaluate its long-term plan with respect to this property. During the September 2007 quarter, the Company incurred an additional $139,000 for costs associated with the Lupeni Sud-1 well. In the December 2006 quarter, the Company commenced construction and completed a pipeline for $3,282,000, linking the Makó-6 well to an existing transmission line. In the September 2007 quarter, an additional $166,000 was incurred for pipeline costs. In the September 2007 quarter, the Company recorded an impairment of $25,000 on its Canadian petroleum and natural gas properties, as the carrying value of the Company’s Canadian properties exceeded the ceiling under the full cost method of accounting. Transactions with Related Parties During the September 2007 and 2006 quarters, the Company paid $45,000 to a current director of the Company for advisory and consulting services rendered to TXM. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Nine Months Ended September 30, 2007 as Compared to the Nine Months Ended September 30, 2006 This review of the results of operations should be read in conjunction with the unaudited interim consolidated financial statements for the nine months ended September 30, 2007 and the audited consolidated financial statements for the year ended December 31, 2006. Results of Operations Net loss for the nine months ended September 30, 2007 was $7,197,000 ($0.016 per share) compared to a net loss of $9,910,000 ($0.026 per share) in the comparable 2006 period. The net loss for the 2007 period included the recording of a foreign exchange gain of $5,468,000 for the period as compared to a gain of $1,852,000 for the comparable 2006 period. The increase in the foreign exchange gain is primarily attributable to foreign exchange 9 rate movements on Canadian denominated cash accounts, as the Canadian Dollar strengthened significantly versus the US Dollar in the September 2007 period as compared to the 2006 period. Substantially all of the Company’s cash balances and financings are in Canadian dollars and a portion of the Company’s operations are in Hungarian Forints. For the nine month period ending September 2007, the Company recognized petroleum revenue of $162,000, of which $109,000 was attributable to initial net revenue from the sale of liquid condensate from initial test production of the Magyarcsanad-1 well. Other than this income from initial test production, the Company has not yet realized any revenue from its planned operations and has incurred significant expenditures in connection with its exploration for oil and gas. During the nine months ended September 30, 2007, the Company realized interest income of $2,180,000 as compared to $2,054,000 for the comparable 2006 period. This increase is attributable to cash received from 2006 common share offerings which was available for short term investment. Liquidity and Capital Resources In March 2006, the Company completed the sale of an aggregate 77,000,000 common shares, including the exercise of an over-allotment option, at a price of CDN$1.30 ($1.12) per share pursuant to a short form prospectus (the “March Offering”), for gross proceeds of CDN$100,100,000 ($86,276,190). In August 2006, the Company completed the sale of an aggregate 49,450,000 Common Shares, including the exercise of an over-allotment option, at a price of CDN$3.50 ($3.12) per share, pursuant to a short form prospectus for gross proceeds of CDN$173,075,000 ($154,490,508) (the “August Offering”). As of the date hereof and as was indicated in the (final) prospectus’ filed in connection with the March Offering and August Offering, the proceeds from such offerings have been used by the Company for the exploration and development of the Company’s projects in Hungary and Romania and for general corporate and working capital purposes. Remaining funds on hand from both offerings will be utilized in accordance with the Company’s disclosures, pending ongoing results of testing and completion activities in 2007. Cash and cash equivalents at September 30, 2007 were $28,247,000 a decrease of $114,391,000 from $142,638,000 at December 31, 2006. Working capital at September 30, 2007 decreased to $18,293,000 from $134,563,000 at December 31, 2006. These decreases include utilization of cash for the September 2007 period investing activities of $120,356,000 and operating activities of $254,000. At September 30, 2006 the Company had cash and cash equivalents of $188,983,000 and working capital of $190,688,000 and for the September 2006 period the Company used $49,471,000 in investing activities and $12,267,000 in operating activities. Included in cash and cash equivalents at September 30, 2007 is $7,079,000 held as security on letters of credit to drilling contractors for Hungarian drilling operations and bank guarantees for Hungarian customs and VAT, as compared to $3,463,000 at September 30, 2006. Accounts payable and accrued expenses at September 30, 2007 were $15,727,000, which includes $13,673,000 for capital expenditures for the Company’s Hungarian drilling operations, as compared to accounts payable of $9,816,000, including amounts for capital expenditures of $7,774,000, at September 30, 2006. The increase is due to increased drilling and exploration activity through June 2007 as compared to June 2006. Amounts receivable at September 30, 2007 includes $4,329,000 due from the Hungarian government as a refund for VAT paid and prepaids include $789,000 for advance payments to and refunds due from, Hungarian suppliers. The Company anticipates that its 2007 operating costs and overhead requirements will be funded from existing working capital. The Company’s activities in Hungary for 2007, as at the date hereof, have been and continue to be focused on testing and evaluating exploratory wells drilled in Hungary. The results of the testing and evaluation of these wells, including finalization of the re-processing of 3D seismic, will define the Company’s future drilling requirements for exploration and development. The Company’s capital requirements in the future will be largely dependent upon, among other things: the progress of the Company’s drilling programs, regulatory approvals, technological advances and the success of the Company’s 10 various exploration programs. The ability of the Company to further these activities will be largely dependent upon the Company’s ability to obtain additional capital through equity or debt financings and/or to attract a strategic partner. Until such time as a production decision is made, it is expected that the only available source of future capital will be through the issuance of additional equity shares including but not limited to the Proposed Offering. The availability of equity capital, and the price at which additional equity could be issued, is dependent upon the success of the Company’s exploration activities and upon the state of the capital markets generally. The Company’s exploration efforts are focused exclusively in Europe, and the Company does not intend to expand its operations in Canada beyond the Hackett Interest. General and Administrative Expenses General and administrative costs for the nine months ended September 30, 2007 were $14,121,000 as compared to $13,837,000 for the corresponding nine month period, an increase of $284,000. Overall, general and administrative costs increased due to the Company’s continued expansion of operations in Hungary, resulting in the expansion the Budapest office and an increase in corporate administration in North America, including relocating to new office facilities in Denver, Colorado during the third quarter of 2006. The significant components of the increase in general and administrative expenses for the September 2007 period as compared to the comparable 2006 period are as follows: • Depreciation increased to $199,000 from $58,000 as a direct result of the acquisition of office and computer equipment in Budapest and Denver. • Consulting fees increased to $1,873,000 from $1,109,000 for fees incurred in 2007 related to gas marketing, financial and business advisory services related to the strategic partner process, and shareholder relations for the 2007 AGM. • Legal fees increased to $1,617,000 from $734,000 for services from outside legal firms in Hungary and North America. The increase is related to the expansion of operational and corporate activities subsequent to the March and August Offerings, regulatory filings in both Canada and Hungary, general corporate matters, including the annual TXM Quota Holders meeting and related filings and AGM, real estate matters in Hungary, obtaining work permits, consulting contract matters, the Company’s continued focus on its strategic partner initiative, and the due diligence process related to the strategic partner initiative. • Office and administrative costs increased to $1,585,000 from $1,222,000, primarily as a result of the expansion of offices in Budapest and Denver and establishment of a field office in Szeged, Hungary, which occurred in the second and third quarters of 2006. • Payroll and related costs increased to $2,811,000 from $553,000 for additional employees in Budapest and Denver as operations expanded from 2006 to 2007, an addition of a corporate general counsel and chief operating officer in the third quarter of 2006, and establishment of a field operation offices in Szeged and Makó, Hungary. • Travel and promotion increased to $2,081,000 from $1,390,000 for additional travel costs for professional personnel to Hungary as operations expanded from 2006 to 2007, and additional costs incurred associated with the increase in financial marketing services and the strategic partner process. In the September 2007 nine month period directors of the Company and members of the audit committee were paid an aggregate $108,000, and officers of the Company were paid salaries of $735,000 as compared to $77,000 paid to directors and $445,000 paid to officers in the comparable 2006 period. The increase in officer salaries from 2006 to 2007 was due to the addition of a full time Chief Operating Officer and a Secretary/General Counsel in the third quarter of 2006. 11 Interest Expense The Company did not incur interest expense in either the September 30, 2007 or 2006 periods. Stock-based Compensation During the September 2007 period, the Company recognized stock based compensation of $2,508,000 for granted options which vested during the quarter, as compared to $7,629,000 for the 2006 period. This decrease is a result of fewer options being granted during the first nine months of fiscal 2007 and the decrease in the fair value of options granted due to fluctuations in the Company’s stock price. Stock-based compensation was calculated utilizing the Black-Scholes option pricing model. Capital Expenditures During the nine months ended September 30, 2007, the Company incurred $110,820,000 for additions to its oil and gas properties in Hungary, as compared to $54,912,000 for the comparable 2006 period. The primary capital expenditures for the first two quarters of 2007 were the location construction of the Foldeak, the drilling of the Makó-4 well, rig down of Rig 403 on the Makó-4 and mobilization of same to Magyarcsanad-1 well, complete logging of the Makó-7 well and rig down, mobilization and rig up of rig 801 on Makó-4, completion of Makó-6 stimulations (fracturing) in the Synrift and lower Basil Conglomerate, release and retrieval of HPHT permanent packer and the continued flow testing of the Magyarcsanad-1 well, completion of initial flow tests of the Szekkutas- 1 well, and completion of the Szekkutas seismic survey. The primary capital expenditures during the 2006 period were additional seismic costs associated with exploration of the Company’s Hungarian licensed properties, the completion of exploratory drilling on the Pusztaszer-1 well, the commencement and completion of drilling of the Szekkutas-1 exploratory well, drilling of the Makó-6 exploratory well and professional fees to consultants, legal fees related to license acquisition and retention and expenditures to determine drilling sites. During the third quarter of 2007, as the Company implemented its evaluation phase of operations, the primary capital expenditures for the period were the rig down and demobilization of Rig 801 on Makó-4, the continued testing operations on the Magyarcsanad and the rig down and demob of Rig 403, the continued testing operations of the Makó-6, the rig down and demobilization of the 340K snubbing unit, the transportation and disposal cost associated with the fracture treating fluids, the demobilization of high pressure well testing equipment, the ongoing seismic interpretation and geological evaluation programs, and the continued monitoring of temporary suspended well operations. As of September 30, 2007, the Company's total cumulative expenditures for exploration under the Licenses, including the acquisition cost of the Licenses, seismic testing, drilling of exploratory wells, and initial testing and completion of wells was approximately $234,842,000, including an Asset Retirement Obligation (“ARO”) of approximately $1,977,000 for the six wells drilled at September 30, 2007. As of March 31, 2007, the Company had plugged and abandoned the Romanian Lupeni Sud-1 well. During the September 2007 period, the Company incurred an additional $824,000 for costs associated with the Lupeni Sud-1 well in addition to $1,628,000 as at December 31, 2006. During the year ended December 31, 2006, the Company commenced construction and completed a pipeline for $3,282,000, linking the Makó-6 well to an existing transmission line. During the September period 2007, an additional $304,000 was incurred for pipeline costs. Transactions with Related Parties During the nine months ended September 30, 2007, the Company paid $135,000 to a current director of the Company for advisory and consulting services rendered to TXM and paid nil in consulting fees to a former director of the Company. During the comparable 2006 period the Company paid $95,000 and $41,341, respectively, under each of these arrangements. In June 2006, the Company entered into an Office Sharing Agreement with PetroHunter Energy Corporation (“PetroHunter”) for office space in Denver, Colorado, of which the Company is the lessee. Under the terms of the agreement, PetroHunter and the Company share, on an equivalent employee basis, all costs related to the office space, including rent, office operating costs, furniture and equipment and any other expenses related to the operations of the corporate offices. Certain employees of PetroHunter have provided services to the Company, and PetroHunter has invoiced the Company for these services at cost. The largest single 12 shareholder of PetroHunter is also the President and CEO of the Company. At September 30, 2007, PetroHunter owed the Company $498,000 for its share of net costs incurred. As previously stated, on June 1, 2005, the Company also entered into the Farmout Agreement with Pannonian, a wholly-owned subsidiary of Galaxy. As a result of his interests in Galaxy, the Company’s President and Chief Executive Office is a “Control Person” of Galaxy within the meaning of the policies of the TSXV. Selected Quarterly Information The following is a summary of the eight most recently completed quarters: Three months Ended December 31, 2005 Three Months Ended March 31, 2006 Three Months Ended June 30, 2006 Three Months Ended September 30, 2006 Total assets $46,708,768 $130,247,204 $133,072,283 $280,434,034 Petroleum and natural gas properties 26,357,743 45,204,250 63,956,829 79,532,565 Working capital (deficiency) 13,737,327 74,024,547 59,152,681 190,688,426 Stockholders’ equity 38,006,436 116,651,645 120,699,352 266,907,319 Revenue 45,873 37,388 21,843 18,157 Net Income (Loss) (1,623,463) (1,600,338) (5,884,325) (2,425,262) Income (Loss) per sharebasic and diluted (0.005) (0.005) (0.015) (0.006) Three Months Ended December 31, 2006 Three Months Ended March 31, 2007 Three Months Ended June 30, 2007 Three Months Ended September 30, 2007 Total assets $286,383,475 $290,190,826 $288,263,412 $274,788,840 Petroleum and natural gas properties 123,777,478 170,905,424 216,433,277 234,934,259 Working capital (deficiency) 134,562,552 85,233,651 40,586,242 18,293,328 Stockholders’ equity 260,006,697 258,580,626 259,789,896 256,068,735 Revenue 5,288 25,043 111,842 25,561 Net Income (Loss) (10,348,426) (3,101,064) 500,233 (4,595,798) Income (Loss) per sharebasic and diluted (0.023) (0.007) 0.001 (0.010) Disclosure of Outstanding Share Data The following is a summary of the Company’s outstanding share data as at September 30, 2007 and as at November 27, 2007: 13 Class Of Securities As of September 30, 2007 As of November 27, 2007 Common Shares 464,499,163 465,199,163 Compensation Warrants Nil Nil Stock Options 37,790,000 36,590,000 March Agents’ Warrants 1,281,900 1,281,900 August Agents’ Warrants 1,236,250 1,236,250 Director and Management Compensation The following is a summary of the amounts paid and payable, directly and indirectly, to Falcon’s directors and officers for the nine months ended September 30, 2007: Name Position with Falcon Amounts paid and payable, directly and indirectly, to Falcon’s directors and officers for the nine months ended September 30, 2007 Marc A. Bruner President, Chief Executive Officer and Chairman of the Board of Directors $225,000 Andrew P. Calerich1 Director $25,700 Dr. Győrgy Szabó2 Director $157,500 Stephen Schultz Director $27,000 Carl Stadelhofer Director $27,000 Evan L. Wasoff Chief Financial Officer $180,000 David Brody3 Corporate Secretary and General Counsel $150,000 Dr. James Edwards Chief Operating Officer $180,000 Igor Akhmerov4 Director $1,300 David Fisher4 Director $1,300 Daryl Gilbert4 Director $1,083 Jan Van Holsbeeck4 Director $1,300 Prof. Ferenc Horvath4 Director $1,083 1Mr. Calerich did not stand for re-election at the Company’s most recent Annual and Special Meeting held on September 18, 2007. 2Of this amount $15,000 was paid and was payable, directly or indirectly, to Dr. Szabó in respect of his services as a director of the Company and $90,000 was paid and was payable, directly or indirectly, to Dr. Szabó in respect of his services as a consultant to the Company. 14 3 This amount does not include any amount paid to Patton Boggs LLP, a US law firm that provides US legal advice to the Company, of which Mr. Brody was and is a partner. The amount paid to Patton Boggs LLP is not included in the amounts paid to Mr. Brody because, since Mr. Brody’s appointment as Corporate Secretary and General Counsel of Falcon, Mr. Brody has not received any remuneration from Patton Boggs LLP. 4These figures represent amounts paid and payable, directly and indirectly, to the individuals for the period commencing September 18, 2007 and ending September 30, 2007. Business Risks and Uncertainties As stated above and as discussed in the Company’s continuous disclosure documents, certain risk and uncertainties that could cause the Company’s actual results to materially differ from our current expectations include, but are not limited to: • The Company’s business is at a similar stage to that of a recently formed company with no operating history, which makes it difficult to evaluate its business prospects; • The Company will have substantial capital requirements that, if not met, may hinder its growth and operations; • The Company’s capital requirements in the future will be largely dependent upon, among other things: the progress of the Company’s drilling programs, regulatory approvals, technological advances and the success of the Company’s various exploration programs. The ability of the Company to further these activities will be largely dependent upon the Company’s ability to obtain additional capital through equity or debt financings and/or to attract a strategic partner. Until such time as a production decision is made, it is expected that the only available source of future capital will be through the issuance of additional equity shares. The availability of equity capital, and the price at which additional equity could be issued, is dependent upon the success of the Company’s exploration activities and upon the state of the capital markets generally. The Company might not be able to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them, which could cause the Company to incur losses; • The Company might incur debt in order to fund its exploration and development activities, which would continue to reduce its financial flexibility and could have a material adverse effect on the Company’s business, financial condition or results of operation; • Shortages of rigs, equipment, supplies and personnel could delay or otherwise adversely affect the Company’s cost of operations or its ability to operate according to its business plans; • Resource estimates depend on many assumptions that may turn out to be inconclusive, subject to varying interpretations, or inaccurate; • The value of the common shares might be affected by matters not related to the Company’s own operating performance for reasons that include the following: • general economic conditions in Canada, the United States, Hungary, Romania, and globally; • industry conditions, including fluctuations in the price of oil and natural gas; • governmental regulation of the oil and gas industry, including environmental regulation; • fluctuation in foreign exchange or interest rates; • liabilities inherent in oil and natural gas operations; • geological, technical, drilling and processing problems; 15 • unanticipated operating events which can reduce production or cause production to be shut in or delayed; • failure to obtain industry partners and other third party consents and approvals, when required; • stock market volatility and market valuations; • competition for, among other things, capital, acquisition of reserves, undeveloped land and skilled personnel; • the need to obtain required approvals from regulatory authorities; • Hungarian and worldwide supplies and prices of and demand for natural gas and oil; • political conditions and developments in Hungary; • political conditions in natural gas and oil producing regions; • revenue and operating results failing to meet expectations in any particular period; • investor perception of the oil and gas industry; • limited trading volume of common shares; • change in environmental and other governmental regulations; • announcements relating to the Company’s business or the business of its competitors; • the Company’s liquidity; and • the Company’s ability to raise additional funds; • The Company might not be able to obtain necessary approvals from one or more Hungarian government agencies, surface owners, or other third parties; • Drilling for and producing natural gas and oil are high-risk activities with many uncertainties that could adversely affect the Company’s business, financial condition or results of operations; • Competition in the oil and gas industry is intense and many of the Company’s competitors have greater financial, technological and other resources than the Company does, which may adversely affect its ability to compete; • Political instability or fundamental changes in the leadership or in the structure of the governments in the jurisdictions in which the Company operates could have a material negative impact on the Company; • Market conditions or operation impediments may hinder the Company’s access to natural gas and oil markets or delay its production; • A substantial or extended decline in natural gas and oil prices may adversely affect the Company’s ability to meet its capital expenditure obligations and financial commitments; 16 • The Company may enter into currency hedging agreements but may not be able to hedge against all such risks; • The Company is subject to complex laws and regulations, including environmental regulations, which can have a material adverse effect on the cost, manner or feasibility of doing business; • The loss of the Company’s chief executive officer or other of the Company’s key management and technical personnel or its inability to attract and retain experienced technical personnel could adversely affect the Company’s ability to operate; • The Company does not plan to insure against all potential operating risks. It might incur substantial losses and be subject to substantial liability claims on its natural gas and oil operations; and • To the extent that the Company establishes natural gas and oil reserves, it will be required to replace, maintain or expand its natural gas and oil reserves in order to prevent its reserves and production from declining, which would adversely affect cash flows and income. Should one or more of these risks materialize, or should the Company’s underlying assumptions prove incorrect, the Company’s actual results may materially differ from the Company’s current expectations. Therefore, in evaluating forward-looking statements, readers should specifically consider the various factors that could cause the Company’s actual results to materially differ from such forward-looking statements. Off-Balance Sheet Arrangements and Proposed Transactions The Company does not have any material off-balance sheet arrangements or proposed transactions. Management’s Responsibility for MD&A The information provided in this MD&A is the responsibility of management. In the preparation of this MD&A, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgments and have been properly reflected in this MD&A. The audit committee has reviewed the MD&A with management. The audit committee has approved the MD&A as presented.
aus der Diskussion:	FALCON - ALLE DATEN, ALLE FAKTEN
Autor (Datum des Eintrages):	oesitrader  (30.11.07 16:34:53)
Beitrag:	40 von 47 (ID:32629407)
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