UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K/A


(Amendment
No. 2)


(Mark
      One)R
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2009OR£
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934





For the
transition period from ___________________ to
________________________


Commission
File Number 0-32455





Far
East Energy Corporation


(Exact
Name of Registrant as Specified in Its Charter)





Nevada
              
              88-0459590(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)363
      N. Sam Houston Parkway East, Suite 380, Houston,
                Texas
              
              77060(Address
      of principal executive offices)
              
              (Zip
      Code)





Registrant’s
telephone number, including area code: (832) 598-0470





Securities
registered pursuant to Section 12(b) of the Exchange Act: None





Securities
registered under 12(g) of the Exchange Act: Common stock (par value $0.001 per
share)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes £ No R





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes £ No R





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes R No £





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes £   No
£





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  R





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large
      accelerated filer
              £
              Accelerated
      filer
              £Non-accelerated
      filer
              £
              Smaller
      reporting company
              R





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).    Yes £ No R





The
aggregate market value of the voting common stock, par value $0.001 per share,
held by non-affiliates of the registrant was approximately $49,963,000 as of
June 30, 2009 (based on $0.39 per share, the last price of the common stock as
reported on the OTC Bulletin Board on such date). For purposes of the foregoing
calculation only, all directors, executive officers and 10% beneficial owners
have been deemed affiliates.





The
number of shares of common stock, par value $0.001 per share, outstanding as of
March 12, 2010 was 185,463,128.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s proxy statement for the 2010 annual meeting of stockholders
are incorporated by reference into Part III of this Form 10-K.





EXPLANATORY
NOTE





This
Amendment No. 2 on Form 10-K/A (this “Amendment”) amends the Annual Report on
Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2009 of
Far East Energy Corporation (the “Company”), originally filed on March 15, 2010
and amended by Amendment No. 1 on Form 10-K/A filed on April 21, 2010 (as
previously amended, the “Original Filing”).  We are filing this
Amendment to correct the omission of dates on the audit reports received from
the Company’s independent registered public accounting firm, JonesBaggett
LLP.  Accordingly, Item 8 of Part II of this filing has been amended
to include the properly dated audit reports, and we have attached as an exhibit
hereto an updated Consent of Independent Registered Public Accounting
Firm.  We have further amended Item 8 of Part II of this filing to
make Management’s Report on Internal Control Over Financial Reporting included
therein consistent with the properly dated audit reports.  The
pagination of the Original Filing has been retained.  In addition, in
connection with the filing of this Amendment and pursuant to the rules of the
Securities and Exchange Commission, we are including with this Amendment certain
currently dated certifications.  Further, Item 15 of Part IV has also
been amended to reflect the filing of these currently dated certifications and
the corrected Consent of Independent Registered Public Accounting
Firm.





Each
amended item has been amended and restated in its entirety.  Except as
described above, no other changes have been made to the Original
Filing.  The Original Filing continues to speak as of the date of the
Original Filing, and we have not updated the disclosures contained therein to
reflect any events that occurred at a date subsequent to the filing of the
Original Filing.  Accordingly, this Amendment should be read in
conjunction with our other filings made with the Securities and Exchange
Commission subsequent to March 15, 2010, including any amendments to those
filings, as information in such filings may update or supersede certain
information contained in those filings as well as in this
Amendment.  In this Amendment, unless the context indicates otherwise,
the terms “Company,” “we,” “us,” and “our” refer to Far East Energy
Corporation and its subsidiaries.








FAR
EAST ENERGY CORPORATION


TABLE
OF CONTENTS





PagePART
      IIItem
      8.
              Financial
      Statements and Supplementary Data
              49PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              75SIGNATURES





PART
II





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our internal control over financial reporting is designed, under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our published
financial statements. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Further, because of changes in
conditions, the effectiveness of internal controls may vary over
time.





Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, assessed the effectiveness of our
internal control over financial reporting as of December 31, 2009. In making
this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Our management has
concluded that, as of December 31, 2009, our internal control over financial
reporting is effective based on these criteria.





Our
independent registered public accounting firm, JonesBaggett LLP, that audited
our consolidated financial statements included in this report, has issued an
attestation report on the effectiveness of our internal control over financial
reporting as of December 31, 2009, which is included on page 51 of this Annual
Report on Form 10-K.


49





REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Far East
Energy Corporation and Subsidiaries:





We have
audited the accompanying consolidated balance sheets of Far East Energy
Corporation and Subsidiaries (a development stage company) (the “Company”) as of
December 31, 2009 and 2008 and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2009 and for the period from the date of
incorporation on February 4, 2000 to December 31, 2009. Our audits also included
the financial statement schedule listed at Item 15(a)(2). These financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Far East Energy
Corporation and Subsidiaries at December 31, 2009 and 2008, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009 and for the period from the date of
incorporation on February 4, 2000 to December 31, 2009, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Far East Energy
Corporation and Subsidiaries’ internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 15, 2010, expressed an unqualified opinion
thereon.





/s/ JonesBaggett LLPJonesBaggett
      LLP (formerly Payne Smith & Jones, P.C.)





Dallas,
Texas


March 15,
2010


50





REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Far East
Energy Corporation and Subsidiaries:





We have
audited Far East Energy Corporation and Subsidiaries’ (a development stage
company) (the “Company”) internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Far East Energy Corporation’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the
circumstances.  We believe that our audit provides a reasonable basis
for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, Far East Energy Corporation and Subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on the COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Far East
Energy Corporation and Subsidiaries, as of December 31, 2009 and 2008 and the
related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2009
and for the period from the date of incorporation on February 4, 2000 to
December 31, 2009, and our report dated March 15, 2010 expressed an unqualified
opinion thereon.





/s/ JonesBaggett LLPJonesBaggett
      LLP (formerly Payne Smith & Jones, P.C.)





Dallas,
Texas


March 15,
2010


51





FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Consolidated
Balance Sheets


(In
Thousands, Except Share Data)





At December 31,2009
                                            
                                            
                                            2008ASSETSCurrent
      assetsCash
      and cash equivalents
                                            
                                            $
                                            5,567
                                            
                                            
                                            $
                                            7,880Restricted
      cash
                                            
                                            
                                            739
                                            
                                            
                                            
                                            -Inventory
                                            
                                            
                                            225
                                            
                                            
                                            
                                            188Prepaid
      expenses
                                            
                                            
                                            166
                                            
                                            
                                            
                                            262Deposits
                                            
                                            
                                            346
                                            
                                            
                                            
                                            124Stock
      subscription receivable
                                            
                                            
                                            275
                                            
                                            
                                            
                                            -Other
      current assets
                                            
                                            
                                            16
                                            
                                            
                                            
                                            46Total
      current assets
                                            
                                            
                                            7,334
                                            
                                            
                                            
                                            8,500Unevaluated
      oil and gas properties
                                            
                                            
                                            34,421
                                            
                                            
                                            
                                            30,837Other
      fixed assets, net
                                            
                                            
                                            480
                                            
                                            
                                            
                                            546Total
      property and equipment
                                            
                                            
                                            34,901
                                            
                                            
                                            
                                            31,383Deferred
      financing costs
                                            
                                            
                                            169
                                            
                                            
                                            
                                            -Total
      assets
                                            
                                            $
                                            42,404
                                            
                                            
                                            $
                                            39,883LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                                            
                                            $
                                            3,098
                                            
                                            
                                            $
                                            2,249Accrued
      liabilities
                                            
                                            
                                            1,354
                                            
                                            
                                            
                                            2,323Total
      current liabilities
                                            
                                            
                                            4,452
                                            
                                            
                                            
                                            4,572Exchangeable
      note payable
                                            
                                            
                                            10,000
                                            
                                            
                                            
                                            -Discount
      on exchangeable note payable
                                            
                                            
                                            (228
                                            )
                                            
                                            
                                            -Long-term
      debt
                                            
                                            
                                            9,772
                                            
                                            
                                            
                                            -Accrued
      interest payable - noncurrent
                                            
                                            
                                            171
                                            
                                            
                                            
                                            -Asset
      retirement and environmental obligation
                                            
                                            
                                            339
                                            
                                            
                                            
                                            -Commitments
      and contingenciesStockholders’
      equityPreferred
      stock, $0.001 par value, 500,000,000 shares authorized, none
      outstanding
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Common
      stock, $0.001 par value, 500,000,000 shares authorized, 173,836,960 and
      161,305,390 issued and outstanding, respectively
                                            
                                            
                                            174
                                            
                                            
                                            
                                            161Additional
      paid-in capital
                                            
                                            
                                            111,982
                                            
                                            
                                            
                                            105,915Unearned
      compensation
                                            
                                            
                                            (279
                                            )
                                            
                                            
                                            (313
                                            )Deficit
      accumulated during the development stage
                                            
                                            
                                            (84,207
                                            )
                                            
                                            
                                            (70,452
                                            )Total
      stockholders’ equity
                                            
                                            
                                            27,670
                                            
                                            
                                            
                                            35,311Total
      liabilities and stockholders’ equity
                                            
                                            $
                                            42,404
                                            
                                            
                                            $
                                            39,883





See the
accompanying notes to consolidated financial statements.


52





FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Consolidated
Statements of Operations


(In
Thousands, Except Per Share Data)





YearendedDecember31,
                                        
                                        
                                        February 4,
                                          2000
                                          (Inception)
                                          through
                                          December 31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007
                                        
                                        
                                        2009Operating
      revenues
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Operating
      expenses:Exploration
      costs
                                        
                                        
                                        4,503
                                        
                                        
                                        
                                        15,283
                                        
                                        
                                        
                                        3,345
                                        
                                        
                                        
                                        31,521Lease
      operating expense
                                        
                                        
                                        1,892
                                        
                                        
                                        
                                        2,904
                                        
                                        
                                        
                                        1,945
                                        
                                        
                                        
                                        7,699General
      and administrative
                                        
                                        
                                        6,479
                                        
                                        
                                        
                                        4,515
                                        
                                        
                                        
                                        7,230
                                        
                                        
                                        
                                        41,567Impairment
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,778Loss
      on investment in joint venture
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        22Amortization
      of contract rights
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        81Total
      operating expenses
                                        
                                        
                                        12,874
                                        
                                        
                                        
                                        22,702
                                        
                                        
                                        
                                        12,520
                                        
                                        
                                        
                                        84,668Operating
      loss
                                        
                                        
                                        (12,874
                                        )
                                        
                                        
                                        (22,702
                                        )
                                        
                                        
                                        (12,520
                                        )
                                        
                                        
                                        (84,668
                                        )Other
      income (expense):Interest
      expense
                                        
                                        
                                        (863
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,040
                                        )Interest
      income
                                        
                                        
                                        5
                                        
                                        
                                        
                                        260
                                        
                                        
                                        
                                        721
                                        
                                        
                                        
                                        1,875Gain
      on sale of assets
                                        
                                        
                                        (5
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3Foreign
      currency transaction loss
                                        
                                        
                                        (18
                                        )
                                        
                                        
                                        (149
                                        )
                                        
                                        
                                        (50
                                        )
                                        
                                        
                                        (377
                                        )Total
      other income
                                        
                                        
                                        (881
                                        )
                                        
                                        
                                        111
                                        
                                        
                                        
                                        671
                                        
                                        
                                        
                                        461Loss
      before income taxes
                                        
                                        
                                        (13,755
                                        )
                                        
                                        
                                        (22,591
                                        )
                                        
                                        
                                        (11,849
                                        )
                                        
                                        
                                        (84,207
                                        )Income
      taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Net
      loss
                                        
                                        $
                                        (13,755
                                        )
                                        
                                        $
                                        (22,591
                                        )
                                        
                                        $
                                        (11,849
                                        )
                                        
                                        $
                                        (84,207
                                        )Comprehensive
      loss
                                        
                                        $
                                        (13,755
                                        )
                                        
                                        $
                                        (22,591
                                        )
                                        
                                        $
                                        (11,849
                                        )
                                        
                                        $
                                        (84,207
                                        )Net
      loss per share:Basic
      and diluted
                                        
                                        $
                                        (0.08
                                        )
                                        
                                        $
                                        (0.15
                                        )
                                        
                                        $
                                        (0.09
                                        )Weighted
      average shares outstanding:Basic
      and diluted
                                        
                                        
                                        162,251
                                        
                                        
                                        
                                        151,231
                                        
                                        
                                        
                                        128,631





See the
accompanying notes to consolidated financial statements.


53





FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Consolidated
Statements of Stockholders’ Equity


(In
Thousands, Except Share Data)





Common
      Stock
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        DeficitNumber
      of
                                          Shares
                                        
                                        
                                        Par
                                          Value
                                        
                                        
                                        Additional
                                          Paid-In
                                          Capital
                                        
                                        
                                        Unearned
                                          Compensation
                                        
                                        
                                        Accumulated
                                          During
      the
                                          Development
                                          Stage
                                        
                                        
                                        Total
                                          Stockholders’
                                          EquityFor
      the Years Ended December 31, 2007, 2008 and
    2009Balance
      at December 31, 2006
                                        
                                        
                                        123,767,342
                                        
                                        
                                        $
                                        124
                                        
                                        
                                        $
                                        77,599
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (36,012
                                        )
                                        
                                        $
                                        41,711Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (11,849
                                        )
                                        
                                        
                                        (11,849
                                        )Common
      shares issued
                                        
                                        
                                        11,480,452
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        14,803
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14,814Shares
      issued to consulting firm
                                        
                                        
                                        60,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        60
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        60Nonvested
      shares issued
                                        
                                        
                                        1,032,292
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        922
                                        
                                        
                                        
                                        (764
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        159Stock
      options issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,171
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,171Stock
      options exercised
                                        
                                        
                                        660,000
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        428
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        429Warrants
      exercised
                                        
                                        
                                        5,208
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Balance
      at December 31, 2007
                                        
                                        
                                        137,005,294
                                        
                                        
                                        
                                        137
                                        
                                        
                                        
                                        94,983
                                        
                                        
                                        
                                        (764
                                        )
                                        
                                        
                                        (47,861
                                        )
                                        
                                        
                                        46,495Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (22,591
                                        )
                                        
                                        
                                        (22,591
                                        )Common
      stock issued
                                        
                                        
                                        24,000,000
                                        
                                        
                                        
                                        24
                                        
                                        
                                        
                                        11,784
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        11,808Shares
      issued to consulting firm
                                        
                                        
                                        20,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14Nonvested
      shares issued
                                        
                                        
                                        538,500
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        325
                                        
                                        
                                        
                                        451
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        776Nonvested
      shares withheld for taxes
                                        
                                        
                                        (258,404
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (136
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (136
                                        )Stock
      options issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,055
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,055
                                        )Balance
      at December 31, 2008
                                        
                                        
                                        161,305,390
                                        
                                        
                                        
                                        161
                                        
                                        
                                        
                                        105,915
                                        
                                        
                                        
                                        (313
                                        )
                                        
                                        
                                        (70,452
                                        )
                                        
                                        
                                        35,311Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (13,755
                                        )
                                        
                                        
                                        (13,755
                                        )Common
      stock issued
                                        
                                        
                                        11,558,645
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        4,349
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4,360Shares
      issued to consulting firm
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Nonvested
      shares issued
                                        
                                        
                                        990,000
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        285
                                        
                                        
                                        
                                        34
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        321Nonvested
      shares withheld for taxes
                                        
                                        
                                        (17,075
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (5
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (5
                                        )Stock
      options issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        844
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        844Warrants
      issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        594
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        594Balance
      at December 31, 2009
                                        
                                        
                                        173,836,960
                                        
                                        
                                        $
                                        174
                                        
                                        
                                        $
                                        111,982
                                        
                                        
                                        $
                                        (279
                                        )
                                        
                                        $
                                        (84,207
                                        )
                                        
                                        $
                                        27,670Inception
      (February 4, 2000) through December 31,
      2009Balance
      at February 4, 2000
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (84,207
                                        )
                                        
                                        
                                        (84,207
                                        )Common
      shares issued-
      Placements
                                        
                                        
                                        160,384,832
                                        
                                        
                                        
                                        159
                                        
                                        
                                        
                                        91,352
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        91,511-
      Newark ValleyOil
      & Gas Inc. acquisition
                                        
                                        
                                        1,600,000
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        3,598
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,600Shares
      issued to consulting firm
                                        
                                        
                                        231,259
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        297
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        297Nonvested
      shares issued
                                        
                                        
                                        2,560,792
                                        
                                        
                                        
                                        4
                                        
                                        
                                        
                                        1,532
                                        
                                        
                                        
                                        (279
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,257Nonvested
      shares withheld for taxes
                                        
                                        
                                        (275,479
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (141
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (141
                                        )Stock
      options issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,274
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,274Stock
      options exercised
                                        
                                        
                                        1,410,000
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        915
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        916Warrants
      issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        804
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        804Warrants
      exercised
                                        
                                        
                                        7,925,556
                                        
                                        
                                        
                                        8
                                        
                                        
                                        
                                        8,185
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        8,193Warrants
      redeemed unexercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2
                                        )Debt
      issued with beneficial conversion feature
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        168
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        168Balance
      at December 31, 2009
                                        
                                        
                                        173,836,960
                                        
                                        
                                        $
                                        174
                                        
                                        
                                        $
                                        111,982
                                        
                                        
                                        $
                                        (279
                                        )
                                        
                                        $
                                        (84,207
                                        )
                                        
                                        $
                                        27,670





See the
accompanying notes to consolidated financial statements.


54





FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Consolidated
Statements of Cash Flows


(In
Thousands)





FortheYearsEndedDecember31,
                                
                                
                                February 4,
                                  2000
                                  (Inception)
                                  through
                                  December 31,2009
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2009Cash
      flows from operating activitiesNet
      loss
                                
                                $
                                (13,755
                                )
                                
                                $
                                (22,591
                                )
                                
                                $
                                (11,849
                                )
                                
                                $
                                (84,207
                                )Adjustments
      to reconcile net loss to cash used in operating
      activities:Depreciation
      and amortization
                                
                                
                                182
                                
                                
                                
                                171
                                
                                
                                
                                88
                                
                                
                                
                                694Amortization
      of deferred financing costs
                                
                                
                                863
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                863Prior
      period capitalized exploratory well costs expensed
                                
                                
                                -
                                
                                
                                
                                7,907
                                
                                
                                
                                157
                                
                                
                                
                                -Stock
      issued to pay expense
                                
                                
                                -
                                
                                
                                
                                14
                                
                                
                                
                                61
                                
                                
                                
                                297Share-based
      compensation
                                
                                
                                1,165
                                
                                
                                
                                (279
                                )
                                
                                
                                1,330
                                
                                
                                
                                6,530Changes
      in components of working capital and asset retirement and environmental
      obligationsRestricted
      cash
                                
                                
                                (739
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (739
                                )Inventory
                                
                                
                                (37
                                )
                                
                                
                                109
                                
                                
                                
                                (241
                                )
                                
                                
                                (226
                                )Prepaid
      expenses
                                
                                
                                96
                                
                                
                                
                                (113
                                )
                                
                                
                                68
                                
                                
                                
                                (166
                                )Deposits
                                
                                
                                (222
                                )
                                
                                
                                (30
                                )
                                
                                
                                269
                                
                                
                                
                                (346
                                )Stock
      subscription receivable
                                
                                
                                (245
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (245
                                )Other
      current assets
                                
                                
                                -
                                
                                
                                
                                (16
                                )
                                
                                
                                (21
                                )
                                
                                
                                (46
                                )Accounts
      payable and accrued liabilities
                                
                                
                                (133
                                )
                                
                                
                                1,687
                                
                                
                                
                                (645
                                )
                                
                                
                                4,854Asset
      retirement and environmental obligations
                                
                                
                                156
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                156Impairment
      expense
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                3,778Loss
      (gain) on sale of assets
                                
                                
                                5
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (3
                                )Other,
      net
                                
                                
                                (5
                                )
                                
                                
                                (136
                                )
                                
                                
                                -
                                
                                
                                
                                237Net
      cash used in operating activities
                                
                                
                                (12,669
                                )
                                
                                
                                (13,277
                                )
                                
                                
                                (10,783
                                )
                                
                                
                                (68,569
                                )Cash
      flows from investing activitiesAdditions
      to unproved oil and gas properties in China
                                
                                
                                (3,388
                                )
                                
                                
                                (7,343
                                )
                                
                                
                                (7,657
                                )
                                
                                
                                (34,713
                                )Other
      oil and gas investment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (1,278
                                )Additions
      to other properties
                                
                                
                                (123
                                )
                                
                                
                                (214
                                )
                                
                                
                                (398
                                )
                                
                                
                                (1,106
                                )Sale
      of oil and gas properties
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,108Sale
      of other fixed assets
                                
                                
                                2
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2Net
      cash used in investing activities
                                
                                
                                (3,509
                                )
                                
                                
                                (7,557
                                )
                                
                                
                                (8,055
                                )
                                
                                
                                (35,987
                                )Cash
      flows from financing activitiesNet
      proceeds from exchangeable note
                                
                                
                                10,000
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                10,000Net
      proceeds from sale of common stock
                                
                                
                                4,360
                                
                                
                                
                                11,808
                                
                                
                                
                                14,814
                                
                                
                                
                                91,511Net
      proceeds from exercise of options
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                429
                                
                                
                                
                                916Net
      proceeds from exercise of warrants
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                8,191Deferred
      financing costs
                                
                                
                                (495
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (495
                                )Net
      cash provided by financing activities
                                
                                
                                13,865
                                
                                
                                
                                11,808
                                
                                
                                
                                15,243
                                
                                
                                
                                110,123(Decrease)
      increase in cash and cash equivalents
                                
                                
                                (2,313
                                )
                                
                                
                                (9,026
                                )
                                
                                
                                (3,595
                                )
                                
                                
                                5,567Cash
      and cash equivalents—beginning of period
                                
                                
                                7,880
                                
                                
                                
                                16,906
                                
                                
                                
                                20,501
                                
                                
                                
                                -Cash
      and cash equivalents—end of period
                                
                                $
                                5,567
                                
                                
                                $
                                7,880
                                
                                
                                $
                                16,906
                                
                                
                                $
                                5,567





See the
accompanying notes to consolidated financial statements.


55





FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





1.  Summary
of Significant Accounting Policies





Business.  We
were incorporated in the state of Nevada on February 4, 2000, and on January 10,
2002, we changed our name to Far East Energy Corporation. The terms “we,” “us,”
“our,” “FEEC” and “our company” refer to Far East Energy
Corporation.  We are an independent energy company.  FEEC,
together with its subsidiaries, engages in the acquisition, exploration and
development of coalbed methane (“CBM”) gas properties in the People’s Republic
of China (“PRC”). We are a development stage company, and our activities have
been limited to organizational activities, including developing a strategic
operating plan, capital funding, hiring personnel, entering into contracts
acquiring rights to explore for, develop, produce and sell oil and gas or
coalbed methane, and drilling, testing and completion of exploratory
wells.





Principles of
Consolidation.  Our consolidated financial statements include
the accounts of our wholly-owned subsidiaries after the elimination of all
intercompany accounts and transactions.





Use of
Estimates.  The preparation of our financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and disclosure of
contingent assets and liabilities that exist at the date of the financial
statements. While we believe our estimates are appropriate, actual results can,
and often do, differ from those estimates.





Cash and Cash
Equivalents.  We consider short-term investments with little
risk of change in value because of changes in interest rates and purchased with
an original maturity of three months or less to be cash
equivalents.





Restricted
Cash.Restricted cash
represents the amount of cash which is restricted by legal or contractual
requirements. Of the $10 million proceeds from the issuance of an exchangeable
note (the “Exchangeable Note”) to Arrow Energy International Pte Ltd (“Arrow”),
$2 million of the proceeds was set aside to be used exclusively to satisfy of
FEEB existing exploration and development commitments in connection with the
Qinnan production sharing contract (“PSC”).  The restricted cash
balance is reduced as the related expenditures are incurred.  As of
December 31, 2009, our balance in restricted cash was $0.7 million.





Inventory.  Inventory
consists primarily of tubular goods and drilling equipment used in our
operations and is carried at cost with adjustments made from time to time to
recognize any reductions in value.





Unevaluated Oil
and Gas Property.  We use the successful efforts method of
accounting for our oil and gas properties. Under this method, oil and gas lease
acquisition costs and intangible drilling costs associated with exploration
efforts that result in the discovery of proved reserves and costs associated
with development drilling, whether or not successful, are capitalized when
incurred. If proved commercial reserves are not discovered, such drilling costs
are expensed. In some circumstances, it may be uncertain whether proved
commercial reserves have been found when drilling has been
completed.  Under Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 932, Extractive Activities – Oil
and Gas (“ASC 932”), such exploratory well drilling costs may continue to be
capitalized if the reserve quantity is sufficient to justify its completion as a
producing well and sufficient progress in assessing the reserves and the
economic and operating viability of the project is being made. We assess our
capitalized exploratory wells pending evaluation each quarter to determine
whether costs should remain capitalized or should be charged to earnings. Other
exploration costs, including geological and geophysical costs, are expensed as
incurred. We recognize gain or loss on the sale of properties on a field
basis.


56





Unproved
property costs are capitalized and reviewed periodically for impairment on a
property-by-property basis, considering factors such as drilling and
exploitation plans and lease terms. The estimated fair value of unproved
leasehold costs includes the present value of probable reserves discounted at
rates commensurate with the risks involved in each classification of reserve.
Costs related to impaired prospects are charged to expense. An impairment
expense could result if oil and gas prices decline in the future or if downward
reserves revisions are recorded, as it may not be economical to develop some of
these unproved properties.  We also evaluate current drilling results,
lease expiration dates, current oil and gas industry conditions, international
economic conditions, capital availability, foreign currency exchange rates,
political stability in the countries in which the Company has an investment, and
available geological and geophysical information. Any impairment assessed is
charged to expense.





Estimates of
future dismantlement, restoration, and abandonment costs. The accounting
for future development and abandonment costs is determined by FASB ASC Topic
410, Asset Retirement and Environmental Obligations, which  requires
the fair value of a liability for an asset retirement obligation to be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The accrual is based on
estimates of these costs for each of our properties based upon the type of
production structure, reservoir characteristics, depth of the reservoir, market
demand for equipment, currently available procedures and consultations with
construction and engineering consultants. Based on our experience and technical
and financial data collected from managing our projects over the years, we were
able to record the costs related to our asset retirement and environmental
obligations in our financial statements beginning the fourth quarter of
2009.  Because these costs typically extend many years into the
future, estimating these future costs is difficult and requires management to
make estimates and judgments that are subject to future revisions based on
numerous factors, including changing technology, the political and regulatory
environment, estimates as to the proper discount rate to use and timing of
abandonment.





Convertible Debts
and Warrants.  We applied FASB ASC Topic 815, Derivatives and
Hedging (“ASC 815”) and FASB ASC Topic 470, Debt (“ASC 470”), in recording the
Exchangeable Note and warrants issued to Arrow in conjunction with a strategic
alliance between the parties. Derivative financial instruments, as defined in
ASC 815, consist of financial instruments or other contracts that contain a
notional amount and one or more underlying, require no initial net investment
and permit net settlement. Derivative financial instruments may be free-standing
or embedded in other financial instruments. Further, derivative financial
instruments are initially, and subsequently, measured at fair value and recorded
as liabilities or, in rare instances, assets.  Convertible debt, as
defined in ASC 470, generally includes an interest rate which is lower than the
issuer could establish for nonconvertible debt, an initial conversion price
which is greater than the market value of the common stock at the time of
issuance, and a conversion price which does not decrease except pursuant to
anti-dilution provisions.  Also, under ASC 470, the portion of the
proceeds from the issuance of the debt which is allocable to the warrant should
be accounted for as additional paid-in capital.  The allocation should
be based on the relative fair values of the two securities at time of
issuance.





Income
Taxes.  Deferred income taxes are accounted for under the asset
and liability method of accounting for income taxes. Under this method, deferred
income taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to differences
between the financial statements carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred taxes of a change in tax rate is
recognized in income in the period the change occurs. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.





Environmental
Matters.Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations, and do not contribute to current or future revenue generation are
expensed. Liabilities are recorded when assessments and/or remediation are
deemed probable and the costs can be reasonably estimated.





Net Loss Per
Share.  We apply FASB ASC Topic 260, Earnings Per Share (“ASC
260”) for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in our earnings.


57





Share-based
Compensation.  We measure the cost of employee services
received in exchange for stock options based on the grant date fair value of the
awarded options under FASB ASC Topic 718, Compensation – Stock Compensation
(“ASC 718”).  We determine the fair value of stock option grants using
the Black-Scholes option pricing model.   We determine the fair
value of shares of nonvested stock (also commonly referred to as restricted
stock) based on the last quoted price of our stock on the OTC Bulletin Board on
the date of the share grant.   The fair value determined
represents the cost for the award and is recognized over the vesting period
during which an employee is required to provide service in exchange for the
award.  As share-based compensation expense is recognized based on
awards ultimately expected to vest, we have reduced the expense for estimated
forfeitures based on historical forfeiture rates.  Previously
recognized compensation costs may be adjusted to reflect the actual forfeiture
rate for the entire award at the end of the vesting period.  Excess
tax benefits, as defined in ASC 718, if any, are recognized as an addition to
paid-in capital.





Foreign Currency
Transactions.  Periodically, we assess the functional
currencies of our Chinese subsidiaries to ensure that the appropriate currency
is utilized in accordance with the guidance in FASB ASC Topic 830, Foreign
Currency Matters (“ASC 830”).  During the fourth quarter of 2006, we
determined that the functional currency for our Chinese operations was U.S.
Dollars, instead of the Chinese Renminbi (“RMB”) as previously reported and
utilized.  Foreign currency transaction gains or losses, which
resulted from transactions denominated in the Chinese RMB, were recorded in the
Consolidated Statement of Operations.





Fair Values of
Financial Instruments.  Our company’s financial instruments
consist primarily of cash and cash equivalents, payables, and accrued
payables.  The carrying values of these financial instruments
approximate their respective fair values as they are short-term in
nature.





Credit
Concentration.  We had deposited with one financial institution
approximately $5.9 million in cash at December 31, 2009, which exceeded the
limit of the Federal Deposit Insurance Corporation. The funds were deposited in
U.S. government agency supported funds.  We did not require collateral
from the financial institutions on these deposits.





Adoption of New
Accounting Pronouncement. In June 2009, the FASB issued authoritative
accounting guidance which established the FASB Accounting Standards Codification
(Codification or ASC) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities and stated that
all guidance contained in the Codification carries an equal level of authority.
The authoritative accounting guidance recognized that rules and interpretive
releases of the SEC under federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. The Company adopted the provisions
of the authoritative accounting guidance during 2009, the adoption of which did
not have a material effect on the Company’s consolidated financial
statements.





2.  Liquidity
and Realization of Assets





We have
not established a source of revenue and are not able to accurately predict the
timing of our first revenue.  We have funded our exploration and
development activities primarily through the sale and issuance of common stock.
During the second quarter of 2008, we completed a transaction for the sale of 24
million shares of our common stock and warrants to purchase up to 8.4 million
shares of our common stock for total net proceeds of $11.8 million under our
shelf registration in effect at that time.  That shelf registration
expired in March 2009.  In September 2009, the Company filed with the
SEC a shelf registration statement on Form S-3 for the offer and sale from time
to time of up to $75 million of the Company’s debt and equity
securities.  In December 2009, we completed a transaction for the sale
of 11.6 million shares of our common stock and warrants to purchase up to 4.6
million shares of our common stock for total net proceeds of $4.3 million under
our shelf registration.  On March 11, 2010, we completed a transaction
for the sale of 11.7 million shares of our common stock and warrants to purchase
up to 4.7 million shares of our common stock for total net proceeds of $4.6
million under our shelf registration.  The amount available under the
registration statement at March 12, 2010 was approximately $65.1
million.


58





On March
13, 2009, we formed a strategic alliance related to our Qinnan Block with Arrow
Energy International Pte Ltd, the Singapore-based subsidiary of Arrow Energy
Limited, a large Australian CBM producer.    Assuming that
we obtain approval from our Chinese partner company and the MOC, and satisfy the
other conditions under the Farmout Agreement with Arrow, then the additional
payment due upon the occurrence of these events from Arrow together with funds
currently available should provide sufficient working capital to meet our
currently planned work programs through 2010.  Our current work
programs would satisfy the minimum exploration expenditures for all three of our
PSCs for 2010.  Management will continue to seek to raise additional
capital to continue operations and to meet future expenditure requirements
necessary to retain our rights under the PSCs.  Management intends to
seek to obtain funds by entering into a strategic relationship or transaction,
such as a joint venture or farmout, and/or obtaining debt or equity
financing.  The global financial crisis has created liquidity problems
for many companies and financial institutions and international capital markets
have stagnated, especially in the United States and Europe.  A
continuing downturn in these markets could impair our ability to obtain, or may
increase our costs associated with obtaining, additional funds through the sale
of our securities.  While we will continue to seek to raise funds,
there can be no assurance that we will be able to enter any strategic
relationship or transaction or that we will be successful in obtaining funds
through debt or equity financing.  Under certain circumstances, the
structure of a strategic transaction may require the approval of the Chinese
authorities, which could delay closing or make the consummation of a transaction
more difficult.  There can be no assurance that the Chinese
authorities will provide the approvals necessary for a transaction or
transfer.  In addition, the terms and conditions of any potential
strategic relationship or transaction or of any debt or equity financing are
uncertain and we cannot predict the timing, structure or other terms and
conditions of any such arrangements.  There can be no guarantee of
future fundraising or exploration success or that we will realize the value of
our unevaluated exploratory well costs. Management believes that we will
continue to be successful in obtaining the funds necessary to continue as a
going concern.





As of
December 31, 2009, we had unevaluated exploratory well costs totaling $34.0
million, of which $30.6 million have been capitalized for a period greater than
one year.  Such costs, which related to the Shouyang Block in Shanxi
Province, were initially capitalized under successful efforts accounting,
pending a determination of whether sufficient quantities of economically
recoverable proved reserves are found.  We make periodic assessments
of whether these costs qualify for continuing capitalization, based on whether
we are making sufficient progress in assessing the reserves and determining the
economic and operating viability of the project, as more fully discussed in Note
5.





In
addition to these periodic assessments, we also assess whether we have a
reasonable expectation of recovering these costs through future net cash flows
from the project, if we are successful in establishing proved reserves. During
the first quarter of 2008, we received the report of an independent engineering
firm, which was commissioned to study the various technical aspects of the
current pilot project in the Shouyang Block.  The study indicated that
significant gas content is present in the pilot area and that the coal in the
area has relatively high permeability, based on production data available from
the first seven wells (three horizontal and four vertical) drilled in the pilot
area.  The report also indicated that we have made progress in
lowering the field pressure to a level which appears to be approaching the
critical desorption pressure necessary for CBM gas
production.  Although there are many uncertainties associated with our
exploration and dewatering efforts, we believe the results of the study provide
the Company with a reasonable basis for the long-term viability of this project,
and support the continued capitalization of our unevaluated capitalized
exploratory well costs in the project while we are continuing to evaluate the
field.





The
report noted that the initial seven pilot wells evaluated by the independent
engineering firm had suffered varying degrees of wellbore damage while being
drilled.  Without taking into consideration future planned wells, the
report also indicates that the seven pilot wells appear insufficient to properly
confine the area for dewatering purposes.  As such, the report
indicates that we are unlikely to produce meaningful quantities of gas from
these initial seven wells without drilling additional wells and/or conducting
remedial activities on the seven wells.  Subsequent to the drilling of
the seven wells included in the report, we have drilled additional 3 horizontal,
15 vertical and 7 deviated wells as of December 31, 2009 in the 1H Pilot
Area.  The unevaluated exploratory well costs at December 31, 2009
comprised of exploratory drilling and related costs for 31 wells in the 1H Pilot
Area.  During the fourth quarter of 2008, we expensed the previously
capitalized costs related to one of the seven pilot wells, FCC-HZ02, pursuant to
FSP No. 19-1, as more fully discussed in Note 5.  We also planned to
drill additional wells in the near future to further explore and assess the
potential of the property.  However, there are many risks and uncertainties
involved in early stages of exploring and attempting to develop a new CBM gas
field and we cannot make any assurances that our efforts will be successful in
making the pilot area commercially viable.  In the event we are not
successful, we may be required to write off some or all of these unevaluated
exploratory well costs.





59




3.  Strategic
Alliance with Arrow





On March
13, 2009, we formed a strategic alliance related to our Qinnan Block with
Arrow.  In conjunction with the strategic alliance, one of our wholly
owned subsidiaries, FEEB, and Arrow entered into a Farmout Agreement (the
“Farmout Agreement”) under which, subject to certain conditions, FEEB will
assign to Arrow 75.25% of its rights in the Qinnan PSC in Shanxi Province (the
“Assignment”).  The Farmout Agreement conditions the Assignment on,
among other things, the receipt of required approvals from the government of the
PRC on or prior to December 19, 2009 or such later date as we may agree
upon.  The terms of the Farmout Agreement were subsequently amended in
November 2009 to provide, among other things, that requisite approvals from
Chinese authorities must be received and other conditions must be satisfied by
December 16, 2009 rather than by November 20, 2009 (the
“Amendment”).  In conjunction with the Amendment, FEEB and Arrow also
agreed that interest on the Exchangeable Note would begin to accrue as
originally scheduled on October 16, 2009.  Since December 19, 2009,
each of the Company and Arrow has had the right to terminate the Farmout
Agreement at any time, though neither party has elected to exercise that right
and the parties are continuing to use efforts to satisfy the conditions
contemplated by the Farmout Agreement.





Upon
satisfaction of the conditions, Arrow will make an initial payment of $8 million
to us, and, subject to certain conditions, will fund all exploration costs
associated with the Qinnan PSC, up to a maximum of $30 million. In addition,
under the Farmout Agreement, if we obtain Chinese governmental approval of an
overall development program for the Qinnan area, Arrow will pay FEEB an
additional $8 million in cash as a bonus. If the conditions under the Farmout
Agreement are not satisfied prior to November 20, 2009, then either party has
the right to terminate the agreement by delivering notice of such termination to
the other party.  Additionally, on March 13, 2009, (i) we entered into
a securities purchase agreement with Arrow (“Securities Purchase Agreement”);
(ii) FEEB issued the Exchangeable Note, $10 million principal amount, to Arrow
for $10 million in cash; (iii) we issued a warrant to Arrow for 7,420,000 shares
of our common stock, at an exercise price of $1.00 per share (“Warrant”); and
(iv) the Company and Arrow entered into a registration rights
agreement.





Under the
Securities Purchase Agreement, the Company issued the Warrant to Arrow and FEEB
issued the Exchangeable Note to Arrow for $10 million in cash, of which $2
million was to be set aside to be used exclusively to satisfy FEEB’s existing
exploration and development commitments in connection with the Qinnan
PSC.  This restricted portion of the proceeds was recorded as
restricted cash on the consolidated balance sheet. During the period from the
formation of the strategic alliance to the year ended December 31, 2009, we used
approximately $1.3 million of the $2 million for exploration expenditures
related to the Qinnan PSC.  See Note 1 – “Summary of Significant
Accounting Policies – Restricted Cash.”





The
Exchangeable Note has an initial principal amount of $10 million.  If
the Chinese government does not approve the Assignment, the Exchangeable Note
bears interest at a rate of 8% per annum, which began to accrue on October 16,
2009, and principal and interest is due and payable on the maturity date of
March 13, 2011.  Arrow has the right at any time to exchange the
Exchangeable Note in whole or in part for shares of common stock at an exchange
rate of 21,052.63 shares per $10,000, or $0.475 per share (the “Exchange Rate”),
of principal and interest.  If the Chinese government approves the
Assignment on or before November 20, 2009, the entire principal amount of the
Exchangeable Note will automatically be exchanged for shares of common stock at
the Exchange Rate.





The
Exchangeable Note contains certain restrictive covenants applicable to the
Company and FEEB, including, among others, restrictions on the incurrence of
indebtedness that ranks senior to or pari passu with the
Exchangeable Note and restrictions on FEEB’s ability to sell all of its rights
under the Shouyang PSC.  The Company has guaranteed FEEB’s payment
obligations under the Exchangeable Note.


60





The
Warrant entitled Arrow to purchase 7,420,000 shares of common stock at an
exercise price of $1.00 per share, subject to certain equitable adjustment
mechanisms in the event of a sale of the Company, stock split or similar
occurrence.  The Warrant expired in December 2009.





For
additional information on the strategic alliance, see Item 1 – “Business” of our
2008 Annual Report.





We
applied ASC 815 and ASC 470 in the recording of the transaction with
Arrow.  According to ASC 815, the Exchangeable Note and the Warrant
were afforded the exemption from derivative accounting treatment as they were
not derivative instruments because (i) their conversion features were indexed to
the Company’s stock, and (ii) the Warrant is and, in the case of the
Exchangeable Note, the conversion feature standalone would be classified in
stockholders’ equity in the balance sheet.  Pursuant to ASC 470, no
portion of the proceeds from the issuance of the Exchangeable Note should be
accounted for as attributable to the conversion feature due to the
inseparability of the debt and the conversion option.  Also, under ASC
470, the portion of the proceeds from the issuance of the Exchangeable Note
which i s allocable to the Warrant should be accounted for as paid-in
capital.  The allocation should be based on the relative fair values
of the two securities at time of issuance.  We determined the fair
value of the Warrant using a combination of the Black-Scholes-Merton valuation
technique and a Monte Carlo simulation.





The
significant assumptions used in the valuation were as follows:





Black-Scholes
                    -Merton
                  
                  
                  MonteCarlo
                    SimulationVolatility
                  
                  
                  124.60
                  %
                  
                  
                  110.16
                  %Risk
      free interest rate
                  
                  
                  0.67
                  %
                  
                  
                  0.83
                  %Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      term
                  
                  0.99
      year
                  
                  
                  1.51
      years





Based on
the combination of the Black-Scholes-Merton valuation technique and the Monte
Carlo simulation, the Warrant was valued at $624,612 at time of
issuance.   The amount was recorded as a debt discount to the
Exchangeable Note in the liabilities section and as additional paid-in capital
in the equity section of the balance sheet.  The debt discount is
accreted as interest expense periodically over the term of the Exchangeable
Note.  We have recorded an accretion amount of $396,593 from the
issuance date to December 31, 2009.





The
Company incurred approximately $0.5 million in direct costs in connection with
the formation of the strategic alliance.  These direct costs were
allocated between the Exchangeable Note and the Warrant in proportion to their
respective fair values at time of issuance.  The costs related to the
Warrant were recorded as an offset to the value of the Warrant in paid-in
capital.  The costs related to the Exchangeable Note were capitalized
as deferred financing costs and amortized based on the effective interest method
over the term of the Exchangeable Note.  The objective of that method
is to arrive at a periodic interest cost which represents a level effective rate
over the term of the Exchangeable Note on its face amount reduced by the
unamortized discount and expense at the beginning of the period.  The
effective interest rate for the Exchangeable Note as calculated is 11.64% per
annum.  We have recorded an amortization amount of $294,682 for the
period from the issuance date to end of the fourth quarter of 2009.





4.  Statements
of Cash Flows





We use
the indirect method to present cash flows from operating activities. Cash paid
for interest expense and income taxes for 2009, 2008, and 2007 was
zero.  Other supplemental cash flow information for 2009, 2008 and
2007, is presented as follows (in thousands):





2009
                  
                  
                  2008
                  
                  
                  2007Non-cash
      transactions:Non-cash
      interest expense
                  
                  $
                  863
                  
                  
                  $
                  -
                  
                  
                  $
                  -Issuance
      of common stock to pay consulting expenses
                  
                  
                  -
                  
                  
                  
                  14
                  
                  
                  
                  61Non-cash
      Share-based compensation
                  
                  
                  1,165
                  
                  
                  
                  (279
                  )
                  
                  
                  1,330


61





5.  Unevaluated
Oil and Gas Properties





The costs
associated with our unevaluated oil and gas properties include the following (in
thousands):





At December 31,2009
                      
                      
                      2008Unproved
      leasehold costs
                      
                      $
                      275
                      
                      
                      $
                      275Unevaluated
      exploratory well costs
                      
                      
                      34,146
                      
                      
                      
                      30,562$
                      34,421
                      
                      
                      $
                      30,837





Unproved property
Costs.Unproved leasehold
costs are composed of amounts we paid to the PRC’s Ministry of Commerce (“MOC”)
and the China United Coalbed Methane Corporation (“CUCBM”) pursuant to a PSC we
entered into in 2002 with CUCBM to acquire the mineral rights in the Enhong and
Laochang areas in Yunnan Province.





Unevaluated Wells
Costs.  Unevaluated well costs include only suspended well
costs which are direct exploratory well costs pending determination of whether
proved reserves have been discovered. Accounting guidance regarding
capitalization of suspended well costs is provided by FASB ASC Topic
932.  FASB ASC 932 addresses whether there are circumstances under the
successful efforts method of accounting for oil and gas producing activities
that would permit the continued capitalization of exploratory well costs beyond
one year, other than when additional exploration wells are necessary to justify
major capital expenditures and those wells are under way or firmly planned for
the near future.  Capitalization of costs should be continued beyond
one year in cases where reserves for the project are not yet proven, but the
Company demonstrates sufficient continuing progress toward assessing those
reserves.  For the capitalized costs at December 31, 2009, our
assessment indicated that our current work programs demonstrated our efforts in
making sufficient continuing progress toward assessing the reserves in the areas
for which the costs were incurred. Therefore, we have continued to capitalize
these costs.





The
following table provides an aging of capitalized exploratory well costs based on
the date the costs were incurred and the number of related wells for which these
exploratory well costs have been capitalized for a period greater than one year
(in thousands, except number of projects):





At December 31,2009
                          
                          
                          2008Unevaluated
      exploratory well costs that have been capitalized for a period of one year
      or less
                          
                          $
                          3,584
                          
                          
                          $
                          6,993Unevaluated
      exploratory well costs that have been capitalized for a period greater
      than one year (1)
                          
                          
                          30,562
                          
                          
                          
                          23,569Total
      unevaluated exploratory well costs
                          
                          $
                          34,146
                          
                          
                          $
                          30,562Number
      of projects that have exploratory well costs that have been capitalized
      for a period greater than one year
                          
                          
                          1
                          
                          
                          
                          1





(1)
            Costs related to our exploratory
      project in the Shouyang Block in the Shanxi
    Province.


62





The
following table reflects the net changes in capitalized exploratory well costs
during 2009, 2008 and 2007 (in thousands):





2009
                        
                        
                        2008
                        
                        
                        2007Beginning
      balance at January 1
                        
                        $
                        30,562
                        
                        
                        $
                        31,539
                        
                        
                        $
                        24,039Additions
      to unevaluated exploratory well costs pending the determination of proved
      reserves
                        
                        
                        3,584
                        
                        
                        
                        6,930
                        
                        
                        
                        7,657Reclassifications
      to wells, facilities, and equipment based on the determination of proved
      reserves
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Unevaluated
      exploratory well costs charged to expense
                        
                        
                        -
                        
                        
                        
                        (7,907
                        )(1)
                        
                        
                        (157
                        )Ending
      balance at December 31
                        
                        $
                        34,146
                        
                        
                        $
                        30,562
                        
                        
                        $
                        31,539





(1)
            During 2008, we determined that
      $7.9 million of unevaluated exploratory well costs incurred previously no
      longer met the requirements for continued
      capitalization.  Accordingly, we charged this amount to
      exploration costs.  The amount includes $7.0 million related to
      the FCC-HZ02 well in the Shouyang
  project.





6.  Asset
Retirement and Environmental Obligations





Estimates of future dismantlement,
restoration, and abandonment costs. The accounting for future development
and abandonment costs is determined by FASB ASC Topic 410, Asset Retirement and
Environmental Obligations, which requires the fair value of a liability for an
asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The accrual is based on estimates of these costs for each of
our properties based upon the type of production structure, reservoir
characteristics, depth of the reservoir, market demand for equipment, currently
available procedures and consultations with construction and engineering
consultants. Based on our experience and technical and financial data collected
from managing our projects over the years, we were able to record the costs
related to our asset retirement and environmental obligations in our financial
statements as of December 31, 2009.  Because these costs typically
extend many years into the future, estimating these future costs is difficult
and requires management to make estimates and judgments that are subject to
future revisions based on numerous factors, including changing technology, the
political and regulatory environment, estimates as to the proper discount rate
to use and timing of abandonment.





The
following table presents the reconciliation of the beginning and ending
aggregate carrying amounts of short-term and long-term legal obligations
associated with the retirement of property, plant and equipment for the years
ended December 31, 2009 and 2008 (in thousands):





2009
                              
                              
                              2008Carrying
      amount at beginning of period
                              
                              $
                              -
                              
                              
                              $
                              -Liabilities
      incurred
                              
                              
                              339
                              
                              
                              
                              -Liabilities
      settled
                              
                              
                              -
                              
                              
                              
                              -Accretion
                              
                              
                              -
                              
                              
                              
                              -Revisions
                              
                              
                              -
                              
                              
                              
                              -Foreign
      currency translations
                              
                              
                              -
                              
                              
                              
                              -Carrying
      amount at end of period
                              
                              $
                              339
                              
                              
                              $
                              -Current
      portion
                              
                              $
                              -
                              
                              
                              $
                              -Noncurrent
      portion
                              
                              $
                              339
                              
                              
                              $
                              -


63





7.  Other
Fixed Assets





Other
fixed assets, net include the following (in thousands):





At December 31,2009
                      
                      
                      2008Other
      fixed assets
                      
                      $
                      984
                      
                      
                      $
                      919Accumulated
      depreciation
                      
                      
                      (504
                      )
                      
                      
                      (373
                      )Other
      fixed assets, net
                      
                      $
                      480
                      
                      
                      $
                      546





Other
fixed assets include leasehold improvements, equipment and
furniture.  Depreciation expense for the years ended December 31,
2009, 2008, and 2007 was approximately $182,000, $171,000, and $88,000,
respectively.





8.  Income
Taxes





Deferred
income taxes reflect the net tax effects of temporary differences between the
recorded amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of our deferred
tax assets and liabilities as of December 31, 2009 and 2008 are as follows (in
thousands):





2009
                                  
                                  
                                  2008Deferred
      tax assets:Net
      operating loss
                                  
                                  $
                                  3,210
                                  
                                  
                                  $
                                  2,024Accrued
      expense and other
                                  
                                  
                                  -
                                  
                                  
                                  
                                  31Stock-based
      compensation
                                  
                                  
                                  529
                                  
                                  
                                  
                                  381Total
      deferred tax assets
                                  
                                  
                                  3,739
                                  
                                  
                                  
                                  2,436Total
      deferred tax liabilities
                                  
                                  
                                  (12
                                  )
                                  
                                  
                                  -Net
      deferred tax assets
                                  
                                  $
                                  3,727
                                  
                                  
                                  $
                                  2,436Net
      deferred tax assets
                                  
                                  $
                                  3,727
                                  
                                  
                                  $
                                  2,436Less:
      valuation allowance
                                  
                                  
                                  (3,727
                                  )
                                  
                                  
                                  (2,436
                                  )$
                                  -
                                  
                                  
                                  $
                                  -





Net
operating loss, which can be carried forward for federal income tax purposes,
was estimated to be approximately $9.4 million at December 31, 2009. We had net
operating loss for federal income tax purposes of approximately $6.0 million at
December 31, 2008.  The net operating loss will begin to expire in
2016.  At December 31, 2009 and 2008, management believed that the
above indicated valuation allowance was necessary in order to comply with the
provisions of FASB ASC Topic 740, Income Taxes (“ASC 740”).





Income
taxes for financial reporting purposes differed from the amounts computed by
applying the statutory federal income tax rates because Bermuda has no income
tax that would apply to FEEB, and because of our recording of the valuation
allowance for the losses generated by us. The net increase in the valuation
allowance for the year ended December 31, 2009 was $1.3 million.  This
increase was primarily attributable to the net operating loss generated during
2009.  The net decrease in the valuation allowance for the year ended
December 31, 2008 was $0.4 million.  This decrease was primarily
attributable to the reversal of temporary timing differences related to
stock-based compensation.





ASC 740
prescribes a minimum recognition threshold and measurement methodology that a
tax position taken or expected to be taken in a tax return is required to meet
before being recognized in the financial statements. It also provides guidance
for derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.  We recognize interest and
penalties related to unrecognized tax benefits within the provision for income
taxes on continuing operations in our consolidated statements of income. There
were no unrecognized tax benefits as of the date of adoption.  There
are no unrecognized tax benefits that if recognized would affect the tax rate for
the year ended December 31, 2009. There is no interest or penalties recognized
as of the date of adoption or for the year ended December 31, 2009.





64




9.  Commitments
and Contingencies





Legal
Proceedings.  We are periodically named in legal actions
arising from normal business activities. We evaluate the merits of these actions
and, if we determine that an unfavorable outcome is probable and can be
estimated, we will establish the necessary accruals. We do not anticipate any
material losses as a result of commitments and contingent liabilities. We are
involved in no material legal proceedings.





Shouyang and
Qinnan Production Sharing Contracts. We are the operator under two
separate PSCs with CUCBM to develop the Shouyang and Qinnan Blocks in the Shanxi
Province. The term of each of the Shouyang and Qinnan PSCs consists of an
exploration period, a development period and a production period. During the
exploration period, we hold a 100% participating interest in the properties, and
we must bear all exploration costs for discovering and evaluating CBM-bearing
areas. If any CBM field is discovered, the development costs for that CBM field
will be borne by us and CUCBM in proportion to the respective participating
interests. The exploration period is divided into three phases called Phase I,
Phase II and Phase III. We have completed our Phase I and Phase II obligations
under the PSCs, and elected to enter into Phase III. Our work commitment to
complete Phase III consists of furthering the horizontal drilling in the coal
seam begun in Phase II to a total of 12,000 meters. We completed eight
horizontal wells which totaled approximately 12,058 meters of horizontal
drilling in coal for the Shouyang PSC and Qinnan PSC together in 2009.
Therefore, we have satisfied the exploration work commitment. During the third
quarter of 2009, the MOC approved a modification agreement to extend Phase III
of the exploration period for the Shouyang PSC to June 30, 2011 from June 30,
2009. With regard to the Qinnan PSC, CNPC has recently replaced CUCBM as our
Chinese partner company. For many months CNPC has been awaiting authorization
from the Chinese government allowing it to deal with foreign partners on CBM
projects. On March 7, 2010, several major news outlets reported that CNPC stated
that it has been authorized to jointly develop coalbed methane projects with
foreign partners, but we have not yet obtained official confirmation of this.
There can be no assurance that CNPC will approve an extension of the exploration
period or approve the Farmout Agreement with Arrow. We have had discussions with
CNPC regarding the extension of the exploration period, which expired on June
30, 2009. At CNPC’s request, we have provided certain operational and financial
information about our Company to assist them in the decision making process.
There can be no assurance that we will be successful in extending the Qinnan
PSC.





Under the
PSCs, we have committed to satisfy certain annual minimum exploration
expenditure requirements for each PSC.  Our minimum exploration
expenditure requirement for each block is based on the minimum exploration
expenditure requirements of CUCBM established by the Ministry of Land and
Resources (“MLR”).  The MLR sets its requirements by applying a
minimum expenditure per acre to the total acreage encompassed by each
PSC.  The annual minimum exploration expenditure requirement is
approximately $2.9 million and $3.4 million, for the Shouyang PSC and the Qinnan
PSC, respectively, based on the currency exchange rate between the U.S. Dollar
and the Chinese RMB as of December 31, 2009.  For 2009, our
exploration expenditure at Shouyang Block exceeded minimum requirement. Pursuant
to the 2009 Shouyang PSC Modification Agreement, the portion of the exploration
expenditures which exceeds the current year’s minimum exploration expenditure
requirement can no longer be carried forward toward the satisfaction of the
subsequent year’s minimum requirement. These expenditure requirements are
denominated in the RMB and therefore, are subject to fluctuations in the
currency exchange rate between the U.S. Dollar and the Chinese
RMB.  Assuming that we obtain approval from our Chinese partner
company and the MOC, and satisfy the other conditions under the Farmout
Agreement with Arrow, then the additional payment due upon the occurrence of
these events from Arrow together with funds currently available should provide
sufficient working capital to meet our currently planned work programs through
2010.  Our current work programs would satisfy the minimum exploration
expenditures for all three of our PSCs for 2010.  The MLR minimum
expenditure requirements are a significant factor that influences the Company’s
exploration work program.


65





Under the
PSCs, we are required to make the following yearly payments to our Chinese
partner companies.  As indicated below, certain amounts may change
from year to year.


Shouyang
      PSC
              
              
              Qinnan
      PSCExploration
      PeriodSalary
      and Benefit2009
              
              $
              162,200
              
              
              $
              143,1002010
              
              
              195,900
              (1)
              
              
              143,100
              (2)Exploration
      Permit Fee2009
              
              
              140,136
              
              
              
              165,5292010
              
              
              143,622
              
              
              
              169,693
              (2)Training
      Fee
              
              
              60,000
              
              
              
              60,000Assistance
      Fee
              
              
              50,000
              
              
              
              50,000Development &
      Production PeriodSignature
      Fee (3)
              
              
              150,000
              
              
              
              150,000Training
      Fee
              
              
              150,000
              
              
              
              150,000Assistance
      Fee
              
              
              120,000
              
              
              
              120,000


(1) The
increase from 2009 to 2010 is due to the increase of standard amount of the
CUCBM’s professionals’ salary and benefit under the amended Shouyang PSC. The
salary and benefits for CUCBM professionals during the development and
production periods is to be determined by negotiation with CUCBM.


(2) The
increase from 2009 to 2010 is due to the phaseout of a discount on exploration
permit fee pursuant to MLR’s regulations.


(3) Due
within 30 days after first approval of the ODP following the exploration
period.





Yunnan Production
Sharing Contract.We are the operator
under one PSC with CUCBM to develop two areas in the Yunnan Province: Enhong and
Laochang. The term of the PSC consists of an exploration period, a development
period and a production period. The exploration period is divided into two
phases, Phase I and Phase II.  We have completed Phase I and are
operating in Phase II.  During the third quarter of 2009, the MOC
approved a modification agreement to extend Phase II of the exploration period
for the Enhong-Laochang PSC to June 30, 2011 from June 30, 2009.





During
the exploration period, we must bear all exploration costs for discovering and
evaluating CBM-bearing areas.  Our work commitment to complete Phase
II consists of drilling at least one horizontal well with a minimum of two
laterals.   We are reviewing the data collected from the vertical
wells we drilled and other wells drilled by the Chinese coal industry to plan
for the drilling of the horizontal well.





Under the
Yunnan PSC, we have committed to satisfy certain annual minimum exploration
expenditure requirements.  Our minimum exploration expenditure
requirements for the blocks subject to the PSC are based on the minimum
exploration expenditure requirements of CUCBM established by the
MLR.  The MLR sets its requirements by applying a minimum expenditure
per acre to the total acreage encompassed by the PSC.  The annual
minimum exploration expenditure requirement is approximately $1.6 million, based
on the currency exchange rate between the U.S. Dollar and the Chinese RMB as of
December 31, 2009.  Pursuant to the 2009 Yunnan PSC Modification
Agreement, the portion of the exploration expenditures which exceeds the current
year’s minimum exploration expenditure requirement can no longer be carried
forward toward the satisfaction of the subsequent year’s minimum
requirement.  Our 2009 exploration expenditure and the cumulative
amount carried forward from 2008 amounted to approximately $1.5 million.
Therefore we were approximately $0.1 million short of the
requirement.  The shortage will be discussed in the next joint
management committee meeting currently scheduled in late March.  Based
on previous experience and the shortage being immaterial, we are hopeful that
permission will be granted from CUCBM to add the underage to the 2010
requirement.  These requirements are denominated in the RMB, and
therefore, are subject to fluctuations in the currency exchange rate between the
U.S. Dollar
and the Chinese RMB.  The MLR minimum expenditure requirements are a
significant factor that influences the Company’s exploration work
program.





66




Pursuant
to the terms of the Yunnan PSC, we have paid CUCBM signature fees totaling
$350,000.  Under the PSC, we are required to make certain payments to
CUCBM, including: (1) CUCBM assistance fees for Chinese personnel totaling
$45,000 per year during the exploration phase and $80,000 per year during the
development and production periods; (2) training fees for Chinese personnel
working on the projects of $45,000 per year during the exploration period and
$80,000 per year during the development and production periods; (3)
reimbursement to CUCBM for government-imposed fees for CBM exploration rights
during the exploration period, which were $74,000 in 2009 and are estimated to
be approximately $79,000 in 2010, and in proportion to our participating
interest in the development and production periods; and (4) salary and benefits
paid to CUCBM professionals during the exploration period, which was
approximately $210,000 in 2009 and are estimated to be approximately $257,000 in
2010.  This increase is due to the increase of standard amount of
CUCBM’s professionals salary and benefit under the extended Yunnan
PSC.  The allocation of salary and benefits for CUCBM professionals
during the development and production periods are to be determined by
negotiation with CUCBM.





Minimum
Commitments.At December 31, 2009, total minimum commitments
from long-term non-cancelable operating leases and other purchase obligations
are as follows (in thousands):





Amount2010
                      
                      $
                      9,3702011
      - 2012
                      
                      
                      15,2442013
      - 2014
                      
                      
                      -2015
      and beyond
                      
                      
                      339Total
      minimum commitments
                      
                      $
                      24,953





10.  Employee
Savings Plan





At
December 31, 2009, we maintained a defined contribution plan covering all of our
U.S. employees. Employees participating in the plan may select from several
investment options. We match the participant’s contribution up to a maximum of
four percent of the participant’s salary. The amounts contributed by the
participants and us vest immediately. We expensed $40,000, $48,000, and $41,000
under this plan for 2009, 2008 and 2007, respectively.





11.  Share-Based
Compensation





We grant
shares of nonvested stock of common stock and options to purchase common stock
to employees, members of the board of directors and consultants under our
shareholder-approved 2005 Stock Incentive Plan (the “2005
Plan”).  Options granted under the 2005 Plan must carry an exercise
price equal to or above the market value of the stock at the grant date, and a
term of no greater than ten years.  The 2005 Plan provides that,
unless otherwise agreed, shares of nonvested stock granted under the 2005 Plan
must be forfeited upon termination of service.  We issue new shares
when options are exercised or shares are granted.  Our option grants
under the 2005 Plan to date have generally utilized these terms: exercise price
above or equal to average market price on the date of the grant; vesting periods
up to four years from date of grant; term of up to ten years; and forfeiture of
unexercised vested options after 60-90 days after termination of employment with
the Company.  Our shares of nonvested stock granted under the 2005
Plan to date have utilized vesting periods of up to three years.





Grants
prior to the adoption of the 2005 Plan and inducement grants associated with
hiring of new employees and appointment of new directors are issued outside of
the 2005 Plan.  These grants of options included varying terms, some
differing from the above.





During
the first half of 2009, we awarded options to purchase up to 1,686,000 shares of
our common stock and 1,190,000 shares of nonvested stock under the 2005 Plan to
employees and members of the board of directors, and options to purchase up to
220,000 shares of our common stock and 100,000 shares of nonvested stock outside
the 2005 Plan to a new employee and consultants. At the annual general meeting
of stockholders of the Company held on July
15, 2009, the Company’s stockholders approved an amendment to the 2005 Plan
which increased the number of shares of common stock issuable from 7,500,000
shares to 12,500,000 shares and increased the number of shares of common stock
that may be granted as restricted stock (shares of nonvested stock), restricted
stock units or any other stock-based awards from 2,400,000 to 3,900,000
shares.  Since the amendments were approved, we have not awarded any
options to purchase our common stock or any share of nonvested stock or other
full-valued stock-based award.  As of December 31, 2009, we had
5,752,333 shares available for awards under the 2005 Plan, of which 1,921,500
shares could be issued as shares of nonvested stock or other full-valued
stock-based awards.





67




In the
fourth quarter of 2008, we reviewed the data we utilized to determine our
estimated forfeiture rates for the share based awards.  The estimated
forfeiture rates were used in the calculations of the share based compensation
costs.  The data indicated that most of the estimated forfeiture rates
should be increased.  Consequently, we adjusted certain previously
recognized compensation costs to reflect the higher estimated forfeiture
rates.  As a result, we reduced the compensation costs by
approximately $2.1 million.  The following table summarizes share
based compensation costs recognized under ASC 718 for 2009, 2008 and 2007 (in
thousands):





2009
                      
                      
                      2008
                      
                      
                      2007General
      and administrative
                      
                      $
                      930
                      
                      
                      $
                      (621
                      )
                      
                      $
                      1,242Exploration
      Costs
                      
                      
                      235
                      
                      
                      
                      342
                      
                      
                      
                      69Tax
      benefit
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      share-based compensation costs, net of tax
                      
                      $
                      1,165
                      
                      
                      $
                      (279
                      )
                      
                      $
                      1,311





We
utilized certain assumptions in determining the fair value of options using the
Black-Scholes option pricing model.  We calculated the estimated
volatility for grants of options made in 2006 and 2007 by averaging the
historical daily price intervals for our common stock for the portion of the
expected life that our shares were publicly traded and the historical daily
price intervals of similar peer companies for the remaining
period.  As of the first quarter of 2008, expected volatility is based
completely on the Company’s own historical volatility since we have sufficient
data to determine the 6-year volatility.  The risk-free interest rate
is based on observed U.S. Treasury rates at date of grant, appropriate for the
expected lives of the options. The expected life of options granted during 2006
and 2007 was determined based on the method provided in Staff Accounting
Bulletin No. 107, as we do not have an adequate exercise history to determine
the average life for the options with the characteristics of those granted in
2007 and 2006.





Compensation
expenses for the stock option grants determined under ASC 718 for 2008, 2007 and
2006 were calculated using the Black-Scholes option pricing model with the
following assumptions:





Actual
                    2009
                  
                  
                  Actual
                    2008
                  
                  
                  Actual
                    2007Dividend
      yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %Expected
      volatility
                  
                  
                  85
      - 89
                  %
                  
                  
                  77
      - 82
                  %
                  
                  
                  82
      - 84
                  %Risk-free
      interest rate
                  
                  
                  1.5
      - 1.7
                  %
                  
                  
                  2.5
      - 3.1
                  %
                  
                  
                  4.2
      - 4.9
                  %Expected
      life of options (years)
                  
                  
                  5.5
      - 6
                  
                  
                  
                  5.5
      - 6
                  
                  
                  
                  5.5
      - 6Weighted
      average fair value per share at grant date
                  
                  $
                  0.17
                  
                  
                  $
                  0.44
                  
                  
                  $
                  0.71


68





The
following table summarizes stock option transactions for 2009:





2009Shares
                              Underlying
                              Options
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            
                            Weighted
                              Average
                              Remaining
                              Life (Years)
                            
                            
                            Aggregate
                              Intrinsic
                              ValueOutstanding
      at beginning of year
                            
                            
                            11,320,500
                            
                            
                            $
                            1.25Granted
                            
                            
                            1,906,000
                            
                            
                            
                            0.40Exercised
                            
                            
                            -
                            
                            
                            
                            -Canceled
                            
                            
                            -
                            
                            
                            
                            -Forfeited
                            
                            
                            (433,333
                            )
                            
                            
                            0.54Expired
                            
                            
                            (2,841,000
                            )
                            
                            
                            1.16Outstanding
      at end of year
                            
                            
                            9,952,167
                            
                            
                            
                            1.14
                            
                            
                            
                            6.32
                            
                            
                            $
                            -Options
      exercisable at end of year
                            
                            
                            6,636,167
                            
                            
                            $
                            1.41
                            
                            
                            
                            5.19
                            
                            
                            $
                            -





No
options were exercised during 2009 and 2008.  The total intrinsic
value of options exercised during 2007 was $383,000.





A summary
of options outstanding as of December 31, 2009 is as follows:





Options Outstanding
                            
                            
                            Options ExercisableRange of
                              Exercise Prices
                            
                            Number
                              Outstanding
                            
                            
                            Weighted
                              Average
                              Remaining
                              Contractual
                              Life (Years)
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            
                            Number
                              Exercisable
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price$0.28
      to $0.45
                            
                            
                            1,496,000
                            
                            
                            
                            9.18
                            
                            
                            $
                            0.28
                            
                            
                            
                            166,667
                            
                            
                            $
                            0.31$0.46
      to $0.70
                            
                            
                            3,248,167
                            
                            
                            
                            7.14
                            
                            
                            
                            0.67
                            
                            
                            
                            1,723,833
                            
                            
                            
                            0.66$0.71
      to $0.99
                            
                            
                            823,000
                            
                            
                            
                            7.32
                            
                            
                            
                            0.81
                            
                            
                            
                            574,667
                            
                            
                            
                            0.80$1.00
      to $1.99
                            
                            
                            1,000,000
                            
                            
                            
                            5.69
                            
                            
                            
                            1.18
                            
                            
                            
                            915,000
                            
                            
                            
                            1.19$2.00
      to $2.37
                            
                            
                            3,385,000
                            
                            
                            
                            4.22
                            
                            
                            
                            2.04
                            
                            
                            
                            3,256,000
                            
                            
                            
                            2.049,952,167
                            
                            
                            
                            6.32
                            
                            
                            
                            1.14
                            
                            
                            
                            6,636,167
                            
                            
                            
                            1.41





The
following table summarizes activity in shares of nonvested stock for
2009:





Shares of
                        Nonvested
                        Stock
                      
                      
                      Weighted
                        Average
                        Grant Date
                        Fair ValueOutstanding
      at beginning of year
                      
                      
                      703,500
                      
                      
                      $
                      0.70Granted
                      
                      
                      1,290,000
                      
                      
                      
                      0.28Vested
                      
                      
                      (322,425
                      )
                      
                      
                      0.66Forfeited
                      
                      
                      (300,000
                      )
                      
                      
                      0.28Withheld
      for Taxes
                      
                      
                      (17,075
                      )
                      
                      
                      0.60Outstanding
      at end of year
                      
                      
                      1,354,000
                      
                      
                      
                      0.40


69





At
December 31, 2009, we had approximately $0.9 million in total unrecognized
compensation cost related to share-based compensation, of which $0.3 million was
related to shares of nonvested stock grants and was recorded in unearned
compensation on our consolidated balance sheets.  This cost is
expected to be recognized over a weighted average period of 1.54 years at
December 31, 2009.





12.  Stockholders’
Equity





Common
Stock.Holders of our common
stock are entitled to one vote for each share held on all matters submitted to a
vote of stockholders and do not have cumulative voting rights. Accordingly,
holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all other directors standing for election.
Holders of common stock are entitled to receive proportionately any dividends
that may be declared by our board of directors, subject to any preferential
rights of outstanding preferred stock. In the event of our liquidation,
dissolution or winding up, holders of common stock will be entitled to receive
proportionately any of our assets remaining after the payment of liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of
common stock have no preemptive, subscription, redemption or conversion
rights.





Shelf
Registration.In September 2009, we filed with the SEC a shelf
registration statement on Form S-3 for the offer and sale from time to time up
to $75 million of our debt and equity securities.  The amount
available under the registration statement at March 12, 2010 was approximately
$65.1 million.





Issuances of
Common Stock and Warrants.  The table below summarizes
placements of our shares of common stock and warrants since the inception of the
Company and warrants outstanding at December 31, 2009:





Shares
                            
                            
                            Proceeds
                            
                            
                            WarrantsOutstanding
                              atDecember31,2009Common
                              Stock
                            
                            
                            Warrant
                            
                            
                            Gross
                            
                            
                            Net
                            
                            
                            Amount
                            
                            
                            ExercisePrice
                            
                            
                            ExpirationCompanyFormation
                            
                            
                            40,500,000
                            
                            
                            
                            -
                            
                            
                            $
                            53,000
                            
                            
                            $
                            53,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Shares
      issued2002
                            
                            
                            5,250,500
                            
                            
                            
                            -
                            
                            
                            
                            3,413,000
                            
                            
                            
                            3,051,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2003
                            
                            
                            10,595,961
                            
                            
                            
                            8,903,270
                            
                            
                            
                            6,607,000
                            
                            
                            
                            5,382,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2004
                            
                            
                            18,186,471
                            
                            
                            
                            11,042,215
                            
                            
                            
                            15,962,000
                            
                            
                            
                            14,621,000
                            
                            
                            
                            198,314
                            
                            
                            
                            $0.80
      - $2.50
                            
                            
                            Jan
      20102005
                            
                            
                            14,893,292
                            
                            
                            
                            150,000
                            
                            
                            
                            13,404,000
                            
                            
                            
                            12,469,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2006
                            
                            
                            25,514,511
                            
                            
                            
                            -
                            
                            
                            
                            25,881,000
                            
                            
                            
                            24,953,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2007 (1)
                            
                            
                            11,485,452
                            
                            
                            
                            4,019,908
                            
                            
                            
                            15,000,000
                            
                            
                            
                            14,814,000
                            
                            
                            
                            4,019,908
                            
                            
                            $
                            2.61
                            
                            
                            Aug
      20122008 (2)
                            
                            
                            24,000,000
                            
                            
                            
                            8,400,000
                            
                            
                            
                            12,000,000
                            
                            
                            
                            11,808,000
                            
                            
                            
                            8,400,000
                            
                            
                            $
                            1.00
                            
                            
                            May
      20132009 (3)
                            
                            
                            11,558,645
                            
                            
                            
                            12,043,458
                            
                            
                            
                            14,900,855
                            
                            
                            
                            13,898,173
                            
                            
                            
                            4,623,458
                            
                            
                            $
                            1.25
                            
                            
                            Dec.
      2014161,984,832
                            
                            
                            
                            44,558,851
                            
                            
                            
                            107,220,855
                            
                            
                            
                            101,049,173
                            
                            
                            
                            17,241,680





(1)
            Registered offering completed in
      August 2007.  The warrants will terminate on the earlier of
      expiration date indicated or the date fixed for redemption under the
      warrant agreement.  We may redeem the warrants if the shares of
      the Company’s common stock trade at a price equal to or in excess of $3.92
      per share for fifteen or more consecutive trading
    days.


(2)
            Registered offering completed in
      the second quarter of 2008.  The warrants will terminate on the
      earlier of expiration date indicated or the date fixed for redemption
      under the warrant agreement.  We may redeem the warrants if the
      shares of the Company’s common stock trade at a price equal to or in
      excess of $2 per share for fifteen or more consecutive trading
      days.


(3)
            On March 13, 2009, FEEB issued an
      Exchangeable Note, $10 million principal amount, to Arrow for $10 million
      cash.  In addition, Arrow received warrants to purchase
      7,420,000 shares of common stock, which expired in December
      2009.  A registered offering was completed in the fourth quarter
      of 2009.  The warrants will terminate on the earlier of
      expiration date indicated or the date fixed for redemption under the
      warrant agreement.  We may redeem the warrants if the shares of
      the Company’s common stock trade at a price equal to or in excess of
      $1.875 per share for fifteen or more consecutive trading
      days.


70





Registered
offering completed in March 2010.  Warrants to purchase up to 4.7
million shares of common stock were issued.  The warrants issued to
the investors in the offering expire on March 11, 2015 and the warrants issued
to the placement agent expire on November 4, 2014.  See Note 13 –
“Subsequent Event.”





Basic and Diluted
Shares Outstanding.  Our basic and diluted numbers of shares
outstanding in each of the three years presented were the same because we had
net losses.  There were (1) 9,952,167, 11,320,500, and 9,965,000
options as of December 31, 2009, 2008 and 2007, respectively; and (2)
17,241,680, 12,618,222, and 4,368,222 warrants as of December 31, 2009, 2008 and
2007, respectively.





Resale
Restrictions.  On December 31, 2009, we had 173,836,960 shares
of common stock outstanding, of which 6,085,533 shares, or 3.5%, were subject to
resale restrictions.





Preferred
Stock.Our
board of directors has the authority, without further action by the
stockholders, to issue up to 500,000,000 shares of preferred stock in one or
more series and to designate the rights, preferences, privileges and
restrictions of each series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
of the common stock, impairing the liquidation rights of the common stock or
delaying or preventing our change in control without further action by the
stockholders. We have no present plans to issue any shares of preferred
stock.





Stock
Subscription Receivable.In December 2009, we
completed a transaction for the sale of 11.6 million shares of our common stock
and warrants to purchase up to 4.6 million shares of our common stock for total
net proceeds of $4.3 million under our shelf registration.  Stock
subscription receivable at December 31, 2009 was $275,000, which was paid on
January 5, 2010.





Warrants.The following table
summarizes warrant transactions for the years ended December 31, 2009, 2008 and
2007.





2009
                  
                  
                  2008
                  
                  
                  2007Outstanding
      at beginning of year
                  
                  
                  12,618,222
                  
                  
                  
                  4,368,222
                  
                  
                  
                  8,661,589Issued
      related toCurrent
      year’s share placements
                  
                  
                  12,043,458
                  
                  
                  
                  8,400,000
                  
                  
                  
                  4,019,908Prior
      year’s share placements
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12,650
                  )Expired
                  
                  
                  (7,420,000
                  )
                  
                  
                  (150,000
                  )
                  
                  
                  (8,300,625
                  )Outstanding
      at end of year (1)
                  
                  
                  17,241,680
                  
                  
                  
                  12,618,222
                  
                  
                  
                  4,368,222





(1)
            The same amount of shares of our
      common stock authorized was reserved for the exercise of the
      warrants.





Stock
Options.In
May 2005, our stockholders approved the 2005 Plan, which permits the granting of
incentive stock options, stock appreciation rights, restricted stock, restricted
stock units and other stock-based awards to employees, consultants and members
of the board of directors.  At the annual general meeting of
stockholders of the Company held on July 15, 2009, the Company’s stockholders
approved an amendment to the 2005 Plan which increased the number of shares of
common stock issuable from 7,500,000 shares to 12,500,000 shares and increased
the number of shares of common stock that may be granted as nonvested stock,
nonvested stock units or any other stock-based awards from 2,400,00 0 to
3,900,000 shares.  Since the amendments were approved, we have not
awarded any options to purchase our common stock or any shares of nonvested
stock or other full-valued stock-based award.  Our shareholders voted
in December 2007 to add 4,000,000 shares of common stock to the 2005
Plan.





During
the first half of 2009, we awarded options to purchase up to 1,686,000 shares of
our common stock and 1,190,000 shares of nonvested stock under the 2005 Plan to
employees and members of the board of directors, and options to purchase up to
220,000 shares of our common stock and 100,000 shares of nonvested stock outside
the 2005 Plan to a new employee and consultants.


71





The
following table summarizes stock option transactions for the years ended
December 31, 2009, 2008 and 2007:





2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007Shares
                                          Underlying
                                          Options
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price
                                        
                                        
                                        Shares
                                          Underlying
                                          Options
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price
                                        
                                        
                                        Shares
                                          Underlying
                                          Options
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          PriceOutstanding
      at beginning of year
                                        
                                        
                                        11,320,500
                                        
                                        
                                        $
                                        1.25
                                        
                                        
                                        
                                        9,965,000
                                        
                                        
                                        $
                                        1.36
                                        
                                        
                                        
                                        10,203,000
                                        
                                        
                                        $
                                        1.44Granted
                                        
                                        
                                        1,906,000
                                        
                                        
                                        
                                        0.40
                                        
                                        
                                        
                                        2,604,500
                                        
                                        
                                        
                                        0.65
                                        
                                        
                                        
                                        3,581,000
                                        
                                        
                                        
                                        1.16Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (660,000
                                        )
                                        
                                        
                                        0.65Canceled
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (125,133
                                        )
                                        
                                        
                                        1.04
                                        
                                        
                                        
                                        (1,840,000
                                        )
                                        
                                        
                                        1.09Forfeited
                                        
                                        
                                        (433,333
                                        )
                                        
                                        
                                        0.54
                                        
                                        
                                        
                                        (543,867
                                        )
                                        
                                        
                                        1.09
                                        
                                        
                                        
                                        (1,219,000
                                        )
                                        
                                        
                                        2.00Expired
                                        
                                        
                                        (2,841,000
                                        )
                                        
                                        
                                        1.16
                                        
                                        
                                        
                                        (580,000
                                        )
                                        
                                        
                                        0.65
                                        
                                        
                                        
                                        (100,000
                                        )
                                        
                                        
                                        3.85Outstanding
      at end of year
                                        
                                        
                                        9,952,167
                                        
                                        
                                        
                                        1.14
                                        
                                        
                                        
                                        11,320,500
                                        
                                        
                                        
                                        1.25
                                        
                                        
                                        
                                        9,965,000
                                        
                                        
                                        
                                        1.36Options
      exercisable at end of year
                                        
                                        
                                        6,636,167
                                        
                                        
                                        
                                        1.41
                                        
                                        
                                        
                                        8,085,467
                                        
                                        
                                        
                                        1.43
                                        
                                        
                                        
                                        7,176,200
                                        
                                        
                                        $
                                        1.47





13.  Subsequent
Event





On March
11, 2010, we completed a transaction for the sale of 11.7 million shares of our
common stock and warrants to purchase up to 4.7 million shares of our common
stock for total net proceeds of $4.6 million under our shelf
registration.  The amount available under the registration statement
at March 12, 2010 was approximately $65.1 million.


72





SUPPLEMENTAL
INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS





Unaudited
Quarterly Financial Information (In Thousands, Except Per Share
Data):





Quarter EndedMarch 31
                  
                  
                  June 30
                  
                  
                  September 30
                  
                  
                  December 31
                  
                  
                  Year2009Revenues
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      expenses
                  
                  
                  3,109
                  
                  
                  
                  3,506
                  
                  
                  
                  3,343
                  
                  
                  
                  2,916
                  
                  
                  
                  12,874Net
      loss
                  
                  
                  (3,161
                  )
                  
                  
                  (3,775
                  )
                  
                  
                  (3,627
                  )
                  
                  
                  (3,192
                  )
                  
                  
                  (13,755
                  )Basic
      and diluted-
      Earnings per share
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.08
                  )-
      Weighted average shares outstanding
                  
                  
                  161,301
                  
                  
                  
                  162,370
                  
                  
                  
                  162,582
                  
                  
                  
                  162,730
                  
                  
                  
                  162,2512008Revenues
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      expenses
                  
                  
                  5,220
                  
                  
                  
                  4,175
                  
                  
                  
                  4,369
                  
                  
                  
                  8,938
                  
                  
                  
                  22,702Net
      loss
                  
                  
                  (5,126
                  )
                  
                  
                  (4,222
                  )
                  
                  
                  (4,335
                  )
                  
                  
                  (8,908
                  )
                  
                  
                  (22,591
                  )Basic
      and diluted-
      Earnings per share
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.15
                  )-
      Weighted average shares outstanding
                  
                  
                  137,207
                  
                  
                  
                  144,978
                  
                  
                  
                  161,213
                  
                  
                  
                  161,305
                  
                  
                  
                  151,231


73





SCHEDULE
II





FAR
EAST ENERGY CORPORATION


VALUATION
AND QUALIFYING ACCOUNTS





For Years
Ended December 31, 2009, 2008 and 2007


(In
thousands)





AdditionsDescription
                
                Balance at
                  Beginning
                  of Period
                
                
                Charged to
                  Cost and
                  Expense
                
                
                Charged to
                  Other
                  Accounts
                
                
                Deductions
                
                
                Balance
                  at End of
                  Period2009
      deferred tax valuation allowance
                
                $
                2,436
                
                
                $
                1,291
                
                
                $
                -
                
                
                $
                -
                
                
                $
                3,7272008
      deferred tax valuation allowance
                
                
                2,789
                
                
                
                (353
                )
                
                
                -
                
                
                
                -
                
                
                
                2,4362007
      deferred tax valuation allowance
                
                
                1,950
                
                
                
                839
                
                
                
                -
                
                
                
                -
                
                
                
                2,789


74





PART
IV





ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)
            The following documents are filed
      as part of this report:





1.
            Financial
      Statements.





Our
consolidated financial statements are included in Part II, Item 8 of this
report:





PageReport
      of Independent Registered Public Accounting Firm
                  
                  50Consolidated
      Balance Sheets
                  
                  52Consolidated
      Statements of Operations
                  
                  53Consolidated
      Statements of Stockholders’ Equity
                  
                  54Consolidated
      Statements of Cash Flows
                  
                  55Notes
      to the Consolidated Financial Statements
                  
                  56





2.
            Financial statement schedules and
      supplementary information required to be
  submitted.




Schedule
      II — Valuation and qualifying accounts.
                          
                          74




Schedules
other than that listed above are omitted because they are not
applicable.





3.
            Exhibits





A list of
the exhibits filed or furnished with this report on Form 10-K/A (or incorporated
by reference to exhibits previously filed or furnished by us) is provided in the
Exhibit Index beginning on page 79 of this report. Those exhibits incorporated
by reference herein are indicated as such by the information supplied in the
parenthetical thereafter. Otherwise, the exhibits are filed
herewith.


77





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 11, 2011.





FAR
      EAST ENERGY CORPORATIONBy:
              /s/ Michael R. McElwrathMichael
      R. McElwrathChief
      Executive Officer








INDEX OF
EXHIBITS




Exhibit
                Number
              
              Description3.1
              
              Articles
      of Incorporation of the Company, as amended (filed as Exhibit 3.1 to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2004,
      which was filed on March 15, 2005, and incorporated herein by
      reference).3.2
              
              Amended
      and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
      Current Report on Form 8-K filed on March 17, 2005, and incorporated
      herein by reference).4.1
              
              Articles
      of Incorporation of the Company, as amended (included as Exhibit
      3.1).4.2
              
              Amended
      and Restated Bylaws of the Company (included as Exhibit
      3.2).4.3
              
              Specimen
      stock certificate (filed as Exhibit 4.5 to the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2004, which was filed on March
      15, 2005, and incorporated herein by reference).4.4
              
              Form
      of Warrant (filed as Exhibit 4.1 to the Company’s Current Report on Form
      8-K filed on August 27, 2007, and incorporated herein by
      reference).4.5
              
              Warrant
      Agreement, dated August 27, 2007, between the Company and Continental
      Stock Transfer & Trust Company (filed as Exhibit 4.2 to the Company’s
      Current Report on Form 8-K filed on August 27, 2007, and incorporated
      herein by reference).4.6
              
              Form
      of Warrant (filed as Exhibit 4.1 to the Company’s Current Report on Form
      8-K filed on May 30, 2008, and incorporated herein by
      reference).4.7
              
              Warrant
      Agreement, dated May 30, 2008, between the Company and Continental Stock
      Transfer & Trust Company (filed as Exhibit 4.2 to the Company’s
      Current Report on Form 8-K filed on May 30, 2008, and incorporated herein
      by reference).4.8
              
              Warrant,
      dated March 13, 2009, issued to Arrow Energy International Pte Ltd. (filed
      as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on March
      16, 2009, and incorporated herein by reference).4.9
              
              Exchangeable
      Note, dated March 13, 2009, by Far East Energy (Bermuda), Ltd. for the
      benefit of Arrow Energy International Pte Ltd. (filed as Exhibit 4.1 to
      the Company’s Current Report on Form 8-K filed on March 16, 2009, and
      incorporated herein by reference).4.10
              
              Registration
      Rights Agreement, dated March 13, 2009, between the Company and Arrow
      Energy International Pte Ltd. (filed as Exhibit 4.3 to the Company’s
      Current Report on Form 8-K filed on March 16, 2009, and incorporated
      herein by reference).4.11
              
              Warrant
      Agreement between the Company and Continental Stock Transfer & Trust
      Company (including the form of warrant) (filed as Exhibit 4.1 to the
      Company’s Current Report on Form 8-K filed on December 22, 2009, and
      incorporated herein by reference).4.12
              
              Form
      of Warrant (filed as Exhibit 4.1 to the Company’s Current Report on Form
      8-K filed on March 9, 2010, and incorporated herein by
      reference).4.13
              
              Form
      of Securities Purchase Agreement (filed as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed on March 9, 2010, and incorporated herein
      by reference).10.1*
              
              Amended
      and Restated Employment Agreement, dated December 23, 2004, by and between
      the Company and Michael R. McElwrath (filed as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed on December 28, 2004, and
      incorporated herein by reference).10.2*
              
              Amended
      and Restated Nonqualified Stock Option Agreement, dated December 23, 2004,
      by and between the Company and Michael R. McElwrath (filed as Exhibit 10.3
      to the Company’s Current Report on Form 8-K filed on December 28, 2004,
      and incorporated herein by reference).10.3*
              
              Amended
      and Restated Nonqualified Stock Option Agreement, dated December 23, 2004,
      by and between the Company and Michael R. McElwrath (filed as Exhibit 10.4
      to the Company’s Current Report on Form 8-K filed on December 28, 2004,
      and incorporated herein by reference).10.4*
              
              Nonqualified
      Stock Option Agreement, dated December 23, 2004, by and between the
      Company and Michael R. McElwrath (filed as Exhibit 10.6 to the Company’s
      Current Report on Form 8-K filed on December 28, 2004, and incorporated
      herein by reference).10.5*
              
              Stock
      Option Agreement, dated May 18, 2004, by and between the Company and
      Donald Juckett (filed as Exhibit 10.13 to the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2004, which was filed on March
      15, 2005, and incorporated herein by reference).10.6*
              
              Stock
      Option Agreement, dated June 18, 2004, by and between the Company and
      Randall D. Keys (filed as Exhibit 10.14 to the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2004, which was filed on March
      15, 2005, and incorporated herein by
  reference).


79





10.7*
              
              Stock
      Option Agreement, dated May 24, 2004, by and between the Company and John
      C. Mihm (filed as Exhibit 10.15 to the Company’s Annual Report on Form
      10-K for the year ended December 31, 2004, which was filed on March 15,
      2005, and incorporated herein by reference).10.8*
              
              Stock
      Option Agreement, dated February 24, 2004, by and between the Company and
      Thomas Williams (filed as Exhibit 10.16 to the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2004, which was filed on March
      15, 2005, and incorporated herein by reference).10.9
              
              Production
      Sharing Contract for Exploitation of Coalbed Methane Resources in Enhong
      and Laochang, Yunnan Province, the People’s Republic of China, dated
      January 25, 2002, by and between China United Coalbed Methane Corp. Ltd.
      and the Company (filed as Exhibit 2(i) to the Company’s Current Report on
      Form 8-K filed on February 11, 2002, and incorporated herein by
      reference).10.10
              
              Modification
      Agreement for Product Sharing Contract for Exploitation of Coalbed Methane
      Resources in Enhong and Laochang, Yunnan Province, the People’s Republic
      of China, dated October 20, 2005, between China United Coalbed Methane
      Corporation Ltd. and the Company (filed as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed on October 26, 2005, and incorporated
      herein by reference).10.11
              
              Production
      Sharing Contract for Exploitation of Coalbed Methane Resources for the
      Quinnan Area in Shanxi Province, Qinshui Basin, the People’s Republic of
      China, dated April 16, 2002, by and between China United Coalbed Methane
      Corporation Ltd. and the Phillips China Inc. (filed as Exhibit 10.21 to
      the Company’s Annual Report on Form 10-K filed on March 15, 2005, and
      incorporated herein by reference).10.12
              
              Application
      for the Extension of Phase Two of the Exploration Period under the Quinnan
      PSC, dated December 2, 2005, by and between the Company and China United
      Coalbed Methane Corporation Ltd. (filed as Exhibit 10.20 to the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2005, which was
      filed on March 14, 2006, and incorporated herein by
      reference).10.13
              
              Application
      for the Extension of Phase Two of the Exploration Period under the Quinnan
      PSC, dated March 16, 2006, by and between the Company and China United
      Coalbed Methane Corporation Ltd. (filed as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed on March 17, 2006, and incorporated
      herein by reference).10.14
              
              Approval
      Certificate from the Ministry of Foreign Trade and Economic Cooperation
      dated December 30, 2002 (filed as Exhibit 2(i) to the Company’s Current
      Report on Form 8-K filed on January 13, 2003, and incorporated herein by
      reference).10.15
              
              Memorandum
      of Understanding, dated March 18, 2003, by and between Phillips China Inc.
      and the Company (filed as Exhibit 10.1 to the Company’s Amendment No. 1 to
      its Quarterly Report on Form 10-QSB/A for the quarter ended June 30, 2003,
      which was filed on December 24, 2003, and incorporated herein by
      reference).10.16
              
              Farmout
      Agreement Quinnan PSC, dated June 17, 2003, by and between Phillips China
      Inc. and the Company (filed as Exhibit 10.2 to the Company’s Amendment No.
      1 to its Quarterly Report on Form 10-QSB/A for the quarter ended June 30,
      2003, which was filed on December 24, 2003, and incorporated herein by
      reference).10.17
              
              First
      Amendment to Farmout Agreement Quinnan PSC, dated December 15, 2003, by
      and between Phillips China Inc. and the Company (filed as Exhibit 10.26 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2004, which was filed on March 15, 2005, and incorporated herein by
      reference).10.18
              
              Second
      Amendment to Farmout Agreement Quinnan PSC, dated December 17, 2004, by
      and between Phillips China Inc. and the Company (filed as Exhibit 10.01 to
      the Company’s Current Report on Form 8-K filed on December 23, 2004, and
      incorporated herein by reference).10.19
              
              Third
      Amendment to Farmout Agreement Quinnan PSC, dated December 19, 2005, by
      and between ConocoPhillips China Inc. and the Company (filed as Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed on December 21,
      2005, and incorporated herein by reference).10.20
              
              Assignment
      Agreement Quinnan PSC, dated June 17, 2003, by and between Phillips China
      Inc. and the Company (filed as Exhibit 10.4 to the Company’s Amendment No.
      1 to its Quarterly Report on Form 10-QSB/A for the quarter ended June 30,
      2003, which was filed on December 24, 2003, and incorporated herein by
      reference).10.21
              
              Farmout
      Agreement Shouyang PSC, dated June 17, 2003, by and between Phillips China
      Inc. and the Company (filed as Exhibit 10.3 to the Company’s Amendment No.
      1 to its Quarterly Report on Form 10-QSB/A for the quarter ended June 30,
      2003, which was filed on December 24, 2003, and incorporated herein by
      reference).10.22
              
              First
      Amendment to Farmout Agreement Shouyang PSC, dated December 15, 2003, by
      and between Phillips China Inc. and the Company (filed as Exhibit 10.30 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2004, which was filed on March 15, 2005, and incorporated herein by
      reference).


80





10.23
              
              Second
      Amendment to Farmout Agreement Shouyang PSC, dated December 17, 2004, by
      and between Phillips China Inc. and the Company (filed as Exhibit 10.02 to
      the Company’s Current Report on Form 8-K filed on December 23, 2004, and
      incorporated herein by reference).10.24
              
              Third
      Amendment to Farmout Agreement Shouyang PSC, dated December 19, 2005, by
      and between ConocoPhillips China Inc. and the Company (filed as Exhibit
      10.2 to the Company’s Current Report on Form 8-K filed on December 21,
      2005, and incorporated herein by reference).10.25
              
              Assignment
      Agreement Shouyang PSC, dated June 17, 2003, by and between Phillips China
      Inc. and the Company (filed as Exhibit 10.5 to the Company’s Amendment No.
      1 to its Quarterly Report on Form 10-QSB/A for the quarter ended June 30,
      2003, which was filed on December 24, 2003, and incorporated herein by
      reference).10.26
              
              Application
      for the Extension of Phase Two of the Exploration Period under the
      Shouyang PSC, dated December 2, 2005, by and between the Company and China
      United Coalbed Methane Corporation Ltd. (filed as Exhibit 10.46 to
      Company’s Annual Report on Form 10-K for the year ended December 31, 2005,
      which was filed on March 14, 2006, and incorporated herein by a
      reference).10.27
              
              Application
      for the Extension of Phase Two of the Exploration Period under the
      Shouyang PSC, dated March 16, 2006, by and between the Company and China
      United Coalbed Methane Corporation Ltd. (filed as Exhibit 10.2 to the
      Company’s Current Report on Form 8-K filed on March 17, 2006, and
      incorporated herein by reference).10.28*
              
              Far
      East Energy Corporation 2005 Stock Incentive Plan (filed as Exhibit 10.28
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2009, which was filed on August 10, 2009, and incorporated herein by
      reference).10.29*
              
              Form
      of Restricted Stock Agreement for Far East Energy Corporation 2005 Stock
      Incentive Plan (filed as Exhibit 10.1 to the Company’s Current Report on
      Form 8-K filed on March 23, 2007, and incorporated herein by
      reference).10.30*
              
              Form
      of Non-Qualified Stock Option Agreement for Far East Energy Corporation
      2005 Stock Incentive Plan (filed as Exhibit 10.1 to the Company’s Current
      Report on Form 8-K filed on April 19, 2007, and incorporated herein by
      reference).10.31*
              
              Form
      of Incentive Stock Option Agreement for Far East Energy Corporation 2005
      Stock Incentive Plan (filed as Exhibit 10.2 to the Company’s Current
      Report on Form 8-K filed on April 19, 2007, and incorporated herein by
      reference).10.32*
              
              Form
      of Letter Agreement with the Company’s non-employee directors (filed as
      Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April
      19, 2007, and incorporated herein by reference).10.33*
              
              First
      Amendment to Amended and Restated Employment Agreement, dated April 16,
      2007, between the Company and Michael R. McElwrath (filed as Exhibit 10.5
      to the Company’s Current Report on Form 8-K filed on April 19, 2007, and
      incorporated herein by reference).10.34
              
              Modification
      Agreement, dated April 24, 2007, for Production Sharing Contract for
      Exploitation of Coalbed Methane Resources for the Shouyang Area in Shanxi
      Province, Qinshui Basin, the People’s Republic of China, dated April 16,
      2002, by and among China United Coalbed Methane Corporation Ltd.,
      ConocoPhillips China Inc. and Far East Energy (Bermuda), Ltd. (filed as
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April
      27, 2007, and incorporated herein by reference).10.35
              
              Modification
      Agreement, dated April 24, 2007, for Production Sharing Contract for
      Exploitation of Coalbed Methane Resources for the Quinnan Area in Shanxi
      Province, Qinshui Basin, the People’s Republic of China, dated April 16,
      2002, by and among China United Coalbed Methane Corporation Ltd.,
      ConocoPhillips China Inc. and Far East Energy (Bermuda), Ltd. (filed as
      Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April
      27, 2007, and incorporated herein by reference).10.36
              
              Modification
      Agreement dated April 24, 2007 for Production Sharing Contract for
      Exploitation of Coalbed Methane Resources for the Enhong and Laochang Area
      in Yunnan Province, the People’s Republic of China, dated December 3,
      2002, between China United Coalbed Methane Corporation Ltd. and Far East
      Energy (Bermuda), Ltd. (filed as Exhibit 10.3 to the Company’s Current
      Report on Form 8-K filed on April 27, 2007, and incorporated herein by
      reference).10.37
              
              Stock
      Subscription Agreement, dated August 24, 2007, between the Company and
      International Finance Corporation (filed as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed on August 27, 2007, and incorporated
      herein by reference).10.38*
              
              Non-Qualified
      Stock Option Agreement, dated October 1, 2007, by and between the Company
      and William A. Anderson (filed as Exhibit 10.52 to the Company’s Quarterly
      Report on Form 10-Q for the quarter ended September 30, 2007, which was
      filed on November 7, 2007, and incorporated herein by
      reference).


81





10.39*
              
              Second
      Amendment to Amended and Restated Employment Agreement, dated November 26,
      2007, between the Company and Michael R. McElwrath (filed as Exhibit 10.1
      to the Company’s Current Report on Form 8-K filed on November 27, 2007,
      and incorporated herein by reference).10.40*
              
              Form
      of Restricted Stock Agreement (filed as Exhibit 4.4 to the Company’s
      Registration Statement on Form S-8 (File No. 333-148363) filed on December
      27, 2007, and incorporated herein by reference).10.41*
              
              Form
      of Non-Qualified Stock Option Agreement (filed as Exhibit 10.54 to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2007,
      which was filed on March 13, 2008, and incorporated herein by
      reference).10.42*
              
              Restricted
      Stock Agreement, dated December 27, 2007, between the Company and Michael
      R. McElwrath (filed as Exhibit 10.55 to the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2007, which was filed on March
      13, 2008, and incorporated herein by reference).10.43*
              
              Restricted
      Stock Agreement, dated December 27, 2007, between the Company and Thomas
      E. Williams (filed as Exhibit 10.56 to the Company’s Annual Report on Form
      10-K for the year ended December 31, 2007, which was filed on March 13,
      2008, and incorporated herein by reference).10.44*
              
              Non-Qualified
      Stock Option Agreement, dated January 9, 2008, between the Company and
      Lucian L. Morrison (filed as Exhibit 10.58 to the Company’s Annual Report
      on Form 10-K for the year ended December 31, 2007, which was filed on
      March 13, 2008, and incorporated herein by
    reference).10.45*
              
              Employment
      Agreement, dated March 12, 2008, between Far East Energy (Bermuda), Ltd.
      and Phil Christian (filed as Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed on March 13, 2008, and incorporated herein by
      reference).10.46*
              
              Non-Qualified
      Stock Option Agreement, dated March 12, 2008, between the Company and Phil
      Christian (filed as Exhibit 10.2 to the Company’s Current Report on Form
      8-K filed on March 13, 2008, and incorporated herein by
      reference).10.47*
              
              Amended
      and Restated Nonqualified Stock Option Agreement, dated December 27, 2007,
      by and between the Company and Thomas Williams (filed as Exhibit 10.61 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2007, which was filed on March 13, 2008, and incorporated herein by
      reference).10.48*
              
              Second
      Amended and Restated Nonqualified Stock Option Agreement, dated December
      27, 2007, by and between the Company and Michael McElwrath (filed as
      Exhibit 10.64 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2007, which was filed on March 13, 2008, and
      incorporated herein by reference). The original option agreement was
      entered into on January 29, 2002.10.49*
              
              Second
      Amended and Restated Nonqualified Stock Option Agreement, dated December
      27, 2007, by and between the Company and Michael McElwrath (filed as
      Exhibit 10.65 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2007, which was filed on March 13, 2008, and
      incorporated herein by reference). The original option agreement was
      entered into on October 13, 2003.10.50*
              
              Third
      Amendment to Amended and Restated Employment Agreement, dated March 7,
      2008, between the Company and Michael R. McElwrath (filed as Exhibit 10.3
      to the Company’s Current Report on Form 8-K filed on March 13, 2008, and
      incorporated herein by reference).10.51
              
              Stock
      Subscription Agreement, dated June 2, 2008, between the Company and
      International Finance Corporation (filed as Exhibit 10.64 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, which
      was filed on August 6, 2008, and incorporated herein by
      reference).10.52*
              
              Amended
      and Restated Employment Agreement, dated October 1, 2008, by and between
      the Company and Andrew Lai (filed as Exhibit 10.1 to the Company’s Current
      Report on Form 8-K/A filed on October 6, 2008, and incorporated herein by
      reference).10.53*
              
              First
      Amendment to Non-Qualified Stock Option Agreement, dated December 19,
      2008, between the Company and Michael McElwrath (filed as Exhibit 10.63 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2008, which was filed on March 30, 2009, and incorporated herein by
      reference). The original option agreement was entered into on February 2,
      2006.10.54*
              
              Second
      Amended and Restated Nonqualified Stock Option Agreement, dated January
      14, 2009, between the Company and Michael McElwrath (filed as Exhibit
      10.64 to the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2008, which was filed on March 30, 2009, and incorporated
      herein by reference). The original option agreement was entered into on
      January 29, 2002.


82





10.55*
              
              Second
      Amended and Restated Nonqualified Stock Option Agreement, dated January
      14, 2009, between the Company and Thomas Williams (filed as Exhibit 10.65
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2008, which was filed on March 30, 2009, and incorporated herein by
      reference). This Agreement amended 100,000 options, which vested on or
      prior to December 31, 2004, of the original option agreement dated
      February 24, 2004.10.56*
              
              Third
      Amended and Restated Nonqualified Stock Option Agreement, dated January
      14, 2009, between the Company and Thomas Williams (filed as Exhibit 10.66
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2008, which was filed on March 30, 2009, and incorporated herein by
      reference). This Agreement amended 300,000 options, which vested on or
      after January 1, 2005, of the original option agreement dated February 24,
      2004.10.57*
              
              Amended
      and Restated Nonqualified Stock Option Agreement, dated January 14, 2009,
      between the Company and John Mihm (filed as Exhibit 10.67 to the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2008, which was
      filed on March 30, 2009, and incorporated herein by reference). The
      original option agreement was entered into on May 24,
      2004.10.58*
              
              Amended
      and Restated Nonqualified Stock Option Agreement, dated January 14, 2009,
      between the Company and Don Juckett (filed as Exhibit 10.68 to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2008,
      which was filed on March 30, 2009, and incorporated herein by reference).
      The original option agreement was entered into on May 18,
      2004.10.59*
              
              First
      Amendment to Employment Agreement, dated December 19, 2008, between the
      Company and Phil Christian (filed as Exhibit 10.69 to the Company’s Annual
      Report on Form 10-K for the year ended December 31, 2008, which was filed
      on March 30, 2009, and incorporated herein by
      reference).10.60*
              
              Second
      Amendment to Employment Agreement, dated December 31, 2008, between the
      Company and Phil Christian (filed as Exhibit 10.70 to the Company’s Annual
      Report on Form 10-K for the year ended December 31, 2008, which was filed
      on March 30, 2009, and incorporated herein by
      reference).10.61*
              
              First
      Amendment to Amended and Restated Employment Agreement, dated December 19,
      2008, between the Company and Andrew Lai (filed as Exhibit 10.71 to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2008,
      which was filed on March 30, 2009, and incorporated herein by
      reference).10.62*
              
              Fourth
      Amendment to Amended and Restated Employment Agreement, dated December 19,
      2008, between the Company and Michael McElwrath (filed as Exhibit 10.72 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2008, which was filed on March 30, 2009, and incorporated herein by
      reference).10.63*
              
              Form
      of Nonqualified Stock Option Agreement for Far East Energy Corporation
      2005 Stock Incentive Plan (filed as Exhibit 10.73 to the Company’s Annual
      Report on Form 10-K for the year ended December 31, 2008, which was filed
      on March 30, 2009, and incorporated herein by
      reference).10.64
              
              Securities
      Purchase Agreement, dated March 13, 2009, among the Company, Far East
      Energy (Bermuda), Ltd., and Arrow Energy International Pte Ltd. (filed as
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March
      16, 2008, and incorporated herein by reference).10.65
              
              Farmout
      Agreement, dated March 13, 2009, between the Company, Far East Energy
      (Bermuda), Ltd., and Arrow Energy International Pte Ltd. (filed as Exhibit
      10.2 to the Company’s Current Report on Form 8-K filed on March 16, 2008,
      and incorporated herein by reference).10.66*
              
              Fifth
      Amendment to Amended and Restated Employment Agreement, dated May 18,
      2009, between the Company and Michael R. McElwrath (filed as Exhibit 10.1
      to the Company’s Current Report on Form 8-K filed on May 18, 2009, and
      incorporated herein by reference).10.67
              
              Modification
      Agreement for Production Sharing Contract for Exploitation of Coalbed
      Methane Resources for the Shouyang Area in Shanxi Province, Qinshui Basin,
      The People’s Republic of China (filed as Exhibit 10.1 to the Company’s
      Current Report on From 8-K filed on August 27, 2009, and incorporated
      herein by reference).10.68
              
              Modification
      Agreement for Production Sharing Contract for Exploitation of Coalbed
      Methane Resources in Enhong and Laochang Area, Yunnan Province, The
      People’s Republic of China (filed as Exhibit 10.2 to the Company’s Current
      Report on From 8-K filed on August 27, 2009, and incorporated herein by
      reference).10.69
              
              Agreement,
      dated October 6, 2009, between Far East Energy (Bermuda), Ltd. and Arrow
      Energy International Ltd (filed as Exhibit 10.1 to the Company’s Current
      Report on Form 8-K filed on October 7, 2009, and incorporated herein by
      reference).10.70*
              
              Release
      of Claims, dated October 6, 2009, by and among Phil Christian, the
      Company, and Far East Energy (Bermuda), Ltd. (filed as Exhibit 10.70 to
      the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2009, and incorporated herein by
      reference).


83





10.71
              
              Agreement,
      dated November 20, 2009, between Far East Energy (Bermuda), Ltd. and Arrow
      Energy International Ltd (filed as Exhibit 10.1 to the Company’s Current
      Report on Form 8-K filed on November 23, 2009, and incorporated herein by
      reference).10.72
              
              Placement
      Agent Agreement between the Company and Pritchard Capital Partners, LLP
      (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
      on December 22, 2009, and incorporated herein by
      reference).21.1
              
              List
      of Subsidiaries of Far East Energy Corporation (filed as Exhibit 21.1 to
      the Company’s Annual Report on Form 10-K filed on March 15, 2010, and
      incorporated herein by reference).23.1
      †
              
              Consent
      of JonesBaggett LLP.24.1
              
              Powers
      of Attorney (filed as Exhibit 24.1 to the Company’s Annual Report on Form
      10-K filed on March 15, 2010, and incorporated herein by
      reference).31.1
      †
              
              Certification
      of Chief Executive Officer of the Company under Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
      †
              
              Certification
      of Chief Financial Officer of the Company under Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
      †
              
              Certification
      of Chief Executive Officer of the Company Pursuant to 18 U.S.C. Sec.
      1350.32.2
      †
              
              Certification
      of Chief Financial Officer of the Company Pursuant to 18 U.S.C. Sec.
      1350.







*
            Management contract or
      compensatory plan
arrangement.


†
            Filed
      herewith


84