UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM
10-K





(Mark
      One)T
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2008OR£
              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£ NoT





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 T





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 TNo £





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.    £





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  T
                Non-accelerated
      filer  £
                Smaller
      reporting company  £





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





The
aggregate market value of the voting common stock, par value $0.001 per share,
held by non-affiliates of the registrant was approximately $87,121,647 as of
June 30, 2008 (based on $0.69 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 4, 2009 was 161,292,283.





Documents
incorporated by reference:  None.













FAREAST ENERGY CORPORATION


TABLE
OF CONTENTS








PagePART
      IItem
      1.
                              Business
                              1Item
      1A.
                              Risk Factors
                              14Item
      1B.
                              Unresolved Staff Comments
                              25Item
      2.
                              Properties
                              25Item
      3.
                              Legal Proceedings
                              26Item
      4.
                              Submission of Matters to a Vote of Security
      Holders
                              26PART
      IIItem
      5.
                              Market for Registrant's Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                              27Item
      6.
                              Selected Financial Data
                              30Item
      7.
                              Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                              31Item
      7A.
                              Quantitative and Qualitative Disclosures About Market
      Risk
                              43Item
      8.
                              Financial Statements and Supplementary Data
                              44Item
      9.
                              Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                              67Item
      9A.
                              Controls and Procedures
                              67Item
      9B.
                              Other Information
                              67PART
      IIIItem
      10.
                              Directors, Executive Officers and Corporate
      Governance
                              68Item
      11.
                              Executive Compensation
                              71Item
      12.
                              Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                              91Item
      13.
                              Certain Relationships and Related Transactions and Director
      Independence
                              93Item
      14.
                              Principal Accountant Fees and Services
                              93PART
      IVItem
      15.
                              Exhibits and Financial Statement Schedules
                              96SIGNATURES





i
 Table of Contents




PART
I





Item 1. BUSINESS





General





We were
incorporated in Nevada on February 4, 2000. In January 2002, we renamed our
company Far East Energy Corporation and changed our focus to exploring,
developing, producing and selling coalbed methane gas ("CBM"). Throughout this
Annual Report on Form 10-K, the terms "we," "the Company," "us," "our" and "our
company" refer to Far East Energy Corporation and its
subsidiaries.  References to "China" and "PRC" are references to the
People's Republic of China.  Today, the operations of our company and
its subsidiaries concentrate on CBM exploration and development in the Shanxi
Province in northern China and Yunnan Province in southern China. Our goal is to
become a recognized leader in CBM property acquisition, exploration, development
and production. Our principal headquarters office is located at 363 North Sam
Houston Parkway East, Suite 380, Houston, Texas 77060. Our main office in China
is located in Beijing and we also maintain satellite offices in Taiyuan City and
Kunming.





We are a
development stage company, and our activities have been principally limited to
the drilling, testing and completion of exploratory CBM wells and organizational
activities. We are party to three production sharing contracts ("PSCs") which
cover the 485,000-acre Shouyang Block in Shanxi Province (the "Shouyang PSC"),
the 573,000-acre Qinnan Block in Shanxi Province ("Qinnan PSC"), and the Enhong
and Laochang areas, which total 265,000 acres, in Yunnan Province (the "Yunnan
PSC").  On March 13, 2009, we formed a strategic alliance related to
our Qinnan Block with Arrow Energy International Pte Ltd ("Arrow"), the
Singapore-based subsidiary of Arrow Energy Limited, a large Australian CBM
producer.  For additional information on the strategic alliance, see
"Strategic Alliance with Arrow" below.  We believe our total net
acreage in these PSCs makes us one of the biggest holders of CBM acreage in
China.




Far East
Energy believes that good environmental, social, health and safety ("ESHS")
performance is an integral part of our business success. We conduct our business
with respect and care for our employees, contractors, communities, and the
environments in which we operate.  Our vision is zero harm to people
and the environment while creating value for our shareholders as well as for
China, including the regions and communities within which we
operate.  Our commitment to these principles is demonstrated by the
fact that we have had no lost-time accidents in the past 3.5 years-plus and no
major environmental incidents.  We have a commitment to being good
corporate citizens of China, striving to emphasize and utilize very high levels
of Chinese content in personnel, services, and equipment; and we have achieved
very high percentages of Chinese content in each category.





Our
Website





Our
website can be found at www.fareastenergy.com. Our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports filed with or furnished to the U.S. Securities and Exchange
Commission ("SEC"), pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 ("Exchange Act"), can be accessed free of charge by linking
directly from our website under the "Investor Relations - SEC Filings" caption
to the SEC's Edgar Database. These filings will be available as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. Information contained on our website is not part of this
report.





Coalbed
Methane Gas and Attributes of Coalbed Methane Resources





Coalbed
methane gas is a type of natural gas found in coal seams of various types of
coal. As coal is formed, large quantities of natural gas are generated and
adsorbed on the internal surface area of the coal.  CBM exploration
and production involves drilling into a known coal deposit and extracting the
natural gas that is contained in the coal. A coal seam is often saturated with
water, with methane gas being held in the coal by water pressure. To produce CBM
from coalbeds, water must first be pumped from the seam in order to reduce the
water pressure that holds the gas in the seam. This process is called
dewatering. When the water pressure is reduced, the gas adsorbed on the coal is
released and diffuses into the fractures, or cleats, contained in the coal seam.
Gas flows to the well


1
 Table of Contents


The
productivity potential of a well depends on many reservoir and geological
characteristics, including permeability, thickness and depth of the coalbed, the
coal ranking of the coalbed, gas content and other factors. We consider these
factors, as well as isotherm tests conducted on core samples, the amount of
dewatering required of a well and a number of other factors, when choosing where
to develop any coalbed methane present in our CBM acreage.


Permeability.  Coalbed
methane gas production requires that the coal have sufficient
permeability.  Permeability is the ability of a substance to allow
another substance to pass through it.  In the case of our CBM
properties, permeability is the ability of the coal to allow water and/or gas to
pass through it.  Permeability in coal is primarily created by
naturally occurring fractures, which are commonly referred to as
cleats.  Permeability is largely based upon how many cleats the coal
has and how close they are to each other. The more cleats that coal has, the
better the coal's permeability and the greater opportunity to retrieve the
adsorbed CBM.  Tectonic fracturing can also contribute greatly to
permeability. Reservoirs with high permeability have a higher propensity for
strong gas production than less permeable reservoirs.  The same
permeability that can contribute to strong gas production, also initially allows
more water to flow through the coal.  Thus, coal seams with higher
permeability often take significantly longer time to dewater than lower
permeability coal seams.  Once sufficient water is produced, higher
permeability normally allows wells to maintain higher production rates for
longer periods and enables higher gas recoveries with fewer wells.





Thickness.  The
thickness of the coal seam is crucial to CBM production. A coal seam with
otherwise unacceptably low permeability could produce commercial quantities of
gas if the coal seam has sufficient thickness. In this case, the gas would flow
out slowly, but because the coal seam is thick, more of the gas would be
produced since there is a large area from which to collect the CBM.





Depth.  The depth
of the coal seam is also a significant factor in the productivity potential of a
well. Where the coal, and thus the methane gas, lies at shallow depths, wells
are generally easier to drill and less expensive to complete. With greater
depth, increased pressure closes cleats in the coal, which reduces permeability
and the ability of the CBM to move through and out of the coal. On the other
hand, if a coal seam is not buried deep enough, there may not have been
sufficient water pressure to hold the gas in place and through geologic time the
gas may have escaped from the coal.





Coal
Ranking.  Methane gas is contained in all ranks of coal. The
most CBM is contained in the highest rank coal, which is called anthracite.
Unfortunately, anthracite has very low permeability. Semi-anthracite coal
typically has lower quantities of CBM than anthracite coal, but may contain
significant cleats as well, making it more permeable. The coalbeds found in our
Shanxi Province project are semi-anthracite coal that has a favorable cleat
structure, which should have a favorable impact on permeability.





The next
lesser coal rank is bituminous coal that contains less CBM per ton than the
anthracite and semi-anthracite coal but usually has a good cleat structure,
allowing for better permeability. The coalbeds found in our Enhong–Laochang
project, which are located in the Yunnan Province, have bituminous and
semi-anthracite coal.





Dewatering.  Water
must be removed from the coal seams to decrease reservoir pressure and release
the gas to produce methane gas from coalbeds. After the detachment of gas
molecules from the coal surface, or desorption, occurs, the gas diffuses through
the coalbed's cleats and fractures toward the well bore. Substantial dewatering
of the coalbed is required initially. Water production declines as methane gas
production increases. Dewatering of a well may generally range in length from a
few weeks to as many as three years or more depending on the attributes of the
coal seam.  Depending on the quantity and quality of the water,
disposal of large quantities of produced water may present major economic and
environmental challenges for operators. These costs can affect the feasibility
of CBM projects.







2
 Table of Contents


Coalbed
Methane in the People's Republic of China
 
 China is
the world's largest coal producing country and has substantial CBM resources
located within its coalfields. Because most of China's CBM is found at shallow
depths, it is easier to drill and complete CBM wells than the deeper wells that
are generally required for other forms of natural resource exploration. China's
mining operations release approximately 6 billion cubic feet of methane gas into
the environment each year because much of the country's CBM resources remain
undeveloped. This results in serious pollution and wastes CBM, which could be
recovered prior to mining.
  Our
business strategy is to explore, develop, produce and sell CBM in China. China
is currently the world's second largest user of petroleum and one of the largest
importers of oil and gas in the world. China's energy needs have grown rapidly
in the past 20 years, fueled in part by the tremendous economic growth during
that period. The growth in demand for energy in China is projected to outpace
the rest of the world over the next decade. As a result of China's increasing
energy needs, the Chinese government has, in recent years, focused great
attention on the development of energy sources, including CBM.  The
Eleventh Five-Year Plan addressed CBM development and these elements were
adopted by the National Development and Reform Commission (the "NDRC") in July
2006. The NDRC is a Chinese commission responsible for the development and
strategic upgrade of key industries in China, including the CBM industry. The
plan outlines the goal to more than double CBM extraction by 2010, from 0.4
billion cubic feet per day ("Bcfd") in 2006 to 1.0 Bcfd in 2010.  A
separate directive specifies safety and extraction regulations alongside
favorable incentive policies for CBM development. The overall goal of this plan
is to foster a surge in CBM industrialization.  As part of its plan to
increase CBM production, the State Council of the PRC, the chief administrative
body of the PRC, created the China United Coalbed Methane Co. Ltd. ("CUCBM") in
1996. The State Council granted CUCBM rights to contract with foreign
corporations for the exploration, development and production of CBM in
China.  Recently, one of the major stakeholders of CUCBM, China
National Petroleum Company ("CNPC"), expressed a desire to contract directly
with foreign corporations to work on CBM projects instead of working through
CUCBM, allowing these foreign entities to tap into CNPC’s operational expertise,
financial strength, and several existing pipelines and reserve blocks. In
addition, the Chinese government has provided incentives to stimulate the
development of CBM, including exempting CBM development from import duties and
import-related duties (Encouraged and Restricted B of the Guidance Catalog of
Industries for Foreign Investments, specific measures executed in accordance
with No. 1602 Document issued by the State Administration of Customs in 1997)
and reducing value-added tax ("VAT") for CBM projects with foreign companies to
5% compared to 13% to 17% VAT for conventional gas companies (The Notice of the
Interim Regulations Concerning the Value-Added Tax, Consumption Tax and Sales
Tax Applied to Foreign Investment Enterprise and Foreign Enterprise (February
22, 1994, Item 3)).  For more information on the laws, regulations and
regulatory bodies that affect our business, see "Regulations Impacting Our
Business" below.





Vertical,
Deviated and Horizontal Drilling Technologies





Vertical,
deviated and horizontal drilling technologies have yielded successful results in
CBM applications. We are currently leveraging all three technologies in our CBM
production in China. Which of these drilling technologies or combination thereof
will yield optimal results as we explore and develop our blocks is not yet
clear. Vertical wells are the cheapest and most straightforward wells to drill
and complete, but each well requires a dedicated surface location. A horizontal
well potentially allows a well bore to be in contact with hundreds or thousands
of feet of coal because the drill bit, when it hits the coal seam, is redirected
from a downward angle to a horizontal plane and tracks along the same plane as
the coalbed, thereby exposing more coal to the wellbore.  This greater
exposure of the coalface achieved by horizontal drilling generally allows for
greater CBM production on a daily basis than can be achieved with conventional
vertical drilling and completion techniques. Although horizontal wells are more
costly and technically challenging than vertical and deviated wells because of
wellbore stability and pumping difficulties, they offer greater potential in
reduced surface facilities and increased production rates.  Deviated
wells are used to access downhole locations that are not accessible with a
vertical wellbore.  Deviated wells are slightly more expensive and
complicated to drill and complete than vertical wells, but are often necessary
to minimize the environmental footprint, optimize surface land use, and access
subsurface locations that would otherwise be inaccessible.  Three such
wells were drilled and completed with success in our Shouyang block in
2008.





3
 Table of Contents





Acreage
in the People's Republic of China





The
following table summarizes the acreage subject to our production sharing
contracts ("PSCs") covering the following undeveloped lease acreage in China as
of December 31, 2008:





Net AcresGross Acres
                  
                  
                  Maximum(1)
                  
                  
                  Minimum(2)China:Shouyang
      Block, Shanxi Province
                  
                  
                  485,000
                  
                  
                  
                  485,000
                  
                  
                  
                  340,000Qinnan
      Block, Shanxi Province
                  
                  
                  573,000
                  (3)
                  
                  
                  573,000
                  
                  
                  
                  401,000Enhong
      and Laochang Areas, Yunnan Province
                  
                  
                  265,000
                  
                  
                  
                  265,000
                  
                  
                  
                  159,000





(1)
Assuming the Chinese partner company chooses not to participate.


(2)
Assuming the Chinese partner company chooses to maximize its
participation.


(3) Under
a farmout agreement entered into in connection with our strategic alliance
related to our Qinnan Block with Arrow, subject to certain conditions precedent
including most notably approval by appropriate Chinese governmental authorities,
we will assign 75.25% of our participating interest in the Qinnan PSC to
Arrow.  For additional information on the strategic alliance, see
"Strategic Alliance with Arrow" below.





As with
any energy exploration and production company, we continuously review our
acreage holdings in order to optimize those holdings.  We may, from
time to time and as circumstances dictate, decide to relinquish all or part of
any of our blocks that we deem non-prospective or sub-optimal in order to
optimize our acreage holdings and/or preserve cash resources.





Our Holdings in the Shanxi Province
of the People's Republic of China





Overview.  In June
2003, we entered into two amendments to certain farmout agreements and
assignment agreements with Phillips China, Inc., a subsidiary of ConocoPhillips
("Phillips"), pursuant to which we acquired a 40% net undivided interest from
Phillips in the Shouyang and Qinnan PSCs between Phillips and CUCBM for the
Shanxi Province ("Shanxi Agreements"). The assignment agreements and related
amendments to the farmout agreements substituted us for Phillips as the
principal party and operator for the projects under the PSCs. These agreements
were approved by CUCBM on March 15, 2004, and ratified by the PRCs Ministry of
Commerce ("MOC") on March 22, 2004.  CUCBM is a joint venture of China
National Coal Group Corp and CNPC.  CUCBM has been our Chinese partner
in the Shouyang and Qinnan PSCs.  During 2008, it was reported in the
press that CNPC had expressed a desire to contract directly with foreign
corporations to work on CBM projects instead of working through
CUCBM.  It was also reported that CNPC would be assigned CUCBM’s
rights and obligations in certain PSCs.  During the fourth quarter of
2008, we were informed verbally by CUCBM that it intends to assign its interest
in the Qinnan PSC to CNPC.  To date, no formal request has been
submitted to us for the required consent under the Qinnan PSC.  We
believe the process of conveying of CUCBM's interest in the Qinnan PSC to CNPC
is underway.  However, we do not have any information as to when any
such conveyance will be consummated if at all.  While CUCBM continues
to serve officially as our Chinese partner company for the Qinnan PSC, we have
begun working with CNPC on various matters concerning the PSC including the
preparation for the next joint management committee (the "JMC") meeting and the
extension of the current exploration phase.  Throughout this Annual
Report on Form 10-K, the term "our Chinese partner company" refers to either
CUCBM or CNPC, as applicable.





On March
13, 2009, we formed a strategic alliance related to our Qinnan Block with Arrow
and entered into a farmout agreement (the "Farmout Agreement") under which,
subject to certain conditions including securing approval from our Chinese
partners and the MOC, our wholly-owned subsidiary, Far East Energy (Bermuda),
Ltd. ("FEEB") will assign to Arrow 75.25% of its rights in the Qinnan PSC in the
Shanxi Province.  For additional information on the strategic
alliance, see "Strategic Alliance with Arrow" below.





4
 Table of Contents





The term
of each of the Shanxi Agreements consists of an exploration period, a
development period and a production period.  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 Shanxi Agreements, and
elected to enter into Phase III.  Phase III of the exploration periods
under each of the two Shanxi PSCs will expire on June 30, 2009, unless extended
or otherwise amended.  We have begun the application process for an
extension by conducting preliminary discussions with and submitting a formal
application to our Chinese partner company with respect to each of the Shanxi
Agreements.  Additionally, at a recent JMC meeting for the Shouyang
PSC, the JMC, composed of representatives from our Company and CUCBM, adopted a
resolution recommending extension of the term. The Qinnan extension will be
discussed in the JMC meeting for the Qinnan PSC to be held in the near
future.  We are hopeful that our Chinese partner company will respond
favorably to the extension application.  After the recommendation for
extension or modification of any PSC, such extensions and associated
modifications will require MOC approval.  There can be no assurance
that we will be successful in extending the PSCs. If we are unable to commit to
certain expenditures or acceleration of our drilling and dewatering efforts, it
may adversely affect our ability to extend the terms of our PSCs.





After the
exploration period we may elect to proceed to develop a given area (a "CBM
Field") in accordance with the PSCs. After the approval and implementation of a
pilot test program in the CBM Field, the parties to the PSC will jointly
determine whether the field can be commercially developed. The development
period as to any CBM Field in the Shanxi Province will begin after the approval
of an Overall Development Program ("ODP") for any such CBM Field.  Any
ODP will be developed and filed jointly by us, our Chinese partner company and,
if the farmout to Arrow is successful, with respect to the Qinnan PSC, Arrow,
and will be submitted to Chinese governmental authorities for
approval.  Under the Farmout Agreement, if we obtain Chinese
governmental approval of an ODP for the Qinnan area, Arrow will pay FEEB an
additional $8 million in cash as a bonus, and FEEB will have the option to
assign all of its interest in the Qinnan PSC to Arrow, while retaining a 5%
overriding royalty interest.  The production period as to any CBM
Field in the Shanxi Province project will begin after the date of commencement
of commercial production of that CBM Field. Provided the Company remains in
compliance with the requirements under the PSCs, the Shanxi Agreements allow
production to continue on a CBM Field until the earlier of the end of the useful
life of the field or July 1, 2032, unless extended or otherwise
amended.





Currently,
we are the operator and are responsible for all exploration costs related to the
Shouyang Block and the Qinnan Block of the Shanxi Province, including all
exploration costs for discovering and evaluating CBM-bearing
areas.  If the farmout of a portion of our interest in the Qinnan PSC
is approved by our Chinese partners and the MOC and other conditions precedent
are met, Arrow will become the operator under our Qinnan PSC and costs under the
PSC will be allocated as discussed under "Strategic Alliance with
Arrow."  If any CBM Field is discovered within the area subject to the
Shanxi Agreements, our Chinese partner company will be deemed to hold a 30%
participating interest in such field and we will be deemed to have a 70%
participating interest, unless the Chinese partner company elects to participate
at a lower level, in which case we will retain all participating interests not
taken by the Chinese partner company and shall be responsible for development
costs associated therewith.  Pursuant to the farmout agreements with
Phillips, Phillips retained a participation interest of 30% with a right to
convert such interest into an overriding royalty interest. Upon our election to
enter Phase III of the exploration periods in the Shanxi Agreements, Phillips
elected to convey its remaining 30% participating interest to us and to receive
an overriding royalty interest of 5% of our participating interest (making our
maximum participating interest, subject to the Farmout Agreement, in each
discovery 70%) or a maximum net overriding interest of 3.5%
overall.  Therefore, depending upon whether and to what extent the
Chinese partner company elects to participate in a given discovery, our interest
in the Shouyang PSC will range from 66.5% (assuming full participation by the
Chinese partner company) to 96.5% (assuming the Chinese partner company chooses
not to participate).  Assuming that we successfully assign the 75.25%
interest in the Qinnan PSC to Arrow, depending upon whether and to what extent
the Chinese partner company elects to participate in a given discovery, our
interest in the Qinnan PSC will range from 16.5% (assuming full participation by
the Chinese partner company) to 23.9% (assuming the Chinese partner company
chooses not to participate).  We note that, under the Farmout Agreement,
Arrow will
fund all exploration costs associated with the Qinnan PSC up to a maximum of $30
million.  After Arrow reaches such $30 million cap, FEEB and Arrow
will share further Qinnan area exploration costs in proportion to their
participating interests in the Qinnan PSC, provided that FEEB may, in its
discretion, instead elect to assign all of its interest in the Qinnan PSC to
Arrow subject to retaining a 2% overriding royalty
interest.








5
 Table of Contents


Our Phase
I, Phase II, and Phase III obligations and results during the exploration period
of the Shanxi Agreements are described below.  The two agreements have
historically been treated interdependently in certain respects.  In
particular, the Phase II and III obligation to complete 12,000 meters of
horizontal drilling in coal seam may be achieved by combining Phase II and Phase
III drilling in the two separate blocks.  This interdependence is
likely to change pursuant to CUCBM’s contemplated conveyance to CNPC of its
interest in the Qinnan block.  It is not yet clear how the remaining
horizontal drilling obligation will be segregated as the interdependence of the
PSCs diminishes.  However,
it is anticipated that this obligation will be fully satisfied upon completion
of the FEE-QN-02H well currently being drilled.





Phase I.We have completed
our Phase I obligations under both PSCs under the Shanxi Agreements. Phase I
obligated us, at our expense, to perform a hydraulic fracture of one of three
exploration wells previously drilled by Phillips by January 31, 2005. In
September 2004, the hydraulic fracture and testing was completed on the QN-002
well drilled previously by Phillips on its acreage in the Qinnan Block located
in the Shanxi Province. The testing was performed on the coal seam at a depth of
approximately 550 meters (1,880 feet), with an objective of gaining information
on the permeability of that coal seam and completing our obligations for Phase I
under the Shanxi Agreements.





Phase II.  We
completed our Phase II obligations under both PSCs for Shanxi Province by
drilling and completing two horizontal wells (FCC-HZ01 and FCC-HZ02) in the
Shouyang Block prior to March 31, 2006.  We also completed a third
horizontal well (FCC-HZ03) under Phase II.  These wells are currently
being dewatered.  FCC-HZ01 and FCC-HZ03 have demonstrated continuous
gas production.  The volumes being produced are small and the data
obtained is not yet sufficient to project peak gas production or commercial
viability.





Phase III.After completion
of Phase II, we elected to commit to Phase III of the Shanxi
PSCs.  Our work commitment to complete Phase III consists of
furthering the horizontal drilling in the coal seam that we began in Phase II to
a total of 12,000 meters. This work obligation can be met by combining the
drilling results in the Shouyang and Qinnan Blocks.  It is anticipated
that this obligation will be fully satisfied upon completion of the FEE-QN-02H
well currently being drilled.





The
drilling depths for our horizontal wells drilled in the Shouyang and Qinnan
Blocks in Shanxi Province during Phases II and III as of March 4, 2009 are
summarized as follows:





Horizontal
                  
                  Vertical Depth
                  
                  
                  Horizontal
      Drilling In Coal SeamWells
                  
                  (Meters)
                  
                  
                  (Feet)
                  
                  
                  (Meters)
                  
                  
                  (Feet)Phase
      IIShouyang
      - FCC-HZ01
                  
                  
                  540
                  
                  
                  
                  1,770
                  
                  
                  
                  2,500
                  
                  
                  
                  8,200Shouyang
      - FCC-HZ02
                  
                  
                  640
                  
                  
                  
                  2,100
                  
                  
                  
                  2,700
                  
                  
                  
                  8,856Shouyang
      - FCC-HZ03
                  
                  
                  561
                  
                  
                  
                  1,800
                  
                  
                  
                  2,030
                  
                  
                  
                  6,658Phase
      IIIShouyang
      - FCC-HZ04
                  
                  
                  495
                  
                  
                  
                  1,623
                  
                  
                  
                  875
                  
                  
                  
                  2,870Shouyang
      - FCC-HZ05
                  
                  
                  473
                  
                  
                  
                  1,551
                  
                  
                  
                  700
                  
                  
                  
                  2,296Shouyang
      - FCC-HZ16
                  
                  
                  526
                  
                  
                  
                  1,726
                  
                  
                  
                  50
                  
                  
                  
                  164Qinnan
      - FEE-QN-01H
                  
                  
                  777
                  
                  
                  
                  2,549
                  
                  
                  
                  3,000
                  
                  
                  
                  9,842Qinnan
      - FEE-QN-02H
                  
                  
                  603
                  
                  
                  
                  1,978
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  4,615
                  
                  
                  
                  15,097
                  
                  
                  
                  11,855
                  
                  
                  
                  38,886





Shouyang Block.The pilot
area of the Shouyang Block is being closely monitored and work programs are
being carried out there to achieve two primary goals: (i) to maximize water
production to attempt to reach critical desorption pressure as soon as possible
in order to achieve commercial quantities of gas production, and (ii) to
determine the optimal approach to minimize costs and maximize gas
recovery.  To reach these goals, we have drilled fourteen vertical
wells and three deviated wells in addition to the six horizontal wells shown in
the tabulation above.  The deviated wells represent another phase in
the process of reducing costs.  These are essentially vertical


6
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We have
gained insights over time as to situations where cavitation or hydraulic
fracture stimulation may improve our dewatering efficiency in the pilot
area.  Hydraulic fracturing is a stimulation method successfully used
in other gas shale and coalbed reservoirs to improve wellbore productivity by
providing channels that extend beyond any formation damage done to the wellbore
during the drilling process.  This allows for water and gas to more
easily flow into the wellbore and then be produced.





Qinnan Block.  In
the Qinnan Block of the Shanxi Province, we have acquired and processed 26
kilometers of 2D seismic data.  We also have obtained test data from a
vertical well we drilled in December 2006.  We have utilized the well
data and the 2D seismic data in the planning for future wells.  During
2008, we completed the drilling of our first horizontal well in the area, with
3,000 meters drilled in the #3 coal seam.   The #3 coal seam is
the object of development by other parties in the area near the southern end of
Shanxi Province.  Our testing of the well to-date has demonstrated
that the coal seam has low permeability of approximately one to two
millidarcies, which we expected, and that the wellbore formation has been
damaged during the drilling process. We intend to continue to test the well
through measured water and gas production.





To expand
our exploration effort and understanding of the potential of the Qinnan Block,
in the third quarter of 2008, we successfully drilled three of four planned
parameter wells on the southern end of the Qinnan Block to test the coal seams
for permeability, reservoir pressure, coal thickness and gas
content.  Although it is still early in the core analyses for gas
content, based on preliminary results, we believe that three of the four wells
have demonstrated high gas content of 300 to 500 standard cubic feet of natural
gas per ton of coal.  These measurements are similar to those obtained
from previous testing of wells on the Qinnan Block.  The tests of the
three parameter wells have provided valuable information on the continuity of
the coal seam on the southern end of the Qinnan Block.  We plan to use
the information gathered in discussions with our Chinese partner company when
determining the size of any potential ODP for the area.  The fourth
well failed to find coal seams sufficiently thick to be prospective and was
plugged and abandoned.





We also
commenced drilling operations in late 2008 on an additional horizontal well in
the Qinnan area.  This well is designed to begin appraising the area
around one of the parameter wells drilled earlier in the
year.  Drilling operations are continuing on this well, but the
current plan is to complete the well and begin production testing of the well as
and if funds are available.





Commercial
Viability.  The aforementioned wells in the Shouyang and Qinnan
Blocks alone are unlikely to produce sufficient CBM to achieve commercial
viability. We plan to drill and complete several more wells in close proximity
to the wells we have already drilled with the intent to make it feasible to
begin commercial production from our current project areas under both PSCs.
Actual production may vary materially from preliminary test results. Actual
production from the wells may also be at recovery rates and gas quality
materially different than our first indications.





Minimum Exploration
Expenditure.  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,
respectively, for the Shouyang PSC and the Qinnan PSC, based on the currency
exchange rate between the U.S. Dollar and the Chinese Renminbi ("RMB") as of
December 31, 2008.  For 2008, our exploration expenditure at each of
the blocks exceeded their respective minimum requirement. As permitted by PRC
law, the portion of the exploration expenditures which exceed the current year's
minimum exploration expenditure requirement can be carried forward toward the
satisfaction of the subsequent year's minimum requirement.  The
cumulative amounts to be carried forward at December 31, 2008 for the Shouyang
and Qinnan blocks were $11.9 million and $0.2 million, respectively. We have
satisfied the 2009 MLR minimum exploration expenditure requirement for the
Shouyang PSC as the cumulative amount of expenditures carried forward from last
year is larger than the annual requirement amount for this
year.  Based on funds currently


7
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suming
that we obtain approval from our Chinese partner company and the MOC, and
satisfy the other conditions under the Farmout Agreement with Arrow prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 2010. The MLR
minimum expenditure requirements are a significant factor that influences our
exploration work program.





Related
Payments.Under the PSCs, we are required to make certain
payments to CUCBM, including: (1) CUCBM assistance fees totaling $100,000 per
year during the exploration period and $240,000 per year during the development
and production periods; (2) training fees for Chinese personnel working on the
projects of $120,000 per year during the exploration phase and $300,000 per year
during the development and production periods; (3) signature fees totaling
$300,000, which will be due within 30 days after first approval of the overall
development plan following the exploration period; (4) reimbursement to CUCBM
for government-imposed fees for CBM exploration rights during the exploration
period, which were $306,000 in 2008, and are estimated to be approximately
$313,000 in 2009, and are in proportion to our participating interest in the
development and production periods; and (5) salary and benefits paid to CUCBM
professionals during the exploration period, which was $164,000 for both blocks
in 2008 and are estimated to be approximately $338,000 in 2009.  This
increase is due to the establishment of separate JMCs due to the pending
assignment to CNPC of CUCBM’s interest in the Qinnan PSC.  The
allocation of salary and benefits for CUCBM professionals during the development
and production periods is to be determined by negotiation with
CUCBM.





Our
Holdings in the Yunnan Province of the People's Republic of China





Overview.  On
January 25, 2002, we entered into a PSC (the "Yunnan PSC") with CUCBM to develop
two areas in Yunnan Province: (1) the Enhong area, which covers approximately
145,198 acres and (2) the Laochang area, which covers approximately 119,772
acres). We are the operator under the PSC. The term of the Yunnan 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 have elected to enter into Phase
II.





Currently,
we are conducting a strategic review of our Yunnan holdings to determine whether
they fit within our risk profile given the tight capital markets and general
economic downturn.  We take into consideration, among other factors,
our overall corporate strategy, the prospective costs and benefits of the
acreage, our relationship with our Chinese partner companies and our current
cash position in order to formulate an optimal strategy for the
Company.  The strategy may include, but not be limited to: (i) minimal
capital spending to continue holding the acreage, (ii) sale, farm-out or partial
farm-out of the acreage, (iii) full or partial relinquishment of the acreage, or
(iv) continued staged exploration of the acreage. We have not yet concluded this
review and cannot make any projection as to the likely outcome of this
review.  Moreover, CUCBM will have its own view and certain outcomes
will be subject to CUCBM and MOC approval.  In the event we
decide to continue our exploration activities or sell or assign all or a portion
of the acreage, our ability to do so will be dependent on approval of our
application for extension of Phase II of the exploration period which is due to
expire on June 30, 2009.





We have begun the extension application process for the Yunnan PSC by conducting
preliminary discussions with and submitting a formal application to
CUCBM.  We are hopeful that CUCBM will respond favorably to the
extension application.  The Yunnan PSC extension will be discussed in
a JMC meeting for the Yunnan PSC to be held in the near
future.  Thereafter, if the JMC recommends an extension, the extension
and associated modifications to the Yunnan PSC will require MOC
approval.  There can be no assurance that we will be successful in
extending the PSC.   If we are unable to commit to certain
expenditures or acceleration of our drilling and dewatering efforts, it may
adversely affect our ability to extend the terms of our PSCs.  If the
PSC is extended, then following completion of Phase II of the exploration
period, we may elect to continue the PSC and conduct development and production
operations on any CBM discoveries. After the exploration period, the development
period as to any CBM Field in the Enhong-Laochang project will begin after the
approval of an ODP for any such CBM Field.  An ODP will be developed
and filed jointly by us and CUCBM, seeking approval from Chinese governmental
authorities, for any CBM Field the Company and CUCBM elect to develop. The
production period as to any CBM Field in the Enhong-Laochang project will begin
after the date of commencement of commercial production of that CBM Field.
Provided


8
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Currently,
we are the operator and are responsible for all exploration costs related to the
Yunnan PSC, including all exploration costs for discovering and evaluating
CBM-bearing areas.  If any CBM Field is discovered within the contract
area, CUCBM will be deemed to hold a 40% participating interest in such field
and we will be deemed to have a 60% participating interest, unless CUCBM elects
to participate at a lower level, in which case we will retain all participating
interests not taken by CUCBM and shall be responsible for development costs
associated therewith.





Our Phase
I and Phase II obligations and results during the exploration period of our PSC
with CUCBM are summarized below.





Phase I.  We
completed our Phase I obligations under the Yunnan PSC. We drilled and completed
three wells on the project, performed a hydraulic fracture and tested one of
these three wells.  We believe the three wells have yielded favorable
gas content results.  We also conducted geological data gathering,
shot 2D seismic data for 10 kilometers in the Enhong area, drilled one slim hole
vertical well in the Enhong area and one slim hole vertical well in the Laochang
area with desorption and standard CBM laboratory analysis.





Phase II.  On
February 23, 2005, we elected to enter into Phase II under our Yunnan PSC, which
required us to drill at least one horizontal well with a minimum of two
laterals.   To continue our preparation for the drilling of the
horizontal well and future development of this field, we continued our
geological and geophysical activities and drilled four slim hole vertical wells
to gain more data and to enhance our understanding of structure complexity, coal
lateral continuity, coal properties and reservoir
characteristics.  Based on the data gathered from these wells and
other wells drilled by the Chinese coal industry, we drilled a cluster of four
deviated wells to stimulate and test-produce the #7, #8, #13 and #19 coal seams
in 2008. These wells were directionally drilled from the same surface location
as an existing vertical well to provide a close pattern of five wells to test
the coal seams.  This pattern allows us to optimize well spacing and
reduce the cost of road/pad construction and land use.  We believe
this will prove to be an optimal method of developing a CBM Field in mountainous
terrain.  As a result of our testing, we anticipate that these coal
seams will have low permeability and that we will need to fracture multiple
zones to fully test these wells.  The outcome of our strategic review
discussed above will determine the future plan for these wells and the
acreage.





Minimum Exploration
Expenditure.  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 $1.1 million, based on the currency exchange rate
between the U.S. Dollar and the Chinese RMB as of December 31,
2008.  For 2008, our exploration expenditure for the Yunnan PSC
exceeded this minimum requirement.  As permitted by PRC law, the
portion of the exploration expenditures which exceed the current year's minimum
exploration expenditure requirement can be carried forward toward the
satisfaction of the subsequent year's minimum requirement.  The
cumulative amount to be carried forward from last year for the Yunnan PSC was
$0.5 million.  We must spend the remaining balance of $0.6 million by
December 31, 2009.  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.





Related
Payments.  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 $65,000 in 2008
and are estimated to be approximately $75,000 in 2009, and in proportion to our
participating interest in the development and production periods; and (4) salary
and benefits paid to CUCBM


9
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Strategic
Alliance with Arrow





On March
13, 2009, the Company and FEEB formed a strategic alliance related to our Qinnan
Block with Arrow Energy International Pte Ltd ("Arrow"), the Singapore-based
subsidiary of Arrow Energy Limited.  Specifically, on that date, (i)
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 (the "Assignment") in the Qinnan PSC, (ii) the Company, FEEB and Arrow
entered into a Securities Purchase Agreement (the "Purchase Agreement"), (iii)
FEEB issued an Exchangeable Note, $10 million principal amount (the
"Exchangeable Note"), to Arrow for $10 million in cash, (iv) the Company issued
a Warrant (the "Warrant") to Arrow for 7,420,000 shares of the Company's common
stock, par value $0.001 per share (the "Common Stock"), at an exercise price of
$1.00 per share, and (v) the Company and Arrow entered into a Registration
Rights Agreement (the "Registration Rights Agreement" and, collectively with the
other agreements described in the preceding clauses (i) through (iv), the
"Agreements").





Farmout
Agreement.The Farmout Agreement conditions the Assignment on,
among other things, the receipt of required approvals from the government of the
PRC (collectively, the "Farm-In Conditions") on or prior to October 15, 2009 or
such later date as the parties may agree upon (the "Farm-In
Deadline").  There can be no assurance that our Chinese partners or
the MOC will approve the Farmout Agreement.  The parties are required
to exercise their respective commercially reasonable efforts in good faith to
satisfy the Farm-In Conditions within the specified timeframe.  Upon
satisfaction of the Farm-In Conditions, Arrow will make an initial payment to
the Company of $8 million, and, subject to certain conditions, including
government approval for the extension of the current exploration period, Arrow
will fund all exploration costs associated with the Qinnan PSC up to a maximum
of $30 million.  After Arrow reaches such $30 million cap, FEEB and
Arrow will share further Qinnan area exploration costs in proportion to their
participating interests in the Qinnan PSC, provided that FEEB may, in its
discretion, instead elect to assign all of its interest in the Qinnan PSC to
Arrow subject to retaining a 2% overriding royalty interest.  In
addition, under the Farmout Agreement, if the parties obtain Chinese
governmental approval of an ODP for the Qinnan area, Arrow will pay FEEB an
additional $8 million in cash as a bonus, and FEEB will have the option to
assign all of its interest in the Qinnan PSC to Arrow, while retaining a 5%
overriding royalty interest.  If an overall development program is
approved, then FEEB and Arrow will share related development costs and any
future revenues for such area on a pro-rata basis in accordance with their
participating interests in the Qinnan PSC.





If the
Farm-In Conditions are not satisfied prior to the Farm-In Deadline, then either
party has the right to terminate the Farmout Agreement by delivering notice of
such termination to the other party.  In addition to the foregoing,
the Farmout Agreement contains certain customary representations, warranties and
covenants of the parties.  Further, if certain events of default
occur, then FEEB will be entitled to exercise rights to revoke the Assignment
and the Farmout Agreement will automatically terminate.





Purchase
Agreement.Under the Purchase Agreement, FEEB issued Arrow the
Exchangeable Note, the Company issued Arrow the Warrant and Arrow paid FEEB $10
million in cash.





Exchangeable
Note.The Exchangeable Note has an initial principal amount of
$10 million and bears interest at a rate of 8% per annum, beginning on the
Farm-In Deadline, with maturity occurring on March 13, 2011 (the "Maturity
Date"), unless repaid earlier.  Principal and interest is due and
payable on the Maturity Date or earlier if payment is accelerated upon the
occurrence and continuance of an event of default (addressed
below).





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) of principal and interest (the "Exchange Rate"), subject to
certain equitable adjustment mechanisms in the event of a sale of the Company,
stock split or similar occurrence.  However, if certain conditions to
the effectiveness of the Assignment are satisfied on or before the Farm-In
Deadline, the entire principal amount of the Exchangeable Note will
automatically be exchanged for shares of Common Stock at the Exchange Rate,
subject to the same adjustment mechanisms.








10
 Table of Contents


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 Shouyang PSC.  The Company has guaranteed FEEB's payment
obligations under the Exchangeable Note.


An event
of default will occur under the Exchangeable Note if at any time (i) the Company
fails to issue the required shares of Common Stock upon exchange of the Note,
(ii) FEEB sells all of its rights under the Shouyang PSC, (iii) any of the
Company and its subsidiaries incurs indebtedness that is not subordinated to
FEEB's obligations under the Exchangeable Note, (iv) FEEB declares bankruptcy,
(v) the Company and its subsidiaries, taken as a whole, cease to carry on all or
substantially all of their business or (vi) it becomes unlawful for the Company
and FEEB to carry out their material obligations under the Exchangeable
Note.  In addition, after the Farm-In Deadline, additional
circumstances may trigger an event of default under the Exchangeable Note,
including, subject to specified qualifications and limitations, if (i) either
the Company or FEEB does not comply with its obligations under the Exchangeable
Note or the Securities Purchase Agreement, (ii) any judgment in excess of $1
million is rendered against the Company or any of its subsidiaries and remains
undischarged or unvacated for 30 days, (iii) any of the Company and its
subsidiaries fails to make any payments on indebtedness, or any of their
indebtedness is accelerated, where the amount unpaid or accelerated, as
applicable, exceeds $500,000, or (iv) any required governmental or other
approvals necessary to maintain the validity of the Exchangeable Note, or allow
the Company or FEEB to perform its obligations thereunder, ceases to be in
effect.  Under the Exchangeable Note, in certain cases, the Company or
FEEB, as applicable, is entitled to notice of a circumstance that may become an
event of default and an opportunity to cure the default before it becomes an
event of default.  Upon the occurrence of an event of default, Arrow
may declare all amounts outstanding under the Exchangeable Note immediately due
and payable.





Warrant.The
Warrant entitles 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 may be exercised in whole or in part only
upon satisfaction of certain conditions to the effectiveness of the Assignment
and is exercisable until the date that is eighteen months from March 13, 2009
(the "Exercise Period").  If, during the Exercise Period, the trading
price of the Common Stock equals or exceeds $1.50 per share for fifteen or more
consecutive trading days, the Company will have the right to require Arrow
either to exercise the Warrant or relinquish its rights thereunder.





Registration Rights
Agreement.  The Registration Rights Agreement requires the
Company to file a registration statement on or prior to June 11, 2009 on Form
S-1 or, if available to the Company, Form S-3 to register the shares issuable
upon exercise of the Warrant and upon exchange of the Exchangeable Note (the
"Registrable Securities").  The Company must also use its commercially
reasonable efforts to have such registration statement declared effective as
soon as reasonably practicable following the filing date and to make such
amendments and supplements to such registration statement as may be necessary to
comply with the Securities Act of 1933, as amended (the "Securities Act"), and
to keep such registration statement effective with respect to the Registrable
Securities for up to two years.





Marketing
and Transportation of Our CBM in China





The
marketability of any gas production will depend, in part, upon the availability,
proximity and capacity of pipelines, gas gathering systems and processing
facilities and upon reaching an agreement with an authorized entity which may
include our Chinese partner company. We may transport our CBM through pipelines
or by compressing or liquefying the CBM for transportation. CBM projects
traditionally require multiple wells to properly dewater the coal and generate
predictable volumes of gas. It is not yet possible to predict volumes so firm
decisions about marketing the CBM cannot yet be made.





Pipelines in Shanxi
Province.  Currently, two pipelines traverse China in proximity
to our Shanxi Province projects.  A pipeline company is currently
constructing an intra-provincial pipeline network in Shanxi
Province.  One branch of that network is currently planned to be
constructed across or directly adjacent to our current area of drilling in the
northern portion of the Shouyang Block.  The pipeline company has
expressed interest in transporting our gas if we achieve commercial levels of
production; however, commercial negotiations must be undertaken in


11
 Table of Contents


farmout
with respect to the Qinnan PSC is successful, we may enter into formal
commercial negotiations with one or more of the above mentioned
entities.  Pipelines may need to be built on those projects to connect
to larger pipelines to transport any CBM that may be produced from those
projects.   We estimate the initial cost for these connecting
pipelines and compression facilities may be in the range of $10 million to $20
million or more.  If CUCBM elects a 30% participating interest in our
Shanxi Province project, our net costs would be reduced
accordingly.  Additionally, if we are successful in assigning 75.25%
of our current participating interest in the Qinnan PSC to Arrow, our net cost
with respect to any project for that PSC would be reduced
accordingly.  There is no assurance that any of the existing pipelines
we might desire to connect to in the future will have sufficient capacity
available to meet our requirements or the costs of using such pipelines would be
economical.  Additionally, there is no assurance that we will be able
to use the existing pipeline on terms acceptable to us or at all, as the PRC
does not require open access to pipeline infrastructure be allowed.





Pipelines in Yunnan
Province.  There are no pipelines in the vicinity of our Yunnan
Province projects, and we estimate the initial cost to construct a
connecting  pipeline and compression facilities from our project to
the nearest large city, Kunming, may be in the range of $20 million to $50
million or more.  If CUCBM elects a 40% participating interest in our
Yunnan Province project our costs would be reduced
accordingly.  Because there is no gas pipeline, CNG facility, LNG
plant or other off-take vehicle in near proximity to these wells, our ability to
sell CBM produced on these projects to communities outside the general area will
be contingent upon a pipeline, CNG facility or LNG plant being built near the
Enhong-Laochang project.





Compressed Natural
Gas.  If we have initial commercial production of CBM from our
Shanxi Province projects, then, prior to the point at which production reaches
pipeline quantities, we could potentially begin to market the CBM produced to
local markets as CNG.  CNG is an alternative to the construction of a
pipeline or LNG facility and is especially appropriate for early stage gas
production where gas volumes are lower.  Thus we may determine to
pursue CNG facilities in order to earn revenues from any early production of
CBM. Production of CNG would require the installation of a CNG facility. We
estimate that this alternative would cost approximately $500,000 to $1.5 million
or more for a CNG facility which would be capable of processing approximately
3.5 million cubic feet ("MMcf") of natural gas per day.





LNG Facility.To
generate revenue in China prior to the point at which production reaches
pipeline quantities, we may elect to construct LNG facilities on our properties.
This would allow CBM to be produced and sold in the period before we achieve
production in sufficient quantities to justify constructing short connecting
pipelines to either of  the two pipelines in the Shanxi Province, or
before a pipeline or other offtake facility is operational in the Yunnan
Province. We estimate that a 100-ton per day LNG facility, which would liquefy
approximately five MMcf of natural gas per day, would cost approximately $10
million to $20 million or more to construct. We estimate that a 1,000-ton per
day facility capable of liquefying 50 MMcf of natural gas per day would cost $50
million to $100 million or more.  Construction of an LNG facility is
expected to take at least two years.  Transportation of LNG would also
require building specially-designed transportation trucks and regasification
facilities at a cost that we are not able to accurately estimate.  It
may also be possible to contract for such transportation and regasification
services although we are not able to accurately estimate the cost of such
services.





We do not
currently have the funds to build these facilities or contract for these
services. We will be required to raise additional funds through debt or equity
financing, a strategic partnership or other means to complete these facilities.
It is not likely that any such facilities will be built until favorable results
are obtained from several wells. We are delaying any decision regarding the
construction of CNG facilities, LNG facilities or pipelines until such time as
significant CBM production volumes are achieved. We believe this delay may allow
us to avoid construction costs to the extent other strategic partners attracted
by our prospects, have constructed, are constructing or are planning to
construct, such facilities.








12
 Table of Contents


CBM Natural Gas
Pricing.  Unlike traditional natural gas produced in China, the
market price of CBM natural gas is not regulated by the Chinese
government.  Based on our research on the prevailing gas market
conditions in China, we expect to receive market-driven, competitive pricing for
our future gas production, regardless of whether we deliver our gas through a
pipeline or in the form of CNG or LNG.  In addition to the fees
described herein, upon commencing commercial sales of CBM, the PRC government
will be entitled to certain royalties and taxes described in the
PSCs.


Our
Competition





The
energy industry is highly competitive in all of its phases. Competition is
particularly intense with respect to the acquisition of desirable producing
properties, the acquisition of CBM prospects suitable for enhanced production
efforts, the hiring of experienced personnel and the marketing of resources. Our
competitors in CBM acquisition, development, and production include major
integrated oil and gas companies and substantial independent energy companies,
many of which possess greater financial and other resources.





Safety
and Health Matters





We employ numerous
safety precautions and emergency response plans designed specifically for our
exploration activities in China to ensure the safety of our employees and
independent contractors.  We have maintained a strong safety record
which includes no lost-time accidents in the past 3.5 years-plus and no major
environmental incidents.  We also conduct our operations in accordance
with various laws and regulations concerning occupational safety and
health.  As protection against operating hazards and environmental
risks, we maintain insurance coverage against some, but not all, potential
injuries and losses.  In addition, we require service providers we
engage to maintain similar insurance coverage.


Regulations
Impacting Our Business





Our
operations will be subject to numerous laws and regulations governing the
discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations require the acquisition of
a permit before drilling commences; restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities; limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas impose substantial liabilities for any pollution resulting from
our operation and limit our discretion in marketing any production.





The
exploration and production of CBM in China is regulated by and affected by the
policies of multiple administrative bodies including the NDRC, the MOC, the MLR,
CNPC and CUCBM.  The Mineral Resources Law and the related regulations
are the primary source of law governing the exploration and production of
coalbed methane in China.





The NDRC
is responsible for the development and strategic upgrade of key industries in
China, including the CBM industry.  Policy making decisions of the
NDRC could, therefore, affect our company.  Additionally, the MOC has
many policy setting functions and, through its Foreign Investment Administration
(the "FIA"), the MOC is directly responsible for foreign investment in
China.  Our PSCs and the subsequent amendments to those contracts
were, and continue to be, subject to approval of the
MOC.   Within the FIA, the Service Trade Division also regulates
the public utilities in urban areas, various pipeline networks, transportation
and CBM exploration and production and, therefore, the division's policies,
rules and regulations could effect our future strategy and operations for
transportation and distribution of any CBM production.





The rules
and regulations of the MLR and, in particular, CUCBM more directly affect the
CBM industry in China as well as our operations.  The MLR is the
principal authority regulating the CBM industry in China.  It has
authority over the designation of land for exploration, the approval of
geological reserve reports, the review and granting of licenses for exploration
and production and the administration of the registration and assignment of
exploration and production licenses.  Presently, CUCBM has the right
to partner with foreign investors in CBM activities.   As
previously discussed, CNPC is in the process of trying to obtain the right to
partner with foreign investors, and if successful, CNPC will become our partner
on the Qinnan Block.  This partnership relationship is administered
and delineated in whole or part through the PSC vehicle.  In the PSCs,
CUCBM represents that they


13
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ommitments.  Under
the terms of the PSCs, we must obtain CUCBM's consent to certain actions,
including the transfer of any rights under the PSCs.  Additionally,
the PSCs authorize us to sell CBM directly into the market but our marketing
efforts may be limited by certain Chinese regulations that require companies to
have a permit not generally available to foreign companies to sell gas in
certain Chinese localities.





Our
Employees





As of
March 4, 2009, we had 23 employees in China and 8 employees in the United States
for a total of 31 employees, all of whom were employed by us on a full-time
basis.





Item 1A. RISK FACTORS





Forward-Looking
Statements





This
report includes forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21B
of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All
statements other than statements of historical facts contained in this report,
including statements regarding our future financial position, business strategy
and plans and objectives of management for future operations, are
forward-looking statements. The words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "project," "expect," "consider" and similar
expressions, as they relate to us, are intended to identify forward-looking
statements.





We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements are subject to a number of known and
unknown risks, uncertainties and assumptions described in this
report.  Although we believe that the expectations reflected in these
forward-looking statements are reasonable, there can be no assurance that the
actual results or developments we anticipate will be realized or, even if
substantially realized, that they will have the expected effects on our business
or operations. Actual results could differ materially from those projected in
such forward-looking statements. Factors that could cause actual results to
differ materially from those projected in such forward-looking statements
include: our lack of operating history; limited and potentially inadequate
management of our cash resources; disruptions in credit and investment markets;
our inability to extend the term of any of our PSCs; risks and uncertainties
associated with exploration, development and production of CBM; expropriation
and other risks associated with foreign operations; matters affecting the energy
industry generally; lack of availability of oil and gas field goods and
services; environmental risks; drilling and production risks; changes in laws or
regulations affecting our operations, as well as other risks described in this
report and our subsequent filings with the Securities and Exchange Commission
(the "SEC").





When you
consider these forward-looking statements, you should keep in mind these risk
factors and the other cautionary statements in this report. Our forward-looking
statements speak only as of the date made. All subsequent oral and written
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these factors. We assume no
obligation to update any of these statements.





Additional
risks include among others, the following:








14
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Risks
Relating to Our Business
 
 We
must obtain additional capital in order to continue our operations.
 
 We are
not able to accurately predict when we will recognize meaningful
revenues.  We expect to experience operating losses and negative cash
flow for the foreseeable future.  On March 13, 2009, we formed a
strategic alliance related to our Qinnan Block with Arrow. See Item 1 – Business
– "Strategic Alliance with Arrow" for additional information.  Assuming
that we obtain approval from our Chinese partner company and the MOC, and
satisfy the other conditions under the Farmout Agreement with Arrow prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 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.  The
ongoing crisis has created a difficult environment in which to negotiate and
consummate a transaction.  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.  In particular, any transfer of our rights under the
PSCs will require the approval of CUCBM.  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.





Our
ability to continue as a going concern depends upon our ability to obtain
substantial funds for use in our development activities and upon the success of
our planned exploration and development activities. There can be no guarantee of
future fundraising or exploration success or that we will realize the value of
our unevaluated exploratory well costs. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.  Management believes that we will continue to be
successful in obtaining the funds necessary to continue as a going
concern.





If our
operating requirements or drilling obligations materially change from those
currently planned, we may require more capital than currently anticipated or may
be required to raise capital earlier than anticipated.  For example,
it is possible that MLR, CUCBM or CNPC could seek to, among other things,
increase our capital expenditures or accelerate our drilling
program.  If we are unable to commit to the expenditures or accelerate
our drilling and dewatering efforts it may adversely affect our ability to
extend the terms of our PSCs.  Raising additional funds by issuing
common stock or other types of equity securities would further dilute our
existing stockholders.  If we fail to obtain the necessary funds to
complete our exploration activities under our production sharing contracts, and
we cannot obtain extensions to the requirements under our production sharing
contracts, we would not be able to successfully complete our exploration
activities and we may lose rights under our production sharing
contracts.





We
must obtain extensions for our PSCs to continue our operations in
China.





We have
commenced the extension application process for our PSCs.  Unless
extended, our three PSCs under which we have the right to develop our properties
in the Yunnan and Shanxi Provinces will expire on June 30, 2009.  We
have begun the extension application process by conducting preliminary
discussions with and submitting a formal application to our Chinese partner
company for each of the Shouyang, Qinnan and Yunnan
PSCs.  Additionally, the JMC for the Shouyang PSC has adopted a
resolution recommending extension.  The Qinnan and Yunnan extensions
will be discussed in the JMC meetings related to each PSC to be held in the near
future.  After the recommendation for extension of any PSC, the
extensions and associated modifications to the PSC will require MOC
approval.  There can be no assurance that we will be successful in
extending the PSCs. Additionally, in


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We are in the initial exploration
phase and have substantial capital requirements that, if not met, will
hinder our ability to continue as a going concern.
 
 We face
significant challenges, expenses and difficulties as a development stage company
seeking to explore, develop and produce coalbed methane gas. The development of
our projects in China will require that we obtain funding to satisfy very
significant expenditures for exploration and development of these projects, if
they are successful.
We will also require resources to fund significant capital expenditures for
exploration and development activities in future periods. In this regard, CUCBM
or CNPC could seek to renegotiate our PSCs to, among other things, increase our
expenditures or accelerate our drilling program beyond the minimum contractual
requirements under our PSCs.  As discussed above, assuming
that we obtain approval from our Chinese partner company and the MOC, and
satisfy the other conditions under the Farmout Agreement with Arrow prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 2010.Our success will
depend on our ability to obtain additional financing to fund our capital
expenditures. If we cannot obtain adequate capital, and we cannot obtain
extensions to the requirements under our production sharing contracts, we will
not be able to successfully complete our exploration and development activities,
and we may lose rights under our production sharing contracts. This would
materially and adversely affect our business, financial condition and results of
operations.





Continued
disruption in national and international investment and credit markets or fraud
or embezzlement of funds at the financial institutions which hold our assets may
adversely affect our business, financial condition and results of
operation.





The
recent meltdown of and disruptions in the global financial system have led to a
significant slowdown in capital market activities, a scarcity of credit, tighter
lending standards and higher interest rates and costs of capital. Current market
conditions may continue or worsen.  We can make no assurances that we
will be able to obtain additional equity or debt financing to fund our
anticipated drilling, exploration and operation costs on terms that are
acceptable to us or at all.  In the absence of capital obtained
through a strategic relationship or transaction with one or more interested
companies, or through an equity or debt financing, our ability to operate and to
meet our obligations under our production sharing contracts would be impaired,
which would have a material adverse effect on our business, financial condition
and results of operation and may affect our ability to continue as a going
concern.





Our cash
and cash equivalents are liquid investments with original maturities of three
months or less at the time of purchase. We maintain the cash and cash
equivalents with reputable major financial institutions in deposit accounts and
U.S. government securities money market accounts. Deposits with these
institutions exceed the Federal Deposit Insurance Corporation's insurance limits
or similar limits in foreign jurisdictions. If one or more of these institutions
are unable to honor our withdrawal requests or redeem our shares in our deposit
or money market accounts as a result of the institution's financial condition,
fraud, embezzlement or otherwise, it could have an adverse affect on our
business, financial condition and results of operations.





The development of CBM properties
involves substantial risks and we cannot assure that our exploration
and drilling efforts will be successful.





The
business of exploring for and, to a lesser extent, developing and operating CBM
properties involves a high degree of business and financial risk that even a
combination of experience, knowledge and careful evaluation may not be able to
overcome. The selection of prospects for CBM gas drilling, the drilling,
ownership and operation of CBM wells and the ownership of interests in CBM
properties are highly speculative. Our well data, including information relating
to permeability and coal thickness, is preliminary in nature.  We
cannot predict whether any prospect will produce CBM or whether, even if
producing, such prospect will produce commercial quantities of CBM.








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Drilling
for CBM gas may involve unprofitable efforts, not only from dry wells, but also
from wells that are productive but do not produce coalbed methane in sufficient
quantities or quality to realize enough net revenues to return a profit after
drilling, operating and other costs. The cost of drilling, completing and
operating wells is often uncertain and cost overruns are common. Our drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond our control, including but not limited to
uncooperative inhabitants, title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of equipment
and services. In addition, other factors such as permeability, structural
characteristics of the coal, or the quality or quantity of water that must be
produced, may hinder, restrict or even make production impractical or
impossible.


Drilling
and completion decisions generally are based on subjective judgments and
assumptions that are speculative. We may drill wells that, although productive,
do not produce CBM in economic quantities. It is impossible to predict with
certainty the production potential of a particular property or well.
Furthermore, the successful completion of a well does not ensure a profitable
return on the investment. A variety of geological, operational, or
market-related factors, including, but not limited to, unusual or unexpected
geological formations, pressures, equipment failures or accidents, fires,
explosions, blowouts, cratering, pollution and other environmental risks,
shortages or delays in the availability of drilling rigs and the delivery of
equipment, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well, or otherwise prevent a
property or well from being profitable. We contract with drilling companies to
drill certain of our wells in China and we face the risk that the other party
may not perform, which may delay our drilling program. A productive well may
also become uneconomic in the event of excessive water or other deleterious
substances are encountered, which impair or prevent the production of natural
gas from the well. In addition, production from any well may be unmarketable if
it is contaminated with water or other deleterious substances. We cannot assure
that wells drilled by us will be productive or, even if productive, will produce
CBM in economic quantities so that we will recover all or any portion of our
investment.  In the event we are not successful, we may be required to
write off some or all of the capitalized well costs on our financial
statements.





We have no current source of
revenue.





We will
not generate material revenues from our existing properties until we have
successfully completed exploration and development, and started production of
CBM.  We are not able to accurately predict when we will recognize
meaningful revenues.  Additionally, pipelines must be built to connect
to larger pipelines or compressed or liquified natural gas facilities must be
constructed on our Shanxi Province projects to process and transport our CBM,
and no facilities exist to transport or process CBM near our Yunnan Province
projects. Our ability to realize revenues from any producing wells may be
impaired until these facilities are built out or arrangements are made to
deliver our production to market.





We
are a development stage company and, thus, we have no relevant operating history
for the purpose of evaluation of our performance and prospects.





We have
been engaged principally in developing and implementing strategic operating and
exploration plans, raising capital, hiring personnel, entering into contracts,
acquiring rights to explore, develop, produce and sell CBM, and drilling,
testing and completing of exploratory wells. We do not have operating experience
in the distribution and marketing of CBM gas in China. We are considered a
development stage company for accounting purposes because we have generated no
revenues to date. Accordingly, we have no relevant operating history upon which
you can evaluate our performance and prospects. In addition, we cannot forecast
operating expenses based on our historical results and our ability to accurately
forecast future revenues is limited. As a result of our limited operating
history, we are more susceptible to business risks including risks of unforeseen
capital requirements, failure to establish business relationships, and
competitive disadvantages against larger and more established
companies.





We have a history of losses, and
expect to incur losses in the foreseeable future. If we do not achieve
profitability, our financial condition and the value of our common stock will
suffer.





To date,
we have no revenues from the sale of CBM.  We incurred net losses
applicable to common stockholders for the years ended December 31, 2008, 2007,
and 2006. We expect to experience operating losses and negative cash flow for
the foreseeable future. We must obtain additional financing and generate
sufficient revenues


17
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We must complete multiple CBM wells
on our Shanxi Province and Yunnan Province projects before
we can commence production.





To date,
we have drilled 8 horizontal wells, 19 vertical wells and 3 deviated wells in
the Shanxi Province projects and 9 vertical wells and 4 deviated wells in Yunnan
Province.  While subject to periodic maintenance, we have achieved
continuous gas production in some of these wells.  At this early
stage, the volumes being produced while dewatering are still small and the data
obtained is not yet sufficient to be able to project the peak gas production
volume or to be able to conclude whether the wells will produce gas in
commercial volumes.  None of the other wells we have drilled to date
are currently producing CBM gas as they are undergoing or will undergo
dewatering and production testing.  However, even if all our current
wells reach production status, they may not produce enough CBM gas to achieve
commercial viability.  For each project, we are analyzing and
evaluating drilling data obtained in an effort to determine how many additional
wells we have to drill in order to begin production of commercial volumes. We
cannot make any assurances that we will have the resources to drill enough
additional wells in the Shanxi and Yunnan Provinces to commence production in
the areas. As a result, even though we may have producing properties in the
region, we may not be in a position to derive any revenues from such wells.
Actual production may vary materially from preliminary test results, including
the results to date for our first horizontal well.  Actual production
from the wells may be at recovery rates and gas quality materially different
than our first indications.





We
are a holding company and we rely on our subsidiaries for dividends and other
payments for funds to meet our obligations.





We are
principally a holding company with substantially all of our assets relating to
operations in China being owned by our subsidiary,
FEEB.  Consequently, we have no direct operations and are not expected
to own a significant amount of assets other than the outstanding capital stock
of our subsidiaries, including FEEB, and cash and cash
equivalents.  Because we conduct our operations through our
subsidiaries, if and when we commence commercial production of CBM, we will
depend on those entities for dividends and other payments to generate the funds
necessary to meet our financial obligations and to pay dividends, if any, with
respect to our common stock. The jurisdictions of our subsidiaries may impose
restrictions on or require government approval of dividends or certain payments
by the subsidiaries. All of our subsidiaries will be separate and independent
legal entities and will have no legal obligation whatsoever to pay, and may be
contractually restricted from paying any dividends, distributions or other
payments to us.





We are dependent on our key
executives and may not be able to hire and retain key employees to fully implement our
business strategy.





Our
success will depend largely on our senior management, which includes our
executive officers. As we grow our business, we must attract, retain and
integrate additional experienced managers, geoscientists and engineers in order
to successfully operate and grow our businesses. The number of available,
qualified personnel in the oil and gas industry to fill these positions may be
limited. Our inability to attract, retain and integrate these additional
personnel or the loss of the services of any of our senior executives or key
employees could delay or prevent us from fully implementing our business
strategy and could significantly and negatively affect our
business.





We are not diversified and we
concentrate on one industry.





Our
business strategy concentrates on exploration and development of CBM gas in
China. There is an inherent risk in not having a diverse base of properties in
exploration and development, because we will not have alternate sources of
revenue if we are not successful with our current exploration and development
activities. As we will invest substantially all of our assets in this market, we
may be more affected by any single adverse economic, political or regulatory
event than a more diversified entity. Our failure in the exploration and
development of our CBM property rights in China would have a material adverse
affect on our business.





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We
may not be able to develop a proven reserve base.





Our
future success will depend upon our ability to find and develop CBM
reserves.  Any CBM reserves that we develop will decline as CBM
production occurs.  To develop reserves and production, we must
implement our exploration, development and production programs and identify and
produce from previously overlooked or by-passed zones and shut-in
wells.  Our current strategy is to develop a reserve base, production
and cash flow through the development of CBM fields in our Shanxi Province and
Yunnan Province projects.  We can give no assurance that our planned
exploration and development activities will result in any reserves or that we
will have any success in discovering and producing reserves at economical
exploration and development costs.





We may have difficulty managing
growth in our business.





Because
of our small size and the relatively large scale of operations required for our
business to yield revenue, growth in accordance with our business plan, if
achieved, will place a significant strain on our financial, technical,
operational and management resources. As we expand our activities and increase
the number of projects we are evaluating or in which we participate, there will
be substantially more demands on these resources. Further, we may be required to
respond to any expansion of our activities in a relatively short period of time
in order to meet the demands created by the expansion of these activities, the
growth of our business and our drilling objectives. The failure to timely
upgrade our technical, administrative, operating and financial control systems
or the occurrence of unexpected expansion difficulties, including the
recruitment and retention of experienced managers, geoscientists and engineers,
could have a material adverse effect on our business, financial condition and
results of operations and our ability to timely execute our business plan. If we
are unable to implement these actions in a timely manner, our results and the
growth of our business may be adversely affected.





Risks
Relating to Our Operations in China





No facilities presently exist to
transport or process CBM near our Yunnan Province projects, and, although
larger pipelines exist in proximity to our Shanxi Province projects, pipelines
must be built to connect to larger pipelines and facilities must be
added to compress or liquefy and perhaps to transport any CBM that may be produced from those
projects.





The
marketability of any production will depend, in part, upon the availability,
proximity and capacity of pipelines, gas gathering systems and processing
facilities. We may transport our CBM through pipelines or by compressing or
liquefying the CBM for transportation.





Currently,
two pipelines traverse China in proximity to our Shanxi Province
projects.  A pipeline company is currently constructing an
intra-provincial pipeline network in Shanxi Province.  One branch of
that network is currently planned to be constructed across or directly adjacent
to our current area of drilling in the northern portion of the Shouyang
Block.  The pipeline company has expressed interest in transporting
our gas if we achieve commercial levels of production; however, commercial
negotiations must be undertaken in conjunction with CUCBM or CNPC and have not
yet commenced.  No compressed natural gas ("CNG") facility, liquefied
natural gas ("LNG") plant or other off-take vehicle currently exists near our
Shanxi Province projects.  We have had discussions with entities
engaged in the business of acquiring, transporting and selling CNG and interest
has been expressed in purchasing gas from our Shouyang project.  If we
achieve desired levels of production, we will consider building a CNG facility
and in conjunction with our Chinese partner company, we may enter into formal
commercial negotiations with one or more of the above mentioned
entities.  Pipelines may need to be built on those projects to connect
to larger pipelines to transport any CBM that may be produced from those
projects.   We estimate the initial cost for these connecting
pipelines and compression facilities may be in the range of $10 million to $20
million or more.  If CUCBM elects a 30% participating interest in our
Shanxi Province project, our net costs would be reduced
accordingly.  There is no assurance that any of the existing pipelines
we might desire to connect to in the future will have sufficient capacity
available to meet our requirements or the costs of using such pipelines would be
economical.  Additionally, there is no assurance that we will be able
to use the existing pipeline on terms acceptable to us or at all, as the PRC
does not require open access to pipeline infrastructure be allowed.





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Pipelines in Yunnan
Province.  There are no pipelines in the vicinity of our Yunnan
Province projects, and we estimate the initial cost to construct a
connecting  pipeline and compression facilities from our project to
the nearest large city, Kunming, may be in the range of $20 million to $50
million or more.  If CUCBM elects a 40% participating interest in our
Yunnan Province project our costs would be reduced
accordingly.  Because there is no gas pipeline, CNG facility, LNG
plant or other off-take vehicle in near proximity to these wells, our ability to
sell CBM produced on these projects to communities outside the general area will
be contingent upon a pipeline, CNG or LNG plant being built near the
Enhong-Laochang project.





Compressed Natural
Gas.  If we have initial commercial production of CBM from our
Shanxi Province projects, then, prior to the point at which production reaches
pipeline quantities, we could potentially begin to market the CBM produced to
local markets as CNG.  CNG is an alternative to the construction of a
pipeline or LNG facility and is especially appropriate for early stage gas
production where gas volumes are lower.  Thus we may determine to
pursue CNG facilities in order to earn revenues from any early production of
CBM. Production of CNG would require the installation of a CNG facility. We
estimate that this alternative would cost approximately $500,000 to $1.5 million
or more for a CNG facility which would be capable of processing approximately
3.5 million cubic feet ("MMcf") of natural gas per day.





LNG Facility.To
generate revenue in China prior to the point at which production reaches
pipeline quantities, we may elect to construct LNG facilities on our properties.
This would allow CBM to be produced and sold in the period before we achieve
production in sufficient quantities to justify constructing short connecting
pipelines to the Shanjing II and West-East pipelines in the Shanxi Province, or
before a pipeline or other offtake facility is operational in the Yunnan
Province. We estimate that a 100-ton per day LNG facility, which would liquefy
approximately five MMcf of natural gas per day, would cost approximately $10
million to $20 million or more to construct. We estimate that a 1,000-ton per
day facility capable of liquefying 50 MMcf of natural gas per day would cost $50
million to $100 million or more.  Construction of a LNG facility is
expected to take at least two years.  Transportation of LNG would also
require building specially-designed transportation trucks and regassification
facilities at cost yet to be determined.  It may also be possible to
contract for such transportation and regassification services, also at cost yet
to be determined.





We do not
have funds to build any of these facilities or contract for these services. Our
success will depend on our ability to raise additional funds through financings
or other means or to find a strategic partner to complete these
facilities.





Substantially all of our assets and
operations are located in China.





Substantially
all of our assets and operations are located in China.  Accordingly,
our business is subject to a significant extent, to the economic, political, and
legal developments in China.  China is a developing country, has only
recently begun participating in global trade with its accession to the World
Trade Organization, and has only a limited history of trade practices as a
nation. We are subject to the laws, rules, regulations, and political authority
of the government of China. We may encounter material problems while doing
business in China, such as interactions with the Chinese government and
uncertain foreign legal precedent pertaining to developing CBM gas in China.
Risks inherent in international operations also include, but are not limited to,
the following:





·
            Global
      economic conditions;


·
            Local
      currency instability;


·
            Inflation;


·
            The
      risk of realizing economic currency exchange losses when transactions are
      completed in currencies other than U.S.
dollars;


·
            The
      ability to repatriate earnings under existing exchange control laws;
      and


·
            Political
      unrest.





Changes
in domestic and foreign import and export laws and tariffs can also materially
impact international operations. In addition, foreign operations involve
political, as well as economic risks, including:





·
            Nationalization;


·
            Expropriation;





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·
            Contract
      renegotiations;


·
            Trade
      protection;


·
            Government
      intervention and price fixing in certain markets;
  and


·
            Changes
      in laws resulting from governmental
changes.





Additionally,
CUCBM and CNPC are subject to rules and regulations of China and the
jurisdiction or influence of other governmental agencies in China that may
adversely affect their ability to perform under, or our rights in our PSCs with
them.  These rules and regulations may affect our rights under or PSCs
by potentially limiting, renegotiating or precluding us from exploring and
developing the full acreage provided for and may also affect the opportunities
and obligations under our PSCs. CUCBM and CNPC could seek to, among other
things, increase our expenditures or accelerate our drilling program beyond the
minimum contractual requirements under our PSCs. We must comply with certain
procedural requirements under our PSCs and with CUCBM in order to obtain the
reimbursement of costs incurred under the PSCs. We cannot assure you that we
will recover or that CUCBM will approve reimbursement of all costs incurred
under the PSC, which could adversely impact our business, financial conditions
and results of operations. In the event of a dispute, we may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in subjecting
foreign persons to the jurisdiction of courts in the United States. We may also
be hindered or prevented from enforcing our rights with respect to a
governmental instrumentality because of the doctrine of sovereign
immunity.





We are exposed to foreign currency
risk.





In July
2005, the Chinese government began to permit the Chinese RMB to float against
the U.S. Dollar.  All of our costs to operate our Chinese offices are
paid in Chinese RMB. Our exploration costs in China may be incurred under
contracts denominated in Chinese RMB or U.S. Dollars.  If the value of
the U.S. Dollar falls in relation to the Chinese RMB, the cost to us of funding
our Chinese operations would rise because more U.S. Dollars would be required to
fund the same expenditures in RMB. Conversely, if the value of the U.S. Dollar
rises in relation to the Chinese RMB, the change in exchange rates would
decrease our dollar cost to fund operations in China.





To date,
we have not engaged in hedging activities to hedge our foreign currency
exposure.  In the future, we may enter into hedging instruments to
manage our foreign currency exchange risk or continue to be subject to exchange
rate risk.  However, we may not be successful in reducing foreign
currency exchange risks, and as a result, we may from time to time experience
losses resulting from fluctuations in the value of the Chinese RMB. During 2008, the U.S.
Dollar to RMB exchange rate fluctuated from a minimum of 1:6.75 to a maximum of
1:7.29, with a yearly average of 1:6.96.





Inflation
may adversely affect our financial condition and results of
operations.


Although
inflation has not materially impacted our operations in the recent past,
increased inflation in China or the U.S. could have a negative impact on our
operating and general and administrative expenses, as these costs could
increase.  China has recently experienced inflationary pressures,
which could increase our costs associated with our operations in
China.  The inflation rate for 2008 was approximately 5.9%, according
to National Bureau of Statistics of China.  In recent months, the
Company has increased its use of Chinese suppliers, including drilling
contractors, that are paid in RMB.  In the future, inflation in China
may results in higher minimum expenditure requirements under our PSCs if CUCBM
adjusts these requirements for inflation.  A material increase in
these costs as a result of inflation could adversely affect our operations and,
if there are material changes in our costs, we may seek to raise more funds
earlier than anticipated.





We
risk the effects of general economic conditions in China.





Any
future CBM sales could be adversely affected by a sustained economic recession
in China. As our operations and end user markets are primarily in China, a
sustained economic recession in that country could result in lower demand or
lower prices for the natural gas to be produced by us. The recent meltdown of
and disruptions in the global financial system may adversely impact China's
growth rates.





21
 Table of Contents





We may depend on a few customers when
we begin selling our gas production.





At
present, we have no CBM gas sales contracts pending and we are not able to
accurately predict when we will recognize meaningful revenues from our gas
production.  However, when we begin selling our gas production, there
may be only a small number of entities we can contract with which will purchase
any gas we may produce.  Losing any such potential contract or client
would have a material negative impact on our business.





Risks
Related to the Oil & Gas Industry





The volatility of natural gas and oil
prices could harm our business.





Our
future revenues, profitability and growth as well as the carrying value of our
oil and gas properties depend to a large degree on prevailing oil and gas
prices. Commercial lending sources are not currently available to us because of
our lack of operating history and income. Our ability to borrow and to obtain
additional equity funding on attractive terms also substantially depends upon
oil and gas prices. Prices for oil and gas are subject to large fluctuations in
response to relatively minor changes in the supply and demand for oil and gas,
uncertainties within the market and a variety of other factors beyond our
control. These factors include weather conditions in China, the condition of the
Chinese economy, the activities of the Organization of Petroleum Exporting
Countries, governmental regulation, political stability in the Middle East and
elsewhere, the foreign supply of oil and gas, the price of foreign imports and
the availability of alternative fuel sources. The prices for oil and natural gas
production have declined substantially during 2008 and may further decline in
the future as a result of the recent meltdown of the global financial system,
which would adversely affect our business. Prices for oil and natural gas have
been and are likely to remain extremely unstable.





We may not be able to successfully
compete with rival companies.





The
energy industry is highly competitive in all its phases. Competition is
particularly intense with respect to the acquisition of CBM prospects suitable
for enhanced production efforts, and the hiring of experienced personnel. Our
competitors in CBM acquisition, development, and production include major
integrated oil and gas companies in addition to substantial independent energy
companies. Many of these competitors possess and employ financial and personnel
resources substantially greater than those that are available to us and may be
able to pay more for desirable producing properties and prospects and to define,
evaluate, bid for, and purchase a greater number of producing properties and
prospects than we can. Our financial or personnel resources to generate revenues
in the future will depend on our ability to select and acquire suitable
producing properties and prospects in competition with these
companies.





The production and producing life of
wells is uncertain and production will decline.





If any
well becomes commercially productive, it will not be possible to predict the
life and production of that well. The actual producing lives could differ from
those anticipated. Sufficient CBM may not be produced for us to receive a profit
or even to recover our initial investment. In addition, production from our CBM
gas wells, if any, will decline over time, and does not indicate any consistent
level of future production.





We may suffer losses or incur
liability for events for which the operator of a property or we have chosen not to
obtain insurance.





Our
operations are subject to hazards and risks inherent in producing and
transporting oil and natural gas, such as fires, natural disasters, explosions,
pipeline ruptures, spills, and acts of terrorism, all of which can result in the
loss of hydrocarbons, environmental pollution, personal injury claims and other
damage to our properties and others. The occurrence of any of these events could
result in the following:





·
            Substantial
      losses due to injury and loss of
life;


·
            Severe
      damage to and destruction of property, natural resources and
      equipment;


·
            Pollution
      and other environmental damage;


·
            Clean-up
      responsibilities; and


·
            Regulatory
      investigation and penalties and suspension of
  operations.





22
 Table of Contents





As
protection against operating hazards, we maintain insurance coverage against
some, but not all, potential losses. The occurrence of an event that is not
covered, or not fully covered, by insurance could have a material adverse effect
on our business, financial condition and results of operations.





Environmental hazards and liabilities
may adversely affect us and result in liability.





There are
numerous natural hazards involved in the drilling of CBM wells, including
unexpected or unusual formations, pressures, and blowouts and involving possible
damages to property and third parties, surface damages, bodily injuries, damage
to and loss of equipment, reservoir damage and loss of reserves. We could also
be liable for environmental damages caused by previous property owners. As a
result, substantial liabilities to third parties or governmental entities may be
incurred which could have a material adverse effect on our financial condition
and results of operations.





We
maintain insurance coverage for our operations in amounts we deem appropriate,
but we do not believe that insurance coverage for environmental damages that
occur over time, or complete coverage for sudden and accidental environmental
damages, is available at a reasonable cost. Accordingly, we may be subject to
liability or may lose the privilege to continue exploration or production
activities upon substantial portions of our properties if certain environmental
damages occur. The insurance coverage we do maintain may also be insufficient.
In that event, our assets would be utilized to pay personal injury and property
damage claims and the costs of controlling blowouts or replacing destroyed
equipment rather than for additional drilling activities.





We face substantial governmental
regulation and environmental risks.





Our
business is subject to various laws and regulations that may be changed from
time to time in response to economic or political conditions. Matters subject to
regulation include the following:





·
            Discharge
      permits for drilling operations;


·
            Drilling
      bonds;


·
            Reports
      concerning operations;


·
            The
      spacing of wells;


·
            Unitization
      and pooling of properties;


·
            Taxation;
      and


·
            Environmental
      protection.





Regulatory
agencies may also impose price controls and limitations on production by
restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve oil and gas.





We are subject to environmental
regulation that can materially and adversely affect the timing and cost of our
operations.





Our
exploration and proposed production activities are subject to certain laws and
regulations relating to environmental quality and pollution control. Our
operations in China are governed by PSCs and the Shanxi farmout agreements. We
are subject to the laws, decrees, regulations and standards on environmental
protection and safety promulgated by the Chinese government. Various government
laws and regulations concerning the discharge of incidental materials into the
environment, the generation, storage, transportation and disposal of waste or
otherwise relating to the protection of public health, natural resources,
wildlife and the environment, affect our current exploration efforts and future
development, processing and production operations and the costs related to them.
These regulations require us to obtain environmental permits to conduct seismic
acquisition, drilling or construction activities. Such regulations also
typically include requirements to develop emergency response plans, waste
management plans, environmental plans and spill contingency plans.





Existing
environmental laws and regulations may be revised or new laws and regulations
may be adopted or become applicable to us. Revised or additional laws and
regulations that result in increased compliance costs or additional operating
restrictions, particularly if those costs are not fully recoverable from
insurance or our customers, could have a material adverse effect on our
business, financial condition or results of operations.





23
 Table of Contents





The
unavailability or high cost of drilling rigs, equipment, supplies, personnel and
oil field services could adversely affect our ability to execute our exploration
and exploitation plans on a timely basis and within our budget.





Shortages
or the high costs of drilling rigs, equipment, supplies or personnel could delay
or adversely affect our exploration and exploitation operations, which could
have a material adverse effect on our business, financial condition or results
of operations.  If the unavailability or high cost of rigs, equipment,
supplies or personnel were particularly severe in China, we could be materially
and adversely affected.





Risks
Relating to our Securities





We
have registered for resale a substantial amount of our outstanding shares of
common stock and shares of common stock underlying warrants and options and
shares of our common stock that cannot currently be traded without restriction
that may become eligible for trading in the future.  We cannot predict
the effect future sales of our common stock will have on the market price of our
common stock.





On
December 31, 2008, we had 500 million shares of common stock authorized, of
which approximately 161 million shares of common stock were issued and
outstanding.  Of the issued and outstanding shares, 7 million, or 14%,
were "restricted stock" subject to resale restrictions.  As of
December 31, 2008, we had 23.9 million shares of common stock subject to options
and warrants.  As of March 16, 2009, we had 31.3 million shares of
common stock subject to options and warrants, including the shares underlying
the Warrant sold to Arrow for the purchase of up to 7.4 million shares of common
stock.  Additionally, 9.7 million shares underlying options and
warrants may be considered to be restricted stock upon issuance.  Our
shares of restricted stock will be available for trading in the future, so long
as all the requirements of Rule 144, promulgated under the Securities Act, are
met.  In conjunction with the sale of the Warrant, we also issued the
Exchangeable Note to Arrow, the principal of which is exchangeable for up to
21,052,632 shares of common stock (any interest will also be
exchangeable).  We have agreed to register for resale the shares of
common stock underlying the Warrant and the Exchangeable Note.





We cannot
predict the effect, if any, that future sales of our common stock will have on
the market price of our common stock prevailing from time to time. Sales of
substantial amounts of common stock, such as the outstanding securities
registered or to be registered on registration statements, or the perception
that such sales could occur, may adversely affect prevailing market prices for
our common stock.





We do not currently intend to pay
dividends on our common
stock.





We
currently intend to retain any profits to fund the development and growth of our
business. As a result, we have not paid dividends on our common stock and our
board of directors currently does not intend to declare dividends or make any
other distributions on our common stock in the foreseeable future. Consequently,
it is uncertain when, if ever, we will declare dividends to our common
stockholders.  Investors in our common stock may not derive any
profits from their investment in us for the foreseeable future, other than
through any price appreciation of our common stock that may occur.





The price of our common stock could
be volatile.





The
market price of our common stock will likely fluctuate significantly in response
to the following factors, some of which are beyond our control:





·
            Variations
      in our quarterly operating results;


·
            Changes
      in market valuations of oil and gas
companies;


·
            Announcements
      by us of significant contracts, acquisitions, strategic partnerships,
      joint ventures or capital
commitments;


·
            Failure
      to extend the terms of our production sharing
  contracts;


·
            Additions
      or departures of key personnel;


·
            Future
      sales of our common stock;





24
 Table of Contents





·
            Stock
      market price and volume fluctuations attributable to inconsistent trading
      volume levels of our common stock;
and


·
            Commencement
      of or involvement in litigation.




In
addition, the trading volume of our common stock is relatively small, and the
market for our common stock may not be able to efficiently accommodate
significant trades on any given day. As a result, sizable trades of our common
stock may cause volatility in the market price of our common stock to a greater
extent than in more actively traded securities. These broad fluctuations may
adversely affect the market price of our common stock.





Trading
in our common stock is limited and sporadic, and a significant market for our
common stock may not develop.





Our
common stock is currently eligible for trading only on the OTC Bulletin
Board.  While there currently exists a limited and sporadic public
trading market for our common stock, the price paid for our common stock and the
amount of common stock traded are volatile.  We cannot assure or
guarantee you that the trading market for our common stock will improve or
develop further, and as a result, the liquidity of our common stock may be
reduced and you may not recover any of your investment.





We may issue our capital stock
without the consent of stockholders. The issuance of any additional equity
securities would further dilute our stockholders.





Our board
of directors has the authority, without further action by the stockholders, to
issue up to 500 million shares of preferred stock in one or more series and to
designate the rights, preferences, privileges and restrictions of each series.
We also have 500 million shares of common stock authorized under our charter
documents, of which approximately 161 million shares are issued and outstanding
as of March 4, 2009. The issuance of preferred stock could have the effect of
restricting dividends on the common stock or delaying or preventing our change
in control without further action by the stockholders. While we have no present
plans to issue any shares of preferred stock, we may need to do so in the future
in connection with capital raising transactions. In addition, we may issue
additional shares of common stock or other equity securities, including
securities convertible into shares of common stock, in connection with capital
raising activities. The issuance of additional common stock would also have a
dilutive impact on our stockholders' ownership interest in our
company.





ITEM 1B.  UNRESOLVED STAFF COMMENTS





None.






ITEM 2. PROPERTIES
 
 Undeveloped  Acreage
 
 The
following table summarizes the acreage subject to our production sharing
contracts covering the following undeveloped acreage in China as of December 31,
2008:
 
 Net AcresGross Acres
                    
                    
                    Maximum(1)
                    
                    
                    Minimum(2)China:Shouyang
      Block, Shanxi Province
                    
                    
                    485,000
                    
                    
                    
                    485,000
                    
                    
                    
                    340,000Qinnan
      Block, Shanxi Province
                    
                    
                    573,000
                    (3)
                    
                    
                    573,000
                    
                    
                    
                    401,000Enhong
      and Laochang Areas, Yunnan Province
                    
                    
                    265,000
                    
                    
                    
                    265,000
                    
                    
                    
                    159,000
 
 (1)
Assuming the Chinese partner company chooses not to participate.
 (2)
Assuming the Chinese partner company chooses to maximize its
participation.
 (3) Under
the Farmout Agreement entered into in connection with our strategic alliance
related to our Qinnan Block with Arrow, subject to certain conditions precedent
including most notably approval by appropriate Chinese governmental authorities,
we will


25
 Table of Contents





assign
75.25% of our participating interest in the Qinnan PSC to Arrow.  For
additional information on the strategic alliance, see Item 1. "Business -
Strategic Alliance with Arrow."





For
further discussion of our interests in these properties, see the discussion of
our production sharing contracts and farmout agreements under "Our Holdings in
the Shanxi Province of the People's Republic of China" and "Our Holdings in the
Yunnan Province of the People's Republic of China" contained in Item 1,
Business.





Other
Properties





Our
principal office is located at 363 N. Sam Houston Parkway East, Suite 380,
Houston, Texas 77060. The principal office consists of approximately 5,770
square feet under lease at December 31, 2008.  We also maintain
offices under lease in the following cities of the People's Republic of
China:  Beijing, Taiyuan, and Kunming.





ITEM 3. LEGAL PROCEEDINGS





We have
no knowledge of any pending or threatened material litigation, settlement of
litigation, or other material claim involving us.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





26
 Table of Contents





PART
II





ITEM 5. MARKET FOR THE
REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





Common
Stock





Our
common stock is not listed for trading on a registered exchange. Shares of our
common stock are traded over the counter and quoted on the OTC Bulletin Board
under the symbol "FEEC." The OTC Bulletin Board provides information to
professional market makers who match sellers with buyers. The high and low bid
quotations of our common stock presented below includes intra-day trading
prices. These quotations represent inter-dealer prices, without retail mark-up,
mark-down, or commissions, and may not represent actual
transactions.





High
                  
                  
                  Low2008First
      Quarter
                  
                  $
                  1.00
                  
                  
                  $
                  0.38Second
      Quarter
                  
                  $
                  0.99
                  
                  
                  $
                  0.45Third
      Quarter
                  
                  $
                  0.70
                  
                  
                  $
                  0.22Fourth
      Quarter
                  
                  $
                  0.32
                  
                  
                  $
                  0.092007First
      Quarter
                  
                  $
                  1.18
                  
                  
                  $
                  0.75Second
      Quarter
                  
                  $
                  1.92
                  
                  
                  $
                  0.81Third
      Quarter
                  
                  $
                  1.68
                  
                  
                  $
                  1.02Fourth
      Quarter
                  
                  $
                  1.50
                  
                  
                  $
                  0.84





On March
4, 2009, we had 161,292,283 shares of common stock outstanding and we had
approximately 92 stockholders of record as of March 4, 2009.  There
are an estimated 3,200 beneficial owners of our common stock, including shares
held in street name.





We
currently intend to retain all future earnings to fund the development and
growth of our business. We have not paid dividends on our common stock and do
not anticipate paying cash dividends in the immediate future. We did not
repurchase any of our equity securities in 2008 and have not adopted a stock
repurchase program.





27
 Table of Contents





Stock
Performance Graph





The
following graph compares the performance of the Company's common stock with that
of the S&P 500 Index and the Dow Jones Oil & Gas Index. The
graph sets forth the cumulative total stockholder return, which assumes
reinvestment of dividends, of a $100 investment on December 31, 2003 in the
Company's common stock, the S&P 500 Index and the Dow Jones Oil &
Gas Index.





COMPARE
CUMULATIVE TOTAL RETURN


AMONG
FAR EAST ENERGY CORPORATION,


S&P 500
INDEX AND DOW JONES OIL & GAS INDEX









ASSUMES
$100 INVESTED ON DEC. 31, 2003


ASSUMES
DIVIDEND REINVESTED


FISCAL
YEAR ENDING DEC.31, 2008





Cumulative Total Return12/31/03
                      
                      
                      12/31/04
                      
                      
                      12/31/05
                      
                      
                      12/31/06
                      
                      
                      12/31/07
                      
                      
                      12/31/08Far
      East Energy Corporation
                      
                      $
                      100.00
                      
                      
                      $
                      37.20
                      
                      
                      $
                      41.46
                      
                      
                      $
                      27.74
                      
                      
                      $
                      29.27
                      
                      
                      $
                      5.34S&P
      500 Index
                      
                      
                      100.00
                      
                      
                      
                      110.88
                      
                      
                      
                      116.33
                      
                      
                      
                      134.70
                      
                      
                      
                      142.10
                      
                      
                      
                      89.53Dow
      Jones Oil & Gas Index
                      
                      
                      100.00
                      
                      
                      
                      139.92
                      
                      
                      
                      231.32
                      
                      
                      
                      243.74
                      
                      
                      
                      350.18
                      
                      
                      
                      255.47





The
information included under this section entitled "Stock Performance Graph" is
deemed not to be "soliciting material" or "filed" with the SEC, is not subject
to the liabilities of Section 18 of the Exchange Act, and shall not be deemed
incorporated by reference into any of the filings previously made or made in the
future by our company under the Exchange Act or the Securities Act, except to
the extent the Company specifically incorporates any such information into a
document that is filed.





28
 Table of Contents





Recent
Sales of Unregistered Securities





During
the first quarter of 2008, we issued 20,000 shares of our common stock as
payment for consulting services, valued at approximately $14,000.





Issuer
Withholdings and Subsequent Cancellations of Equity Securities





Column
(a) in the tabulation below indicates shares which were withheld by us to
satisfy tax withholding obligations that arose upon the vesting of non-vesting
shares (also commonly referred to as restricted stock) during
2008.  Once withheld, these shares were cancelled and removed from the
number of outstanding shares.  Currently, the Company does not have a
share repurchase plan.





Period
                  
                  (a)
                    Total Number of Shares
      Purchased
                  
                  
                  (b)
                    Average Price Paid Per
Share
                  
                  
                  (c)
                    Total Number of Shares Purchased as Part of
      Publicly Announced Plan or Programs
                  
                  
                  (d)
                    Maximum Number of Shares that May Yet Be Purchased
      Under The Plans or ProgramsMarch
      2008
                  
                  
                  70,100
                  
                  
                  $
                  0.52
                  
                  
                  
                  -
                  
                  
                  
                  -April
      2008
                  
                  
                  123,154
                  
                  
                  
                  0.52
                  
                  
                  
                  -
                  
                  
                  
                  -May
      2008
                  
                  
                  65,150
                  
                  
                  
                  0.54
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  258,404
                  
                  
                  
                  0.52
                  
                  
                  
                  -
                  
                  
                  
                  -





29
 Table of Contents





ITEM6. SELECTED FINANCIAL DATA


(In
Thousands, Except Per Share Data)





As of and for the Years Ended
      December 31,2008
                    
                    
                    2007
                    
                    
                    2006(1)
                    
                    
                    2005
                    
                    
                    2004Operating
      Results DataOperating
      revenues
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      expenses:Exploration
      costs (2)
                    
                    
                    15,283
                    
                    
                    
                    3,345
                    
                    
                    
                    1,914
                    
                    
                    
                    3,510
                    
                    
                    
                    2,069Leasehold
      operating expense
                    
                    
                    2,904
                    
                    
                    
                    1,945
                    
                    
                    
                    958
                    
                    
                    
                    -
                    
                    
                    
                    -General
      and administrative
                    
                    
                    4,515
                    
                    
                    
                    7,230
                    
                    
                    
                    7,903
                    
                    
                    
                    5,052
                    
                    
                    
                    5,470Impairment
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    450Amortization
      of contract rights
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    23Total
      operating expenses
                    
                    
                    22,702
                    
                    
                    
                    12,520
                    
                    
                    
                    10,775
                    
                    
                    
                    8,562
                    
                    
                    
                    8,012Operating
      loss
                    
                    
                    (22,702
                    )
                    
                    
                    (12,520
                    )
                    
                    
                    (10,775
                    )
                    
                    
                    (8,562
                    )
                    
                    
                    (8,012
                    )Other
      income (expense):Interest
      expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (9
                    )Interest
      income
                    
                    
                    260
                    
                    
                    
                    721
                    
                    
                    
                    560
                    
                    
                    
                    293
                    
                    
                    
                    17Gain
      on sale of assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8
                    
                    
                    
                    -Foreign
      currency exchange loss
                    
                    
                    (149
                    )
                    
                    
                    (50
                    )
                    
                    
                    (128
                    )
                    
                    
                    (31
                    )
                    
                    
                    -Total
      other income (expense)
                    
                    
                    111
                    
                    
                    
                    671
                    
                    
                    
                    432
                    
                    
                    
                    270
                    
                    
                    
                    8Loss
      before income taxes
                    
                    
                    (22,591
                    )
                    
                    
                    (11,849
                    )
                    
                    
                    (10,343
                    )
                    
                    
                    (8,292
                    )
                    
                    
                    (8,004
                    )Income
      taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      loss
                    
                    $
                    (22,591
                    )
                    
                    $
                    (11,849
                    )
                    
                    $
                    (10,343
                    )
                    
                    $
                    (8,292
                    )
                    
                    $
                    (8,004
                    )Earnings
      per share: Basic and diluted
                    
                    $
                    (0.15
                    )
                    
                    $
                    (0.09
                    )
                    
                    $
                    (0.10
                    )
                    
                    $
                    (0.10
                    )
                    
                    $
                    (0.13
                    )Financial
      Position DataTotal
      assets
                    
                    $
                    39,883
                    
                    
                    $
                    49,793
                    
                    
                    $
                    45,654
                    
                    
                    $
                    27,011
                    
                    
                    $
                    15,413Total
      liabilities
                    
                    
                    4,572
                    
                    
                    
                    3,298
                    
                    
                    
                    3,943
                    
                    
                    
                    2,830
                    
                    
                    
                    940Stockholders'
      equity
                    
                    
                    35,311
                    
                    
                    
                    46,495
                    
                    
                    
                    41,711
                    
                    
                    
                    24,181
                    
                    
                    
                    14,473





(1)
              During
      the fourth quarter of 2006, we determined that the functional currency for
      our Chinese operations for 2006 and prior reporting periods included in
      this Annual Report on Form 10-K was U.S. Dollars, instead of the Chinese
      RMB as previously reported and utilized.  For additional
      information, see "Foreign Currency Transactions" in Note 1 to the
      consolidated financial
statements.


(2)
              For
      additional information on our Exploration costs, see Item 7, "Managements
      Discussion and Analysis of Financial Condition and Results of Operations –
      Critical Accounting Policies" and Note 4 to the consolidated financial
      statements.





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 Table of Contents





ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion and
analysis of our financial condition and results of operations should be read
in conjunction with our audited consolidated financial statements
and related notes and all of the other information contained elsewhere in
this report.  The terms "we,"
"us," "our" and "our company" refer to Far East Energy Corporation and its
consolidated subsidiaries.





Overview.We are a
development stage company, and our objective is to become a recognized leader in
CBM property acquisition, exploration, development and production. In 2008, we
continued our primary activities of drilling, testing and completion of
exploratory wells, which we commenced in late 2003.  Our activities
prior to 2003 were principally limited to organizational activities, including
developing a strategic operating plan, capital funding, hiring personnel,
entering into contracts, and acquiring rights to explore, develop, produce and
sell oil and gas or coalbed methane ("CBM").




We
believe that good environmental, social, health and safety ("ESHS") performance
is an integral part of our business success. We conduct our business with
respect and care for our employees, contractors, communities, and the
environments in which we operate.  Our vision is zero harm to people
and the environment while creating value for our shareholders as well as for
China, including the regions and communities within which we
operate.  Our commitment to these principles is demonstrated by the
fact that we have had no lost-time accidents in the past 3.5 years-plus and no
major environmental incidents.  We have a commitment to being good
corporate citizens of China, striving to emphasize and utilize very high levels
of Chinese content in personnel, services, and equipment; and we have achieved
very high percentages of Chinese content in each category.
  During
2008, we continued our efforts to explore and develop CBM in Shanxi Province in
northern People's Republic of China ("PRC" or "China") and in Yunnan Province in
southern PRC.  We continued to employ numerous safety precautions to
ensure the safety of our employees and independent contractors.  We
also conducted our operations in accordance with various laws and regulations
concerning the environment, occupational safety and health.




Although
we believe the results of our exploration activities in Shanxi and Yunnan
Provinces to date have been favorable, we will need to complete more wells to
achieve commercial viability in these provinces, which will require additional
capital expenditures.  On March 13, 2009, we formed a strategic
alliance related to our Qinnan Block with Arrow Energy International Pte Ltd
("Arrow"), the Singapore-based subsidiary of Arrow Energy Limited, a large
Australian CBM producer.  For additional information on the strategic
alliance, see "Capital Resources and Liquidity" and Item 1. "Business –
Strategic Alliance with Arrow."  Assuming
that we obtain approval from our Chinese partner company and the MOC, and
satisfy the other conditions under the Farmout Agreement with Arrow prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 2010.Management intends to
continue 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.  The ongoing crisis has created a difficult
environment in which to negotiate and consummate a transaction.  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.  In particular, any
transfer of our rights under the PSCs will require the approval of our Chinese
partner company and the MOC.  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


31
 Table of Contents






Total Exploration
Expenditures.  The table below sets out the components of our
total exploration expenditures, both capitalized and expensed (in
thousands):





Year ended
December 31,
                      
                      
                      February 4,
      2000 (Inception) through2008
                      
                      
                      2007
                      
                      
                      December 31, 2008Additions
      to Unevaluated Oil and Gas PropertiesShanxi
      Province
                      
                      $
                      6,930
                      
                      
                      $
                      7,326
                      
                      
                      $
                      30,837Yunnan
      Province
                      
                      
                      -
                      
                      
                      
                      331
                      
                      
                      
                      -6,930
                      
                      
                      
                      7,657
                      
                      
                      
                      30,837Exploration
      Expenditures  (1)
                      
                      
                      7,376
                      
                      
                      
                      3,188
                      
                      
                      
                      27,018Total
      Cost Incurred Related to Exploratory Activities
                      
                      $
                      14,306
                      
                      
                      $
                      10,845
                      
                      
                      $
                      57,855





(1)
              Exploration
      Expenditures shown are different from Exploration costs in the
      Consolidated Statements of Operations as these expenditures do not include
      prior year unevaluated exploratory well costs charged to expense of $7.9
      million and $0.2 million for December 31, 2008 and 2007,
      respectively.


In 2008,
we incurred Exploration Expenditures of $14.3 million, of which $6.9 million
related to our Shouyang PSC project were capitalized.  Exploration
Expenditures shown in the table above differ from Exploration costs in our
Consolidated Statements of Operations.  Exploration Expenditures in
the table above represent costs incurred during the current period
only.  Exploration costs include prior periods' costs charged to
expense during the current period. Oil and gas exploration costs, other than the
costs of drilling exploratory wells, are charged to expense as incurred. The
costs of drilling exploratory wells are capitalized pending determination of
whether they have discovered proved commercial reserves.  We assess
our capitalized exploratory well costs each quarter to determine whether costs
should remain capitalized or should be charged to earnings. During 2008, we
determined that $7.9 million of the previously capitalized costs no longer met
the requirements for continued capitalization pursuant to Financial Accounting
Standards Board Staff Position No. 19-1 – Accounting for Suspended Well
Costs.  Therefore, we charged the amount to Exploration
costs.  The amount included $7.0 million exploration expenditures
related to the FCC-HZ02 well in the Shouyang project.  For the
capitalized costs at December 31, 2008, 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.  As
of December 31, 2008, we had approximately $23.6 million exploratory drilling
costs that have been deferred for more than one year (see Note 4 to the
Consolidated Financial Statements).


As with
any energy exploration and production company, we continuously review our
acreage holdings in order to optimize those holdings.  We may, from
time to time and as circumstances dictate, decide to relinquish all or part of
any of our blocks that we deem non-prospective or sub-optimal in order to
optimize our acreage holdings and/or preserve cash resources.





Shouyang Block, Shanxi
Province.  The pilot area of the Shouyang Block is being
closely monitored and work programs are being carried out there to achieve two
primary goals: (i) to maximize water production to attempt to reach critical
desorption pressure as soon as possible in order to achieve commercial
quantities of gas production, and (ii) to determine the optimal approach to
minimize costs and maximize gas recovery. During the later portion of the second
quarter and through the third quarter of 2008, we increased our drilling
activities considerably.





We have
gained insights over time as to situations where cavitation or hydraulic
fracture stimulation may improve our dewatering efficiency in the pilot
area.  Hydraulic fracturing is a stimulation method successfully used
in other gas shale and coalbed reservoirs to improve wellbore productivity by
providing channels that extend beyond any formation damage done to the wellbore
during the drilling process.  This allows for water and gas to more
easily flow into the wellbore and then be produced.  During 2008, we
performed hydraulic fracturing operations on seven vertical wells in the
Shouyang Block.  Six of the wells were existing wells, and the
fracturing operations increased


32
 Table of Contents






To
further increase water production, we drilled three deviated wells in the second
half of 2008 to increase the amount of productive wellbores in the coal
face.  Once drilled to the coal seam, the wells were fracture
stimulated.  The last one of the three wells was fracture stimulated
in late October.  These deviated wells represent a component in our
efforts to reduce costs, in relation to costs associated with drilling a
horizontal well.  These are essentially vertical wells but drilled at
a very high angle from an existing well pad and location. Utilizing an existing
well location allows more than one well to be drilled from the same pad,
consequently reducing land and pad construction costs, as well as reducing
environmental impact.





Based on
the knowledge and experience we have gained in this area, we believe short-reach
horizontal wells may further enhance water production of the area.  In
the fourth quarter, we completed drilling of a short-reach horizontal
well.  This well was drilled using lightweight drilling fluids in an
attempt to minimize formation damage during the drilling
process.  Operational difficulties with the drilling fluid prevented
us from drilling as much horizontal section as planned.  We
successfully drilled approximately 50 meters of coal in the horizontal plane and
this well is currently producing both water and gas.  Our current
near-term appraisal plan contemplates drilling additional vertical and deviated
wells as and if funds are available.





During
the third quarter of 2008, we also drilled a parameter well approximately ten
kilometers away from the FCC-HZ01 well area to gather additional information on
the coal seam characteristics of the #3, #9 and #15 coal seams, all of which are
potential CBM producers in the Shouyang Block.  We plan to use the
data in any potential overall development program for the area that may be
submitted to CUCBM.





Qinnan Block, Shanxi
Province.  During the third quarter of 2008, we completed the
drilling of our first horizontal well in the area, with 3,000 meters drilled in
the #3 coal seam.   The #3 coal seam is the stated object of
development by other parties in the area near the southern end of Shanxi
Province.   Our testing of the well to date has demonstrated that
the coal seam has low permeability of approximately one to two millidarcies,
which we expected, and that the wellbore formation has been damaged during the
drilling process. We continue to test the well through measured water and gas
production.





To expand
our exploration effort and understanding of the potential of the Qinnan Block,
in the third quarter of 2008, we successfully drilled three of four planned
parameter wells on the southern end of the Qinnan Block to test the coal seams
for permeability, reservoir pressure, coal thickness and gas
content.  Although it is still early in the core analyses for gas
content, based on preliminary results, we believe that the three parameter wells
have demonstrated gas content of 300 to 500 standard cubic feet of natural gas
per ton of coal.  These measurements are similar to those obtained
from previous testing of wells on the Qinnan Block.  The tests of the
three parameter wells have provided valuable information on the continuity of
the coal seam on the southern end of the Qinnan Block.  We plan to use
the information gathered in discussions with our Chinese partner company when
determining the size of any potential overall development program for the
area.  The fourth parameter well failed to find coal seams
sufficiently thick to be prospective and was plugged and abandoned.





We also
commenced drilling operations in late 2008 on an additional horizontal well in
the Qinnan area.  This well is designed to begin appraising the area
around one of the parameter wells drilled earlier in the
year.  Drilling operations are continuing on this well, but the
current plan is to complete the well and begin production testing of the well as
and if funds are available.





Enhong-Laochang Area, Yunnan
Province.  During 2008, we completed drilling the third and the
fourth deviated wells in a five well pattern to test the #7, #8, #13 and #19
coal seams in Yunnan. These wells were directionally drilled from the same
surface location as an existing vertical well to provide a close pattern of
wells to test the coal seams and to provide valuable information on how best to
exploit this area in 2009.  As a result of our testing, we anticipate
that these coal seams will have low permeability and that we will need to
fracture multiple zones to fully test these wells.  We believe these
wells will provide us with more geological and reservoir information about the
area.  In addition, we drilled one vertical parameter well in Yunnan
Province.







33
 Table of Contents


Currently,
we are conducting a strategic review of our Yunnan holdings to determine whether
they fit within our risk profile given the tight capital markets and general
economic downturn.  We take into consideration, among other factors,
our overall corporate strategy, the prospective costs and benefits of the
acreage, our relationship with our Chinese partner companies and our current
cash position in order to formulate an optimal strategy for the Company.  The
strategy may include, but not be limited to: (i) minimal capital spending to
continue holding the acreage, (ii) sale, farm-out or partial farm-out of the
acreage, (iii) full or partial relinquishment of the acreage, or (iv) continued
staged exploration of the acreage.  We have not yet concluded this
review and cannot make any projection as to the likely outcome of this
review.  Moreover, CUCBM will have its own view and certain outcomes
will be subject to CUCBM and MOC approval.





Production Sharing
Contracts.  Our operations in the Shouyang and Qinnan Blocks in
Shanxi Province and the Enhong-Laochang area of Yunnan Province are conducted
under three separate production sharing contracts ("PSCs").  The two
Shanxi PSCs and the Yunnan PSC will expire on July 1, 2032 and January 1, 2033,
respectively, subject to the existence of commercially productive reserves and
unless extended or otherwise amended.  CUCBM has the right to
participate in up to 30% of the interest in the Shanxi PSCs and up to 40% of the
interest in the Yunnan PSC.  CUCBM is the participant with respect to
the remaining shares of the PSCs.  The three PSCs are divided into
three periods: exploration, development and production.  All three
PSCs are currently in the exploration period, which expires on June 30, 2009,
unless extended or otherwise amended.  We have begun the application
process for an extension by conducting preliminary discussions with and
submitting a formal application to each Chinese partner company under each
PSC.  Additionally, at a recent JMC meeting for the Shouyang PSC, the
JMC, composed of representatives from our Company and our Chinese partner
company, adopted a resolution recommending extension of the term. The Qinnan and
Yunnan extensions will be discussed in the respective JMC meeting for the Qinnan
PSC and Yunnan PSC to be held in the near future.  We are hopeful that
our Chinese partner company for each PSC will respond favorably to the extension
application.  After the recommendation for extension or modification
of any PSC, such extensions and associated modifications will require MOC
approval.  There can be no assurance that we will be successful in
extending the PSCs.  If we are unable to commit to certain
expenditures or acceleration of our drilling and dewatering efforts, it may
adversely affect our ability to extend the terms of our PSCs.





During
the exploration period, all expenditures are funded by
us.  Expenditures in the development and production periods are funded
in proportion to the respective participating share of the participants in the
PSC.  If we satisfy the conditions to the Farmout Agreement, including
obtaining approval from our Chinese partners and the MOC, and successfully
assign 75.25% of our participating interest in the Qinnan PSC to Arrow, Arrow
will make an initial payment of $8 million to us, become the operator under the
Qinnan PSC, and, subject to certain conditions, will fund all exploration and
other development costs associated with the Qinnan PSC up to a maximum of $30
million.  If the conditions to the Farmout Agreement are not satisfied
prior to October 15, 2009, then either party has the right to terminate the
Farmout Agreement by delivering notice of such termination to the other
party.  Assuming that the Farmout Agreement conditions are met, after
Arrow reaches such $30 million cap, FEEB and Arrow will share further Qinnan
development costs and any future revenues in proportion to the participating
interests in the Qinnan PSC, provided that FEEB may, in its discretion, instead
elect to assign all of its interest in the Qinnan PSC to Arrow subject to
retaining a 2% overriding royalty interest.  In addition, under the
Farmout Agreement, if we obtain Chinese governmental approval of an ODP for the
Qinnan area, Arrow will pay FEEB an additional $8 million in cash as a bonus,
and FEEB will have the option to assign all of its interest in the Qinnan PSC to
Arrow, while retaining a 5% overriding royalty interest.  Qualified
project costs incurred under the PSCs by us can be recovered from the value of
the first 75% of gross production of CBM for the two Shanxi Province PSCs and
70% of gross production of CBM for the Yunnan PSC.  Participants will
pay their proportionate share of the value added tax of 5% and a royalty to the
Chinese government of up to 3%.  In addition, with respect to the
Shouyang and Qinnan PSCs, our company must pay ConocoPhillips, Inc. a 3.5%
royalty on production.





34
 Table of Contents





Results
of Operations





Year
Ended 2008 compared to Year Ended 2007





The table
below sets forth our exploration costs, lease operating expense ("LOE") and
general and administrative expense for the years ended December 31, 2008 and
December 31, 2007 (in thousands):





2008
                  
                  
                  2007
                  
                  
                  Increase
      (Decrease)
                  
                  
                  %
      ChangeExploration
      costs
                  
                  $
                  15,283
                  
                  
                  $
                  3,345
                  
                  
                  $
                  11,938
                  
                  
                  
                  357
                  %Lease
      operating expense
                  
                  
                  2,904
                  
                  
                  
                  1,945
                  
                  
                  
                  959
                  
                  
                  
                  49
                  %General
      and administrative
                  
                  
                  4,515
                  
                  
                  
                  7,230
                  
                  
                  
                  (2,715
                  )
                  
                  
                  -38
                  %Total
                  
                  $
                  22,702
                  
                  
                  $
                  12,520
                  
                  
                  $
                  10,182
                  
                  
                  
                  81
                  %





Exploration
costs consist primarily of the write-off of drilling and exploration costs
previously capitalized. Accounting for such write-offs is determined by
Statement of Financial Accounting Standards (SFAS) No. 19 - Financial Accounting and Reporting
by Oil and Gas Producing Entities and Financial Accounting Standards
Board Staff Position (FSP) No. 19-1, Accounting for Suspended Well
Cost,which
require that wells be expensed unless a sufficient quantity of reserves has been
located to justify completing the well, and the enterprise is making sufficient
progress assessing the reserves.  Oil and gas exploration costs, other
than the costs of drilling exploratory wells, are charged to expense as
incurred. The costs of drilling exploratory wells are capitalized pending
determination of whether they have discovered proved commercial
reserves.  For further discussion of our accounting policies, see
"Critical Accounting Policies—Accounting for Oil and Gas Properties"
below.





The table
below sets out components of exploration costs for the years ended December 31,
2008 and December 31, 2007 (in thousands):





Year ended
December 31,2008
                  
                  
                  2007Capitalized
      well costs charged to expense
                  
                  $
                  7,907
                  
                  
                  $
                  157Seismic
      data acquisition
                  
                  
                  84
                  
                  
                  
                  320Technical
      personnel compensation
                  
                  
                  641
                  
                  
                  
                  430PSC
      related payments
                  
                  
                  1,044
                  
                  
                  
                  1,007Contract
      drilling & related expenses
                  
                  
                  5,607
                  
                  
                  
                  1,431Total
                  
                  $
                  15,283
                  
                  
                  $
                  3,345





During
2008, we determined that $7.9 million of capitalized costs incurred previously
no longer met the requirements for continued capitalization.  The
amount includes $7.0 million related to the FCC-HZ02 well in the Shouyang
project.  Accordingly, we charged this amount to exploration costs.
Comparable charges in 2007 were $0.2 million.  Exploration costs also
increased due to higher contract drilling and related expenses of $4.2 million
as a result of increased drilling activities and higher employee compensation of
technical personnel of $0.2 million, which consisted primarily of non-cash
share-based compensation. The increases were partially offset by a decrease in
the cost of the acquisition of seismic data in the Qinnan Block of $0.2
million.





35
 Table of Contents





The table
below sets out components of LOE expense for the years ended December 31, 2008
and December 31, 2007 (in thousands):





Year ended
December 31,2008
                  
                  
                  2007Workovers
                  
                  $
                  1,266
                  
                  
                  $
                  840Pumping
      Related Costs
                  
                  
                  1,265
                  
                  
                  
                  792Supervision
                  
                  
                  373
                  
                  
                  
                  313Total
                  
                  $
                  2,904
                  
                  
                  $
                  1,945





LOE for
the year ended December 31, 2008 was comprised of costs pertaining to the
dewatering efforts in the Shouyang and Qinnan Blocks in Shanxi Province, which
presently have sustained low rates of small gas production. To date, the
production is not at commercial levels and the data obtained is not sufficient
to project when or if the wells will achieve commercial gas production rates and
what those rates may be.  LOE for the year ended December 31, 2008
increased primarily due to an increase in workovers of $0.4 million and an
increase in pumping related costs of $0.4 million. Dewatering efforts in 2008
related to a total of 20 wells: 5 horizontal wells, 3 deviated wells and 12
vertical wells. Dewatering efforts in 2007 related to a total of 5 wells: 4
horizontal wells and 1 vertical well.





General
and administrative expenses for 2008 decreased primarily due to a $2.1 million
adjustment made to previously recognized share-based compensation costs to
reflect higher estimated forfeiture rates. Other decreases in general and
administrative expenses for 2008 are due to actions taken to reduce expenses of
$0.2 million in light of the change in the global economic conditions, reduction
in travel expense of $0.1 million, and a reduction in third party investor
relations and web-site hosting of $0.2 million. Additionally, insurance expense
in 2008 was lower by $0.1 million.





Year
Ended 2007 compared to Year Ended 2006





The table
below sets forth our exploration costs, LOE and general and administrative
expense for the years ended December 31, 2007 and December 31, 2006 (in
thousands):





2007
                  
                  
                  2006
                  
                  
                  Increase
      (Decrease)
                  
                  
                  %
      ChangeExploration
      costs
                  
                  $
                  3,345
                  
                  
                  $
                  1,914
                  
                  
                  $
                  1,431
                  
                  
                  
                  75
                  %Lease
      operating expense
                  
                  
                  1,945
                  
                  
                  
                  958
                  
                  
                  
                  987
                  
                  
                  
                  103
                  %General
      and administrative
                  
                  
                  7,230
                  
                  
                  
                  7,903
                  
                  
                  
                  (673
                  )
                  
                  
                  -9
                  %Total
                  
                  $
                  12,520
                  
                  
                  $
                  10,775
                  
                  
                  $
                  1,745
                  
                  
                  
                  16
                  %





Expensed
exploration costs for 2007 was higher than 2006 primarily due to the expensing
of exploration permit fees and inclusion of certain general and administrative
expenses, which were identified as directly related to exploratory
activities.





LOE for
2007 comprised of expenses pertained to the dewatering efforts of four
horizontal wells and a vertical well in the Shouyang Block in the Shanxi
Province, which presently have small sustained gas flows.  The
production is currently small and the data obtained is not yet sufficient to
project peak gas production.  Recording of these costs related to the
first two of the four horizontal wells as LOE began in July and October
2006.  Recording of these costs related to the last two of the four
horizontal wells and the vertical well as LOE began in May 2007 and August
2007.  LOE for 2007 increased due primarily to the additional costs as
a result of dewatering five wells in 2007 versus two in 2006.





General
and administrative expenses for 2007 decreased primarily due to lower
share-based compensation amortization as grants awarded in the first half of
2004 were completely amortized by the end of the second quarter of 2007 and the
absence of costs incurred related to the proxy contest which began in late third
quarter of 2006.  The decrease was partially offset by salary
adjustments effective in the first quarter of 2007 and higher professional
service fees and costs related to additional employees in China to support
expanded operations.





36
 Table of Contents





Capital
Resources and Liquidity





We have
no source of revenue or cash flow from operations, and our primary source of
cash flow has been cash proceeds from public offerings and private placements of
our common stock and warrants to purchase our common stock, and the exercise of
warrants and options to purchase our common stock.





On March
13, 2009, the Company and FEEB formed a strategic alliance related to our Qinnan
Block with Arrow Energy International Pte Ltd ("Arrow"), the Singapore-based
subsidiary of Arrow Energy Limited.  Specifically, on that date, (i)
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 (the "Assignment") in the Qinnan PSC, (ii) the Company, FEEB and Arrow
entered into a Securities Purchase Agreement (the "Purchase Agreement"), (iii)
FEEB issued an Exchangeable Note, $10 million principal amount (the
"Exchangeable Note"), to Arrow for $10 million in cash, (iv) the Company issued
a Warrant (the "Warrant") to Arrow for 7,420,000 shares of the Company's common
stock, par value $0.001 per share (the "Common Stock"), at an exercise price of
$1.00 per share, and (v) the Company and Arrow entered into a Registration
Rights Agreement (the "Registration Rights Agreement" and, collectively with the
other agreements described in the preceding clauses (i) through (iv), the
"Agreements").





Farmout
Agreement.The Farmout Agreement conditions the Assignment on,
among other things, the receipt of required approvals from the government of the
PRC (collectively, the "Farm-In Conditions") on or prior to October 15, 2009 or
such later date as the parties may agree upon (the "Farm-In
Deadline").  There can be no assurance that our Chinese partners or
the MOC will approve the Farmout Agreement.  The parties are required
to exercise their respective commercially reasonable efforts in good faith to
satisfy the Farm-In Conditions within the specified timeframe.  Upon
satisfaction of the Farm-In Conditions, Arrow will make an initial payment to
the Company of $8 million, and, subject to certain conditions, including
government approval for the extension of the current exploration period, Arrow
will fund all exploration costs associated with the Qinnan PSC up to a maximum
of $30 million.  After Arrow reaches such $30 million cap, FEEB and
Arrow will share further Qinnan area exploration costs in proportion to their
participating interests in the Qinnan PSC, provided that FEEB may, in its
discretion, instead elect to assign all of its interest in the Qinnan PSC to
Arrow subject to retaining a 2% overriding royalty interest.  In
addition, under the Farmout Agreement, if the parties obtain Chinese
governmental approval of an ODP for the Qinnan area, Arrow will pay FEEB an
additional $8,000,000 in cash as a bonus, and FEEB will have the option to
assign all of its interest in the Qinnan PSC to Arrow, while retaining a 5%
overriding royalty interest.  If an overall development program is
approved, then FEEB and Arrow will share related development costs and any
future revenues for such area on a pro-rata basis in accordance with their
participating interests in the Qinnan PSC.





If the
Farm-In Conditions are not satisfied prior to the Farm-In Deadline, then either
party has the right to terminate the Farmout Agreement by delivering notice of
such termination to the other party.  In addition to the foregoing,
the Farmout Agreement contains certain customary representations, warranties and
covenants of the parties.  Further, if certain events of default
occur, then FEEB will be entitled to exercise rights to revoke the Assignment
and the Farmout Agreement will automatically terminate.





Purchase
Agreement.Under the Purchase Agreement, FEEB issued Arrow the
Exchangeable Note, the Company issued Arrow the Warrant and Arrow paid FEEB $10
million in cash.





Exchangeable
Note.The Exchangeable Note has an initial principal amount of
$10 million and bears interest at a rate of 8% per annum, beginning on the
Farm-In Deadline, with maturity occurring on March 13, 2011 (the "Maturity
Date"), unless repaid earlier.  Principal and interest is due and
payable on the Maturity Date or earlier if payment is accelerated upon the
occurrence and continuance of an event of default (addressed
below).





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) of principal and interest (the "Exchange Rate"), subject to
certain equitable adjustment mechanisms in the event of a sale of the Company,
stock split or similar occurrence.  However, if certain conditions to
the effectiveness of the Assignment are satisfied on or before the Farm-In
Deadline, the entire principal amount of the Exchangeable Note will
automatically be exchanged for shares of Common Stock at the Exchange Rate,
subject to the same adjustment mechanisms.





37
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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 Shouyang PSC.  The Company has guaranteed FEEB's payment
obligations under the Exchangeable Note. For
additional information on the restrictive covenants and events of default under
the Exchangeable Note, see Item 1. "Business – Strategic Alliance with
Arrow."





Warrant.The
Warrant entitles 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 may be exercised in whole or in part only
upon satisfaction of certain conditions to the effectiveness of the Assignment
and is exercisable until the date that is eighteen months from March 13, 2009
(the "Exercise Period").  If, during the Exercise Period, the trading
price of the Common Stock equals or exceeds $1.50 per share for fifteen or more
consecutive trading days, the Company will have the right to require Arrow
either to exercise the Warrant or relinquish its rights thereunder.




Assuming
that we obtain approval from our Chinese partner company and the MOC, and
satisfy the other conditions under the Farmout Agreement with Arrow prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 2010.Our ability to
continue as a going concern depends upon our ability to obtain substantial funds
for use in our development activities and upon the success of our planned
exploration and development activities. There can be no guarantee of future
fundraising or exploration success or that we will realize the value of our
unevaluated exploratory well costs. The consolidated financial statements
included in this Annual Report on Form 10-K do not include any adjustments that
might result from the outcome of this uncertainty.  Management
believes that we will continue to be successful in obtaining the funds necessary
to continue as a going concern.





Cash
flow





As of
December 31, 2008, 2007 and 2006, cash and cash equivalents were $7.9 million,
$16.9 million and $20.5 million, respectively.





Cash used
in operating activities for 2008 was $13.3 million as compared to $10.8 million
for 2007 and $6.5 million for 2006.  We generated no revenue in any of
those years. The increase in cash used in operating activities in 2008 was due
primarily to increased exploration costs and operating expense, partially offset
by an increase in total accounts payable and accrued
liabilities.  Operating expense for 2008 increased as a result of our
expanded dewatering efforts.  Dewatering efforts in 2008 related to a
total of 20 wells: 5 horizontal wells, 3 deviated wells and 12 vertical wells.
Dewatering efforts in 2007 related to a total of 5 wells: 4 horizontal wells and
1 vertical well. Dewatering efforts in 2006 related to two horizontal
wells.





Cash used
in investing activities for 2008 was $7.6 million, as compared to $8.1 million
for 2007 and $13.6 million for 2006.  In 2008, cash used in investing
activities was lower than in 2007 due primarily to decreased capitalized
drilling costs.  The decrease in cash used in investing activities in
2007, as compared to 2006, was due to drilling of one horizontal well, as
compared to three in 2006.  In 2006, cash used in investing activities
included $14.9 million, offset by return of an escrow of $1.3
million.





Cash
provided by financing activities for 2008 was $11.8 million, as compared to
$15.2 million for 2007 and $26.1 million for 2006.  Cash provided by
financing activities for 2008 was a result of the sale of 24 million shares of
our common stock and warrants to purchase up to 8.4 million shares of our common
stock in the second quarter of 2008.  Cash provided by financing
activities for 2007 was a result of the sale of approximately 11.5 million
shares of common stock and warrants to purchase up to approximately 4 million
shares of common stock as well as proceeds from the exercise of options to
purchase our common stock of $0.4 million.  Cash provided by financing
activities in 2006 was generated by the private placement and public offering of
our common stock, as well as proceeds from the exercise of warrants for
previously completed equity offerings and from the exercise of options to
purchase our common stock.


38
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Capital
Resources and Requirements





Our board
of directors has the authority, without further action by the stockholders, to
issue up to 500 million shares of preferred stock in one or more series and to
designate the rights, preferences, privileges and restrictions of each series.
We also have 500 million shares of common stock authorized under our charter
documents, of which approximately 161.3 million shares were issued and
outstanding as of December 31, 2008. After filing our Annual Report on Form 10-K
for 2008, we will not be eligible to use our shelf registration statement on
Form S-3 unless the price of our common stock increases to a point such that the
aggregate market value of our common stock held by non-affiliates is $75 million
or more.  If we again become eligible to use Form S-3, we plan to file
a new registration statement but there can be no assurance that we will become
eligible or, if we become eligible and file a registration statement, that the
registration statement would become effective.





The
issuance of preferred stock could have the effect of restricting dividends on
the common stock or delaying or preventing our change in control without further
action by the stockholders. While we have no present plans to issue any shares
of preferred stock, we may need to do so in the future in connection with
capital raising transactions. In addition, we may issue additional shares of
common stock in connection with capital raising activities. The issuance of
additional common stock would also have a dilutive impact on our stockholders'
ownership interest in our company.





The
exploration and development of CBM reserves requires substantial capital
expenditures. In order to reduce our required investment in a particular
project, we may form joint ventures and seek joint venture partners to share the
costs. We incurred approximately $14.3 million of costs related to exploratory
activities during 2008.  Assuming
that we obtain approval from our Chinese partner company and the MOC, and
satisfy the other conditions under the Farmout Agreement with Arrow prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 2010.We may expand our
capital and related expenditures, depending on the timing of our receipt of any
funds from our fundraising efforts and on whether results from our current
exploratory activities indicate that it is beneficial for us to incur the
additional expenditures.





We will
also require resources to fund significant capital expenditures for exploration
and development activities and to fund operating expenses in future periods. We
are not able to accurately predict when we will recognize meaningful
revenues.  CBM projects traditionally require multiple wells to
properly dewater the coal and generate predictable volumes of gas. It is not yet
possible to predict volumes, so firm decisions about marketing the CBM cannot
yet be made. To generate revenue prior to the point at which production reaches
pipeline quantities, we may elect to install compressors and produce compressed
natural gas ("CNG"), which could be sold to local communities. We estimate that
this alternative would cost approximately $0.5 million to $1.5 million or more
for a CNG facility which is capable of processing approximately 3.5 million
cubic fee ("MMcf") of natural gas per day. We could also elect to construct
liquefied natural gas ("LNG") facilities on our properties. We estimate that a
100-ton per day LNG facility, which would liquefy approximately five MMcf of gas
per day, would cost approximately $10 million to $20 million or more to
construct. We estimate that a 1,000-ton per day facility capable of liquefying
50 MMcf of gas per day would cost approximately $50 million to $100 million or
more.  Construction of a LNG facility is expected to take at least two
years.  The Shanxi Province is currently constructing an
intra-provincial pipeline network.  One branch of the network is
currently planned to be constructed across or directly adjacent to our current
area of drilling in the northern portion of the Shouyang Block. We may construct
pipelines to move CBM from our fields to either municipalities or other
pipelines. We estimate the initial cost to construct pipelines in the Yunnan
Province and Shanxi Province will total approximately $30 million to $70 million
or more.  If CUCBM elects a 30% participating interest in Shanxi and
40% participating interest in Yunnan, our net costs would be approximately $33
million.  Additionally, if we are successful in assigning 75.25% of
our current participating interest in the Qinnan PSC to Arrow, our net cost with
respect to any project for that PSC would be reduced according to the Farmout
Agreement.  We are delaying any decisions regarding the construction
of CNG facilities, LNG facilities or pipelines until such time as significant
CBM volumes are achieved.  We believe this delay may allow us to avoid
construction costs to the extent other entities or strategic partners have
constructed, are constructing, or are planning to construct, such facilities.


39
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Assuming that we obtain
approval from our Chinese partner company and the MOC, and satisfy the other
conditions under the Farmout Agreement with Arrow prior to October 15, 2009,
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 current minimum exploration expenditures for all three of
our PSCs through early 2010.However, to develop our projects in
China over the long term, we need to obtain project funding to satisfy
significant expenditures for exploration and development of those projects, if
they are successful. We intend to obtain the funds for our planned exploration
and development activities by various methods, which might include issuing
equity securities, issuing debt instruments, the exercise of warrants issued to
investors in conjunction with the recently completed private offerings,
obtaining farmout partners, selling certain property interests, and entering
into a strategic transaction, among other alternatives. No assurance can be
given that we will be able to obtain any additional financing on favorable
terms, if at all. 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.  In particular, any transfer of our rights under the PSCs
will require the approval of CUCBM.  There can be no assurance that
the Chinese authorities will provide the approvals necessary for a transaction
or transfer.  If our operating requirements vary materially from those
currently planned, we may require more financing than currently anticipated.
Borrowing money may involve pledging some or all or our
assets.  Raising additional funds by issuing common stock or other
types of equity securities would further dilute our existing
stockholders.  If we fail to raise the necessary funds to complete our
exploration activities and we cannot obtain any required extensions to the
requirements under our PSCs, we would not be able to successfully complete our
exploration activities and we may lose rights under our PSCs.





Contractual
Obligations





Obligations
under non-cancelable agreements at December 31, 2008 were as follows (in
thousands):





Payments Due by PeriodTotal
                    
                    
                    2009
                    
                    
                    
                    2010-2012
                    
                    
                    
                    2013-2014
                    
                    
                    2015
      andBeyondLong-Term
      Debt Obligations
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Capital
      Lease Obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      Lease Obligations(1)
                    
                    
                    972
                    
                    
                    
                    403
                    
                    
                    
                    569
                    
                    
                    
                    -
                    
                    
                    
                    -Purchase
      Obligations(2)
                    
                    
                    2,697
                    
                    
                    
                    2,128
                    
                    
                    
                    569
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      Long-Term Liabilities Reflected on theRegistrant's
      Balance Sheet Under GAAP
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Totals
                    
                    $
                    3,669
                    
                    
                    $
                    2,531
                    
                    
                    $
                    1,138
                    
                    
                    $
                    -
                    
                    
                    $
                    -


____________





(1)We enter into operating
leases in the normal course of business primarily for our office space and
equipment.


(2)
We include in purchase obligations contractual agreements to purchase goods or
services that are legally enforceable and that specify all significant terms,
including fixed or minimum quantities, fixed, minimum or variable price
provisions and the approximate timing of the transaction. We have included our
obligations under the PSCs for the Yunnan Province project and Shanxi Province
project for which the amounts were specified in the contracts. We have elected
to enter into Phase II for the Yunnan Province project and Phase III for the
Shanxi Province project and have included contractual expenses through
completion of these phases, which are currently required to be completed by June
30, 2009.





On March
13, 2009, as part of the aforementioned strategic alliance related to our Qinnan
Block with Arrow, FEEB executed the Exchangeable Note in favor of Arrow, in the
principal amount of $10 million.  The Exchangeable Note will mature on
March 13, 2011, unless repaid earlier.  The Exchangeable Note bears
interest at a rate of 8% per annum, beginning on the date the conditions set
forth in the Farmout Agreement with Arrow are satisfied.  The interest
and principal is due and payable as a lump sum on the March 13, 2011 or earlier
if payment is accelerated upon the occurrence and continuance of an event of
default.  Arrow has the right at any time to exchange the Exchangeable
Note in whole or in part for shares of our common stock at an exchange rate of
21,052.63 shares per $10,000 of principal and interest. If, on or before October
15, 2009, the approval by Chinese governmental


40
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Off-Balance
Sheet Arrangements





As part
of our ongoing business, we do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structure finance or special purpose entities
(SPEs), which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. As of December 31, 2008, we were not involved in any form of
off-balance sheet arrangement.





Critical
Accounting Policies





Our
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. We consider an accounting estimate to be
critical if (1) it requires assumptions to be made that were uncertain at the
time the estimate was made; and (2) changes in the estimate or different
estimates that could have been selected could have a material impact on our
results of operations or financial condition.





Management
has discussed the development and selection of its critical accounting policies
with our Audit Committee, and the Audit Committee has reviewed the disclosures
presented below relating to them.





We
believe the following critical accounting policies reflect our significant
estimates and judgments used in the preparation of our financial
statements:





Accounting for Oil and Gas
Properties.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 Staff Position (FSP) No. 19-1 - Accounting for Suspended Well
Costs, 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.





Unproved
leasehold 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 economic 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.





Share-based
Compensation.  We measure the compensation expense for stock
options granted as compensation to our employees  based on the grant
date fair value of the awarded options under Statement of Financial Accounting
Standard ("SFAS") No. 123 (Revised 2004) – Share-Based Payment("SFAS
123R").  We determine the fair value of stock option grants using the
Black-Scholes option pricing model.   We determine the fair value
of non-vested shares 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


41
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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
SFAS No. 123R, if any, are recognized as an addition to paid-in
capital.





Impairment of unproved oil and gas
properties.Unproved leasehold costs and exploratory drilling in progress
are capitalized and are reviewed periodically for impairment. Costs related to
impaired prospects or unsuccessful exploratory drilling are charged to expense.
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. Our assessment of the results of exploration
activities, commodity price outlooks, planned future sales or expiration of all
or a portion of such leaseholds impacts the amount and timing of impairment
provisions. An impairment expense could result if oil and gas prices decline in
the future, as it may not be economical to develop some of these unproved
properties. As of December 31, 2008, we had total unproved oil and gas property
costs of approximately $30.8 million, consisting of undeveloped leasehold costs
of $0.3 million in China and unevaluated exploratory drilling costs of $30.5
million incurred in China.





Estimates of future dismantlement,
restoration, and abandonment costs. The accounting for future development
and abandonment costs is determined by SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 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. 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.





We have
drilled a number of horizontal wells and vertical wells in the Shanxi Province
and Yunnan Province.  Phillips drilled three wells in the Shanxi
Province, which we acquired through our farmout agreements with
Phillips.  We will be required to plug and abandon those wells and
restore the well site upon completion of their production. Sufficient testing on
the wells has not been completed to determine the lives of these wells and,
therefore, we have insufficient information to determine the timing of the
obligations related to plugging, abandoning and restoring the site and cannot
determine the present value of the obligation. Due to the small number of wells,
we do not believe the obligation is material, and we will recognize the
liability when a reasonable estimate of fair value can be made. Therefore, there
is no provision in the accompanying consolidated financial
statements.





Assessments of functional
currencies.  Periodically, we assess the functional currencies
of our Chinese subsidiaries to ensure that the appropriate currencies are
utilized in accordance with the guidance in SFAS No. 52, Foreign Currency
Translation.   We determine whether the U.S. or the
Chinese currency is the appropriate functional currency based on an assessment
of the economic and financing environments in which the Chinese subsidiary is
situated.  The assessment includes, among other factors, in what
currencies the financing and operating expenditures are denominated and whether
the subsidiary's operations are sufficient to service additional
financings.  The assessment of functional currencies can have a
significant impact on periodic results of operations and financial
position.





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ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





In
addition to the U.S. Dollar, we conduct our business in Chinese RMB and,
therefore, are subject to foreign currency exchange risk on cash flows related
to expenses and investing transactions.  Prior to July 2005, the
exchange rate between U.S. Dollars and Chinese RMB was fixed, and, consequently,
we experienced no fluctuations in the value of goods and services we purchased
in China because of currency exchange.





In July
2005, the Chinese government began to permit the Chinese RMB to float against
the U.S. Dollar.  All of our costs to operate our Chinese offices are
paid in Chinese RMB.  Our exploration costs in China may be incurred
under contracts denominated in Chinese RMB or U.S. Dollars.  During
2008, the  U.S. Dollar to RMB exchange rate fluctuated from a minimum
of 1:6.75 to a maximum of 1:7.29, with a yearly average of 1:6.96.  If
the Chinese RMB continues to appreciate with respect to the U.S. Dollar, our
costs in China may increase.  To date we have not engaged in hedging
activities to hedge our foreign currency exposure.  In the future, we
may enter into hedging instruments to manage our foreign currency exchange risk
or continue to be subject to exchange rate risk.





Although
inflation has not materially impacted our operations in the recent past,
increased inflation in China or the U.S. could have a negative impact on our
operating and general and administrative expenses, as these costs could
increase.China has
recently experienced inflationary pressures, which could increase our costs
associated with our operations in China.  The inflation rate for 2008
was approximately 5.9%, according to National Bureau of Statistics of
China.   In recent months, the Company has increased its use of
Chinese suppliers, including drilling contractors, that are paid in
RMB.  In the future, inflation in China may result in higher minimum
expenditure requirements under our PSCs if CUCBM adjusts these requirements for
inflation.  A material increase in these costs as a result of
inflation could adversely affect our operations and, if there are material
changes in our costs, we may seek to raise additional funds earlier than
anticipated.





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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, 2008. 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, 2008, our internal control
over financial reporting is effective based on these criteria.





Our
independent registered public accounting firm, Payne Smith & Jones, P.C.,
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, 2008, which is included on page 46 of
this Annual Report on Form 10-K.





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 Table of Contents




REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors


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) as of December 31,
2008 and 2007 and the related consolidated statements of operations, changes in
stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2008 and for the period from the date of incorporation
on February 4, 2000 to December 31, 2008. Our audits also included the financial
statement schedule listed in Item 15. These consolidated 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 financial position of Far East Energy Corporation
and Subsidiaries as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2008 and for the period from the date of incorporation on
February 4, 2000 to December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
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’s internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated February 27, 2009, expressed an unqualified
opinion.





February
27, 2009, except for Notes 2 and 12 as to which the date is March 30,
2009





/s/
Payne Smith & Jones, P.C.


Payne
Smith & Jones, P.C.





Dallas,
Texas





45
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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors


Far East
Energy Corporation and Subsidiaries





We have
audited Far East Energy Corporation and Subsidiaries' (FEEC) (a development
stage company) internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). FEEC'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 FEEC'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, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk.  Our audit also included 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, FEEC maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of FEEC, as of
December 31, 2008 and 2007 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows of FEEC for each of
the years in the three-year period ended December 31, 2008 and for the period
from the date of incorporation on February 4, 2000 to December 31, 2008, and our
report dated  February 27, 2009 expressed an unqualified
opinion.





February
27, 2009, except for Notes 2 and 12 as to which the date is March 30,
2009





/s/ Payne Smith & Jones
P.C.


Payne
Smith & Jones, P.C.





Dallas,
Texas





46
 Table of Contents




FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Consolidated
Balance Sheets


(In
Thousands, Except Share Data)





At December 31,2008
                                              
                                              
                                              2007ASSETSCurrent
      assetsCash
      and cash equivalents
                                              
                                              $
                                              7,880
                                              
                                              
                                              $
                                              16,906Inventory
                                              
                                              
                                              188
                                              
                                              
                                              
                                              297Prepaid
      expenses
                                              
                                              
                                              262
                                              
                                              
                                              
                                              149Deposits
                                              
                                              
                                              124
                                              
                                              
                                              
                                              94Other
      current assets
                                              
                                              
                                              46
                                              
                                              
                                              
                                              30Total
      current assets
                                              
                                              
                                              8,500
                                              
                                              
                                              
                                              17,476Unevaluated
      oil and gas properties
                                              
                                              
                                              30,837
                                              
                                              
                                              
                                              31,814Other
      fixed assets, net
                                              
                                              
                                              546
                                              
                                              
                                              
                                              503Total
      assets
                                              
                                              $
                                              39,883
                                              
                                              
                                              $
                                              49,793LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                                              
                                              $
                                              2,249
                                              
                                              
                                              $
                                              1,243Accrued
      liabilities
                                              
                                              
                                              2,323
                                              
                                              
                                              
                                              2,055Total
      current liabilities
                                              
                                              
                                              4,572
                                              
                                              
                                              
                                              3,298Commitments
      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, 161,305,390 and
      137,005,294 issued and outstanding, respectively
                                              
                                              
                                              161
                                              
                                              
                                              
                                              137Additional
      paid-in capital
                                              
                                              
                                              105,915
                                              
                                              
                                              
                                              94,983Unearned
      compensation
                                              
                                              
                                              (313
                                              )
                                              
                                              
                                              (764
                                              )Deficit
      accumulated during the development stage
                                              
                                              
                                              (70,452
                                              )
                                              
                                              
                                              (47,861
                                              )Total
      stockholders' equity
                                              
                                              
                                              35,311
                                              
                                              
                                              
                                              46,495Total
      liabilities and stockholders' equity
                                              
                                              $
                                              39,883
                                              
                                              
                                              $
                                              49,793





See the
accompanying notes to consolidated financial statements.





47
 Table of Contents




FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Consolidated
Statements of Operations


(In
Thousands, Except Per Share Data)





Year ended
December 31,
                
                
                February 4,
      2000 (Inception) through2008
                
                
                2007
                
                
                2006
                
                
                December 31, 2008Operating
      revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      expenses:Exploration
      costs
                
                
                15,283
                
                
                
                3,345
                
                
                
                1,914
                
                
                
                27,018Lease
      operating expense
                
                
                2,904
                
                
                
                1,945
                
                
                
                958
                
                
                
                5,807General
      and administrative
                
                
                4,515
                
                
                
                7,230
                
                
                
                7,903
                
                
                
                35,088Impairment
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,778Loss
      on investment in joint venture
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                22Amortization
      of contract rights
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                81Total
      operating expenses
                
                
                22,702
                
                
                
                12,520
                
                
                
                10,775
                
                
                
                71,794Operating
      loss
                
                
                (22,702
                )
                
                
                (12,520
                )
                
                
                (10,775
                )
                
                
                (71,794
                )Other
      income (expense):Interest
      expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (177
                )Interest
      income
                
                
                260
                
                
                
                721
                
                
                
                560
                
                
                
                1,870Gain
      on sale of assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8Foreign
      currency transaction loss
                
                
                (149
                )
                
                
                (50
                )
                
                
                (128
                )
                
                
                (359
                )Total
      other income
                
                
                111
                
                
                
                671
                
                
                
                432
                
                
                
                1,342Loss
      before income taxes
                
                
                (22,591
                )
                
                
                (11,849
                )
                
                
                (10,343
                )
                
                
                (70,452
                )Income
      taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                $
                (22,591
                )
                
                $
                (11,849
                )
                
                $
                (10,343
                )
                
                $
                (70,452
                )Earnings
      per share:Basic
      and diluted
                
                $
                (0.15
                )
                
                $
                (0.09
                )
                
                $
                (0.10
                )Weighted
      average shares outstanding:Basic
      and diluted
                
                
                151,231
                
                
                
                128,631
                
                
                
                104,913





See the
accompanying notes to consolidated financial statements.





48
 Table of Contents





FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Consolidated
Statements of Stockholders' Equity


(In
Thousands, Except Share Data)





Common Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    Deficit
      Accumulated During the
                    
                    
                    TotalNumber
      of Shares
                    
                    
                    Par
      Value
                    
                    
                    Additional
                      Paid-In
      Capital
                    
                    
                    Unearned
      Compensation
                    
                    
                    Development
      Stage
                    
                    
                    Stockholders'
      EquityFor the Years Ended December 31, 2008, 2007 and
      2006Balance
      at December 31, 2005
                    
                    
                    97,147,222
                    
                    
                    $
                    97
                    
                    
                    $
                    49,661
                    
                    
                    $
                    -
                    
                    
                    $
                    (25,577
                    )
                    
                    $
                    24,181Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (10,343
                    )
                    
                    
                    (10,343
                    )Common
      shares issued
                    
                    
                    25,514,511
                    
                    
                    
                    26
                    
                    
                    
                    24,927
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    24,953Shares
      issued to consulting firm
                    
                    
                    59,259
                    
                    
                    
                    -
                    
                    
                    
                    91
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    91Stock
      options issued
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,772
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,772Stock
      options exercised
                    
                    
                    510,000
                    
                    
                    
                    -
                    
                    
                    
                    331
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    331Warrants
      issued
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    34
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    34Warrants
      exercised
                    
                    
                    536,350
                    
                    
                    
                    1
                    
                    
                    
                    783
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    784Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (92
                    )
                    
                    
                    (92
                    )Balance
      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
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    60Non-vested
      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
                    )
                    
                    $
                    35,311Inception (February 4, 2000) through December 31,
      2008Balance
      at February 4, 2000
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (70,452
                    )
                    
                    
                    (70,452
                    )Common
      shares issued-
      Placements
                    
                    
                    148,826,187
                    
                    
                    
                    148
                    
                    
                    
                    87,003
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    87,151-
      Newark ValleyOil
      & Gas Inc acquisition
                    
                    
                    1,600,000
                    
                    
                    
                    2
                    
                    
                    
                    3,598
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,600Shares
      issued to consulting firm
                    
                    
                    231,259
                    
                    
                    
                    -
                    
                    
                    
                    297
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    297Non-vested
      shares issued
                    
                    
                    1,570,792
                    
                    
                    
                    2
                    
                    
                    
                    1,247
                    
                    
                    
                    (313
                    )
                    
                    
                    -
                    
                    
                    
                    936Non-vested
      shares withheld for taxes
                    
                    
                    (258,404
                    )
                    
                    
                    -
                    
                    
                    
                    (136
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (136
                    )Stock
      options issued
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,430
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,430Stock
      options exercised
                    
                    
                    1,410,000
                    
                    
                    
                    1
                    
                    
                    
                    915
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    916Warrants
      issued
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    210
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    210Warrants
      exercised
                    
                    
                    7,925,556
                    
                    
                    
                    8
                    
                    
                    
                    8,185
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,193Warrants
      redeemed unexercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2
                    )Debt
      issued with beneficial conversion feature
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    168
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    168Balance
      at December 31, 2008
                    
                    
                    161,305,390
                    
                    
                    $
                    161
                    
                    
                    $
                    105,915
                    
                    
                    $
                    (313
                    )
                    
                    $
                    (70,452
                    )
                    
                    $
                    35,311





See the
accompanying notes to consolidated financial statements.





49
 Table of Contents




FAR
EAST ENERGY CORPORATION


(A
Development Stage Company)


Consolidated
Statements of Cash Flows


(In
Thousands)





For the Years Ended
      December 31,
                          
                          
                          February 4,
      2000 (Inception) through2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          December 31, 2008Cash
      flows from operating activitiesNet
      loss
                          
                          $
                          (22,591
                          )
                          
                          $
                          (11,849
                          )
                          
                          $
                          (10,343
                          )
                          
                          $
                          (70,452
                          )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
                          
                          
                          171
                          
                          
                          
                          88
                          
                          
                          
                          83
                          
                          
                          
                          512Stock
      issued to pay expense
                          
                          
                          14
                          
                          
                          
                          61
                          
                          
                          
                          91
                          
                          
                          
                          297Share-based
      compensation
                          
                          
                          (279
                          )
                          
                          
                          1,330
                          
                          
                          
                          1,772
                          
                          
                          
                          5,365Prior
      period capitalized exploratory well costs expensed
                          
                          
                          7,907
                          
                          
                          
                          157
                          
                          
                          
                          264
                          
                          
                          
                          -(Increase)
      decrease in inventory
                          
                          
                          109
                          
                          
                          
                          (241
                          )
                          
                          
                          101
                          
                          
                          
                          (189
                          )(Increase)
      decrease in prepaids
                          
                          
                          (113
                          )
                          
                          
                          68
                          
                          
                          
                          475
                          
                          
                          
                          (262
                          )(Increase)
      decrease in deposits
                          
                          
                          (30
                          )
                          
                          
                          269
                          
                          
                          
                          (109
                          )
                          
                          
                          (124
                          )(Increase)
      decrease in other current assets
                          
                          
                          (16
                          )
                          
                          
                          (21
                          )
                          
                          
                          6
                          
                          
                          
                          (46
                          )Increase
      (decrease) in accounts payable and accrued liabilities
                          
                          
                          1,687
                          
                          
                          
                          (645
                          )
                          
                          
                          1,147
                          
                          
                          
                          4,987Impairment
      expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,778Gain
      on sale of assets
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (8
                          )Other,
      net
                          
                          
                          (136
                          )
                          
                          
                          -
                          
                          
                          
                          18
                          
                          
                          
                          242Net
      cash used in operating activities
                          
                          
                          (13,277
                          )
                          
                          
                          (10,783
                          )
                          
                          
                          (6,495
                          )
                          
                          
                          (55,900
                          )Cash
      flows from investing activitiesAdditions
      to unproved oil and gas properties in China
                          
                          
                          (7,343
                          )
                          
                          
                          (7,657
                          )
                          
                          
                          (14,838
                          )
                          
                          
                          (31,325
                          )Other
      oil and gas investment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,278
                          )Additions
      to other property
                          
                          
                          (214
                          )
                          
                          
                          (398
                          )
                          
                          
                          (23
                          )
                          
                          
                          (983
                          )Sale
      of oil and gas property
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,108Escrow
      account transactions
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,250
                          
                          
                          
                          -Net
      cash used in investing activities
                          
                          
                          (7,557
                          )
                          
                          
                          (8,055
                          )
                          
                          
                          (13,611
                          )
                          
                          
                          (32,478
                          )Cash
      flows from financing activitiesNet
      proceeds from sale of common stock
                          
                          
                          11,808
                          
                          
                          
                          14,814
                          
                          
                          
                          24,953
                          
                          
                          
                          87,151Net
      proceeds from exercise of options
                          
                          
                          -
                          
                          
                          
                          429
                          
                          
                          
                          331
                          
                          
                          
                          916Net
      proceeds from exercise of warrants
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          784
                          
                          
                          
                          8,191Net
      cash provided by financing activities
                          
                          
                          11,808
                          
                          
                          
                          15,243
                          
                          
                          
                          26,068
                          
                          
                          
                          96,258Effect
      of exchange rate changes on cash
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (92
                          )
                          
                          
                          -Increase
      (decrease) in cash and cash equivalents
                          
                          
                          (9,026
                          )
                          
                          
                          (3,595
                          )
                          
                          
                          5,870
                          
                          
                          
                          7,880Cash
      and cash equivalents--beginning of period
                          
                          
                          16,906
                          
                          
                          
                          20,501
                          
                          
                          
                          14,631
                          
                          
                          
                          -Cash
      and cash equivalents--end of period
                          
                          $
                          7,880
                          
                          
                          $
                          16,906
                          
                          
                          $
                          20,501
                          
                          
                          $
                          7,880





See the
accompanying notes to consolidated financial statements.





50
 Table of Contents




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.





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 Staff Position (FSP) No. 19-1 - Accounting for Suspended Well
Costs, 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.





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.





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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 Statement of Financial Accounting Standard
("SFAS") No. 128 - Earnings
Per Share 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.





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 SFAS No. 123 (Revised 2004) – Share-Based Payment("SFAS
123R").  We determine the fair value of stock option grants using the
Black-Scholes option pricing model.   We determine the fair value
of non-vested shares 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 SFAS No. 123R, 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 SFAS No.
52 – "Foreign Currency Translation."  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 $2.8 million and with another $4.2 million in cash at December 31,
2008, 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.





Recent Accounting
Pronouncements.In August 2008, the SEC announced that it will issue for
comment a proposed roadmap regarding the potential use of International
Financial Reporting Standards ("IFRS") for the preparation of financial
statements by U.S. registrants. IFRS are standards and interpretations adopted
by the International Accounting Standards Board. Under the proposed roadmap, we
would be required to prepare financial statements in accordance with IFRS
beginning in 2014, including comparative information also prepared under IFRS
for 2013 and 2012. We are currently assessing the potential impact of IFRS on
our financial statements and will continue to follow the proposed roadmap for
future developments.





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In May
2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 162 -
The Hierarchy of Generally
Accepted Accounting Principles ("GAAP"), which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. FAS 162 is effective 60 days following the
Security and Exchange Commission's ("SEC") approval of the Public Company
Accounting Oversight Board amendments to AU Section 411 - The Meaning
of  Present Fairly in Conformity with GAAP.  We do not
expect the adoption of SFAS 162 to have an impact on our consolidated financial
position, results of operations or cash flows.





Effective
January 1, 2008, the Company adopted SFAS No. 157 - Fair Value
Measurements.  SFAS No. 157 provides a definition of fair value
and provides a framework for measuring fair value. The standard also requires
additional disclosures on the use of fair value in measuring assets and
liabilities. In February 2008, the FASB issued FASB Staff Position ("FSP") No.
157-1 - Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
that Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13, and FSP No. 157-2 - Effective Date of FASB Statement No.
157.  We have adopted the provisions of FSP Nos. 157-1 and
157-2 in the first quarter of 2008. The adoptions of SFAS No. 157, FSP No. 157-1
and FSP No. 157-2 did not have a material impact on our financial
statements.





In
February 2007, the FASB issued SFAS No. 159 - The Fair Value Option for Financial
Assets and Financial Liabilities.SFAS No. 159 gives us the irrevocable
option to carry many financial assets and liabilities at fair values, with
changes in fair value recognized in earnings. SFAS No. 159 is effective for us
beginning January 1, 2008. Currently, we have elected not to adopt the fair
value option provision allowed under SFAS No. 159.





2.  Liquidityand 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.  After filing our Annual Report on Form 10-K for
2008, we will not be eligible to use our shelf registration statement on Form
S-3 unless the price of our common stock increases to a point that the aggregate
market value of our common stock held by non-affiliates is $75 million or
more.  If we again become eligible to use Form S-3, we plan to file a
new registration statement but there can be no assurance that we will become
eligible or, if we become eligible and file a registration statement, that the
registration statement would become effective.





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.  For additional information
on the strategic alliance, see Note 12 – Subsequent Event.  Assuming
that we obtain approval from our Chinese partner company and the MOC, and
satisfy the other conditions under the Farmout Agreement with Arrow prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 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





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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, 2008, we had unevaluated exploratory well costs totaling $30.6
million, of which $23.6 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
4.





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 (four horizontal and three 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 an additional
horizontal, 8 vertical and 3 deviated wells as of December 31, 2008 in the pilot
area.  The unevaluated exploratory well costs at December 31, 2008
included exploratory drilling and related costs for six of the seven pilot wells
and the additional wells.  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
4.  If these wells produce sufficient water and are cost effective,
additional horizontal, deviated and/or vertical drilling efforts are
likely.  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.





3.  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 2008, 2007 and 2006 was
zero.  Other supplemental cash flow information for 2008, 2007 and
2006, is presented as follows (in thousands):





2008
                  
                  
                  2007
                  
                  
                  2006Non-cash
      transactions:Issuance
      of common stock to pay consulting expenses
                  
                  $
                  14
                  
                  
                  $
                  61
                  
                  
                  $
                  91Increase
      in outstanding stock options
                  
                  
                  (279
                  )
                  
                  
                  1,330
                  
                  
                  
                  1,772





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4.  Unevaluated
Oil and Gas Properties





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





At December 31,2008
                  
                  
                  2007Unproved
      property costs
                  
                  $
                  275
                  
                  
                  $
                  275Unevaluated
      wells costs
                  
                  
                  30,562
                  
                  
                  
                  31,539$
                  30,837
                  
                  
                  $
                  31,814





Unproved property
Costs.Unproved property 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 production
sharing contract 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 FSP No.
19-1.  FSP No. 19-1 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.  During 2008, we determined that $7.9 million of the
previously capitalized costs no longer met the requirements for continued
capitalization pursuant to FSP No. 19-1.  Therefore, we charged the
amount to Exploration Costs.  The amount included $7.0 million
exploration expenditures related to the FCC-HZ02 well in the Shouyang
project.  For the capitalized costs at December 31, 2008, 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):





2008
                  
                  
                  2007Unevaluated
      exploratory well costs that have been capitalized for a period of one year
      or less
                  
                  $
                  6,993
                  
                  
                  $
                  7,657Unevaluated
      exploratory well costs that have been capitalized for a period greater
      than one year (1)
                  
                  
                  23,569
                  
                  
                  
                  23,882Balance
      at December 31
                  
                  $
                  30,562
                  
                  
                  $
                  31,539Number
      of projects that have exploratory well costs that have been capitalized
      for a period greater than one year
                  
                  
                  1
                  
                  
                  
                  2





(1)
            Costs,
      as of December 31, 2008, related to our exploratory project in the
      Shouyang Block in the Shanxi Province.  Costs, as of December
      31, 2007, related to our exploratory projects in the Shouyang and Qinnan
      Blocks in the Shanxi Province.





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The
following table reflects the net changes in capitalized exploratory well costs
during 2008, 2007 and 2006 (in thousands):





2008
                  
                  
                  2007
                  
                  
                  2006Beginning
      balance at January 1
                  
                  $
                  31,539
                  
                  
                  $
                  24,039
                  
                  
                  $
                  9,465Additions
      to unevaluated exploratory well costs pending the determination of proved
      reserves
                  
                  
                  6,930
                  
                  
                  
                  7,657
                  
                  
                  
                  14,838Reclassifications
      to wells, facilities, and equipment based on the determination of proved
      reserves
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Unevaluated
      exploratory well costs charged to expense
                  
                  
                  (7,907
                  )(1)
                  
                  
                  (157
                  )
                  
                  
                  (264
                  )Ending
      balance at December 31
                  
                  $
                  30,562
                  
                  
                  $
                  31,539
                  
                  
                  $
                  24,039





(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.





Asset Retirement
Obligations.The accounting for
future development and abandonment costs is determined by SFAS No. 143 – Accounting for Asset Retirement
Obligations.  SFAS No. 143 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.  Sufficient testing on our wells has not been
completed to determine the lives of these wells and, therefore, we have
insufficient information to determine the timing of the obligations related to
plugging, abandoning and restoring the site and cannot determine the present
value of the obligation.  Due to the small number of wells, we do not
believe the obligation is material, and we will recognize the liability when a
reasonable estimate of fair value can be made. Therefore, there is no provision
in the accompanying consolidated financial statements.





5.  Other
Fixed Assets





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





At December 31,2008
                  
                  
                  2007Other
      fixed assets
                  
                  $
                  919
                  
                  
                  $
                  769Accumulated
      depreciation
                  
                  
                  (373
                  )
                  
                  
                  (266
                  )Other
      fixed assets, net
                  
                  $
                  546
                  
                  
                  $
                  503





Other
fixed assets include leasehold improvements, equipment and
furniture.  Depreciation expense for the years ended December 31,
2008, 2007, and 2006 was approximately $167,000, $88,000 and $83,000,
respectively.





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6.  Income
Taxes


During the third quarter
2006, we implemented a restructuring plan under which we formed Far East Energy
(Bermuda), Ltd. ("FEEB"), our wholly-owned subsidiary organized under the laws
of Bermuda. We transferred to FEEB substantially all of our assets relating to
operations in the PRC. Subsequent to the restructuring, we own primarily the
outstanding capital stock of our subsidiaries, including FEEB, and cash and cash
equivalents. FEEB is a Bermuda company, and Bermuda does not currently impose
corporate income taxes.




For U.S.
income tax purposes, the restructuring resulted in a reduction in both our net
operating loss carry forwards and temporary differences attributable to these
assets. Accordingly, our deferred tax assets and valuation allowance related to
the foreign assets were reduced.




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, 2008 and 2007 are as follows (in
thousands):





2008
                  
                  
                  2007Deferred
      tax assets:Net
      operating loss
                  
                  $
                  2,024
                  
                  
                  $
                  1,987Accrued
      expense and other
                  
                  
                  31
                  
                  
                  
                  19Stock-based
      compensation
                  
                  
                  381
                  
                  
                  
                  783Total
      deferred tax assets
                  
                  
                  2,436
                  
                  
                  
                  2,789Total
      deferred tax liabilities
                  
                  
                  -
                  
                  
                  
                  -Net
      deferred tax assets
                  
                  $
                  2,436
                  
                  
                  $
                  2,789Net
      deferred tax assets
                  
                  $
                  2,436
                  
                  
                  $
                  2,789Less:
      valuation allowance
                  
                  
                  (2,436
                  )
                  
                  
                  (2,789
                  )$
                  -
                  
                  
                  $
                  -





Net
operating loss, which can be carried forward for federal income tax purposes,
was estimated to be approximately $6.0 million at December 31, 2008. We had net
operating loss for federal income tax purposes of approximately $4.4 million at
December 31, 2007.  The net operating loss  will begin to
expire in 2016.  At December 31, 2008 and 2007, management believed
that the above indicated valuation allowance was necessary in order to comply
with the provisions of Statement of Financial Accounting Standard No. 109 -Accounting for Income Taxes
as discussed below.





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 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.  The net increase in
the valuation allowance for the year ended December 31, 2007 was $0.8
million.  This increase was primarily attributable to the net
operating loss generated during 2007. The net decrease in the valuation
allowance for the year ended December 31, 2006 was $5.3 million, which was
attributable to the reduction of the net operating loss resulting from the
restructuring plan with FEEB.




In
June 2006, FASB issued Interpretation No. 48 - Accounting for Uncertainty in Income
Taxes-anInterpretation of FASB Statement No.
109("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a company's financial statements in accordance with SFAS No.
109.FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.





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7.  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. This obligation can be met by combining the drilling results in the
Shouyang and Qinnan Blocks.  We have completed two horizontal wells in
the Shouyang Block under Phase III, the second of which was completed in the
first quarter of 2007.  The wells we have drilled to date total
approximately 11,855 meters of horizontal drilling in coal seam.  We
are currently drilling a horizontal well in the Qinnan block which, when
completed, is expected to fulfill the remainder of the 12,000 meter
obligation.  The Phase III exploration period will expire on June 30,
2009, unless extended.





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, 2008.  For 2008, our
exploration expenditure at each of the blocks exceeded their respective minimum
requirement. As permitted by PRC law, the portion of the exploration
expenditures which exceed the current year's MLR minimum exploration expenditure
requirement can be carried forward toward the satisfaction of the subsequent
year's minimum requirement.  The cumulative amounts to be carried
forward at December 31, 2008 for the Shouyang and Qinnan blocks were $11.9
million and $0.2 million, respectively. 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 prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 2010.The MLR minimum
expenditure requirements are a significant factor that influences the Company's
exploration work program.





Under the
PSCs, we are required to make certain payments to CUCBM, including: (1) CUCBM
assistance fees totaling $100,000 per year during the exploration period and
$240,000 per year during the development and production periods; (2) training
fees for Chinese personnel working on the projects of $120,000 per year during
the exploration phase and $300,000 per year during the development and
production periods; (3) signature fees totaling $300,000, which will be due
within 30 days after first approval of the overall development plan following
the exploration period; (4) reimbursement to CUCBM for government-imposed fees
for CBM exploration rights during the exploration period, which were $306,000 in
2008, and are estimated to be approximately $313,000 in 2009, and are in
proportion to our participating interest in the development and production
periods; and (5) salary and benefits paid to CUCBM professionals during the
exploration period, which was $164,000 for both blocks in 2008 and are estimated
to be approximately $338,000 in 2009.  This increase is due to the
establishment of separate JMCs due to the potential assignment to CNPC of
CUCBM’s interest in the Qinnan PSC.  The allocation of salary and
benefits for CUCBM professionals during the development and production periods
will be determined by negotiation with CUCBM.





58
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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.  The Phase II portion of the exploration period
expires on June 30, 2009, unless extended.





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 requirement.  Our minimum exploration expenditure
requirement for the block is 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 minimum exploration expenditure
requirement is approximately $1.1 million, based on the currency exchange rate
between the U.S. Dollar and the Chinese RMB as of December 31,
2008.  We must spend this amount by December 31,
2009.  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.  For 2008, our exploration expenditure for
the Yunnan PSC exceeded its minimum requirement.  As permitted by PRC
law, the portion of the exploration expenditures which exceed the current year's
MLR minimum exploration expenditure requirement can be carried forward toward
the satisfaction of the subsequent year's minimum requirement.  The
cumulative amount to be carried forward at December 31, 2008 for the Yunnan PSC
was $0.5 million.   Assuming
that we obtain approval from our Chinese partner company and the MOC, and
satisfy the other conditions under the Farmout Agreement with Arrow prior to
October 15, 2009, 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 current minimum exploration expenditures
for all three of our PSCs through early 2010.The MLR minimum
expenditure requirements are a significant factor that influences the Company's
exploration work program.





Pursuant
to the terms of our Enhong-Laochang PSC with CUCBM, 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 $65,000 in 2008 and are estimated to
be approximately $75,000 in 2009, 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 $190,000 in 2008 and are estimated to be approximately the same in
2009.  The allocation of salary and benefits for CUCBM professionals
during the development and production periods are determined by CUCBM and us
through consultation.  As of December 31, 2008, CUCBM has not
collected, and therefore we have carried forward, the accrual of $45,000 for the
total assistance fees for 2008, the accruals of $45,000 and $25,000 of the
$45,000 per year  training fees for 2008 and 2007,
respectively,  the accruals of $65,000 and $35,000 of the $45,000
government-imposed fees for CBM exploration rights for 2008 and 2007,
respectively, and the accrual of $142,000 of the $190,000 per year CUCBM
professional salary and benefits for 2008.





Minimum
Commitments.At December 31, 2008, total minimum commitments
from long-term non-cancelable operating leases and other purchase obligations
are as follows ( in thousands):





Amount2009
                  
                  $
                  2,5312010
      - 2012
                  
                  
                  1,1382013
      - 2014
                  
                  
                  -2015
      and beyond
                  
                  
                  -Total
      Minimum Commitments
                  
                  $
                  3,669





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8.  Employee
Savings Plan





At
December 31, 2008, 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
three percent of the participant's salary. The amounts contributed by the
participants and us vest immediately. We expensed $48,000, $41,000 and $32,000
under this plan for 2008, 2007 and 2006, respectively.





9.  Share-based
Compensation





We grant
options to purchase common stock and non-vested shares of common stock to
employees, members of the board of directors and consultants under our 2005
Stock Incentive Plan (the "2005 Plan"), which is
shareholder-approved.  Our shareholders voted in December 2007 to add
4,000,000 shares of common stock to the 2005 Plan.  The 2005 Plan
permits the grant of share-based awards, including options, non-vested shares
(also commonly referred to as "restricted shares"), and stock appreciation
rights and provides a total of 7,500,000 shares for grants.  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,
non-vested shares 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 non-vested shares granted under the 2005 Plan to date
have utilized vesting periods of up to three years.





Prior to
adoption of the 2005 Plan, grants of options included varying terms, some
differing from the above.    During 2008, share-based awards
granted outside the 2005 Plan included inducement awards for a new director and
two new employees.  These awards carried terms similar to those made
under the 2005 Plan.





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 SFAS No.123R for
2008, 2007 and 2006 (in thousands):





2008
                  
                  
                  2007
                  
                  
                  2006General
      and administrative
                  
                  $
                  (621
                  )
                  
                  $
                  1,242
                  
                  
                  $
                  1,414Exploration
      Costs
                  
                  
                  342
                  
                  
                  
                  69
                  
                  
                  
                  449Tax
      benefit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      share-based compensation costs, net of tax
                  
                  $
                  (279
                  )
                  
                  $
                  1,311
                  
                  
                  $
                  1,863





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.





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Compensation
expenses for the stock option grants determined under SFAS No.123(R) for
2008, 2007 and 2006 were calculated using the Black-Scholes option pricing model
with the following assumptions:





Actual
      2008
                  
                  
                  Actual
      2007
                  
                  
                  Actual
      2006Dividend
      yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %Expected
      volatility
                  
                  
                  77
      - 82
                  %
                  
                  
                  82
      - 84
                  %
                  
                  
                  83
                  %Risk-free
      interest rate
                  
                  
                  2.5
      - 3.1
                  %
                  
                  
                  4.2
      - 4.9
                  %
                  
                  
                  4.5
                  %Expected
      life of options (years)
                  
                  
                  5.5
      - 6
                  
                  
                  
                  5.5
      - 6
                  
                  
                  
                  6Weighted
      average fair value per share at grant date
                  
                  $
                  0.44
                  
                  
                  $
                  0.71
                  
                  
                  $
                  1.19





The
following table summarizes stock option transactions for 2008:





2008Shares
      Underlying Options
                                  
                                  
                                  Weighted
      Average Exercise Price
                                  
                                  
                                  Weighted
      Average Remaining Life
      (Years)
                                  
                                  
                                  Aggregate
      Intrinsic ValueOutstanding
      at beginning of year
                                  
                                  
                                  9,965,000
                                  
                                  
                                  $
                                  1.36Granted
                                  
                                  
                                  2,604,500
                                  
                                  
                                  
                                  0.65Exercised
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Canceled
                                  
                                  
                                  (125,133
                                  )
                                  
                                  
                                  1.04Forfeited
                                  
                                  
                                  (543,867
                                  )
                                  
                                  
                                  1.09Expired
                                  
                                  
                                  (580,000
                                  )
                                  
                                  
                                  0.65Outstanding
      at end of year
                                  
                                  
                                  11,320,500
                                  
                                  
                                  
                                  1.25
                                  
                                  
                                  
                                  4.43
                                  
                                  
                                  $
                                  -Options
      exercisable at end of year
                                  
                                  
                                  8,085,467
                                  
                                  
                                  $
                                  1.43
                                  
                                  
                                  
                                  2.65
                                  
                                  
                                  $
                                  -





The total
intrinsic value of options exercised during the years ended December 31, 2008,
2007 and 2006 was $0, $383,000 and $354,000, respectively.





A summary
of options outstanding as of December 31, 2008 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$0.65
      to $0.99
                  
                  
                  5,800,500
                  
                  
                  
                  5.46
                  
                  
                  $
                  0.66
                  
                  
                  
                  3,000,667
                  
                  
                  $
                  0.66$1.00
      to $1.99
                  
                  
                  1,100,000
                  
                  
                  
                  6.12
                  
                  
                  
                  1.17
                  
                  
                  
                  930,000
                  
                  
                  
                  1.18$2.00
      to $2.37
                  
                  
                  4,420,000
                  
                  
                  
                  2.66
                  
                  
                  
                  2.03
                  
                  
                  
                  4,154,800
                  
                  
                  
                  2.0411,320,500
                  
                  
                  
                  4.43
                  
                  
                  
                  1.25
                  
                  
                  
                  8,085,467
                  
                  
                  
                  1.43





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The
following table summarizes activity in non-vested shares of common stock for
2008:





Non-Vested
      Shares of Common
Stock
                  
                  
                  Weighted
      Average Grant Date Fair
      ValueOutstanding
      at beginning of year
                  
                  
                  1,032,292
                  
                  
                  $
                  0.91Granted
                  
                  
                  538,500
                  
                  
                  
                  0.60Vested
                  
                  
                  (608,888
                  )
                  
                  
                  1.04Withheld
      for Taxes
                  
                  
                  (258,404
                  )
                  
                  
                  0.53Outstanding
      at end of year
                  
                  
                  703,500
                  
                  
                  
                  0.70





10.  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.





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, 2008:





Common
                
                
                
                
                
                Proceeds
                
                
                Warrants
      Outstanding at December 31,
      2008Shares
                
                
                Warrants
                
                
                Gross
                
                
                Net
                
                
                Amount
                
                
                Exercise Price
                
                
                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
      (1)
                
                
                25,514,511
                
                
                
                -
                
                
                
                25,881,000
                
                
                
                24,953,000
                
                
                
                -
                
                
                
                -
                
                
                
                -2007(2)
                
                
                11,485,452
                
                
                
                4,019,908
                
                
                
                15,000,000
                
                
                
                14,814,000
                
                
                
                4,019,908
                
                
                $
                2.61
                
                
                Aug
      20122008(3)
                
                
                24,000,000
                
                
                
                8,400,000
                
                
                
                12,000,000
                
                
                
                11,808,000
                
                
                
                8,400,000
                
                
                $
                1.00
                
                
                May
      2013150,426,187
                
                
                
                32,515,393
                
                
                $
                92,320,000
                
                
                $
                87,151,000
                
                
                
                12,618,222





(1)
            On
      June 30, 2006, we accepted subscription agreements for the purchase of
      6,622,222 common shares in a private placement for gross proceeds of $8.9
      million.  In connection with this sale, commissions of $603,000
      were paid.  In conjunction with this offering, an investor
      purchased 30,068 shares of our common stock for total gross proceeds of
      approximately $41,000, which were offered pursuant to the terms of the
      Stock Subscription Agreement dated December 21, 2004 between us and
      certain investors.  In October 2006, we sold 18,862,221 common
      shares in a registered offering for gross proceeds of approximately $17.0
      million.  In connection with this sale, commissions of $329,000
      were paid.


(2)
            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.


(3)
            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.





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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) 11,320,500, 9,965,000 and 10,203,000
options as of December 31, 2008, 2007 and 2006, respectively; and (2)
12,618,222, 4,368,222 and 8,661,589 warrants as of December 31, 2008, 2007 and
2006, respectively.





Resale
Restrictions.  On December 31, 2008, we had 161,305,390 shares
of common stock outstanding, of which 7,030,165 shares, or 4.4%, 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.





Warrants.The following table
summarizes warrant transactions for the years ended December 31, 2008, 2007 and
2006.





2008
                  
                  
                  2007
                  
                  
                  2006Outstanding
      at beginning of year
                  
                  
                  4,368,222
                  
                  
                  
                  8,661,589
                  
                  
                  
                  11,862,601Issued
      related toCurrent
      year's share placements
                  
                  
                  8,400,000
                  
                  
                  
                  4,019,908
                  
                  
                  
                  -Prior
      year's share placements
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  92,287Exercised
                  
                  
                  -
                  
                  
                  
                  (12,650
                  )
                  
                  
                  (547,799
                  )Expired
                  
                  
                  (150,000
                  )
                  
                  
                  (8,300,625
                  )
                  
                  
                  (2,745,500
                  )Outstanding
      at end of year(1)
                  
                  
                  12,618,222
                  
                  
                  
                  4,368,222
                  
                  
                  
                  8,661,589





(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.  Our shareholders voted in December 2007 to
add 4,000,000 shares of common stock to the 2005 Plan.  The 2005 Plan
provides that the maximum number of shares of our common stock with respect to
which the awards may be granted is 7,500,000 shares, subject to adjustment in
accordance with the provisions of the 2005 Plan.  During 2008,
we granted 1,641,500 options under the 2005 Plan.  As of December
31, 2008, we had 3,195,000 shares available for awards under the 2005 Plan, of
which 1,311,500 shares could be issued as restricted stock, non-vesting shares
or other full-valued stock-based awards.  Prior to approval of the
2005 Plan, we granted stock options to employees, directors, technical advisors
and consultants under individual option agreements.





63
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The
following table summarizes stock option transactions for the years ended
December 31, 2008, 2007 and 2006:





2008
                
                
                2007
                
                
                2006Shares
      Underlying Options
                
                
                Weighted
      Average Exercise Price
                
                
                Shares
      Underlying Options
                
                
                Weighted
      Average Exercise Price
                
                
                Shares
      Underlying Options
                
                
                Weighted
      Average Exercise PriceOutstanding
      at beginning of year
                
                
                9,965,000
                
                
                $
                1.36
                
                
                
                10,203,000
                
                
                $
                1.44
                
                
                
                9,786,000
                
                
                $
                1.35Granted
                
                
                2,604,500
                
                
                
                0.65
                
                
                
                3,581,000
                
                
                
                1.16
                
                
                
                1,073,000
                
                
                
                1.96Exercised
                
                
                -
                
                
                
                -
                
                
                
                (660,000
                )
                
                
                0.65
                
                
                
                (510,000
                )
                
                
                0.65Canceled
                
                
                (125,133
                )
                
                
                1.04
                
                
                
                (1,840,000
                )
                
                
                1.09
                
                
                
                -
                
                
                
                -Forfeited
                
                
                (543,867
                )
                
                
                1.09
                
                
                
                (1,219,000
                )
                
                
                2.00
                
                
                
                (146,000
                )
                
                
                2.00Expired
                
                
                (580,000
                )
                
                
                0.65
                
                
                
                (100,000
                )
                
                
                3.85
                
                
                
                -
                
                
                
                -Outstanding
      at end of year
                
                
                11,320,500
                
                
                
                1.25
                
                
                
                9,965,000
                
                
                
                1.36
                
                
                
                10,203,000
                
                
                
                1.44Options
      exercisable at end of year
                
                
                8,085,467
                
                
                
                1.43
                
                
                
                7,176,200
                
                
                $
                1.47
                
                
                
                7,542,100
                
                
                $
                1.31





11.  Comprehensive
Loss





There
were no reconciling items between the comprehensive loss and net loss for each
of 2008 and 2007.  Therefore, comprehensive loss and net loss were the
same for each of the periods.  Net loss was $22.7 million and $11.8
million, respectively, for 2008 and 2007.  The comprehensive loss for
2006 was $10.4 million, consisted of net loss of $10.3 million and foreign
currency translation adjustment of $0.1 million.





12.  Subsequent
Event





On March
13, 2009, we formed a strategic alliance related to our Qinnan Block with Arrow
Energy International Pte Ltd ("Arrow").  In conjunction with the
strategic alliance, one of our wholly owned subsidiaries, Far East Energy
(Bermuda), Ltd. ("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 the Shanxi
Province.  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 October 15, 2009 or such later date as we may agree
upon.  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 and other development 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 October 15, 2009, then either party has the right to
terminate the agreement by delivering notice of such termination to the other
party.  Additionally, on the same date, (i) we entered into a
securities purchase agreement with Arrow; (iii) FEEB issued an exchangeable
note, $10 million principal amount, to Arrow for $10 million in cash, which we
received shortly after the note was executed; (iv) we issued a warrant to Arrow
for 7,420,000 shares of our common stock, at an exercise price of $1.00 per
share; and (v) the Company and Arrow entered into a registration rights
agreement.  The Company incurred approximately $0.5 million in costs
in connection with the formation of the strategic alliance.





64
 Table of Contents





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
                
                
                Year2008Revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -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
                
                
                
                151,2312007Revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Total
      expenses
                
                
                2,728
                
                
                
                3,444
                
                
                
                2,521
                
                
                
                3,827
                
                
                
                12,520Net
      loss
                
                
                (2,528
                )
                
                
                (3,347
                )
                
                
                (2,327
                )
                
                
                (3,647
                )
                
                
                (11,849
                )Basic
      and diluted-
      Earnings per share
                
                $
                (0.02
                )
                
                $
                (0.03
                )
                
                $
                (0.02
                )
                
                $
                (0.03
                )
                
                $
                (0.09
                )-
      Weighted average shares outstanding
                
                
                123,888
                
                
                
                124,594
                
                
                
                129,429
                
                
                
                136,464
                
                
                
                128,631





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SCHEDULE
II





FAR
EAST ENERGY CORPORATION


VALUATION
AND QUALIFYING ACCOUNTS





For Years
Ended December 31, 2008, 2007 and 2006


(In
thousands)





AdditionsDescription
                
                Balance
      at Beginning of
Period
                
                
                Charged
      to Cost and Expense
                
                
                Charged
      to Other Accounts
                
                
                Deductions
                
                
                Balance
      at End of Period2008
      deferred tax valuation allowance
                
                $
                2,789
                
                
                $
                (353
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                2,4362007
      deferred tax valuation allowance
                
                
                1,950
                
                
                
                839
                
                
                
                -
                
                
                
                -
                
                
                
                2,7892006
      deferred tax valuation allowance
                
                
                7,200
                
                
                
                -
                
                
                
                -
                
                
                
                5,250
                
                
                
                1,950





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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





Not
applicable.





ITEM
9A.  CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
carried out an evaluation under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period
covered by this report. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this
report.





Management's
Report on Internal Control over Financial Reporting





Management's
report on internal control over financial reporting as of December 31, 2008 is
included on page 44 of this report. Additionally, our independent registered
public accounting firm, Payne Smith & Jones, P.C., 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, 2008, which is included on page 46 of this
report.





Changes
in Internal Controls





In
connection with the evaluation described above, our management, including our
Chief Executive Officer and Chief Financial Officer, identified no change in our
internal control over financial reporting that occurred during the fiscal
quarter ended December 31, 2008, that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.





ITEM
9B.  OTHER INFORMATION





Not
Applicable.





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PART
III





ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Executive
Officers and Board of Directors





The table
below sets forth the names and ages of each of the members of our board of
directors (the "Board") and our executive officers, as well as the positions and
offices held by such persons. A summary of the background and experience of each
of these individuals is set forth after the table.





Name
                
                Age
                
                PositionThomas
      E. Williams
                
                56
                
                Chairman
      of the BoardMichael
      R. McElwrath
                
                57
                
                President,
      Chief Executive Officer and DirectorWilliam
      A. Anderson
                
                69
                
                DirectorC.
      P. Chiang
                
                66
                
                DirectorDonald
      A. Juckett
                
                64
                
                DirectorJohn
      C. Mihm
                
                66
                
                DirectorLucian
      L. Morrison
                
                72
                
                DirectorK.
      Andrew Lai
                
                45
                
                Chief
      Financial Officer and Principal Accounting OfficerPhil
      A. Christian
                
                51
                
                Chief
      Operating Officer, President and Country Manager of Far East Energy
      (Bermuda), Ltd.





Thomas E. Williamshas served
as Chairman of the Board since June 2007 and was appointed as a director in
February 2004. Mr. Williams also serves on the Audit Committee of the Board.
From 2000 until his retirement in 2007, Mr. Williams served as Vice President,
Research and Business Development of Noble Technology Services, a wholly-owned
subsidiary of Noble Corporation, a provider of diversified drilling and other
services to the oil and gas industry. Mr. Williams also served as President of
Maurer Technology Inc., a leading drilling R&D and engineering technology
company and a wholly-owned subsidiary of Noble Corporation. He held senior
executive positions at the U.S. Departments of Energy and Interior during the
Bush Administration from 1989 to 1993. From 1993 to 2000, he was Business
Development Director at Westport Technology Center in Houston, an upstream oil
and gas research company. He was a co-founder and served on the Board of
Cementing Solutions, Inc., an oil and gas cementing services and technology
company based in Houston, Texas. He has been in the oil and gas industry for
over 25 years, having owned and operated an oil and gas exploration, production
and consulting company prior to joining the Department of Energy. Mr. Williams
has authored more than 100 energy publications, presentations and articles and
serves on a number of oil and gas organizations, associations and boards
including the Research Partnership to Restore Energy for America (RPSEA),
Independent Petroleum Association of America, the Petroleum Technology Transfer
Council, the Society of Petroleum Engineers, American Association of Drilling
Engineers, DeepStar Consortium Contributors Advisory Board, Nautilus
International, Petris Technologies and the Environmentally Friendly Drilling
Consortium.  He has a B.S. degree in business from Campbellsville
College.





Michael R. McElwrath has
served as the Company's President and Chief Executive Officer since October
2003. He became a director in October 2003 and served as Chairman of the Board
from October 2003 until January 2005. Mr. McElwrath also served as Secretary and
Treasurer from October 2003 until March 2005. He was employed as Vice President
of Hudson Highland (formerly known as TMP Worldwide) from 1999 until joining the
Company in October 2003. He also served as Acting Assistant Secretary of Energy
in the first Bush Administration, as Director of the National Institute for
Petroleum and Energy Research, as Director of British Petroleum's outsourced
exploration and production lab for the Americas and as Deputy Assistant
Secretary for policy for the U.S. Department of Interior in the last year of the
Reagan Administration. Mr. McElwrath holds a J.D. from the University of Texas
School of Law, as well as a B.A. from the Plan II Honors Program at the
University of Texas. He is also a member of the Society of Petroleum Engineers,
the Independent Petroleum Association of America, and the Texas Independent
Producers and Royalty Owners Association.





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William A. Anderson has served
as a member of the Company's Board since October 2007. Mr. Anderson is the
Chairman of the Audit Committee of the Board and has been designated as an
"audit committee financial expert." He also serves on the Compensation Committee
of the Board. Mr. Anderson has served as a consultant for Eastman Dillon Oil and
Gas Association since 2006. From 1989 through 2005, he was a founder and partner
of Weller, Anderson & Co. Ltd., a full-service stock brokerage firm. Prior
to founding Weller in 1989, Mr. Anderson held several senior executive
positions, including President of HARC Technologies, President of Rainbow
Pipeline Company, President of Farmers Oil Company, Chief Financial Officer of
ENSTAR Corporation, and General Partner and Senior Vice President of Blyth,
Eastman, Dillon & Co. Mr. Anderson has extensive corporate board experience,
having served as a director, committee chairman and/or committee member for a
number of organizations, including Rancher Energy Corp., Tom Brown, Inc.,
Equisales, Inc., NationsBank Houston, Northern Trust Bank of Texas, American
Income Life Insurance Company, Wing Corporation and Seven J-Stock Farm, Inc. He
holds an MBA from the Harvard Business School and a B.S. in Business
Administration from the University of Arkansas.





C.P. Chiang has served on the
Board since December 2006. He also serves on the Nominating and Corporate
Governance Committee of the Board. From 2001 until his retirement in 2006, Mr.
Chiang served as the China Project Manager/Country Manager - China of Burlington
Resources where he was responsible for managing the operations and activities of
Burlington Resources in China and worked closely and negotiated with various
Chinese governmental organizations. Throughout his 36 year career in the oil and
gas industry, Mr. Chiang has held various engineering and management positions
with oil and gas companies including British Gas E&P, Inc., Tenneco Oil
Production and Exploration and Exxon Oil Company, now known as Exxon Mobil
Corporation. Mr. Chiang earned a B.S. degree in mining engineering from National
Cheng Kung University and a M.S. degree in petroleum engineering from New Mexico
Institute of Mining and Technology.





Donald A. Juckett has served
as a director since May 2004. Mr. Juckett is the Chairman of the Nominating and
Corporate Governance Committee of the Board. He also serves on the Compensation
Committee of the Board. In November 2005, Dr. Juckett established the position
of Director of the Washington, D.C. office of the American Association of
Petroleum Geologists. He presently serves as Founding Director for AAPG's
Washington office. Prior to that, Dr. Juckett was self-employed as an industry
information consultant. He served at the U.S. Department of Energy from 1988
until his retirement in 2003. At his retirement, Dr. Juckett was Director of the
Office of Natural Gas and Petroleum Import and Export Activities for Fossil
Energy. During his tenure with the Department of Energy, he also served as a
member of the Senior Executive Service and held positions as Director of the
Office of Natural Gas and Petroleum Import and Export Activities, Director for
Natural Gas and Petroleum Technology and Acting Deputy Assistant Secretary for
Natural Gas and Petroleum Technology. Dr. Juckett managed a portfolio of
international projects including bilateral agreements with China, Russia,
Venezuela, Ukraine, Bangladesh and Mexico. Dr. Juckett also played an active
role in the formation of the United States/China Oil and Gas Industry Forum in
1998. From 1974 to 1988, Dr. Juckett worked for Phillips Petroleum Company, now
known as ConocoPhillips, Inc., in management positions including responsibility
for the support of worldwide divisions with exploration technologies including
geochemistry and satellite imagery. Dr. Juckett earned a B.S. degree in
chemistry from the State University of New York-Oswego and a Ph.D. in chemistry
from the State University of New York-Albany.





John C. Mihm  has
served as a director since May 2004. He served as Chairman of the Board from
January 2005 through June 2007. Mr. Mihm currently serves on the Audit Committee
and the Nominating and Corporate Governance Committee of the Board. He serves on
the board of eProjectManagement and HNNG, and also serves as HNNG's Chief
Operating Officer. Mr. Mihm is the owner and President of JCM Consulting, PLLC,
which provides services in the engineering, construction, and project management
field. From 1964 until his retirement in 2003, Mr. Mihm worked for Phillips
Petroleum Company, now known as ConocoPhillips, Inc., in various management
positions, finally serving as Senior Vice President of Technology and Project
Development. Mr. Mihm's career includes over 20 years of work experience in
China on offshore development and onshore coalbed methane exploration, working
closely with China National Petroleum Corporation, China National Offshore Oil
Corporation and SINOPEC on several joint ventures and employee development
programs. He is a past board member of The Society of Petroleum Engineers and
the ASME Foundation. Mr. Mihm is a registered professional engineer in Texas and
Oklahoma. Mr. Mihm earned a B.S. degree in chemical engineering from Texas Tech
University and serves on or has served on advisory boards at Texas Tech
University, Oklahoma State University, University of Tulsa, University of Texas,
Colorado School of Mines, Georgia Tech and University of Trondheim.





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Lucian L. Morrison was
appointed to the Board in January 2008.   Mr. Morrison is the
Chairman of the Compensation Committee of the Board. He also serves as a member
of the Audit Committee of the Board and has been designated as an "audit
committee financial expert."  Mr. Morrison currently serves as a
director, audit committee member and compensation committee member of Erie
Indemnity Company.  Additionally, Mr. Morrison served as a director of
Encore Trust Company from 2005 to 2007 and of Encompass Services, Inc. from 1997
to 2003.  He founded Heritage Trust Company in 1979 and served as its
CEO until 1990 when he sold it to Northern Trust Bank of Texas.  He
served as director and chairman of the Trust Committee of Northern Trust Bank of
Texas from 1990 until 1992.  He co-founded Sentinel Trust Company in
1997 and continues to serve as a consultant to the company and its other
founders, and a director and a member of the company's investment
committee.  From 1998 to 2002, he was chairman of Wing Corporation, a
private exploration and production company.  Mr. Morrison serves as an
independent trustee and consultant in trust, estate, probate and qualified plan
matters and also manages oil and gas properties in Texas. He is also a
development board member of the University of Texas Houston Health Science
Center.  He holds a J.D. from the University of Texas School of Law, a
graduate degree from the Southern Methodist University Southwestern Graduate
School of Banking, Trust Division and a B.B.A. in Accounting from the University
of Texas School of Business Administration.





K. Andrew Lai was appointed as
Chief Financial Officer and Principal Accounting Officer in October
2008.  Mr. Lai joined Far East Energy in January 2007 and served as
Corporate Controller, Treasurer and Secretary of the Company. Prior to joining
the Company, Mr. Lai held financial management positions with EOG Resources,
Inc. from 1999 through January 2007. He also served with UMC Petroleum (now part
of Devon Energy) from 1987 to 1995 and practiced public accounting from 1995
through 1999. Mr. Lai was raised in Hong Kong and is fluent in Cantonese and
Mandarin. He holds BBA, MBA and J.D. degrees from the University of Houston. Mr.
Lai is a Certified Public Accountant.





Phil A. Christianwas
appointed as Chief Operating Officer, President and Country Manager of Far East
Energy (Bermuda), Ltd., our wholly-owned subsidiary in March
2008.  Mr. Christian has served in multiple operations management
roles at British Petroleum Company p.l.c. ("BP") since 2003, including as Wells
Manager for BP's Russian offshore operations and, as Director of Internal Audit,
Director of Major Projects, and Technology Performance Team Leader in BP's
Russian joint venture.  Between 1999 and 2003 he served as Project
Manager and Team Leader in BP's Exploration and Production Technology Group and
as Wells Manager in Colombia.  Prior to 1999, Mr. Christian served as
a Drilling and Operations Manager for Amoco Production Company, in Latin America
and China.  Mr. Christian has over 24 years of experience in the oil
and gas industry. Mr. Christian earned a B.S. in Chemical Engineering from the
University of Texas.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires our officers, directors and persons who own
more than ten percent of our common stock to file reports of ownership and
changes in ownership with the SEC.  Officers, directors and greater
than ten percent stockholders are required by the SEC's regulations to furnish
us with copies of all Section 16(a) reports they file.  Based solely
on our review of the copies of such forms received by us, we believe that all
filing requirements applicable to our officers, directors and greater than ten
percent stockholders for the year ended December 31, 2008, were complied with
except for the timely filing of a Form 4 and a Form 3 by International Finance
Corporation and Persistency, respectively, each a ten percent stockholder, and
the filing of a Form 4 and a Form 3 for Lucian L. Morrison.  These
filings were made after their due date on June 24, 2008, June 10, 2008, February
5, 2008 and February 5, 2008, respectively.





Code
of Ethics





We have
adopted a code of ethics entitled "Code of Business Conduct," which applies to
all employees, including our chief executive officer, chief financial officer
and principal accounting officer. The full text of our Code of Business Conduct
is published on our website, at www.fareastenergy.com, under the "Investor
Relations" caption.  We intend to disclose future amendments to, or
waivers from, certain provisions of this code on our website within four
business days following the date of such amendment or
waiver.  Information contained on the website is not part of this
report.





70
 Table of Contents





Audit
Committee





The Audit
Committee was established in accordance with Section 3(a)(58)(A) of the Exchange
Act and assists the Board and management of the Company in ensuring that we
consistently act with integrity and accuracy in financial
reporting.  The Board has adopted a written charter for the Audit
Committee.  The Audit Committee's responsibilities
include:





·
            selecting
      and reviewing our independent registered public accounting firm and their
      services;





·
            reviewing
      and discussing the audited financial statements, related accounting and
      auditing principles, practices and disclosures with the appropriate
      members of management;





·
            reviewing
      and discussing our quarterly financial statements prior to the filing of
      those quarterly financial
statements;





·
            establishing
      procedures for the receipt of, and response to, any complaints received
      regarding accounting, internal accounting controls, or auditing matters,
      including anonymous submissions by
employees;





·
            reviewing
      the accounting principles and auditing practices and procedures to be used
      for the audit of our financial statements and reviewing the results of
      those audits; and





·
            monitoring
      the adequacy of our operating and internal controls as reported by
      management and the independent registered public accounting
      firm.





William
A. Anderson is the chairman of the Audit Committee and the other members of the
Audit Committee are John Mihm, Lucian L. Morrison and Thomas E.
Williams.  The Board has determined that each member of the Audit
Committee is independent within the meaning of the American Stock Exchange LLC
("AMEX") listing standards and satisfies the AMEX listing standards financial
literacy requirements.  The Board has determined that each of William
A. Anderson and Lucian L. Morrison are "audit committee financial experts" as
that term is defined under Item 407 of Regulation S-K.





ITEM 11.  EXECUTIVE COMPENSATION





Compensation
Committee Interlocks and Insider Participation





Lucian
Morrison, Donald A. Juckett and William A. Andersonserve
on the Compensation Committee. Our independent directors are, and we expect they
will continue to be, the only members of the Compensation Committee. None of our
directors or executive officers has a relationship with us or any other company
that the SEC defines as a compensation committee interlock or insider
participation that should be disclosed to stockholders.





Report
of the Compensation Committee





The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis below with management, and based on reviews and discussions, the
Compensation Committee recommended to the Board, and the Board has approved,
that it be included in this report and in our 2008 Proxy Statement.





Lucian
Morrison, Chairman of the Compensation Committee


William
A. Anderson


Donald A.
Juckett





71
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COMPENSATION
DISCUSSION AND ANALYSIS





Compensation
Committee





It is the
responsibility of the Compensation Committee of our Board to set compensation
for executive officers and directors, to establish and administer an overall
compensation program that promotes the long-term interests of the Company and
our stockholders, and to evaluate performance of executive
officers.





The
Compensation Committee uses information supplied by various sources, including
Company management and outside compensation consultants, to assist it in
determining compensation for our executive officers.  Management's
role is primarily to provide information relevant to performance
measurement.  At the request of the Compensation Committee, our Chief
Executive Officer provides informal evaluations of the performance of the
executives that report directly to him and may make recommendations as to base
compensation and performance awards for these
individuals.  Additionally, our Chief Executive Officer works with the
Compensation Committee in determining appropriate criteria for evaluating
individual and company performance.  Due to the small size of our
company, the Compensation Committee is able to make or specifically approve
virtually all decisions regarding executive compensation and, therefore, the
delegation of the committee's authority in this regard is very
limited.





We have
used the compensation consulting firm, Towers Perrin, since
2004.  Towers Perrin was selected by the Compensation Committee and
reports directly to it.  They have performed no other work for us and
have no other outside relationship to the Company's directors or
officers.  For further information, see "Use of Compensation
Consultant and Benchmarking."





Compensation
Philosophy and Objectives





In
setting overall total compensation for executive officers, the Compensation
Committee strives to achieve and balance the following objectives:





·
            hiring
      and retaining executive officers with the background and skills to help us
      achieve our company's objectives;


·
            aligning
      the goals of executive officers with those of the stockholders and the
      Company;


·
            motivating
      executive officers to achieve the Company's important short, medium and
      long-term goals;


·
            conserving
      cash by setting compensation levels consistent with market conditions and
      taking into consideration the Company's financial condition;
      and


·
            providing
      sufficient ongoing cash compensation to retain executives in a competitive
      marketplace..





The
philosophy we use in setting compensation levels and structures is based on the
following principles:





·
            compensation
      for our executive officers should be strongly linked to
      performance;


·
            compensation
      should consist of an increasingly higher percentage of compensation that
      is at risk and subject to performance-based awards as an executive
      officer's range of responsibility and ability to influence the Company's
      results increases;


·
            compensation
      should be fair and competitive in relation to the marketplace and our
      financial condition;


·
            employment
      security should be used to equalize our employment opportunities with
      those of more mature companies, to the extent
  appropriate;


·
            sense
      of ownership and long-term perspective should be reaffirmed through our
      compensation structure; and


·
            outstanding
      achievement should be recognized.





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Setting
Executive Compensation





The
Compensation Committee annually reviews and approves the base salaries, bonuses
and equity awards of our executive officers.  During 2008, our
executive officers included:





Name
                  PositionMichael
      R. McElwrath
                  President,
      Chief Executive Officer and DirectorK.
      Andrew Lai
                  Chief
      Financial Officer and Principal Accounting Officer (from October 1,
      2008)Randall
      D. Keys
                  Chief
      Financial Officer (through October 1, 2008)Phil
      A. Christian
                  Chief
      Operating Officer, President and Country Manager of Far East Energy
      (Bermuda), Ltd. (from March 12, 2008)Garry
      R. Ward *
                  Senior
      Vice President, EngineeringAlex
      Yang *
                  Senior
      Vice President, Exploration and
Production





* In
December 2008, the Board of Directors reviewed the responsibilities of Garry
Ward and Alex Yang with input from management and considered whether they were
performing policy making functions for the Company.  Based on that
review, the Board determined Messrs. Ward and Yang were not performing policy
making functions and therefore, were not executive officers of the
Company.  As a result, Messrs. Ward and Yang will not be treated as
executive officers in 2009.





We use a
combination of compensation elements in our executive compensation program,
including:





·
            salaries;


·
            cash
      bonuses;


·
            equity
      awards;


·
            post-termination
      compensation; and


·
            benefits.





Salaries
and bonuses are our primary forms of cash compensation.  We strive to
set salaries competitively by utilizing benchmarks as reference
points.  We try to provide a reasonable amount of cash compensation to
our employees to retain their executive talent in a competitive
marketplace.  We provide short-term incentives by awarding annual cash
bonuses determined by the Compensation Committee on a discretionary
basis.  The bonuses reward achievement of short-term goals and allow
us to recognize individual and team achievements.  The cash portion of
our compensation structure consists of a higher percentage of salary as compared
to bonus.  Bonuses and equity awards are our two forms of
performance-based compensation.  We tend to use more equity awards
than cash awards for performance-based compensation.  As a result of
our lower cash bonuses, annual discretionary cash bonuses as a percentage of our
cash compensation is relatively low in comparison to the companies surveyed by
Towers Perrin.





We
provide long-term incentives through equity awards, which have historically
consisted of stock options that vest over time.  In 2007, we also
began to grant awards of restricted stock that vest over time.  Equity
awards are a non-cash form of compensation.  We believe equity awards
are an effective way for us to reward achievement of long-term goals, conserve
cash resources and create a sense of ownership in our
executives.  Options become valuable only as long-term goals are
achieved and our stock price rises.  They provide our executive
officers with a personal stake in the performance of the Company's equity even
before vesting.  Restricted stock awards that vest over time provide
similar incentives.  A large percentage of the total compensation paid
to our executive officers consists of equity awards because we believe this is
consistent with our philosophy of paying for performance and requiring more
compensation to be at risk for employees at the highest level.





Our
executive officers (other than Mr. Keys) have also entered into employment
agreements that have defined termination benefits, which we believe, in part,
compensate for the potentially lower annual salary at our company as compared to
more mature companies by providing security.  Our employment
agreements as well as our equity awards generally provide compensation to our
executive officers if they are terminated within 24 months of a change in
control of the Company, which provides employment and financial security to our
employees in that





73
 Table of Contents





situation.  The
competitive compensation and the employment agreements foster an environment of
relative security within which we believe our executives will be able to focus
on achieving Company goals.  For further discussion of the employment
agreements with our executive officers, see "Narrative to Summary Compensation
Table and Grants of Plan-Based Awards Table – Employment Agreements with
Executive Officers."





Use
of Compensation Consultant and Benchmarking





Towers
Perrin provides survey data to the Compensation Committee, which the committee
uses to gauge the reasonableness and competitiveness of both total compensation
and structure of the compensation package for our executive
officers.  In February 2008, Towers Perrin provided the Compensation
Committee with an analysis of compensation for top executives at certain oil and
gas companies, primarily smaller companies with revenues below $175
million.  The analysis included a combination of data from the William
M. Mercer 2007 Energy Industry
Compensation Survey and the Towers Perrin 2007 Oil & Gas Compensation
Survey.  The Mercer survey included data from more than 200
small to mid-sized companies grouped by size.  The Towers Perrin
survey included a smaller number of companies that varied in
size.  All of the companies in the Mercer and Towers Perrin surveys
were energy companies in the exploration and production
sector.  Towers Perrin used the Mercer survey data for smaller
companies to benchmark salaries and its own survey to benchmark short-term and
long-term incentives as a percentage of salary.





Towers
Perrin also provided compensation data for a selected peer group of publicly
traded companies, which the Compensation Committee also used as a reference
point to assist in evaluating the reasonableness of certain elements of
compensation.  Towers Perrin, with the assistance of management,
identified fifteen companies in the peer group.  These companies were
selected for similarity of industry and because management believes that the
Company competes with these companies for executive talent.  The
following companies made up the peer group:





Harvest
      Natural Resources, Inc.
              Toreador
      Resources Corp.Clayton
      Williams Energy, Inc.
              PrimeEnergy
      Corp.Petroquest
      Energy Inc.
              Transmeridian
      Exploration Inc.Callon
      Petroleum Company
              FX
      Energy Inc.Endeavour
      International Corp.
              TXCO
      Resources Inc.Brigham
      Exploration Company
              Cano
      Petroleum Inc.HKN,
      Inc.
              American
      Oil & Gas Inc.BPZ
      Energy, Inc.





Information
on the pay practices of the peer group is provided by Towers Perrin to the
extent such information is available.  The Compensation Committee used
their analysis of performance and the survey information in reviewing salaries
and equity awards for 2008 and bonuses for 2008 performance for our executive
officers.  However, the purpose of the analysis and survey information
furnished by Towers Perrin is not to supplant the analysis of individual
performance and other measures used in the compensation decision process for
executive officers.  Because this analysis and information is just one
of several analytical tools that are used in setting executive compensation, the
Compensation Committee has discretion in determining the nature and extent of
its use.





Total
Compensation and Description and Allocation of Its Components





Total
Compensation.  The Compensation Committee reviews total
compensation for executive officers annually when they evaluate existing
salaries and determine annual cash bonuses.  The committee evaluates
survey data provided by Towers Perrin to assist in determining the appropriate
total compensation for each officer.





The
Compensation Committee blends the components of compensation to achieve a total
compensation package that is weighted toward the equity
component.  Total compensation for each officer, with some variation,
was between the 25th and the
50th
percentile of the total compensation of the companies in the survey data
provided by Towers Perrin.  The cash components of compensation, which
constitute a smaller percentage of total compensation, were near or below the
25th
percentile.  Of the two cash components, salary was generally at or
near the 25th and the
50th
percentile and cash bonus opportunities were below the 25th
percentile.  This is consistent with our objective of emphasizing
equity awards and conserving cash.  Our level of cash compensation
also reflects a key difference between our company and other companies in the
survey.  Our company is in the development stage while
the





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surveyed
companies are generally revenue producing and therefore may be less concerned
about conserving their cash resources.





Equity
awards for executive officers have historically constituted a larger percentage
of total compensation.  In 2008, equity awards. were between the
25th
and the 50th
percentile based on the survey data provided by Towers
Perrin.   During 2008, the Company granted both options
and  restricted stock to executive officers.  For further
information, see "2008 Summary Compensation Table," "2008 Grants of Plan-Based
Awards Table" and "Narrative to Summary Compensation Table and Grants of
Plan-Based Awards Table."





Decisions
regarding salary increases, bonus awards and equity awards are ultimately at the
discretion of the Compensation Committee.  However, in making these
decisions, the committee considers the achievements of the Company in the
previous fiscal year, the obstacles overcome in our exploration efforts, the
progress toward commercial gas production and revenues, and whether expenditures
have been reasonably managed.





In
addition to the Company's achievements, the Compensation Committee reviews the
accomplishments and performance of the individual executive
officers.  For 2008, in reviewing company and individual performance
and as part of the determination of compensation, the Compensation Committee
considered, among other things, the following company performance factors and
individual performance factors:





Company
Performance Factors





·
            level
      of production of CBM gas, if any;
and


·
            changes
      in the Company's share price.





Individual
Performance Factors





·
            development
      and implementation of strategic plans related to the executive officer's
      responsibilities;


·
            improvement
      of the Company's and our executive officer's relationships with CUCBM and
      other constituencies;


·
            improvement
      of data management and technical
analysis,


·
            control
      of drilling and exploration costs;


·
            creation
      of an overall development plan for the Shouyang Block in the Shanxi
      Province of China;


·
            provision
      of relevant operational and production updates to executive team and the
      Board, as appropriate;


·
            completion
      of successful capital raising at an appropriate level to meet upcoming
      operational needs; and


·
            maintenance
      of effective investor relations and outreach to potential
      investors.





During
its review of the 2008 performance criteria, the Compensation Committee gave
approximately one-third of the weight of its evaluation of the executive officer
based on company performance measures.  The remainder of the
evaluation of the executive officer was based on the individual performance
factors and other considerations.  These performance measures were
also discussed with the applicable executive officers. The performance criteria
had a significant impact on the Compensation Committee's decisions regarding
discretionary bonuses for 2008, although they were not determinative in those
decisions.  The committee also considered the 2007 performance
criteria in determining salary increases in 2008.





In 2009,
the Compensation Committee plans to continue to implement guidelines under which
performance at the executive level can be measured with simplicity and
transparency and performance awards can be granted in relation to those
performance measures.  For a development stage company, appropriate,
reliable performance measures can be difficult to identify.  However,
we will seek to identify measurements that are appropriate to a development
stage company and which will relate to the achievement of Company goals,
particularly in the areas of drilling and production and appropriate management
of our cash resources.  For 2009, the Compensation Committee intends
to set performance measures based on both Company and individual performance
factors and to adopt target bonuses based on a percentage of the executive's
base salary.  The committee expects that the maximum bonus that an
executive may earn will be set at a specified percentage of the executive's base
salary.  The executive may earn that maximum bonus or percentage of
salary only if the company and individual performance factors for the year are
fully met.  Otherwise, the bonus actually earned will fall short of
the maximum potential bonus achievable for the





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year and
will be reduced based upon the committee's evaluation of company and individual
performance factors.  The committee believes these performance
measures will be a very strong factor in making bonus decisions and may
influence salary adjustments and equity awards.  However, the
Compensation Committee plans to continue to use its discretion in making these
compensation decisions.





Salaries.  The
Compensation Committee reviews salaries for our executive officers annually near
the beginning of the year and adjustments to salaries, if any, have historically
been made effective as of January 1 of that year.  Initial base
salaries are set forth in the executive's employment agreement.  The
level of salary is determined by market factors when the executive officer is
hired and are adjusted as necessary during the annual review of
salary.  Infrequently, specific circumstances may prompt a salary
change outside the usual review schedule.  The Compensation Committee
evaluates adjustments to salary based, in part, on the survey and peer group
data provided by Towers Perrin and the company and individual performance
criteria.  If an executive has changed or increased his level of
responsibility within the Company, the Compensation Committee also considers a
commensurate change in salary.





In
February 2008, the Compensation Committee approved salary increases of 5% for
each Michael R. McElwrath, Garry Ward and Zhendong "Alex" Yang.  These
increases were made to maintain market competitiveness and to adjust for
increases in cost of living based on available market comparison data, and were
at rates consistent with or below salary rate increases at the Company
generally.  In September 2008, Mr. Yang's annual salary was increased
from $156,500 to $182,420 in conjunction with his move to work for the Company
in China.  Additionally, Mr. Lai's salary was increased from $150,000
to $195,000 in conjunction with his promotion and appointment to Chief Financial
Officer.  The Compensation Committee determined not to make any
salary increases for 2009 for our executive officers.





Bonuses.   The
Compensation Committee awards cash bonuses each year, typically early in the
first quarter, for performance during the previous fiscal year.  We
are required to pay a minimum bonus of $40,000 per annum to our Chief Executive
Officer pursuant to his employment agreement with the Company, and certain
bonuses related to foreign service for executives working in
China.  Additionally, each year under the terms of the Company's
employment agreements with Mr. Yang and Mr. Christian, the Company is obligated
to pay 20% of each officer's base salary as an international service bonus for
the service of these executives in China.  Other than contractual
bonuses, the amount of each bonus has ultimately been a discretionary
determination, based on the events and accomplishments of the
year.  In light of the Company's current financial condition, the
Compensation Committee determined to defer its decision whether to award cash
bonuses for the 2008 performance period.





In
determining discretionary bonuses, the Compensation Committee generally awards
cash bonuses that are towards the lower end of the range for oil and gas
companies in the survey data provided by Towers Perrin.  This is
accomplished by setting a maximum bonus range as a percentage of salary and,
through the 2007 performance period, this percentage has not exceeded
65%.  However, the Compensation Committee continues to use its
discretion in making these compensation decisions.  The committee may
consider granting retention bonuses in the future but does not currently intend
to award additional retention bonuses.





Equity
Awards.  Equity awards are an important component in our
compensation structure, particularly because we are a development stage company
and it is important for us to conserve cash resources.  Equity awards
may be granted at a date other than the date that salary and bonus decisions are
made but are typically granted during the first quarter of the
year.  Until recently, we granted only awards of non-qualified stock
options.  In 2007, the Compensation Committee began to use restricted
stock grants in addition to the traditional use of option grants and has
continued to grant restricted stock in 2008.





Choice of equity
vehicles.  We use grants of options to purchase our common
stock for the equity awards granted to our executive officers.  Stock
options effectively align our executives' goals with those of stockholders and
motivate executive officers to achieve our long-term goals.  Our
option agreements typically include both time-vesting and termination forfeiture
terms, which assist us in inducing the employment and retention of executive
officers by providing a financial incentive related to retention.  The
Compensation Committee plans to continue to utilize options awards.





76
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In
addition, the Compensation Committee also utilizes restricted stock for equity
awards.  The committee considered that the use of this form of equity
in some cases, rather than options, would reduce dilution to our existing
stockholders, provide equity participation in our company to these executives
and reduce the overall number of shares granted.  The Compensation
Committee believes that decreasing the dilutive effect related to our equity
awards will assist in preserving the economic value of our existing
stockholders.  The committee also believes that shares of time-vesting
restricted stock will encourage achievement of long-term goals and retention of
key executives in a similar manner as option awards.  The Compensation
Committee plans to continue to grant options and/or restricted stock in the
future to our executive officers.





Determining the size of the equity
award.  We use equity awards as both a reward for past
performance and an incentive for future performance.  The Compensation
Committee has historically approved discretionary equity award grants to
executive officers during the first quarter of the year.





Each of
our executive officers received a grant of equity awards upon joining the
Company, providing them with an initial equity stake and a long-term
incentive.  The size of these initial grants is determined primarily
by market factors, with such grants offered as an inducement to accept our offer
of employment.  Although it has typically granted additional awards
annually, the Compensation Committee is not bound to make continuing equity
awards to executive officers, and in fact, does not in every
case.  Factors considered by the committee in determining whether an
executive receives an award of options and/or restricted stock and the size and
vesting schedule of that award include the following:





·
            the
      performance indicators and the events and accomplishments used to
      determine total compensation, as described
  above;


·
            the
      cumulative number of shares and terms (including option exercise price) of
      previous equity awards, which may, in the view of the Compensation
      Committee, be sufficient to achieve the goals of the equity award program
      for a given individual, without supplement in a particular
      year;


·
            the
      estimated fair value of the award (using the Black-Scholes option pricing
      model for options) and its impact on the executive's total
      compensation;


·
            the
      estimated impact of the expense of the award on reported income in the
      year of the award and subsequent
years;


·
            the
      stockholder dilution, including overhang of existing options and warrants
      for our common stock;


·
            the
      shares remaining available for grants under the 2005
  Plan;


·
            the
      tax consequences related to the vesting of the equity awards;
      and


·
            the
      review of equity award data for comparable companies as provided by Towers
      Perrin.





2005 Stock Incentive Plan
awards.  Since its approval by our stockholders in 2005, with
certain exceptions described below, we have granted options and restricted
shares to executive officers under the 2005 Plan.  Our grants to
executive officers under the 2005 Plan have historically had a vesting period of
three to four years from date of grant and a term of up to ten
years.  Typically, our option awards provide for forfeiture of
unexercised options after a period of 60 to 90 days after the applicable
executive's termination of employment with the Company.





Awards granted outside the 2005
Plan.  Prior to the adoption of the 2005 Plan, grants of
options to executives included varying terms, some differing from the
above.  Since the adoption of the 2005 Plan, we generally do not grant
any awards outside the 2005 Plan except for inducement equity awards These
awards contained terms similar to those made under the 2005 Plan.  The
Compensation Committee may continue to grant options and/or restricted stock
outside of the 2005 Plan, particularly for inducement grants to newly appointed
executive officers and directors.





Expense
recognition.  All compensatory options and restricted stock are
expensed over time in accordance with generally accepted accounting principles.
For information on the equity award expense recognized in 2008 for each
executive officer, see "Summary Compensation Table – Option Awards" and "Summary
Compensation Table – Restricted Stock Awards."  For further details
regarding 2008 equity grants to our named executive officers, see the "Grants of
Plan-Based Awards" table.  For further information on the 2005 Plan,
see "Narrative to Summary Compensation Table and Grants of Plan-Based Awards
Table – 2005 Stock Incentive Plan" and "Security





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Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters –
Equity Compensation Plan Information."





Procedures for granting equity
awards.We have generally granted any equity awards to our
executive officers annually during the first quarter of each fiscal year or at
employment.  Since the adoption of the 2005 Plan, options are dated
and assigned exercise prices as of the nearest trading date to the meeting of
the Compensation Committee in which such awards were
approved.  Exercise prices for option grants during 2008 have been set
at the fair market value on the date of grant or higher.  For purposes
of determining exercise prices for our stock option awards, the fair market
value of our common stock, on a given date, means the average of the closing bid
and asked prices of the shares of common stock as reported that day on the OTC
Bulletin Board.  We intend to continue this practice.  We
attempt to avoid issuing options near the time of any expected significant
movement in our stock price by taking care, within reason, not to schedule these
meetings in proximity to upcoming or recent announcements of significance, such
as earnings releases or other public announcements relating to current or future
profitability.  Scheduling of meetings of the Compensation Committee
is also impacted by availability of personnel and the need to make timely hiring
decisions and cannot be perfectly aligned with regard to public
announcements.  Under the 2005 Plan, the Chief Executive Officer, as
long as he is a member of the Board, has the authority to grant equity awards of
up to an aggregate of 200,000 shares of common stock in each calendar year to
employees that are not subject to the rules promulgated under Section 16 of the
Exchange Act.  The exercise price for such grants made by the Chief
Executive Officer are to be based on the date the award agreement is signed,
which is as soon as possible after the decision to make the award is
settled.  In practice, all awards have usually been approved by the
Compensation Committee.





Awards
have also been granted to new executive officers and incumbent directors on or
near the date of hire or election.  Our current practice is to grant,
date and price options to new executives on the date of hire, which is not the
date of their acceptance of our offer of employment, but rather, the first day
they report for work at the Company.  During 2008, the Compensation
Committee also granted restricted stock as an inducement of employment for new
executive officers.  Similar to option awards, our current practice is
to grant and date restricted stock awards on the first day the executive reports
for work at the Company.  Grants to newly elected directors are
generally awarded at the first meeting of the Compensation Committee after their
election.





Post Termination
Compensation.  We have employment agreements with all of our
named executive officers.  However, the Company did not have an
employment agreement with Mr. Keys, the Company's former Chief Financial
Officer.  All of our executive employment contracts provide some form
of termination benefits.  As a development stage company whose future
may be uncertain, we believe it is necessary to provide contractual assurance of
continued employment to our executives, and that without such assurances, our
recruitment efforts would not be as successful.





Our
executive employment agreements provide for termination benefits, including in
certain cases upon a change in control.  These clauses assist us in
attracting and retaining executive officers and are designed to provide stable
leadership for the Company during any potential or actual change of
control.  With the assurance of these benefits, we believe our
executives will be better able to objectively evaluate offers to purchase the
Company or other forms of potential change of control.  The clauses
also encourage continuation of the leadership and experience of our key
executives after a change in control, at least through a period of
transition.





For
further discussion of the terms of each employment agreement, see "Narrative to
Summary Compensation Table and Grants of Plan-Based Awards Table – Employment
Agreements with Named Executive Officers."





Perquisites and
Other Benefits.  We provide health insurance to our executive
officers, which is the same as that provided to our other U.S.
employees.  We also provide matching contributions for those U.S.
employees who contribute to a Simple Individual Retirement Account ("Simple
IRA"), matching up to 3% of annual salary, subject to certain caps provided by
tax regulation.  These benefits were approved by the Compensation
Committee when adopted.  We also provide additional pay to our U.S.
executive officers working in China to compensate those executives for living
outside the U.S.  The additional payments will be determined based on
what we believe market compensation is when each is hired.





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Tax
and Accounting Considerations





Section
162(m) of the Code generally disallows a tax deduction to public companies for
compensation in excess of $1 million paid to any executive officer unless such
compensation is paid pursuant to a qualified performance-based compensation
plan.  All compensation awarded to our executive officers in 2008 is
expected to be tax deductible.  The Compensation Committee considers
such deductibility and the potential cost to the Company when granting awards
and considering salary changes.





We
account for equity awards under the provisions of Statement of Financial
Accounting Standard No. 123 (revised 2004), Share-Based Payment ("FAS No.
123(R)").  We charge the estimated fair value of option and restricted
stock awards to income over the time of service provided by the employee to earn
the award, typically the vesting period.  The fair value of options is
measured using the Black-Scholes option pricing model.  The fair value
of restricted stock awards is measured by the closing price of our common stock
on the date of the award, with no discount for vesting period or other
restrictions.  The compensation expense to the Company under FAS No.
123(R) is one of the factors the Compensation Committee considers in determining
equity awards to be granted, and also may influence the vesting period
chosen.





As a
result of the resignation of Randy D. Keys during 2008, Mr. Keys forfeited
options to purchase up to 340,000 shares of common stock.





Chief
Executive Officer Compensation





For 2008,
the compensation of our Chief Executive Officer, Michael R. McElwrath, compares
to the survey data provided by Towers Perrin as follows:





Component
                    PercentileSalary
                    Between
      the  25th
      and  50thAnnual
      cash bonus
                    Below
      the 25thEquity
      award
                    Between
      the 25th
      and 50thTotal
                    Below
      the 25th





The
comparison of Mr. McElwrath's compensation to the benchmarks is similar to that
of our other executive officers.





Of Mr.
McElwrath's 2008 total compensation, 36% was attributable to the elements of
salary and annual cash bonus and 64% to non-cash equity elements.  For
other executive officers, the cash elements ranged from 50% to 71% of total
compensation, with the exception of our officers working outside the U.S., whose
cash elements comprised a higher percentage of their total
compensation.  The allocation between cash and non-cash compensation
for our executive officers was within the range of allocations that the
Compensation Committee considers appropriate.





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COMPENSATION
TABLES AND ADDITIONAL INFORMATION





The
following table sets forth a summary of compensation paid to our Chief Executive
Officer, Chief Financial Officer, and three other most highly paid persons
serving as executive officers (the "Named Executive Officers") for the fiscal
years ended December 31, 2008, December 31, 2007 and December 31,
2006.





2008
Summary Compensation Table
 
 Name
      and Principal Position
                          Year
                          
                          Salary
                          
                          
                          Bonus
                          
                          
                          Stock
      Awards (1)
                          
                          
                          Option
      Awards (1)
                          
                          
                          All
      Other Compen-sation
                          
                          
                          TotalMichael
      R. McElwrath
                          2008
                          
                          $
                          330,750
                          
                          
                          $
                          40,000
                          (2)
                          
                          $
                          467,383
                          
                          
                          $
                          216,164
                          
                          
                          $
                          10,500
                          (4)
                          
                          $
                          1,064,797President
      and Chief
                          2007
                          
                          
                          315,000
                          
                          
                          
                          128,993
                          
                          
                          
                          103,694
                          
                          
                          
                          458,276
                          
                          
                          
                          27,129
                          
                          
                          
                          1,033,092Executive
      Officer
                          2006
                          
                          
                          300,000
                          
                          
                          
                          100,000
                          
                          
                          
                          -
                          
                          
                          
                          637,110
                          
                          
                          
                          10,001
                          
                          
                          
                          1,047,111K.
      Andrew Lai
                          2008
                          
                          
                          161,250
                          
                          
                          
                          -
                          
                          
                          
                          14,775
                          (3)
                          
                          
                          51,300
                          (3)
                          
                          
                          4,125
                          (4)
                          
                          
                          231,450Chief
      Financial OfficerRandall
      D. Keys  (5)
                          2008
                          
                          
                          166,750
                          
                          
                          
                          -
                          
                          
                          
                          52,500
                          
                          
                          
                          88,558
                          
                          
                          
                          6,860
                          (4)
                          
                          
                          314,668Former
      Chief Financial Officer
                          2007
                          
                          
                          62,500
                          
                          
                          
                          12,938
                          
                          
                          
                          52,500
                          
                          
                          
                          92,772
                          
                          
                          
                          44,875
                          
                          
                          
                          265,585Phil
      A. Christian
                          2008
                          
                          
                          184,556
                          
                          
                          
                          36,911
                          (2)
                          
                          
                          73,800
                          (3)
                          
                          
                          64,722
                          (3)
                          
                          
                          276,903
                          (6)
                          
                          
                          636,892President,
      COOFar
      East Energy (Bermuda), Ltd.Garry
      R. Ward
                          2008
                          
                          
                          171,791
                          
                          
                          
                          -
                          
                          
                          
                          116,905
                          
                          
                          
                          55,010
                          
                          
                          
                          -
                          
                          
                          
                          343,706Senior
      Vice President,
                          2007
                          
                          
                          163,611
                          
                          
                          
                          19,756
                          
                          
                          
                          4,370
                          
                          
                          
                          45,515
                          
                          
                          
                          -
                          
                          
                          
                          233,252Engineering
                          2006
                          
                          
                          155,820
                          
                          
                          
                          23,373
                          
                          
                          
                          -
                          
                          
                          
                          193,468
                          
                          
                          
                          -
                          
                          
                          
                          372,661Zhendong
      "Alex" Yang
                          2008
                          
                          
                          170,904
                          
                          
                          
                          11,148
                          (2)
                          
                          
                          10,275
                          
                          
                          
                          27,366
                          
                          
                          
                          47,747
                          (7)
                          
                          
                          267,440Senior
      Vice President,
                          2007
                          
                          
                          156,450
                          
                          
                          
                          26,010
                          
                          
                          
                          -
                          
                          
                          
                          27,066
                          
                          
                          
                          5,364
                          
                          
                          
                          214,890Exploration
                          2006
                          
                          
                          149,000
                          
                          
                          
                          22,350
                          
                          
                          
                          -
                          
                          
                          
                          260,800
                          
                          
                          
                          5,070
                          
                          
                          
                          437,220





(1)
            The
      amounts in this column reflect the recognized value of stock or option
      awards, as applicable, granted to each Named Executive Officer through the
      end of fiscal year 2008 as determined in accordance with FAS
      123R.  See Note 9 to the consolidated financial statements
      included in Part II of this report for assumptions used in valuing these
      awards and the methodology for recognizing the related
      expense.  The expense, as presented in accordance with SEC rules
      in this table, has been modified to eliminate forfeiture assumptions
      related to service-based vesting conditions in computing the expense for
      unforfeited awards, and to reverse previously reported executive
      compensation expense for awards forfeited during the year. All options
      awards are for the purchase of our common stock.  Stock awards
      are grants of restricted stock representing time-vesting
      shares.  As a result of his resignation during 2008, Mr. Keys
      forfeited options to purchase up to 340,000 shares of common
      stock.


(2)
            The
      bonuses of $40,000, $36,911 and $11,148 for Messrs. McElwrath, Christian
      and Yang are for service in 2008 and are required under the terms of their
      employment agreements.


(3)
            On
      October 1, 2008, Mr. Lai was granted 45,000 shares of restricted stock and
      options to purchase up to 100,000 shares of common stock in conjunction
      with his appointment as Chief Financial Officer.  On March 12,
      2008, Mr. Christian was granted 120,000 shares of restricted stock and
      options to purchase up to 500,000 shares of common stock in connection
      with his retention as President and Chief Operating Officer of Far East
      Energy (Bermuda), Ltd. ("FEEB").  The restricted stock terms of
      both Messrs. Lai and Christian reflect the Company's 2005
      Plan.


(4)
            Represents
      the cost of matching funds to the Named Executive Officer's Simple
      IRA.


(5)
            Mr.
      Keys was Chief Financial Officer from October 1, 2007 through October 1,
      2008.  There were no severance or other payments made to Mr.
      Keys in connection with his
separation.


(6)
            Mr.
      Christian's other compensation includes $59,846 for housing in China,
      $55,930 for the expenses of two cars and two drivers, $40,860 for tax
      equalization, $73,505 for relocation expenses, $24,073 for vacation and
      home leave travel and $22,689 for the education of Mr. Christian's
      children while living in China.  The cost of the two cars and
      two drivers include vehicle leasing and maintenance expense, payroll,
      tolls, and fuel.  No allocation of the costs related to the use
      of the cars and drivers has been made between personal use and business
      travel within China.


(7)
            Mr.
      Yang's other compensation includes $14,988 for housing in China, $11,780
      for tax equalization, $10,000 for vacation and home leave travel, $6,744
      for the expense of a car and driver, and $4,235 for the cost of matching
      funds to Mr. Yang's Simple IRA.  The cost of the car and driver
      includes vehicle leasing and maintenance expense, payroll, tolls, and
      fuel.  No allocation of the costs related to the use of the cars
      and drivers has been made  between personal use and business
      travel within China.





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Grants
of Plan-Based Awards in 2008





The
following table provides information on equity awards granted during
2008:





Name
                                                      
                                                      
                                                      Grant
      Date (1)
                                                      
                                                      
                                                      All
      Other Stock Awards: Number of Shares of Stock or Units
      (#)
                                                      
                                                      
                                                      All
      Other Option Awards: Number of Securities Underlying Options (#)
      (2)
                                                      
                                                      
                                                      Exercise
      or Base Price of Option Awards ($ / Sh) (2)
                                                      
                                                      
                                                      Grant
      Date Fair Value of Stock and Option Awards ($)Michael
      R. McElwrath
                                                      
                                                      
                                                      02/11/08
                                                      
                                                      
                                                      
                                                      135,000
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      92,47502/11/08
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      540,000
                                                      
                                                      
                                                      
                                                      0.69
                                                      
                                                      
                                                      
                                                      251,640K.
      Andrew Lai
                                                      
                                                      
                                                      02/11/08
                                                      
                                                      
                                                      
                                                      45,000
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      30,82502/11/08
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      180,000
                                                      
                                                      
                                                      
                                                      0.69
                                                      
                                                      
                                                      
                                                      83,88010/01/08
                                                      
                                                      
                                                      
                                                      45,000
                                                      (3)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      13,50010/01/08
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      100,000
                                                      
                                                      
                                                      
                                                      0.30
                                                      
                                                      
                                                      
                                                      21,300Phil
      A. Christian
                                                      
                                                      
                                                      03/12/08
                                                      
                                                      
                                                      
                                                      120,000
                                                      (3)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      73,80003/12/08
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      500,000
                                                      
                                                      
                                                      
                                                      0.62
                                                      
                                                      
                                                      
                                                      208,500Garry
      R. Ward
                                                      
                                                      
                                                      02/11/08
                                                      
                                                      
                                                      
                                                      45,000
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      30,82502/11/08
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      135,000
                                                      
                                                      
                                                      
                                                      0.69
                                                      
                                                      
                                                      
                                                      62,910Zhendong
      "Alex" Yang
                                                      
                                                      
                                                      02/11/08
                                                      
                                                      
                                                      
                                                      45,000
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      30,82502/11/08
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      135,000
                                                      
                                                      
                                                      
                                                      0.69
                                                      
                                                      
                                                      
                                                      62,910





(1)
            Awards
      granted on February 11, 2008 are related to the 2007 performance
      period.


(2)
            All
      option awards and restricted stock awards were granted under the 2005
      Plan, except for the option award granted to Mr. Christian which was an
      inducement award and was granted outside the 2005 Plan. This award carried
      terms similar to those made under the 2005 Plan.  The exercise
      price of all the options granted under the 2005 Plan was equal to the fair
      market value of our common stock on the date of grant.  The fair
      market value, on a given date, means the average of the closing bid and
      asked price of our common stock as reported that day on the OTC Bulletin
      Board.


(3)
            On
      October 1, 2008, Mr. Lai was granted 45,000 shares of restricted stock and
      options to purchase up to 100,000 shares of common stock in conjunction
      with his retention as Chief Financial Officer.  On March 12,
      2008, Mr. Christian was granted 120,000 shares of restricted stock and
      options to purchase up to 500,000 shares of common stock in conjunction
      with his retention as President and Chief Operating Officer of
      FEEB.





81
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Narrative
to Summary Compensation Table and Grants of Plan-Based Awards Table





Employment Agreements with
Name Executive Officers





We have
employment agreements with our Named Executive Officers (except for Randall D.
Keys) and those agreements are summarized below.





Agreement with Michael R.
McElwrath.On December 23, 2004, the Company entered into an
amended and restated employment agreement with Mr. McElwrath.  On
November 26, 2007, the Company amended the agreement by extending the term to
October 13, 2010.  The employment agreement provides that Mr.
McElwrath will receive performance bonuses of not less than $20,000 payable on
or before the 13th of April and October of each year.  Mr. McElwrath's
annual base salary for 2008 was increased to $330,750 from
$315,000.





Unless
further extended, the employment agreement for Mr. McElwrath terminates on
October 13, 2010.  The employment agreement provides that if Mr.
McElwrath is terminated by the Company for Cause (as defined in the employment
agreement), the Company will pay his base salary and all amounts actually
earned, accrued or owing as of the date of termination and he will be entitled
for a period of three months after termination to exercise all options granted
to him under his employment agreement or otherwise to the extent vested and
exercisable on the date of termination unless otherwise provided in Mr.
McElwrath's option agreements.  Subsequent to the three-month
post-termination exercise period, remaining unexercised options will be
forfeited.





If Mr.
McElwrath's employment is terminated by the Company (other than as a result of
death, Disability (as defined in his employment agreement) or Cause), or if he
terminates his employment for Good Reason (as defined in his employment
agreement), he shall be entitled to the following:





·
            a
      lump sum payment of two times the sum of his base salary and bonus paid
      during the immediately preceding twelve-month
  period;


·
            continued
      participation in all employee benefit plans, programs or arrangements
      available to the Company's executive officers in which the executive was
      participating on the date of termination for a specified period of time
      following termination;


·
            for
      a period of three years following the termination date, the exercise of
      all options and restricted stock awards granted to him to the extent
      vested and exercisable at the date of termination of his employment (after
      the three year period is completed, remaining unexercised options will be
      forfeited); and


·
            certain
      gross-up payments for any excise
taxes.





Notwithstanding
the foregoing, if Mr. McElwrath's termination of employment by the Company
(other than for death, Cause or Disability) or by him for Good Reason occurs
within 24 months following a Change of Control (as defined in the employment
agreement), then he will be entitled to a lump sum payment of three times the
sum of his base salary and bonus during the immediately preceding twelve-month
period and all options and restricted stock granted to him will immediately vest
and become exercisable as of the date of termination. After a period of three
years following the termination date, all remaining unexercised options will be
forfeited.  Pursuant to the Company’s employment agreement with
Michael R. McElwrath, during the term of Mr. McElwrath’s employment, the Company
agreed to nominate Mr. McElwrath for election to the Board of Directors at each
annual meeting of the stockholders called for the purpose of electing
directors.  Mr. McElwrath is entitled to terminate his employment for
Good Reason (as defined in his employment agreement) if he is not nominated and
elected as a director of the Company.  The employment agreement also
entitles Mr. McElwrath to certain gross up payments for excise taxes in the
event of a Change of Control.





If Mr.
McElwrath's employment is terminated as a result of death or Disability, the
Company will pay his base salary and all amounts actually earned, accrued or
owing as of the date of termination and he or his estate will be entitled to
exercise all options granted to him regardless of whether or not the option or
restricted stock is vested on the date of termination.  Mr. McElwrath
or his estate may exercise any of the options or restricted stock that vest on
the date of termination for a period of three years, after which time the awards
are forfeited.





Mr.
McElwrath's employment agreement contains no covenant-not-to-compete or similar
restrictions after termination.





82
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Arrangement with Randall D.
Keys.  Mr. Keys was appointed as Chief Financial Officer on
October 1, 2007 and he continued to serve as Chief Financial Officer until
October 1, 2008.  He had no employment contract with
us.  Mr. Keys' annual base salary was $250,000 and he was also
eligible to receive discretionary bonuses as determined by the Compensation
Committee.  In the event that Mr. Keys' employment with the Company
and its subsidiaries had been terminated upon or within 24 months of a Change of
Control (as defined in the 2005 Plan), all options and restricted stock granted
to Mr. Keys would have been immediately and fully vested and exercisable as of
the date of termination. Mr. Keys resigned as Chief Financial Officer of the
Company on October 1, 2008.  He received no compensation in connection
with his resignation.





Agreement with Phil A.
Christian.On March 12, 2008, Far East Energy (Bermuda), Ltd.
(“FEEB”) entered into an employment agreement with Mr. Christian pursuant to
which Mr. Christian serves as FEEB’s President, Chief Operating Officer and
Country Manager. The employment agreement will terminate on March 12, 2010,
unless extended or earlier terminated. Under the terms of the agreement, Mr.
Christian will receive an annual base salary of $230,000 and, while he is
employed with FEEB in China, an international service bonus of 20% of Mr.
Christian’s base salary per year, a housing allowance of up to $100,000 per
year, a moving allowance, reimbursement for up to $30,000 for certain travel
expense between China and the United States and reimbursement of up to $40,000
of education expenses for his children. He may also receive discretionary
bonuses as determined by the Compensation Committee of the Company. Generally,
Mr. Christian will also receive a tax equalization payment to the extent the
amount Mr. Christian actually pays for income taxes exceeds the United States
income tax and social security tax he would have paid as a citizen of the United
States while he is employed with FEEB in China.  If Mr. Christian’s
employment is terminated without cause (as defined in the employment agreement)
or for good reason (as defined in the employment agreement), he will receive a
severance payment of 100% of his annual base salary; provided that if Mr.
Christian’s employment is so terminated on or within 24 months of a change in
control (as defined in the employment agreement), he will receive a severance
payment of 200% of his annual base salary.





Mr.
Christian’s employment agreement contains no covenant-not-to-compete or similar
restrictions after termination.





Agreement with K. Andrew
Lai.  On October 1, 2008, the Company entered in an amended and
restated employment agreement (the "Agreement") with Mr. Lai pursuant to which
Mr. Lai will serve as the Company's Chief Financial Officer effective October 1,
2008.  The Agreement will terminate on October 1, 2010, unless
extended or earlier terminated.  Pursuant to the Agreement, Mr. Lai's
base salary is $195,000.  He may also receive discretionary bonuses in
an amount up to 45% of his base salary.  In conjunction with his
appointment as Chief Financial Officer, Mr. Lai also received options to
purchase up to 100,000 shares of the Company's common stock and 45,000 shares of
restricted stock.  If Mr. Lai's employment is terminated without Cause
(as defined in the amended and restated employment agreement) or for Good Reason
(as defined in the amended and restated employment agreement), he will receive a
severance payment of 100% of his annual base salary; provided that if Mr. Lai's
employment is so terminated on or within 24 months of a Change in Control (as
defined in the amended and restated employment agreement), he will receive a
severance payment of 200% of his annual base salary.  If Mr. Lai's
employment is terminated as a result of death or Disability (as defined in the
amended and restated employment agreement), the Company will pay his base
salary  which would have been payable to Mr. Lai through the date his
employment is terminated and all amounts actually earned, accrued or owing as of
the date of termination.  If Mr. Lai’s employment is terminated for
Cause or Mr. Lai voluntarily terminates his employment, the Company will pay his
base salary and all amounts actually earned, accrued or owing as of the date of
termination and he will be entitled for a period of three months after
termination to exercise all options granted to him under his employment
agreement or otherwise to the extent vested and exercisable on the date of
termination.





Mr. Lai's
employment agreement contains no covenant-not-to-compete or similar restrictions
after termination.





Agreement with Garry R.
Ward.On February 1, 2004, the Company entered into an
employment agreement with Mr. Ward whereby Mr. Ward serves as the Senior Vice
President of Engineering for a term of five years unless sooner
terminated.  Mr. Ward's employment agreement expired by its terms on
January 31, 2009 and Mr. Ward and the Company are in discussions regarding
entering into a new employment agreement. Mr. Ward will receive an annual base
salary of at least $140,000. Mr. Ward's annual base salary for 2008 was
$171,791.  Subject to management's discretion, Mr. Ward would have
been eligible to receive annual bonuses in an amount equal to 20%





83
 Table of Contents





to 25% of
his annual base salary at the time of payment.  If Mr. Ward were
terminated by the Company for any reason other than Cause or is terminated after
a Change in Control (as such terms are defined in the employment agreement), the
Company will pay him a single lump-sum severance payment of
$50,000.  If Mr. Ward's employment were terminated without Cause, he
would have retained all of his rights in, and ownership of, all stock options
vested as of the date of termination or that would vest within 30 days following
the date of termination.  Additionally, in the event that Mr. Ward's
employment with the Company and its subsidiaries were terminated upon or within
24 months of a Change of Control (as defined in the 2005 Plan), all options and
restricted stock granted to Mr. Ward shall be immediately and fully vested and
exercisable as of the date of termination. Mr. Ward's agreement includes a
covenant-not-to-compete and a confidentiality provision, each of which apply for
one year after termination.  In December 2008, the Board of Directors
reviewed the responsibilities of Mr. Ward with input from discussion with
management and considered whether he was performing policy making function for
the Company.  Upon completion of the review, the Board determined that
Mr. Ward was not performing any policy making function and, therefore, is not an
executive officer of the Company.





Agreement with Zhendong "Alex"
Yang.On November 1, 2003, the Company entered into an
employment agreement with Dr. Yang. The term of the employment agreement is five
years unless sooner terminated. Dr. Yang will receive an annual base salary of
at least $126,000.  In the event that Dr. Yang's employment with the
Company and its subsidiaries is terminated upon or within 24 months of a Change
of Control (as defined in the 2005 Plan), all options granted to Dr. Yang shall
be immediately and fully vested and exercisable as of the date of
termination.  Dr. Yang's agreement includes a covenant not to compete
and a confidentiality provision, each of which apply for one year after
termination.   On September 10, 2008, Dr. Yang entered into an
amended and restated employment agreement with the Company. The agreement will
terminate on September 10, 2010, unless extended or earlier
terminated.  The Agreement provides that Dr. Yang will serve as the
Senior Vice President – Exploration of Far East Energy (Bermuda) Ltd., a
wholly-owned subsidiary of the Company ("FEEB"), and will work in
China.  Prior to entering into the agreement and relocating to China,
Dr. Yang served as the Senior Vice President – Exploration of the
Company.  Pursuant to the amended and restated employment agreement,
Dr. Yang will receive an initial base salary of $182,420 and, while he is
employed with FEEB in China, an international service bonus equal to 20% of his
base salary, a housing allowance of up to $60,000 per year, a moving allowance
and reimbursement for up to $30,000 for certain travel expenses per
year.  He may also receive discretionary bonuses as determined by the
Compensation Committee of the Company. Generally, Dr. Yang will also receive a
tax equalization payment to the extent the amount Dr. Yang actually pays for
income taxes exceeds the United States income tax he would have paid as a
citizen of the United States while he is employed with FEEB in China. If Dr.
Yang's employment is terminated without cause (as defined in the amended and
restated employment agreement), he will receive a lump sum payment of
$50,000.    In December 2008, the Board of Directors
reviewed the responsibilities of Dr. Yang with input from discussion with
management and considered whether he was performing policy making function for
the Company.  Upon completion of the review, the Board determined Dr.
Yang was not performing any policy making function and, therefore, is not an
executive officer of the Company.





2005 Stock Incentive
Plan





On May
27, 2005, the Company's stockholders approved the 2005 Plan. At the Company's
annual meeting held on December 7, 2007, its stockholders approved amendments to
the 2005 Plan (1) to increase the number of shares available from 3,500,000 to
7,500,000, (2) to increase the number of shares that may be granted as
restricted stock units or any other stock based awards from 900,000 to 2,400,000
shares and (3) to add a provision prohibiting the repricing of options issued
under the 2005 Plan without stockholder approval.  Unless sooner
terminated by the Board or the Compensation Committee, the 2005 Plan will
terminate on May 27, 2015.  The 2005 Plan permits the Compensation
Committee to grant stock options, including incentive stock options ("ISOs") and
non-qualified stock options, stock appreciation rights, restricted stock,
restricted stock units, and other stock-based awards.





The
purpose of the 2005 Plan is to (1) aid the Company in attracting, securing and
retaining employees of outstanding ability, (2) attract members to the Board,
(3) attract consultants to provide services to the Company, as needed, and (4)
motivate such persons to exert their best efforts on behalf of the
Company.





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 Table of Contents





The 2005
Plan is administered by the Compensation Committee.  The 2005 Plan
provides that if the Chief Executive Officer of the Company is a member of the
Board, the Board may authorize him or her to grant awards of up to an aggregate
of 200,000 shares of common stock in each calendar year to participants who are
not subject to the rules promulgated under Section 16 of the Exchange
Act.





The
maximum number of shares of common stock with respect to which awards may be
granted is 7,500,000 shares (subject to adjustment in accordance with the
provisions of the 2005 Plan).  The total number of shares of common
stock that will be available for grants of ISOs is 2,600,000 shares and the
total number of shares of common stock that will be available for grants of
unrestricted shares of common stock, restricted stock, restricted stock units or
any other stock-based awards is 2,400,000 shares.  The maximum number
of shares with respect to which awards of any and all types may be granted
during a calendar year to any participant is limited, in the aggregate, to
1,500,000 shares.  The 2005 Plan also provides that the maximum amount
of a performance-based award to any Covered Employee (as defined in the 2005
Plan) for any fiscal year of the Company will be $1,000,000.  Shares
which are subject to awards which terminate, expire, are cancelled, exchanged,
forfeited, lapse or are settled for cash may be utilized again with respect to
awards granted under the Plan.





With
respect to any options that are awarded, the exercise price pursuant to which
common stock may be purchased will be determined by the Compensation Committee,
but will not be less than the fair market value (as defined in the 2005 Plan) of
the common stock on the date the option is granted.  Under the 2005
Plan, fair market value, on a given day, is defined as the mean of the closing
bid and asked prices of the common shares as reported that day on the OTC
Bulletin Board.  No option shall be exercisable more than 10 years
after the date of grant.  The 2005 Plan also grants the Compensation
Committee discretion to accelerate vesting or extend the time available for
exercise of options after termination of an executive so long as termination is
not for cause (as determined by the Compensation Committee).





85
 Table of Contents





Outstanding
Equity Awards at Fiscal Year-End





The
following table sets forth the number of unexercised options segregated by those
that were exercisable and those that were unexercisable as of December 31, 2008,
and the number of vested and unvested shares of restricted stock.





OPTION
      AWARDS
                                                                                                                              
                                                                                                                              
                                                                                                                              STOCK
      AWARDSName
                                                                                                                              Grant
      Date
                                                                                                                              
                                                                                                                              Number
      of Securities Underlying Unexercised Options Exercisable
    (#)
                                                                                                                              
                                                                                                                              
                                                                                                                              Number
      of Securities Underlying Unexercised Options Unexercisable
    (#)
                                                                                                                              
                                                                                                                              
                                                                                                                              Option
      Exercise Price ($)
                                                                                                                              
                                                                                                                              
                                                                                                                              Option
                                                                                                                                Expiration
                                                                                                                                Date
                                                                                                                              
                                                                                                                              
                                                                                                                              Number
      of Shares or Units of Stock That Have Not Vested (#)
                                                                                                                              
                                                                                                                              
                                                                                                                              Market
      Value of Shares or Units of Stock That Have Not Vested ($)Michael
      R. McElwrath
                                                                                                                              01/29/02
                                                                                                                              
                                                                                                                              
                                                                                                                              60,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.65
                                                                                                                              
                                                                                                                              
                                                                                                                              01/29/12
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -10/13/03
                                                                                                                              
                                                                                                                              
                                                                                                                              480,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.65
                                                                                                                              
                                                                                                                              
                                                                                                                              10/13/13
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -12/23/04
                                                                                                                              
                                                                                                                              
                                                                                                                              200,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              2.00
                                                                                                                              
                                                                                                                              
                                                                                                                              12/23/09
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -02/02/06
                                                                                                                              
                                                                                                                              
                                                                                                                              300,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              200,000
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              2.00
                                                                                                                              
                                                                                                                              
                                                                                                                              02/02/16
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -12/27/07
                                                                                                                              
                                                                                                                              
                                                                                                                              500,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              1.30
                                                                                                                              
                                                                                                                              
                                                                                                                              10/13/13
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -12/27/07
                                                                                                                              
                                                                                                                              
                                                                                                                              160,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.65
                                                                                                                              
                                                                                                                              
                                                                                                                              12/31/09
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -03/21/07
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              300,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              54,00002/11/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              135,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              24,30002/11/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              540,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.69
                                                                                                                              
                                                                                                                              
                                                                                                                              02/10/18
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -K.
      Andrew Lai
                                                                                                                              01/29/07
                                                                                                                              
                                                                                                                              
                                                                                                                              56,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              84,000
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.79
                                                                                                                              
                                                                                                                              
                                                                                                                              01/29/17
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -02/11/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              180,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.69
                                                                                                                              
                                                                                                                              
                                                                                                                              02/10/18
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -02/11/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              45,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              8,10010/01/08
                                                                                                                              
                                                                                                                              
                                                                                                                              33,333
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              66,670
                                                                                                                              (3)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.30
                                                                                                                              
                                                                                                                              
                                                                                                                              10/01/18
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -10/01/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              30,000
                                                                                                                              (3)
                                                                                                                              
                                                                                                                              
                                                                                                                              5,400Randall
      D. Keys
                                                                                                                              06/18/04
                                                                                                                              
                                                                                                                              
                                                                                                                              400,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (4)
                                                                                                                              
                                                                                                                              
                                                                                                                              2.00
                                                                                                                              
                                                                                                                              
                                                                                                                              06/18/14
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -10/01/07
                                                                                                                              
                                                                                                                              
                                                                                                                              150,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (5)
                                                                                                                              
                                                                                                                              
                                                                                                                              1.05
                                                                                                                              
                                                                                                                              
                                                                                                                              10/01/17
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -Phil
      A. Christian
                                                                                                                              03/12/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              500,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.615
                                                                                                                              
                                                                                                                              
                                                                                                                              03/12/18
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -Garry
      R. Ward
                                                                                                                              02/01/04
                                                                                                                              
                                                                                                                              
                                                                                                                              100,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              2.00
                                                                                                                              
                                                                                                                              
                                                                                                                              02/01/14
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -12/23/04
                                                                                                                              
                                                                                                                              
                                                                                                                              200,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              2.00
                                                                                                                              
                                                                                                                              
                                                                                                                              12/23/14
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -02/02/06
                                                                                                                              
                                                                                                                              
                                                                                                                              30,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              20,000
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              2.00
                                                                                                                              
                                                                                                                              
                                                                                                                              02/02/16
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -03/13/07
                                                                                                                              
                                                                                                                              
                                                                                                                              16,665
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              33,335
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.875
                                                                                                                              
                                                                                                                              
                                                                                                                              03/13/17
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -12/19/07
                                                                                                                              
                                                                                                                              
                                                                                                                              300,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              2.37
                                                                                                                              
                                                                                                                              
                                                                                                                              02/01/14
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -02/11/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              45,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              8,10002/11/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              135,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.69
                                                                                                                              
                                                                                                                              
                                                                                                                              02/10/18
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -Zhendong
      "Alex" Yang
                                                                                                                              08/08/03
                                                                                                                              
                                                                                                                              
                                                                                                                              320,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              (1)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.65
                                                                                                                              
                                                                                                                              
                                                                                                                              01/29/09
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -03/13/07
                                                                                                                              
                                                                                                                              
                                                                                                                              10,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              20,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.875
                                                                                                                              
                                                                                                                              
                                                                                                                              03/13/17
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -02/11/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              45,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              8,10002/11/08
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              135,000
                                                                                                                              (2)
                                                                                                                              
                                                                                                                              
                                                                                                                              0.685
                                                                                                                              
                                                                                                                              
                                                                                                                              02/10/18
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -


(1)
            These
      options vest 20% on grant date, and 20% on each grant date anniversary
      thereafter.


(2)
            This
      grant of restricted stock or options, as applicable, will vest in three
      equal annual installments beginning on the first anniversary date of the
      grant.


(3)
            On
      October 1, 2008, Mr. Lai was granted 45,000 shares of restricted stock and
      options to purchase up to 100,000 shares of common stock in conjunction
      with his appointment as Chief Financial Officer.  Both the
      shares of restricted stock and options vest in three equal installments
      beginning on grant date, and on each grant date anniversary
      thereafter.   The restricted stock vest in three equal
      installments beginning on grant date and the two subsequent anniversaries
      thereof.





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(4)
            These
      options vested 25% on grant date, and 25% on each grant date anniversary
      thereafter.  On January 14, 2009, the original expiration date
      of June 18, 2009 of these options was extended to June 18,
      2014.


(5)
            As
      a result of the resignation of Mr. Keys during 2008, Mr. Keys forfeited
      options to purchase up to 40,000 shares of common stock awarded on January
      25, 2007 and forfeited options to purchase up to 300,000 of 450,000 shares
      of common stock awarded October 1,
2007.





Stock
Option and Restricted Stock Vested Table





The
following table summarizes certain information regarding vesting of restricted
stock during fiscal year 2008 for each of the Named Executive
Officers:





Stock
      AwardsName
                        
                        Number
      of Shares Acquired on Vesting (#)
                        
                        
                        Value
      Realized on Vesting ($)Michael
      R. McElwrath
                        
                        
                        488,542
                        
                        
                        $
                        263,620K.
      Andrew Lai
                        
                        
                        15,000
                        
                        
                        
                        4,500Randall
      D. Keys
                        
                        
                        100,000
                        
                        
                        
                        49,000Phil
      A.Christian
                        
                        
                        120,000
                        
                        
                        
                        33,600Garry
      R. Ward
                        
                        
                        115,625
                        
                        
                        
                        57,234


No stock
options were exercised during 2008.





Potential
Payments Upon Termination or Change in Control





For a
description of the potential payments to our Named Executive Officers upon
termination or a change in control, see "Narrative to Summary Compensation Table
and Grants of Plan-Based Awards Table – Employment Agreements with Executive
Officers" above.   For further discussion of the determination of
termination benefits, see "Compensation Discussion and Analysis – Total
Compensation and Description and Allocation of Its Components – Post-Termination
Compensation."





Quantification of termination
benefits.  The following table quantifies the termination
benefits due to our Named Executive Officers, in the event of their termination
for various reasons, including any termination occurring within 24 months
following a change of control.  The amounts were computed as if each
executive officer's employment terminated on December 31, 2008.





87
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2008 Potential Termination
Benefits for Named Executive Officers
 
 Termination
      for Other than Cause, Death, or DisabilityExecutive
      Officer /
                                Element
      of Compensation
                              
                              Termination
      due to Death or Disability
                              
                              
                              or
      by Executive for Good Reason
                              
                              
                              within
      24 Months Following a Change of ControlMichael
      R. McElwrathSalary
      and bonus
                              
                              $
                              -
                              
                              
                              $
                              741,500
                              
                              
                              $
                              1,112,250Equity
      awards (1)
                              
                              
                              78,300
                              
                              
                              
                              -
                              
                              
                              
                              78,300Benefits
      (2)
                              
                              
                              -
                              
                              
                              
                              46,514
                              
                              
                              
                              46,514Tax
      Gross-up (3)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              396,897Total
      Mr. McElwrath
                              
                              $
                              78,300
                              
                              
                              $
                              788,014
                              
                              
                              $
                              1,633,961K.
      Andrew LaiSalary
      and bonus
                              
                              $
                              -
                              
                              
                              $
                              195,000
                              
                              
                              $
                              390,000Equity
      awards (1)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              13,500Total
      Mr. Lai
                              
                              $
                              -
                              
                              
                              $
                              195,000
                              
                              
                              $
                              403,500Phil
      A. ChristianSalary
      and bonus
                              
                              $
                              -
                              
                              
                              $
                              230,000
                              
                              
                              $
                              460,000Equity
      awards (1)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      Mr. Christian
                              
                              $
                              -
                              
                              
                              $
                              230,000
                              
                              
                              $
                              460,000Garry
      R. WardSalary
      and bonus
                              
                              $
                              50,000
                              
                              
                              $
                              50,000
                              
                              
                              $
                              50,000Equity
      awards (1)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              8,100Total
      Mr. Ward
                              
                              $
                              50,000
                              
                              
                              $
                              50,000
                              
                              
                              $
                              58,100Zhendong
      "Alex" YangSalary
      and bonus
                              
                              $
                              -
                              
                              
                              $
                              50,000
                              
                              
                              $
                              50,000Equity
      awards (1)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              8,100Total
      Dr. Yang
                              
                              $
                              -
                              
                              
                              $
                              50,000
                              
                              
                              $
                              58,100





(1)
            Equity
      awards are quantified at the intrinsic value on December 31, 2008 of all
      options and restricted stock that was not fully vested and exercisable,
      but would become exercisable, under the terms of the Name Executive
      Officer's employment agreement, due to the form of termination specified
      in the column heading. The intrinsic value of options is determined by
      calculating the difference between the closing market price of our common
      stock on December 31, 2008, which was  $0.18 per share, and the
      exercise price of the option, and multiplying that difference by the
      number of options exercisable at that given exercise price. The intrinsic
      values of all the options are then totaled.  The intrinsic value
      of restricted stock is equal to the number of shares times the closing
      price of our common stock on December 31,
2008.


(2)
            Benefits
      quantified include the incremental cost to the Company of continuing
      health care benefits (based on December 2008 premium rates) and the cost
      of the Company's matching
contributions.


(3)
            Tax
      gross-up refers to reimbursement for any excise tax (and taxes on the
      imputed income attributable to the reimbursement for the excise tax and
      tax gross-up) the Named Executive Officer is required to pay under Section
      4999 of the Code for excess parachute payments.  This amount
      reflects the estimated gross-up payments that would be due to Mr.
      McElwrath as if he had been terminated on December 31,
    2008.





Randall
D. Keys resigned as Chief Financial Officer of the Company on October 1,
2008.  There were no severance or other payments made to Mr. Keys in
connection with his separation.





88
 Table of Contents





Directors'
Compensation





The
following table summarizes compensation paid to non-employee directors for
2008.  Mr. McElwrath is the only employee serving as a director and he
does not receive any additional compensation for his service on the
Board.  Mr. Keys served as an independent director on our Board from
June 2004 until his appointment as Chief Financial Officr on October 1, 2007, at
which time he resigned from the Board and its committees.  All of Mr.
Keys' compensation, including all compensation earned from service on the Board,
is reported in the 2007 Summary Compensation Table under "All Other
Compensation."





2008
Director Compensation
 
 Name
                    
                    Fees
      Earned or Paid in Cash
                    
                    
                    Stock
      Awards (1)
                    
                    
                    Option
      Awards (1)
                    
                    
                    TotalThomas
      E. Williams (2)
                    
                    $
                    37,500
                    
                    
                    $
                    25,937
                    (3)
                    
                    $
                    19,973
                    
                    
                    $
                    83,410William
      A. Anderson  (2)
                    
                    
                    39,000
                    
                    
                    
                    -
                    
                    
                    
                    58,465
                    
                    
                    
                    97,465C.
      P. Chiang (2)
                    
                    
                    23,000
                    
                    
                    
                    -
                    
                    
                    
                    41,969
                    
                    
                    
                    64,969Donald
      A. Juckett(2)
                    
                    
                    30,500
                    
                    
                    
                    -
                    
                    
                    
                    19,973
                    
                    
                    
                    50,473John
      C. Mihm(2)
                    
                    
                    29,625
                    
                    
                    
                    -
                    
                    
                    
                    19,973
                    
                    
                    
                    49,598Lucian
      Morrison(2)
      (4)
                    
                    
                    24,875
                    
                    
                    
                    -
                    
                    
                    
                    78,482
                    
                    
                    
                    103,357





(1)
            Stock
      Awards and Option Awards are quantified in the table according to the
      amount included in 2008 share-based compensation expense for the awards
      granted to each named director through the end of fiscal year
      2008.  See Footnote 9 to the Consolidated Financial Statements
      which is included in Part II of this report for assumptions used in
      valuing these awards and the methodology for recognizing the
      related  expense.  The expense has been modified in
      accordance with SEC rules to eliminate forfeiture assumptions in computing
      the expense for the year.   There were no actual
      forfeitures during 2008 by any of the named directors.  All
      options are for the purchase of our common stock.  All stock
      awards are grants of restricted stock representing time-vesting shares of
      our common stock.


(2)
            On
      February 11, 2008, Messrs. Williams, Anderson, Chiang, Juckett, Mihm, and
      Morrison were granted options to purchase 40,000 shares of our common
      stock.  The grant date fair values of these awards were $27,400
      to each of these directors.


(3)
            This
      stock award was made in 2007 to compensate Mr. Williams for the loss of
      value to his options that were modified to increase the exercise price in
      order to comply with Section 409A of the
Code.


(4)
            Effective January 9, 2008 , Mr.
      Morrison was appointed as a director.  On that date he was
      granted options to purchase up to 188,000 shares of our common stock. The
      grant date fair value of this award was
  $120,884.





89
 Table of Contents





The table
below provides information regarding the outstanding stock option and restricted
stock awards for each of our directors as of December 31, 2008.





2008 Outstanding Equity Awards for
      DirectorsName
                    
                    Number
      of Securities Underlying Unexercised Options (#)Thomas
      E. Williams
                    
                    
                    480,000William
      A. Anderson
                    
                    
                    250,000C.
      P. Chiang
                    
                    
                    240,000Donald
      A. Juckett
                    
                    
                    480,000John
      C. Mihm
                    
                    
                    480,000Lucian
      Morrison
                    
                    
                    228,000





In 2007,
the Company began paying cash compensation to non-employee directors for their
service on the Board. In January 2007, the Board approved a standard
compensation arrangement for directors, effective January 1, 2007, as
follows:





Schedule
      of Directors' feesAnnual
      cash retainer
                    
                    $
                    15,000
                    
                    annuallyBoard
      meetings in person
                    
                    
                    1,500
                    
                    for
      each meetingBoard
      meetings by telephone
                    
                    
                    500
                    
                    for
      each meetingCommittee
      meetings in person
                    
                    
                    1,000
                    
                    for
      each meetingCommittee
      meetings by telephone
                    
                    
                    500
                    
                    for
      each meetingCommittee
      Chairman retainer
                    
                    
                    5,500
                    
                    annuallyAudit
      Committee Chairman retainer
                    
                    
                    12,000
                    
                    annuallyBoard
      Chairman retainer
                    
                    
                    12,000
                    
                    annually





The
Company also reimburses directors for the reasonable expenses they incur to
attend Board, Board committee and/or investor relations meetings.  In
addition, in 2008, the Board approved an annual grant of options to purchase
40,000 shares of common stock to each non-employee director, which have an
exercise price equal to fair market value on date of grant, a term of ten years
and will vest in their entirety on the first anniversary of the date of
grant.  The fair market value, on a given date, is the mean of the
closing bid and asked prices of the common shares as reported that day on the
OTC Bulletin Board.  These grants are expected to be made during the
first quarter each fiscal year.  The 2008 grant to each of the six
non-employee directors was made on February 11, 2008.  The options
have an exercise price of $0.765, which was the fair market value of our stock
on the date of grant.





In
addition to the annual grants of options to directors described above, we
typically grant options to directors upon their initial appointment or election
as a director.  On January 9, 2008, Lucian Morrison received an option
grant of 188,000 shares, with a ten year term and an exercise price of $0.94,
which was the fair market value of our stock on that date.  The
options will vest over three years, with 25% vested immediately and an
additional 25% vesting on the first, second and third anniversary of the date of
grant.  If upon or within 24 months of a Change of Control (as defined
in the 2005 Plan) a director's service in their capacity as a director of the
Company is terminated, then all options granted to the director will immediately
and fully vest and be exercisable as of the date their service is
terminated.





90
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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





Security
Ownership





The
following table sets forth, as of March 4, 2009, certain information with
respect to the beneficial ownership of our common stock by (a) each stockholder
beneficially owning more than 5% of the Company's outstanding common stock; (b)
each director of the Company who is a stockholder of the Company; (c) each of
the Named Executive Officers who is a stockholder of the Company; and (d) all
Named Executive Officers and directors of the Company as a
group.  Total shares outstanding on March 4, 2009 were
161,292,283.





Name
      of Beneficial Owner
                    
                    Amount
      and Nature of Beneficial Ownership of Common Stock
                    
                    
                    Percent
      of Outstanding Common StockInternational
      Finance Corporation
                    
                    
                    21,580,360
                    (1)
                    
                    
                    13.4
                    %Persistency
      Capital, LLC
                    
                    
                    17,530,543
                    (2)
                    
                    
                    10.9
                    %Goldman
      Sachs Group, Inc.
                    
                    
                    11,617,333
                    (3)
                    
                    
                    7.2
                    %Executive
      Officers:Michael
      R. McElwrath
                    
                    
                    2,735,567
                    (4)
                    
                    
                    1.7
                    %K.
      Andrew Lai
                    
                    
                    282,333
                    (5)
                    
                    
                    *Phil
      A. Christian
                    
                    
                    421,667
                    (6)
                    
                    
                    *Non-Executive
      Directors:Thomas
      E. Williams
                    
                    
                    508,125
                    (7)
                    
                    
                    *William
      A. Anderson
                    
                    
                    155,000
                    (8)
                    
                    
                    *C.
      P. Chiang
                    
                    
                    200,000
                    (9)
                    
                    
                    *Donald
      A. Juckett
                    
                    
                    519,100
                    (10)
                    
                    
                    *John
      C. Mihm
                    
                    
                    492,500
                    (11)
                    
                    
                    *Lucian
      L. Morrison
                    
                    
                    134,000
                    (12)
                    
                    
                    *All
      Directors and Executive Officers as a Group (9 persons)
                    
                    
                    5,448,292
                    (13)
                    
                    
                    3.3
                    %
 
 ___________________________
 *    Less
than 1%.





(1)
            The
      amount of beneficial ownership of the shares is based on a Schedule 13G
      filed with the SEC dated June 20, 2008.  The address for
      International Finance Corporation is 2121 Pennsylvania Avenue, N.W.,
      Washington, D.C. 20433.


(2)
            The
      amount of beneficial ownership of the shares is based on a Schedule 13G
      filed with the SEC dated February 13, 2009.  The address for
      Persistency Capital, LLC is 1270 Avenue of the Americas, Suite 2100, New
      York, NY  10020.  Based on the Schedule 13G,
      Persistency Capital, LLC and Mr. Andrew Morris share investment and voting
      power over the shares.


(3)
            The
      amount of beneficial ownership of the shares are based on a Schedule 13G
      filed with the SEC dated February 11, 2009.  The address for
      Goldman Sachs Group, Inc is 85 Broadway Street, New York, NY
      10004.


(4)
            Includes
      1,980,000 shares which Michael R. McElwrath may purchase pursuant to
      options which are exercisable within 60 days of March 4,
      2009.  Also includes 300,000 shares of restricted stock which
      vest in two equal installments on March 21, 2009 and 2010; and 90,000
      shares of restricted stock which vest in two equal installments on
      February 11, 2010 and 2011.


(5)
            Includes
      177,330 shares which Andrew Lai may purchase pursuant to options which are
      exercisable within 60 days of March 4, 2009.  Also includes
      30,000 shares of restricted stock which vest in two equal installments on
      February 11, 2009 and 2010; and 60,000 shares of restricted stock, which
      vest in two equal installments on October 1, 2009 and
  2010.





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(6)
            Includes
      166,667 shares which Phil Christian may purchase pursuant to options which
      are exercisable within 60 days of March 4, 2009.  Also includes
      35,000 shares which Mr. Christian may purchase pursuant to warrants which
      he acquired in June 2008 associated with the Company's fundraising
      transactions.  Also includes 120,000 shares of restricted stock
      which vested on September 11, 2008.


(7)
            Includes
      480,000 shares which Thomas E. Williams may purchase pursuant to options
      which are exercisable within 60 days of March 4, 2009.  Also
      includes 28,125 shares of restricted stock which vested on May 1,
      2008.


(8)
            Includes
      145,000 shares which William A. Anderson may purchase pursuant to options
      which are exercisable within 60 days of March 4, 2009.  Mr.
      Anderson disclaims beneficial ownership of 10,000 of these securities held
      by Anderson Securities Corp. except to the extent of his pecuniary
      interest therein, and the inclusion of these shares in this report shall
      not be deemed an admission of beneficial ownership of all of the reported
      shares for any purpose.


(9)
            Includes
      200,000 shares which C.P. Chiang may purchase pursuant to options which
      are exercisable within 60 days of March 4,
2009.


(10)
            Includes
      480,000 shares which Donald A. Juckett may purchase pursuant to options
      which are exercisable within 60 days of March 4,
  2009.


(11)
            Includes
      480,000 shares which John C. Mihm may purchase pursuant to options which
      are exercisable within 60 days of March 4,
2009.


(12)
            Includes
      134,000 shares which Lucian L. Morrison may purchase pursuant to options
      which are exercisable within 60 days of March 4,
  2009.


(13)
            Includes
      4,278,000 shares which may be purchased pursuant to options and warrants
      which are exercisable within 60days
      of March 4, 2009 by our directors and executive
  officers.





Equity
Compensation Plan Information





The
following table provides information regarding the equity compensation plans as
of December 31, 2008.





Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                        
                        
                        Weighted
      average exercise price of outstanding options, warrants and
      rights
                        
                        
                        Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      Compensation Plan Category
                        
                        (a)
                        
                        
                        (b)
                        
                        
                        (c)Plans
      approved by security holders (1)
                        
                        
                        3,216,500
                        
                        
                        $
                        1.01
                        
                        
                        
                        3,195,000Plans
      not approved by security holders-
      Inducement awards(2)
                        
                        
                        1,098,000
                        
                        
                        
                        0.75
                        
                        
                        
                        --
      Investor Relations Consultant
                        
                        
                        125,000
                        
                        
                        
                        0.86
                        
                        
                        
                        --
      IRS 409A related grants(3)
                        
                        
                        1,260,000
                        
                        
                        
                        1.66
                        
                        
                        
                        --
      Prior to adoption of the 2005 Plan(4)
                        
                        
                        5,621,000
                        
                        
                        
                        1.41
                        
                        
                        
                        -Total
                        
                        
                        11,320,500
                        
                        
                        
                        1.25
                        
                        
                        
                        3,195,000





(1)
            For
      discussion of the 2005 Stock Incentive Plan ("2005 Plan"), which was
      approved by the security holders, see "Executive Compensation - Narrative
      to Summary Compensation Table and Grants of Plan-Based Awards Table—2005
      Stock Incentive Plan."


(2)
            We
      awarded as inducement grants options to purchase shares of common stock to
      new board members and new employees outside the 2005 Plan. The grants
      carried a term of ten years.


(3)
            We
      granted options to purchase shares of common stock in December 2007 which
      were replacements for options cancelled due to potential adverse tax
      consequences to the holders of the cancelled options under Section 409A of
      the Internal Revenue Code.  The cancelled options had been
      granted prior to adoption of the 2005 Plan.  The replacement
      stock options have terms between one and approximately six years, and
      exercise prices in the range of $0.65 to $2.37 per
  share.


(4)
            We
      granted options to purchase shares of common stock prior to the adoption
      of the 2005 Plan, which are evidenced by individual stock option
      agreements.  The options were granted to officers, directors and
      consultants and have a term of between five and ten years and an exercise
      price in the range of $0.65 to $2.37 per
share.





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ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE





Review
of Related Person Transactions





In
accordance with our audit committee charter, the Audit Committee reviews related
person transactions.  It is the Company's policy that we will not
enter into transactions that are considered related person transactions that are
required to be disclosed under Item 404 of Regulation S-K unless the committee
or another independent body of the board first reviews and approves the
transactions.





Board
Independence





The Board
has determined that each director, except for Michael R. McElwrath, has no
material relationship with the Company and is independent within the meaning of
the AMEX listing standards.








ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND
SERVICES





Independent
Registered Public Accounting Firm Fee Information





Audit
Fees





The
aggregate fees billed by Payne Smith & Jones, P.C. for professional services
rendered for the audit of our annual financial statements for the years ended
December 31, 2008 and 2007 and for the review of the financial statements
included in our Quarterly Reports on Form 10-Q for those years were $154,466 and
$140,839, respectively.





Audit-Related
Fees





Payne
Smith & Jones, P.C. did not render any audit-related professional services
for the years ended December 31, 2008 and 2007.





Tax
Fees





The
aggregate fees billed by Payne Smith & Jones, P.C. for professional services
rendered for tax compliance, tax advice and/or tax planning for the years ended
December 31, 2008 and 2007 were $6,000 and $5,000, respectively.  The
fees were for the preparation of the 2007 and 2006 corporate tax
returns.





All
Other Fees





Payne
Smith & Jones, P.C. did not bill any other fees for professional products or
services rendered to us, other than those described above under "Audit Fees,"
"Audit-Related Fees" and "Tax Fees" for the years ended December 31, 2008 and
2007.





The Audit
Committee pre-approved all of the audit and non-audit fees described above for
the years ended December 31, 2008 and 2007.





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Pre-Approval
Policies and Procedures





In
accordance with the Audit Committee Charter, the Audit Committee has established
policies and procedures by which it approves in advance any audit and
permissible non-audit services to be provided by our independent registered
public accounting firm.  Under these procedures, prior to the
engagement of the independent registered public accounting firm for pre-approved
services, requests or applications for the independent registered public
accounting firm to provide services must be submitted to our chief financial
officer or his designee and the Audit Committee and must include a detailed
description of the services to be rendered.  The chief financial
officer or his designee and the independent registered public accounting firm
must ensure that the independent registered public accounting firm is not
engaged to perform the proposed services unless those services are within the
list of services that have received the Audit Committee's pre-approval and must
cause the Audit Committee to be informed in a timely manner of all services
rendered by the independent registered public accounting firm and the related
fees.





Requests
or applications for the independent registered public accounting firm to provide
services that require case-by-case approval will be submitted to the Audit
Committee (or any Audit Committee members who have been delegated pre-approval
authority) by the chief financial officer or his designee.  Each
request or application must include:





·
            a
      recommendation by the chief financial officer (or designee) as to whether
      the Audit Committee should approve the request or application;
      and





·
            a
      joint statement of the chief financial officer (or designee) and the
      independent registered public accounting firm as to whether, in their
      view, the request or application is consistent with the SEC's and the
      Public Company Accounting Oversight Board's requirements for
      independence.





The Audit
Committee will not permit the independent registered public accounting firm to
provide services in connection with a transaction initially recommended by them,
the purpose of which may be tax avoidance and the tax treatment of which may not
be supported in the Code and related regulations.  The Audit Committee
also will not permit the independent registered public accounting firm to
provide any services to the extent that the SEC has prohibited the provision of
those services by the independent registered public accounting firm, which
generally include:





·
            bookkeeping
      or other services related to accounting records or financial
      statements;





·
            financial
      information systems design and
implementation;





·
            appraisal
      or valuation services, fairness opinions or contribution-in-kind
      reports;





·
            actuarial
      services;





·
            internal
      audit outsourcing services;





·
            management
      functions;





·
            human
      resources;





·
            broker-dealer,
      investment adviser or investment banking
  services;





·
            legal
      services; and





·
            expert
      services unrelated to the audit.





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The Audit
Committee delegated authority to the chairman of the Audit Committee,
to:





·
            pre-approve
      any services proposed to be provided by the independent registered public
      accounting firm and not already pre-approved or prohibited by the Audit
      Committee's Pre-Approval Policy;





·
            increase
      any authorized fee limit for pre-approved services (but not by more than
      20% of the initial amount that was pre-approved) before the Company or its
      subsidiaries engage the independent registered public accounting firm to
      perform services for any amount in excess of the fee limit;
      and





·
            investigate
      further the scope, necessity or advisability of any services as to which
      pre-approval is sought.





The
Chairman is required to report any pre-approval or fee increase decisions to the
Audit Committee at the next Audit Committee meeting.  The Audit
Committee does not delegate to management any of the Audit Committee's authority
or responsibilities concerning the independent registered public accounting
firm's services.





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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
                  45Consolidated
      Balance Sheets
                  47Consolidated
      Statements of Operations
                  48Consolidated
      Statements of Stockholders' Equity
                  49Consolidated
      Statements of Cash Flows
                  50Notes
      to the Consolidated Financial Statements
                  51





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





Schedule
      II — Valuation and qualifying accounts.
                66





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 (or incorporated
by reference to exhibits previously filed or furnished by us) is provided in the
Exhibit Index beginning on page 98 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.





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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 March 30, 2009.





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





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report is
signed below by the following persons on behalf of the registrant and in the
capacities with Far East Energy Corporation indicated and on March 30,
2009.





Signature
                  Title/s/ Michael R. McElwrath
                  Chief
      Executive Officer,(Michael
      R. McElwrath)
                  President
      and Director(Principal
      Executive Officer)/s/  K. Andrew
Lai
                  Chief
      Financial Officer(K.
      Andrew Lai)
                  (Principal
      Financial andAccounting
      Officer)*  Thomas E.
    Williams
                  Chairman
      of the Board(Thomas
      E. Williams)*  William A.
      Anderson
                  Director(William
      A. Anderson)*  C. P. Chiang
                  Director(C.
      P. Chiang)*  Donald A.
    Juckett
                  Director(Donald
      A. Juckett)*  John C. Mihm
                  Director(John
      C. Mihm)*  Lucian L.
    Morrison
                  Director(Lucian
      L. Morrison)*
                  By:   /s/   K.
      Andrew Lai(K.
      Andrew Lai)(Attorney-in-fact
      for persons indicated)





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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, 2005, 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 in 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 in 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 in 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, 2008, 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, 2008, 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, 2008, 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 23, 2004, and
      incorporated herein by reference).10.2*
                    
                    
                    Employment
      Agreement, dated February 1, 2004, by and between the Company and Garry R.
      Ward (filed as Exhibit 10.3 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).10.3*
                    
                    
                    Amended
      and Restated Employment Agreement, dated September 10, 2008, by and
      between the Company and Zhendong "Alex" Yang (filed as Exhibit 10.1 to the
      Company's Current Report on Form 8-K filed on September 10, 2008, and
      incorporated herein by reference).10.4*
                    
                    
                    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).10.5*
                    
                    
                    Amended
      and Restated Nonqualified Stock Option Agreement, dated December 23, 2004,
      by and between the Company and Michael R. McElwrath (filed as Exhibit 10.5
      to the Company's Current Report on Form 8-K filed on December 28, 2004,
      and incorporated herein by reference).10.6*
                    
                    
                    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).10.7*
                    
                    
                    Nonqualified
      Stock Option Agreement, dated December 23, 2004, by and between the
      Company and Garry Ward (filed as Exhibit 10.9 to the Company's Current
      Report on Form 8-K filed on December 28, 2004, and incorporated herein by
      reference).10.8*
                    
                    
                    Stock
      Option Agreement, dated May 18, 2004, by and between the Company and
      Donald
Juckett





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(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).10.9*
                
                
                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).10.10*
                
                
                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).10.11*
                
                
                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).10.12*
                
                
                Stock
      Option Agreement, dated February 1, 2004, by and between the Company and
      Garry Ward (filed as Exhibit 10.17 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).10.13*
                
                
                Stock
      Option Agreement, dated December 1, 2003, by and between the Company and
      Zhendong "Alex" Yang (filed as Exhibit 10.19 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).10.14
                
                
                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).10.15
                
                
                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).10.16
                
                
                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).10.17
                
                
                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).10.18
                
                
                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).10.19
                
                
                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).10.20
                
                
                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).10.21
                
                
                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).10.22
                
                
                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).





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10.23
                
                
                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).10.24
                
                
                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).10.25
                
                
                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).10.26
                
                
                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).10.27
                
                
                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).10.28
                
                
                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).10.29
                
                
                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).10.30
                
                
                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).10.31
                
                
                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).10.32
                
                
                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).10.33*
                
                
                Far
      East Energy Corporation 2005 Stock Incentive Plan (filed as Exhibit 10.1
      to the Company's Registration Statement on Form S-8 (File No. 333-148361)
      filed on December 27, 2007, and incorporated herein by
      reference).10.34
                
                
                Registration
      Rights Agreement, dated September 20, 2005, by and among Morgan Keegan
      & Company, Inc. and the Company (filed as Exhibit 10.47 to the
      Company's Registration Statement on Form S-2 (File No. 333-129309) filed
      on October 28, 2005, and incorporated herein by
  reference).10.35*
                
                
                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 21, 2007, and incorporated herein by
      reference.)10.36*
                
                
                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).10.37*
                
                
                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).10.38*
                
                
                Form
      of Letter Agreement with Zhendong "Alex" Yang and Garry R. Ward for Far
      East Energy Corporation 2005 Stock Incentive Plan (filed as Exhibit 10.3
      to the Company's Current Report on Form 8-K filed on April 19, 2007, and
      incorporated herein by reference).10.39*
                
                
                Form
      of Letter Agreement with the Company's non-employee directors (filed as
      Exhibit 10.4 to the





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Company's
      Current Report on Form 8-K filed on April 19, 2007, and incorporated
      herein by reference).10.40*
                
                
                First
      Amendment to Amended and Restated Employment Agreement, dated April 16,
      2007, between the Company and Michael R. McElwrath (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).10.41
                
                
                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).10.42
                
                
                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
      19, 2007, and incorporated herein by reference).10.43
                
                
                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 19, 2007, and incorporated herein by
      reference).10.44*
                
                
                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).10.45*
                
                
                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).10.46*
                
                
                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).10.47*
                
                
                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).10.48*
                
                
                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).10.49*
                
                
                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).10.50*
                
                
                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).10.51*
                
                
                Restricted
      Stock Agreement, dated December 27, 2007, between the Company and Garry R.
      Ward (filed as Exhibit 10.57 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).10.52*
                
                
                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).10.53*
                
                
                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 12, 2008, and incorporated herein by
      reference).10.54*
                
                
                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 12, 2008, and incorporated herein by
      reference).





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10.55*
                
                
                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).10.56*
                
                
                Amended
      and Restated Nonqualified Stock Option Agreement, dated December 27, 2007,
      by and between the Company and Garry Ward (filed as Exhibit 10.62 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).10.57*
                
                
                Amended
      and Restated Nonqualified Stock Option Agreement, dated December 27, 2007,
      by and between the Company and Zhendong "Alex" Yang (filed as Exhibit
      10.63 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).10.58*
                
                
                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, 2002.10.59*
                
                
                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, 2003.10.60*
                
                
                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 12, 2008, and
      incorporated herein by reference).10.61
                
                
                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).10.62*
                
                
                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 filed on October 6, 2008, and incorporated herein by
      reference).10.63* †
                
                
                First
      Amendment to Non-Qualified Stock Option Agreement, dated December 19,
      2008, between the Company and Michael McElwrath.  The original
      option agreement was entered into on February 2, 2006.10.64* †
                
                
                Second
      Amended and Restated Nonqualified Stock Option Agreement, dated January
      14, 2009, between the Company and Michael McElwrath.  The
      original option agreement was entered into on January 29,
      2002.10.65* †
                
                
                Second
      Amended and Restated Nonqualified Stock Option Agreement, dated January
      14, 2009, between the Company and Thomas Williams.  This
      Agreement amended 100,000 options, which was vested on or prior to
      December 31, 2004, of the original agreement dated February 24,
      2004.10.66* †
                
                
                Third
      Amended and Restated Nonqualified Stock Option Agreement, dated January
      14, 2009, between the Company and Thomas Williams.  This
      Agreement amended 300,000 options, which was vested on or after January 1,
      2005, of the original agreement dated February 24,
2004.10.67* †
                
                
                Amended
      and Restated Nonqualified Stock Option Agreement, dated January 14, 2009,
      between the Company and John Mihm.  The original option
      agreement was entered into on May 24, 2004.10.68* †
                
                
                Amended
      and Restated Nonqualified Stock Option Agreement, dated January 14, 2009,
      between the Company and Don Juckett.  The original option
      agreement was entered into on May 18, 2004.10.69* †
                
                
                First
      Amendment to Employment Agreement, dated December 19, 2008, between the
      Company and Phil Christian.10.70* †
                
                
                Second
      Amendment to Employment Agreement, dated December 31, 2008, between the
      Company and Phil Christian.10.71* †
                
                
                First
      Amendment to Amended and Restated Employment Agreement, dated December 19,
      2008, between the Company and Andrew Lai.10.72* †
                
                
                Fourth
      Amendment to Amended and Restated Employment Agreement, dated December 19,
      2008, between the Company and Michael
McElwrath.





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10.73* †
                
                Form
      of Nonqualified Stock Option Agreement for Far East Energy Corporation
      2005 Stock Incentive Plan.10.74
                
                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).10.75
                
                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).21.1 †
                
                List
      of Subsidiaries of Far East Energy Corporation.23.1 †
                
                Consent
      of Payne Smith & Jones, P.C.24.1 †
                
                Powers
      of Attorney31.1 †
                
                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






103