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UNITED STATES SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended: September 30, 2008o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


Commission file number 0-02517

TOREADOR RESOURCES CORPORATION(Exact name of registrant as specified in its charter)

Delaware

75-0991164(State or other jurisdiction
of incorporation)

(I.R.S. Employer
Identification Number)


13760 Noel Road, Suite 1100
Dallas, Texas 75240(Address of principal executive office)

Registrant's telephone number, including area code: (214) 559-3933

Indicate by check mark whether the Registrant (i) 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 (ii) has been subject to such filing requirements for the
past 90 days. Yes ý    No o

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 o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

As of November 7, 2008, there were 20,263,333 shares of common stock outstanding.



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Table of Contents

TOREADOR RESOURCES CORPORATION
TABLE OF CONTENTS



PagePART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsConsolidated Balance SheetsSeptember 30, 2008 (unaudited) and December 31,
2007

1Consolidated Statements of Operations (unaudited)for the three months ended September 30,
2008 and 2007

2Consolidated Statements of Operations (unaudited)for the nine months ended September 30,
2008 and 2007

3Consolidated Statements of Cash Flows (unaudited)for the nine
months ended September 30, 2008 and 2007

4Notes to Consolidated Financial Statements

5Item 2.

Management's Discussion and Analysis of Financial Condition and
Results of Operations

21Item 3.

Quantitative and Qualitative Disclosures About Market
Risk

40Item 4.

Controls and Procedures

40PART II. OTHER INFORMATIONItem 6.

Exhibits

44SIGNATURES

45


i

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TOREADOR RESOURCES CORPORATION        CONSOLIDATED BALANCE SHEETS

September 30,
2008

December 31,
2007(Unaudited)(In thousands, except share
and per share data)ASSETSCurrent assets:Cash and cash equivalents

$
24,147

$
12,721Accounts receivable, net of allowance of $243 and $120


6,599


12,340Other


3,206


3,912Total current assets


33,952


28,973Oil and natural gas properties, net, using successful efforts method of accounting


118,060


271,951Oil and natural gas properties, net, held for sale


77,210


Investments


200


500Restricted cash


11,749


10,818Goodwill


4,827


4,942Deferred income tax asset


3,358


Other assets


5,765


5,927$
255,121

$
323,111LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable and accrued liabilities

$
22,393

$
18,280Deferred lease payable


88


183Fair value of oil and gas derivatives





192Income taxes payable


5,496


674Total current liabilities


27,977


19,329Long-term accrued liabilities


511


522Deferred lease payable


576


478Long-term debt


30,000


30,000Asset retirement obligations


7,191


7,339Deferred income tax liabilities


14,482


15,368Convertible senior notes


80,750


86,250Total liabilities


161,487


159,286Commitments and contingenciesStockholders' equity:Common stock, $0.15625 par value, 30,000,000 shares authorized; 20,984,360 and 20,566,470 shares issued


3,279


3,214Additional paid-in capital


166,081


163,955Accumulated deficit


(112,687
)

(42,564
)Accumulated other comprehensive income


39,495


41,754Treasury stock at cost, 721,027 shares


(2,534
)

(2,534
)Total stockholders' equity


93,634


163,825$
255,121

$
323,111


The
accompanying notes are an integral part of these financial statements.

1

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TOREADOR RESOURCES CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended
September 30,2008

2007(Unaudited)(In thousands, except share
and per share data)Oil and natural gas sales

$
17,695

$
12,400Operating costs and expenses:Lease operating


4,818


2,943Exploration expense


926


4,812Depreciation, depletion and amortization


9,984


6,098Dry hole expense





4,250General and administrative


2,787


5,013(Gain) loss on oil and gas derivative contracts


(2,405
)

207Total operating costs and expenses


16,110


23,323Operating income (loss)


1,585


(10,923
)Other income (expense):Foreign currency exchange gain (loss)


1,591


(13,576
)Gain on the early extinguishment of debt


368


Interest and other income


457


283Interest expense, net of interest capitalized


(2,139
)

(1,600
)Total other income (expense)


277


(14,893
)Income (loss) before taxes


1,862


(25,816
)Income tax provision


(1,806
)

(945
)Income (loss) from continuing operations


56


(26,761
)Income from discontinued operations, net of taxes


14


6,021Net income (loss)


70


(20,740
)Preferred dividends





(40
)Income (loss) available to common shares

$
70

$
(20,780
)Basic income (loss) available to common shares per share:From continuing operations

$


$
(1.40
)From discontinued operations





0.31$


$
(1.09
)Diluted income (loss) available to common shares per share:From continuing operations

$


$
(1.40
)From discontinued operations





0.31$


$
(1.09
)Weighted average shares outstanding:Basic


19,929


19,170Diluted


19,930


19,170


The
accompanying notes are an integral part of these financial statements.

2

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TOREADOR RESOURCES CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended
September 30,2008

2007(Unaudited)(In thousands, except share
and per share data)Oil and natural gas sales

$
51,540

$
29,183Operating costs and expenses:Lease operating


13,132


8,337Exploration expense


2,875


9,544Depreciation, depletion and amortization


29,953


13,525Dry hole expense





21,357General and administrative


12,619


14,248Loss on oil and gas derivative contracts


1,806


813Impairment on investments


300


Impairment on oil and gas properties


55,461


Gain on sale of other assets





(3,584
)Total operating costs and expenses


116,146


64,240Operating loss


(64,606
)

(35,057
)Other income (expense):Equity in earnings of unconsolidated investments





22Foreign currency exchange gain (loss)


2,930


(29,347
)Gain on the early extinguishment of debt


368


Interest and other income


994


865Interest expense, net of interest capitalized


(6,389
)

(2,510
)Total other expense


(2,097
)

(30,970
)Loss before taxes


(66,703
)

(66,027
)Income tax (provision) benefit


(3,399
)

4,534Loss from continuing operations


(70,102
)

(61,493
)Income (loss) from discontinued operations, net of taxes


(22
)

6,931Net loss


(70,124
)

(54,562
)Preferred dividends





(122
)Loss available to common shares

$
(70,124
)
$
(54,684
)Basic income (loss) available to common shares per share:From continuing operations

$
(3.55
)
$
(3.41
)From discontinued operations





0.38$
(3.55
)
$
(3.03
)Diluted income (loss) available to common shares per shareFrom continuing operations

$
(3.55
)
$
(3.41
)From discontinued operations





0.38$
(3.55
)
$
(3.03
)Weighted average shares outstanding:Basic


19,776


18,092Diluted


19,776


18,092


The
accompanying notes are an integral part of these financial statements.

3

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TOREADOR RESOURCES CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,2008

2007(Unaudited)
(In thousands)Cash flows from operating activities:Net loss

$
(70,124
)
$
(54,562
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation, depletion and amortization


29,953


14,136Gain on sale of oil and gas properties and other assets





(3,584
)Gain on sale of discontinued operations





(9,244
)Gain on the early extinguishment of debt


(368
)

Equity in earnings of unconsolidated investments





(22
)Stock based compensation


1,859


3,374Impairment on investments


300


Impairment on oil and gas properties


55,461


Dry hole expense





21,460Deferred income taxes benefit


(4,271
)

(1,893
)Decrease (increase) in accounts receivable


5,637


(3,775
)Decrease in other current assets


646


7,787Decrease in other assets


(161
)

64Increase in accounts payable and accrued liabilities


4,295


1,264Increase in income taxes payable


5,148


439Net cash provided by (used in) operating activities


28,375


(24,556
)Cash flows from investing activities:Expenditures for property and equipment


(9,729
)

(82,300
)Restricted cash


(1,191
)

10,742Proceeds from sale of oil and gas properties and other assets





26,074Distributions from unconsolidated subsidiaries





60Purchase of long term investments





(500
)Net cash used in investing activities


(10,920
)

(45,924
)Cash flows from financing activities:Borrowings from long-term debt





25,000Repayments of long-term debt


(4,909
)

(21,550
)Payment of equity issue cost





(3,013
)Proceeds from issuance of common stock





50,415Payment of preferred dividends





(122
)Exercise of stock options


745


1,485Net cash provided by (used in) financing activities


(4,164
)

52,215Net increase (decrease) in cash and cash equivalents


13,291


(18,265
)Effects of foreign currency translation on cash and cash equivalents


(1,865
)

26,029Cash and cash equivalents, beginning of period


12,721


12,664Cash and cash equivalents, end of period

$
24,147

$
20,428Supplemental disclosures:Cash paid during the period for interest, net of interest capitalized

$
4,419

$
1,000Cash paid during the period for income taxes

$
2,488

$
2,200


The
accompanying notes are an integral part of these financial statements.

4

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TOREADOR RESOURCES CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (UNAUDITED)

NOTE 1BASIS OF PRESENTATION

The consolidated financial statements of Toreador Resources Corporation and subsidiaries ("Toreador," "we," "us," "our," or the "Company") included herein have been prepared by the
Company and are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission. They reflect all adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations for the interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have
been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained herein are adequate to make the information presented not misleading.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 2007. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Unless
otherwise noted, amounts reported in tables are in thousands, except per unit data.



In May 2008, the Financial Accounting Standards Board ("FASB") issued Statement No. 162"The
Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162").The new standard is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. SFAS No. 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU
Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We are currently assessing the effect, if
any, the adoption of SFAS No. 162 will have on our financial statements and related disclosures

In
March 2008, the FASB issued Statement No. 161"Disclosures about Derivative Instruments and Hedging
Activities"an Amendment of FASB Statement No. 133 ("SFAS No. 161"). This statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged
items are accounted for under FASB Statement No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. SFAS No. 161 is effective for annual periods beginning after November 15, 2008. We are currently assessing the effect, if any, the adoption of SFAS
No. 161 will have on our financial statements and related disclosures.

In
September 2006, the FASB issued Statement No. 157"Fair Value Measurements"("SFAS No. 157"). SFAS No. 157
provides guidance for using fair value to measure assets and liabilities. It applies whenever other standards require or permit assets or liabilities to be measured at fair value but it does not
expand the use of fair value in any new circumstances. In November 2007, the FASB issued FSP No. 157-2 to defer the effective date of SFAS 157 to fiscal year beginning after
November 15, 2008, and the interim period for that fiscal year for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a
recurring basis. We are currently evaluating the

5

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TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 1BASIS OF PRESENTATION (Continued)

impact
of our adoption of FSP No. 157-2 which will be adopted on January 1, 2009. The provisions of SFAS No. 157 that were not deferred were effective for financial
statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157, effective January 1, 2008, did not have a significant effect on our reported
financial position or earnings. In October 2008, the FASB issued FSP No. 157-3,"Determining the Fair Value of a Financial Asset When the Market for That
Asset is Not Active"(FSP 157-3). FSP 157-3 clarifies the application of SFAS 157, which the Company adopted as of January 1, 2008, in
cases where a market is
not active. The Company has considered FSP 157-3 in its determination of estimated fair values as of September 30, 2008, and the impact was not material.

In
February 2007, the FASB issued Statement 159,"The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement 115"("SFAS No. 159").SFAS No. 159 permits
entities to choose to measure certain financial instruments and other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Unrealized gains and losses on any items for
which we elect the fair value measurement option are to be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company elected not to
measure any eligible items using the fair value option in accordance with SFAS No. 159 and therefore the adoption of SFAS No. 159, effective January 1, 2008, did not have an
effect on our reported financial position or earnings.

In
December 2007, the FASB issued Statement No. 141R,"Business Combinations"("SFAS No. 141R"). Under SFAS No. 141R,
a company is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and any contingent consideration measured at their fair value at the acquisition date. It
further requires that research and development assets acquired in a business combination that have no alternative future use are to be measured at their acquisition-date fair value and
then immediately charged to expense, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this statement also requires
that "negative goodwill" be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resultant in a business combination be recognized in income from continuing
operations in the period of the combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting
period beginning after December 15, 2008. We are currently determining the effect of adopting SFAS No. 141R.

In
December 2007, the FASB issued Statement No. 160,"Noncontrolling Interests in Consolidated Financial Statements"an
amendment of ARB No. 51 ("SFAS No. 160"). SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable
to the parent and to the noncontrolling interest. SFAS No. 160 is effective for financial statements issued for fiscal years, and

6

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TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 1BASIS OF PRESENTATION (Continued)

interim
periods within those fiscal years, beginning after December 15, 2008. The effect of adopting SFAS No. 160 is not expected to have an effect on our reported financial position or
earnings.

NOTE 2CONCENTRATION OF CREDIT RISK AND ACCOUNTS RECEIVABLE

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash, restricted cash and accounts receivable. We place our cash with high
credit quality financial institutions. We sell oil and natural gas to various customers. At September 30, 2008 the allowance for doubtful accounts was $242,844.

We
periodically review the collectability of accounts receivable and record a valuation allowance for those accounts which are, in our judgment, unlikely to be collected. We have not had
any significant credit losses in the past and we believe our accounts receivable are fully collectable with the exception of the current allowance.

Accounts
receivable consisted of the following:

September 30,
2008

December 31,
2007Accrued oil and natural gas sales receivables, net of allowance of $243 and $120

$
5,585

$
3,154Joint interest receivables


621


2,163Trade receivables


17


2,182Recoverable VAT





4,221Other accounts receivable


376


620$
6,599

$
12,340


7

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 3INCOME (LOSS) PER COMMON SHARE

The following table reconciles the numerators and denominators of the basic and diluted income (loss) per common share computation:

Three Months Ended
September 30,2008

2007Basic income (loss) per share:Numerator:Income (loss) from continuing operations, net of income tax

$
56

$
(26,761
)Less: dividends on preferred shares





40Net income (loss) from continuing operations


56


(26,801
)Income from discontinued operations, net of income tax


14


6,021Income (loss) available to common shareholders

$
70

$
(20,780
)Denominator:Common shares outstanding


19,929


19,170Basic income (loss) available to common shareholders per share from:Continuing operations

$


$
(1.40
)Discontinued operations





0.31$


$
(1.09
)Diluted income (loss) per share:Numerator:Income (loss) from continuing operations, net of income tax

$
56

$
(26,761
)Less: dividends on preferred shares, if antidilutive





40Net income (loss) from continuing operations


56


(26,801
)Income from discontinued operations, net of income tax


14


6,021Income (loss) available to common shareholders

$
70

$
(20,780
)Denominator:Weighted average common shares outstanding


19,929


19,170Common stock options and warrants


1


(1
)Conversion of preferred shares


(2
)

(2
)Conversion of 5.0% notes payable


(3
)

(3
)Diluted shares outstanding


19,930


19,170Diluted income (loss) available to common shareholders per share from:Continuing operations

$


$
(1.40
)Discontinued operations





0.31$


$
(1.09
)


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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 3INCOME (LOSS) PER COMMON SHARE (Continued)

Nine Months Ended
September 30,2008

2007Basic income (loss) per share:Numerator:Loss from continuing operations, net of income tax

$
(70,102
)
$
(61,493
)Less: dividends on preferred shares





122Net loss from continuing operations


(70,102
)

(61,615
)Income (loss) from discontinued operations, net of income tax


(22
)

6,931Loss available to common shareholders

$
(70,124
)
$
(54,684
)Denominator:Common shares outstanding


19,776


18,092Basic income (loss) available to common shareholders per share from:Continuing operations

$
(3.55
)
$
(3.41
)Discontinued operations





0.38$
(3.55
)
$
(3.03
)Diluted income (loss) per share:Numerator:Loss from continuing operations, net of income tax

$
(70,102
)
$
(61,493
)Less: dividends on preferred shares, if antidilutive





122Net loss from continuing operations


(70,102
)

(61,615
)Income (loss) from discontinued operations, net of income tax


(22
)

6,931Loss available to common shareholders

$
(70,124
)
$
(54,684
)Denominator:Weighted average common shares outstanding


19,776


18,092Common stock options and warrants


(1
)

(1
)Conversion of preferred shares


(2
)

(2
)Conversion of 5.0% notes payable


(3
)

(3
)Diluted shares outstanding


19,776


18,092Diluted income (loss) available to common shareholders per share from:Continuing operations

$
(3.55
)
$
(3.41
)Discontinued operations





0.38$
(3.55
)
$
(3.03
)


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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 4COMPREHENSIVE LOSS

The following table presents the components of comprehensive loss, net of related tax:

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007Net income (loss)

$
70

$
(20,740
)
$
(70,124
)
$
(54,562
)Foreign currency translation adjustment


(7,102
)

15,689


(2,259
)

34,151Comprehensive loss

$
(7,032
)
$
(5,051
)
$
(72,383
)
$
(20,411
)


NOTE 5LONG-TERM DEBT

Long-term debt consisted of the following:

September 30,
2008

December 31,
2007Secured revolving facility with the International Finance Corporation

$
30,000

$
30,000Convertible senior notes


80,750


86,250110,750


116,250Less: current portion





$
110,750

$
116,250


CONVERTIBLE SENIOR NOTES DUE OCTOBER 1, 2025

On September 27, 2005, we issued $75 million of Convertible Senior Notes due October 1, 2025 ("Notes") to
qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933. The Company also granted the initial purchasers the option to purchase an additional $11.25 million
aggregate principal amount of Notes to cover over-allotments. The option was exercised on September 30, 2005. The total principal amount of Notes issued was $86.25 million
and total net proceeds were approximately $82.2 million. We incurred approximately $4.1 million of costs associated with the issuance of the Notes; these costs have been recorded in
other assets on the balance sheet and are being amortized to interest expense using the straight-line interest rate method over the term of the Notes.

The
net proceeds were used for general corporate purposes, including funding a portion of the Company's 2005 and 2006 exploration and development activities.

The
Notes bear interest at a rate of 5% per annum and can be converted into common stock at an initial conversion rate of 23.3596 shares of common stock per $1,000 principal amount of
Notes, subject to adjustment in an event of a fundamental change, as defined, (equivalent to a conversion price of approximately $42.81 per share). The Company may redeem the Notes, in whole or in
part, on or after October 6, 2008, and prior to October 1, 2010, for cash at a redemption price equal to 100% of the principal amount of Notes to be redeemed, plus any accrued and unpaid
interest, if the closing price of its common stock exceeds 130% of the conversion price over a specified period. On or after October 1, 2010, the Company may redeem the Notes, in whole or in
part, at a redemption price equal to 100% of

10

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 5LONG-TERM DEBT (Continued)

the
principal amount of Notes to be redeemed, plus any accrued and unpaid interest, irrespective of the price of our common stock. Holders may convert their Notes at any time prior to the close of
business on the business day immediately preceding their stated maturity, and holders may, (i) upon the occurrence of certain fundamental changes, and also (ii) on October 1,
2010, October 1, 2015, and October 1, 2020, require the Company to repurchase all or a portion of their Notes for cash in an amount equal to 100% of the principal amount of such Notes,
plus any accrued and unpaid interest. On September 30, 2008, the outstanding principal amount of the Notes was $80.7 million.

Due
to our restating the consolidated financial statements for the years ended December 31, 2003, 2004 and 2005 and our consolidated financial statements for each of the quarters
ended March 31 and June 30, 2006, we did not provide the trustee under the indenture of the Notes with copies of our annual reports, information, documents and other reports that we are
required to file with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 within thirty (30) days of when such reports were
required to be filed with the Securities and Exchange Commission.

On
December 15, 2006, we received a notice from the trustee for failure to provide the trustee with a copy of our Form 10-Q for the nine month period ended
September 30, 2006. Since we cured the covenant default within thirty (30) days after receiving the written notice from the trustee, an event of default did not occur.

The
registration rights agreement covering the Notes provided for a penalty if the registration statement was filed and declared effective but thereafter ceased to be effective (a
"Suspension Period") for an aggregate of forty-five (45) days in any three month period or ninety (90) days in any twelve month period (an "Event Date"). Such penalty called
for an additional 0.25% per annum in interest expense on the aggregate principal amount of the Notes for the first ninety (90) days following an Event Date and an additional 0.50% per annum in
interest expense on the aggregate principal amount of the Notes thereafter, until such Suspension Period ended upon the registration statement again becoming effective or not being required to be
effective pursuant to the registration rights agreement. Because we did not file our Quarterly Report on Form 10-Q for the nine month period ended September 30, 2006 in a
timely manner, the registration statement for the Notes became ineffective and we entered a Suspension Period on November 15, 2006. Such Suspension Period ended on January 23, 2007 when
we provided notice that the Form 10-Q had been filed and the Suspension Period was no longer in effect. Because the Suspension Period exceeded forty-five
(45) days in any three month period, we paid approximately $14,375 in additional interest expense. On March 16, 2007, the date we filed our Form 10-K for the year
ended December 31, 2006, we again entered a Suspension Period until all the Notes became eligible for sale pursuant to Rule 144(k) on September 30, 2007. On October 1,
2007, $155,000 was deposited with the trustee for the Notes as the penalty for any holders of the Notes who were eligible on October 1, 2007 to receive a pro rata portion of such payment. Such
eligible holders had to have registered their Notes on the registration statement and still held those Notes on October 1, 2007. On April 1, 2008, we requested that the trustee return
$150,957 which represents the unclaimed portion of the penalty and on April 3, 2008 we received the funds from the trustee. Through September 30, 2008, we paid $4,043 of the penalty
deposit to eligible holders of Notes.

11

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 5LONG-TERM DEBT (Continued)

On
July 9, 2008, our Board of Directors authorized a program to repurchase up to $10 million of the Convertible Senior Notes by December 31, 2008. In August 2008, we
repurchased $5.5 million of the
Convertible Senior Notes for $4.9 million plus accrued interest of $106,180. Additionally, we expensed $222,995 of prepaid loan fees that attributable to the repurchased notes. This resulted in
a $368,255 gain on the early extinguishment of debt. Any repurchases will be made in the open market or in privately negotiated transactions, subject to market conditions, applicable legal
requirements and other factors. The plan does not obligate us to acquire any particular amount of the Convertible Senior Notes bonds and the plan may be suspended at any time at our discretion.

SECURED REVOLVING FACILITY WITH THE INTERNATIONAL FINANCE CORPORATION

On December 28, 2006, we guaranteed the obligations of certain of our direct and indirect subsidiaries in a loan and guarantee
agreement with the International Finance Corporation. The loan and guarantee agreement provides for the $25 million loan facility which is a secured revolving facility with a current maximum
facility amount of $25 million which maximum facility amount will increase to $40 million when the projected total borrowing base amount exceeds $50 million. The
$25 million facility was funded on March 2, 2007. The total proceeds received on March 2, 2007 were approximately $25 million, of which $11 million was used to
retire the outstanding balance on the $15 million credit facility with Natixis Banques Populaires and the remaining $14 million of funds was used to finance our capital expenditures in
Turkey and Romania. The loan and guarantee agreement also provides for a $10 million facility which was funded on December 28, 2006. In September 2007, we repaid $5 million on the
$25 million facility from proceeds received on the U.S. oil and gas property sale. As of December 31, 2007, the International Finance Corporation reduced our borrowing base under both
loans to $30 million from $35 million. Until the next redetermination date in the first quarter of 2009, the Company has no additional borrowing capacity under these facilities. Both the
$25 million facility and $10 million facility are to fund our operations in Turkey and Romania.

Interest
accrues on any loans under the $25 million facility at a rate of 2% over the six month LIBOR rate. Interest accrued on the $10 million facility at a rate of 1.5%
over the six month LIBOR rate until the $25 million facility was funded after which the rate for the $10 million facility was lowered to 0.5% over the six month LIBOR rate. As of
September 30, 2008, the interest rate on the $10 million facility was 3.634% and the interest rate on the $25 million facility was 5.134%. Interest is to be paid on each
June 15 and December 15.

The
$25 million facility is secured as follows: (i) the lender has a first ranking security interest in (a) certain proceeds, receivables and contract rights
relating to and from the sale of oil or gas production in France, Turkey and Romania and (b) funds held in certain bank accounts; (ii) the lender has an assignment of all rights and
claims to any compensation or other special payments in respect of all concessions other than those arising in the normal course of operations payable by the government of Turkey and Romania; and
(iii) the lender has a first ranking pledge (a) by Toreador International Holding, LLC of all its shares in the borrowers; (b) by Madison Oil France SAS of all its shares
in Toreador France; and (c) by the Company of all its shares in Toreador International Holding, LLC.

On
December 31, 2011, the maximum amount available under the $25 million facility begins to decrease by $5 million every six months from $40 million (assuming
the projected borrowing base amount exceeds $50 million) until the final portion of the $25 million facility is due on December 15,

12

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 5LONG-TERM DEBT (Continued)

2014.
On December 15, 2014, $5 million of the $10 million facility is to be repaid with the remaining $5 million being due on June 15, 2015.

We
are required to meet the following ratios on a consolidated basis: (i) the life of loan coverage ratio of not less than: (a) 1.2:1.0 in 2006 and 2007; (b) 1.3:1.0
in 2008; and (c) 1.4:1.0 in 2009 and each subsequent year thereafter; (ii) reserve tail ratio of not less than 25%; (iii) adjusted financial debt to EBITDAX (earnings before
interest, taxes, depreciation and amortization and exploration expenses) ratio of not more than 3.0:1.0; (iv) liabilities to tangible net worth ratio of not more than 60:40; and
(v) interest coverage ratio of not less than 3.0:1.0. On August 9, 2007, the ratios were amended to replace the adjusted financial debt to EBITDA ratio not being more than 3.0:1.0 with
the adjusted financial debt to EBITDAX ratio not being more than 3.0:1.0 and the definition of interest coverage ratio was adjusted to substitute EBITDAX instead of EBITDA for calculation purposes. At
December 31, 2007, we were not in compliance with the interest coverage ratio of not less than 3.0:1.0; the actual ratio was 2.8:1.0. The International Finance Corporation has granted the
Company a temporary waiver for the interest coverage ratio provided the Company maintains EBITDAX to net interest expense ratio of 2.7:1.0 until July 2, 2008 and EBITDA to net interest expense
ratio of at least 2.7:1.0 during the remaining period of the waiver's effectiveness. The waiver is effective until March 8, 2009.

At
March 31, 2008, we were not in compliance with the adjusted financial debt to EBITDAX ratio threshold of not more than 3.0:1.0; the actual ratio was 4.5:1.00. The International
Finance Corporation has granted the Company a temporary waiver on the condition that the Company maintains the adjusted financial debt to EBITDA ratio for the (i) quarter ending
March 31, 2008 of 4.5:1.0; (ii) quarter ending June 30, 2008 of 4.0:1.0; (iii) quarter ending September 30, 2008 of 3.5:1.0, and (iv) quarter ending
December 31, 2008 of 3.25:1.0. We must also be compliant with the original requirement of adjusted financial debt to EBITDA of not more than 3.0:1.0 starting from the end of the first quarter
ending March 31, 2009. The waiver is effective until April 1, 2009.

We
are in compliance with all covenants as of September 30, 2008, as modified by the waivers described above. However, based on our current projections, we may not be in
compliance with all covenants as of March 31, 2009. Additionally, our proposed sale of a 26.75% interest in the South Akcakoca Sub-Basin may require us to obtain waivers or
renegotiate our covenants. If we cannot satisfy or renegotiate these covenants in the future, we may be subject to remedies included in the loan agreement, including, but not limited to, mandatory
early repayment of the debt. The Company believes that, if necessary, it will be able to obtain the required waiver from the International Finance Corporation or renegotiate the covenants.

We
are subject to certain negative covenants, including, but not limited to, the following: (i) subject to certain exceptions, paying dividends; (ii) subject to certain
exceptions, incurring debt, making guarantees or creating or permitting to exist any liens, (iii) subject to certain exceptions, making or permitting to exist loans or advances to, or deposits,
with other persons or investments in any person or enterprise; (iv) subject to certain exceptions, selling, transferring, leasing or otherwise disposing of all or a material part of our
borrowing base assets; and (v) subject to certain exceptions, undertaking or permitting any merger, spin-off, consolidation or reorganization.

Included
in interest expense for the nine months ended September 30, 2008, is $701,625 of additional compensation due to the IFC related to the prior year. This amount should have
been

13

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 5LONG-TERM DEBT (Continued)

recognized
as additional interest expense in the prior year. Although the amount may be considered material to the financial results for the nine months ended September 30, 2008, management
does not believe the error had a material effect on the financial results for the year ended December 31, 2007 or that the correction of the error in the current period will have a material
effect on the financial results for the year ended December 31, 2008. Also included in interest expense for the three and nine months ended September 30, 2008 is an estimate of $838,750
and $1.8 million, respectively of the fee to be paid in 2009 relating to 2008 operations.

NOTE 6ASSET RETIREMENT OBLIGATIONS

We account for our asset retirement obligations in accordance with Statement No. 143,Accounting for Asset Retirement Obligations("Statement 143"), which requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the
entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the liability, we either settle the obligation for its recorded amount or incur a gain or a loss.

The
following table summarizes the changes in our asset retirement liability during the nine months ended September 30, 2008 and for the year ended December 31, 2007:

Nine Months Ended
September 30,

Year Ended
December 31,2008

2007Asset retirement obligation January 1

$
7,339

$
4,519Asset retirement accretion expense


350


462Foreign currency exchange (gain) loss


(142
)

394Change in estimates


(432
)

1,964Property additions


411


Property dispositions


(335
)

Asset retirement obligation at the end of the period

$
7,191

$
7,339


NOTE 7GEOGRAPHIC OPERATING SEGMENT INFORMATION

We have operations in only one industry segment, the oil and natural gas exploration and production
industry. We are structured along geographic operating segments or regions. As a result, we have reportable operations in the United States, France, Turkey and Romania and Hungary.

14

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 7GEOGRAPHIC OPERATING SEGMENT INFORMATION (Continued)

The
following tables provide the geographic operating segment data required by Statement of Financial Accounting Standards No. 131,"Disclosure about
Segments of an Enterprise and Related Information".

Three Months Ended September 30, 2008United States

France

Turkey

Romania

Hungary

TotalRevenues

$
14

$
9,626

$
7,375

$
680

$


$
17,695Costs and expenses


(132
)

3,639


10,592


1,577


434


16,110Operating income (loss)

$
146

$
5,987

$
(3,217
)
$
(897
)
$
(434
)
$
1,585




Three Months Ended September 30, 2007(1)Revenues

$
10

$
6,714

$
4,687

$
989

$


$
12,400Costs and expenses


2,643


3,565


10,025


6,556


533


23,323Operating income (loss)

$
(2,634
)
$
3,149

$
(5,338
)
$
(5,567
)
$
(533
)
$
(10,923
)




Nine Months Ended September 30, 2008Revenues

$
39

$
29,438

$
20,005

$
2,058

$


$
51,540Costs and expenses


14,548


11,377


84,420


4,718


1,083


116,146Operating income (loss)

$
(14,509
)
$
18,061

$
(64,415
)
$
(2,660
)
$
(1,083
)
$
(64,606
)




Nine Months Ended September 30, 2007(2)Revenues

$
27

$
18,024

$
8,098

$
3,034

$


$
29,183Costs and expenses


7,691


14,754


15,686


21,010


5,099


64,240Operating income (loss)

$
(7,664
)
$
3,270

$
(7,588
)
$
(17,976
)
$
(5,099
)
$
(35,057
)




Total Assets(3)September 30, 2008

$
278,739

$
97,411

$
(31,826
)
$
(31,784
)
$
4,941

$
317,481December 31, 2007

$
298,949

$
83,683

$
31,417

$
(29,271
)
$
693

$
385,471


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15

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 8INCOME TAXES

At September 30, 2008, we recorded an income tax payable of $5.5 million primarily due to income taxes payable by the French subsidiary. For the nine months ended
September 30, 2008 and 2007, we paid income taxes of approximately $2.5 million and $2.2 million, respectively, related to French taxable income. As of September 30, 2008,
our French operations recorded a $6.7 million tax provision, the US operations recorded a tax benefit of $448,000 and Turkey recorded a tax benefit of $2.9 million which resulted in a
consolidated tax provision of $3.4 million. Our effective income tax rate differs from the statutory rates applicable to jurisdictions in which we operate due primarily to the establishment of
a United States valuation allowance of $6 million which was required because we could not be assured of the future utilization of US net operating losses of $18.1 million and the
establishment of a Turkish valuation allowance of $10.6 million which was required because we could not be assured of the future utilization of Turkish net operating losses of
$53 million.

We
adopted FIN No. 48,"Accounting for Uncertainty in Income Taxes", on January 1, 2007. As a result of the adoption we
recognized an increase in the liability for unrecognized tax expense of approximately $45,000, which was accounted for as a decrease to the January 1, 2007 balance of retained earnings. As of
the date of adoption and after the impact of recognizing the increase in liability noted above, our unrecognized tax benefits totaled approximately $357,000, the disallowance of which would not
materially affect the effective income tax rate. There are no tax positions for which a material change in the unrecognized tax benefit is reasonably possible in the next 12 months.

We
recognize potential accrued interest and penalties related to unrecognized tax benefits within our global operations in income tax expense. In conjunction with the adoption of FIN
No. 48, we recognized approximately $28,000 for the accrual of interest and penalties at January 1, 2007 which is included as a component of the $357,000 unrecognized tax benefit noted
above. During the nine months ended September 30, 2008, we recognized $0 in potential interest and penalties associated with uncertain tax positions. To the extent interest and penalties are
not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We
file several state and foreign tax returns, many of which remain open for examination for five years.

NOTE 9CAPITAL

On March 23, 2007, we closed a $45 million private placement of equity. In the transaction, we issued an aggregate of 2,710,843 shares of common stock to six institutional
investors, providing us with $45 million of gross proceeds at closing. We also granted the investors the right to purchase an additional $8.1 million aggregate amount of common stock
within the next 30-day period. On April 24, 2007, two of the institutional investors exercised their warrants for an aggregate of 326,104 additional shares of common stock,
providing us with approximately $5.4 million of gross proceeds. The net proceeds from the private placement totaled approximately $47 million and were used to help fund our 2007
exploration and development activities.

In
connection with the private placement, we entered into a registration rights agreement with the investors. The registration rights agreement provided that we would file a
registration statement with the Securities and Exchange Commission covering the resale of the common stock within 60 days after the closing date. If the registration statement was not filed
with the Securities and Exchange

16

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 9CAPITAL (Continued)

Commission
within such time, we had to pay 1.0% of the aggregate purchase price, an additional 1.0% on the one month anniversary of the 60th day after closing if the registration statement had
not been filed by such date and an additional 2.0% of the aggregate purchase price for each 30 day period after the one month anniversary if the registration statement was not filed by such
date. We filed the registration statement with the Securities and Exchange Commission on May 8, 2007. If the registration statement was not declared effective by the Securities and Exchange
Commission within 150 days after the closing date, we had to pay 1.0% of the aggregate purchase price, an additional 1.0% on the one month anniversary of the 150th day after the closing
if the registration statement had not been declared effective by the Securities and Exchange Commission by such date and an additional 2.0% of the aggregate purchase price for each 30 day
period after the one month anniversary if the registration statement was not declared effective by such date. The registration statement was declared effective July 26, 2007. Now that the
registration statement has been declared effective by the Securities and Exchange Commission, if, subject to certain exceptions, future sales cannot be made pursuant to the registration statement
after 60 days has elapsed, we must pay 1.0% of the aggregate purchase price on
the date sales cannot be made pursuant to the registration statement, an additional 1% on the one month anniversary of the date sales are not permitted under the registration statement if sales are
not permitted under the registration statement by such date and an additional 2.0% of the aggregate purchase price for each 30 day period after the one month anniversary if sales under the
registration statement are not permitted by such date. Any one month or 30 day periods during which we cure the violation will cause the payment for such period to be made on a pro rata basis.
As a result of the change in the resale restrictions under Rule 144, effective February 15, 2008, we amended the registration rights agreement to provide that we do not have to keep the
registration statement effective if the holders of the shares covered by the registration rights agreement can sell all of the shares pursuant to Rule 144.

We
account for registration rights agreements containing a contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, in
accordance withEITF Issue No. 00-19-2, "Accounting for Registration Payment Arrangements".Under this approach, the
contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement shall be recognized and measured separately in accordance with "FAS No. 5, Accounting for
Contingencies" and "FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss".

For
the nine months ended September 30, 2008, we issued 314,184 restricted stock grants to employees, directors and consultants. Forfeitures for the nine months ended
September 30, 2008 were 86,094 shares of restricted stock.

NOTE 10CAPITALIZED INTEREST

We capitalize interest on major projects that require an extended period of time to complete. Interest capitalized for the three months ended September 30, 2008 and 2007 was
$230,000 and $298,000, respectively. For the nine months ended September 30, 2008 and 2007 interest capitalized was $780,000 and $3.8 million, respectively.

17

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 11COMMITMENTS AND CONTINGENCIES

Black Sea Incidents.In October 2005, in an incident involving a vessel owned by Micoperi Srl, the Ayazli 2 and Ayazli 3 wells were damaged, and subsequently had
to be re-drilled. We and our co-venturers have made a claim in respect of the cost of re-drilling and repeating flow-testing. The claim is currently
approximately 8.2 million Euros, valued at $11.7 million before interest, subject to adjustment when the actual cost of flow-testing the re-drilled wells is
known. In addition, we and our co-venturers have filed a claim to recover back from Micoperi a sum of about 5.9 million Euros, currently valued at $8.4 million, paid to
Micoperi under the contract between us, our co-venturers and Micoperi. Micoperi has made a cross-claim for about 5.1 million Euros, currently valued at $7.3 million in
respect of sums allegedly due to Micoperi under the contract between us, our co-venturers and Micoperi. Micoperi has also asserted a claim that the arrest of the vessel "MICOPERI 30" at
Palermo, Italy was wrongful and have asserted a claim for damages in respect of such allegedly wrongful arrest. We and our co-ventures have received security from Micoperi by way of a
letter of undertaking from their insurers, and have provided security to Micoperi in respect of their cross-claims by way of a bank guarantee of 5.9 million Euros, currently valued at
$8.4 million. The claims and cross-claims are subject to the jurisdiction of the English Court; however, neither side has yet commenced any court proceedings. All the amounts stated above are
gross and our share would be equal to 36.75%. We have accrued our portion of the unpaid invoices and are accounting for the potential receivable from Micoperi as a gain contingency. Accordingly, the
potential gain has not been recorded.

From
time to time, we are named as a defendant in other legal proceedings arising in the normal course of business. In our opinion, the final judgment or settlement, if any, which may be
awarded with any suit or claim would not have a material adverse effect on our financial position.

NOTE 12DISCONTINUED OPERATIONS

On June 14, 2007, the Board of Directors authorized management to sell all oil and gas properties in the United States. The sale of these properties completed the divestiture of
the company's non-core domestic assets and allows us to focus exclusively on our international operations. The sale was closed on September 1, 2007. The sales price was
$19.1 million which resulted in a pre-tax gain of

18

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 12DISCONTINUED OPERATIONS (Continued)

$9.2 million.
The table below compares discontinued operations for the three and nine months ended September 30, 2008 and 2007:

Three Months
Ended
September 30,

Nine Months
Ended
September 30,2008

2007

2008

2007Revenue:Oil and natural gas sales

$


$
1,422

$


$
4,441Operating costs and expenses:Lease operating expense


(14
)

428


22


1,557Exploration expense





10





98Depreciation, depletion and amortization





61





611Dry hole expense





(69
)




103General and administrative expense





79





378Gain on sale of properties and other assets





(8,624
)




(9,244
)Total operating costs and expenses


(14
)

(8,115
)

22


(6,497
)Operating income (loss)


14


9,537


(22
)

10,938Income tax provision





(3,516
)




(4,007
)Income (loss) from discontinued operations

$
14

$
6,021

$
(22
)
$
6,931


NOTE 13DERIVATIVES

We periodically utilize derivative instruments such as futures and swaps for purposes of hedging our exposure to fluctuations in the sales price of crude oil and natural gas. We entered
into futures and swap contracts for approximately 16,000 Bbls per month for the months of January 2008 through September 2008. This resulted in a net derivative fair value gain of $2.4 million
for the three months ended September 30, 2008 and $1.8 million loss for the nine months ended September 30, 2008. Presented in the table below is a summary of the contracts
entered into for the period ending September 30, 2008:

Type

Period

Barrels

Floor

Ceiling

Gain/(Loss)Collar

January 1March 31, 2008


48,000

$
84.75

$
92.75

$
(19
)Collar

April 1June 30, 2008


48,000

$
92.25

$
100.25


(2,239
)Collar

July 1September 30, 2008


48,000

$
91.75

$
99.75


452$
(1,806
)


For
the comparable period in 2007, we entered into futures and swap contracts for approximately 15,000 Bbls per month for the months of June 2007 through December 2008 and subsequently
sold all contracts as of September 30, 2007. For the three and nine month periods ended September 30, 2007, the net derivative fair value loss was $207,000 and $813,000, respectively.

The
Company has no outstanding derivative contracts at September 30, 2008.

19

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Table of Contents

TOREADOR RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

NOTE 14IMPAIRMENT OF ASSETS

We evaluate producing property costs for impairment and reduce such costs to fair value if the sum of expected undiscounted future cash flows is less than net book value pursuant to
Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement 144"). We assess impairment of
non-producing leasehold costs and undeveloped mineral and royalty interests periodically on a field-by-field basis. We charge any impairment in value to expense in
the period incurred. For the nine months ended September 30, 2008, we incurred an impairment charge of $53.5 million on our Turkish natural gas producing properties, $2 million on
our undeveloped leasehold in Trinidad and $300,000 on our investment in ePsolutions preferred stock.

The
impairment charge in Turkey is a result of a decline in the fair market value of the Company's interest in South Akcakoca Sub-Basin assets. The fair market value has been
determined based on a Letter of Intent, as described in Note 15, to sell a 26.75% interest in the South Akcakoca Sub-Basin assets to Petrol Ofisi AS for $80.3 million. This
sale price indicates that the fair value of our 36.75% working interest is $103.8 million. The net book value of the Black Sea asset at June 30, 2008 was $157.3 million, resulting
in an impairment charge of $53.5 million. No additional impairment was recorded on these properties for the quarter ending September 30, 2008.

The
impairment charge of $2 million for the undeveloped leasehold costs in Trinidad, is due to management's decision to exit Trinidad and discontinue our association with our
registered agent in the country.

NOTE 15BLACK SEA SALE

On August 8, 2008, we entered into a Letter of Intent with Petrol Ofisi AS, a Turkish Company, to sell a 26.75% interest in the South Akcakoca Sub-Basin assets for
$80.3 million. On September 17, 2008, we entered into the Assignment Agreement. The transaction is subject to Turkish government approval. This will result in the Company retaining a 10%
working interest in these assets. We expect to close on the sale by the end of November 2008; however, no assurance can be given that we will close the transaction as contemplated. It is anticipated
that the net proceeds from the sale will primarily be used to retire portions of the Note and/or repay portions of the facilities with the International Finance Corporation. These assets have been
classified on the balance sheet as held for sale and are valued at lower of the book value or fair value less the cost to sell.

20

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Table of Contents

ITEM 2MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist you in understanding our business and results of operations together with our present
financial condition. This section should be read in conjunction with our Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly Report on
Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2007.

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere
in this report may constitute "forward-looking" statements for purposes of the Securities Act of 1933, and the Securities Exchange Act of 1934 and, as such, may involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such
forward-looking statements. When used in this report, the words "anticipates," "estimates," "plans," "believes," "continues," "expects," "projections," "forecasts," "intends," "may," "might," "could,"
"should," and similar expressions are intended to be among the statements that identify forward-looking statements. Various factors that could cause the actual results, performance or achievements to
differ materially from our expectations are disclosed in this report ("Cautionary Statements"), including, without limitation, those statements made in conjunction with the forward-looking statements
included under the caption identified above and otherwise herein. All written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the Cautionary
Statements.

EXECUTIVE OVERVIEW

We are an independent international energy company engaged in oil and natural gas exploration, development, production, leasing and
acquisition activities. Our strategy is to increase our oil and natural gas reserves through a balanced combination of exploratory drilling, development and exploitation projects and acquisitions. We
focus on exploration activities in countries where we can establish large acreage positions. We also focus on prospects where we do not have to compete directly with major integrated or large
independent oil and natural gas producers and where extensive geophysical and geological data is available. Our operations are located in European Union or European Union candidate countries that we
believe have stable governments, have transportation infrastructure, attractive fiscal policies and are net-importers of oil and natural gas.

We
currently hold interests in permits granting us the right to explore and develop oil and natural gas properties in the Paris Basin, France; onshore and offshore Turkey; onshore
Romania; and Hungary.

The
Company's executive summary for the nine months ended September 30, 2008, included the following:



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LIQUIDITY AND CAPITAL RESOURCES

This section should be read in conjunction with Note 5 to Notes to Consolidated Financial Statements included in this filing.



As of September 30, 2008, we had cash and cash equivalents and restricted cash of $35.9 million, a current ratio of
approximately 1.2 to 1 and a debt (long-term debt and Convertible Senior Notes) to equity ratio of 1.18 to 1. For the nine months ended September 30, 2008, we had an operating loss
of $64.6 million and capital expenditures, excluding capitalized interest and changes in accounts payable, were $9 million. The restricted cash ($11.7 million) relates to a letter
of credit relating to the dispute with Micoperi regarding the October 2005 well issues in the Black Sea and a letter of credit to secure additional permits in Hungary.

In
March 2007, we closed a $45 million private placement of equity. In connection with the private placement, we entered into a registration rights agreement with the investors.
The registration rights agreement provided that we would file a registration statement with the Securities and Exchange Commission covering the resale of the common stock within 60 days
after the closing date. If the registration statement was not filed with the Securities and Exchange Commission within such time, we had to pay 1.0% of the aggregate purchase price, an additional 1.0%
on the one month anniversary of the 60th day after closing if the registration statement had not been filed by such date and an additional 2.0% of the aggregate purchase price for each
30 day period after the one month anniversary if the registration statement was not filed by such date. We filed the registration statement with the Securities and Exchange Commission on
May 8, 2007. If the registration statement was not declared effective by the Securities and Exchange Commission within 150 days after the closing date, we had to pay 1.0% of the
aggregate purchase price, an additional 1.0% on the one month anniversary of the 150th day after the closing if the registration statement had not been declared effective by the Securities and
Exchange Commission by such date and an additional 2.0% of the aggregate purchase price for each 30 day period after the one month anniversary if the registration statement was not declared
effective by such date. The registration statement was declared effective July 26, 2007. Now that the registration statement has been declared effective by the Securities and Exchange
Commission, if, subject to certain exceptions, future sales cannot be made pursuant to the registration statement, we must pay 1.0% of the aggregate purchase price on the date sales cannot be made
pursuant to the registration statement, an additional 1% on the one month anniversary of the date sales are not permitted under the registration statement if sales are not permitted under the
registration statement by such date and an additional 2.0% of the aggregate purchase price for each 30 day period after the

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one
month anniversary if sales under the registration statement are not permitted by such date. Any one month or 30 day periods during which we cure the violation will cause the payment for
such period to be made on a pro rata basis. As a result of the change in the resale restrictions under Rule 144, effective February 15, 2008, we amended the registration rights agreement
to provide that we do not have to keep the registration statement effective if the holders of the shares covered by the registration rights agreement can sell all of the shares pursuant to
Rule 144.

Our
capital expenditure budget for 2008, excluding capitalized interest and changes in accounts payable, was originally set at $27.5 million which was the Company's share of
estimated Phase II development costs in the Black Sea. However, due to delays experienced by the operator in the design and tendering process it has been determined that the start of
Phase II development will not begin until late fourth quarter of 2008. Our revised capital expenditure budget for 2008 is $12 million. We believe that our French oil production will
generate sufficient free cash flow to cover a significant portion of our costs and contribute to our share of development capital expenditures in the Black Sea. We believe that our Turkish cash flow
will provide the balance of those development expenditures.

On
August 8, 2008, we entered into a Letter of Intent with Petrol Ofisi AS, a Turkish Company, to sell a 26.75% interest in the South Akcakoca Sub-Basin assets for
$80.3 million. On September 17, 2008, we entered into the Assignment Agreement. The transaction is subject to Turkish government approval. This will result in the Company retaining a 10%
working interest in these assets. We expect to close on the sale by the end November 2008; however, no assurance can be given that we will close the transaction as contemplated. The net proceeds from
the sale will primarily be used to
retire portions of the Convertible Senior Notes and/or repay portions of the facilities with the International Finance Corporation.

We
believe we will have sufficient cash flow from operations to meet all of our 2008 and 2009 obligations. However, if the cash flow from our operations is less than anticipated,
including due to the recent decline in oil and natural gas prices, and if our available cash is fully utilized or declines substantially, we may also seek additional capital by (i) forward
selling our crude oil and natural gas production; (ii) selling our interest in prospects and or licenses; (iii) selling down our working interest in properties; or (iv) a
combination of these actions in addition to issuing new debt or equity securities, if available on acceptable terms due to the recent downturn in the credit and equity markets. We believe such
actions, combined with the sale of the South Akcakoca Sub-Basin assets described above, will allow us to meet our capital commitments and as a result will have sufficient liquidity for the
remainder of 2008 and 2009.

Beginning
in the fourth quarter of 2007, we made a strategic decision to no longer drill 100% exploratory wells or fund 100% seismic programs on exploratory acreage. We began a
systematic process of farming out our exploratory prospects to industry partners. The terms of farm outs have been and will generally be structured so that the farmee will pay at least a majority of
all seismic costs and drill an exploratory well to casing point in order to earn a 50%-75% working interest in the prospect or concession.

We
will operate the Company, at a minimum, through 2009 in this manner. We will not incur costs to keep a permit or license in effect, but rather we will manage the Company's resources
so that only the areas that meet certain economic hurdles will be considered. We believe that this philosophy will not only strengthen the Company's financial position in the short term, but will also
ensure the Company's position for the future.

In
the past we have engaged Merrill Lynch & Co. to assist us, including with the March 2007 private placement of equity. Currently, we pay a retainer to Merrill
Lynch & Co. to assist us in analyzing various possible transactions relating to our business operations, which may involve possible strategic alternatives. No decision has been made
regarding any possible transactions.

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On December 28, 2006, we entered into a loan and guarantee agreement with the International Finance Corporation. The loan and
guarantee agreement provides for a $25 million facility which is a secured revolving facility with a current maximum facility amount of $25 million which maximum facility amount will
increase to $40 million when the projected total borrowing base amount exceeds $50 million. The $25 million facility funded on March 2, 2007. The total proceeds received on
March 2, 2007 were approximately $25 million, of which $11 million was used to retire the outstanding balance on the $15 million credit facility with Natixis Banques
Populaires and the remaining $14 million of funds was used to finance our capital expenditures in Turkey and Romania. The loan and guarantee agreement also provides for an unsecured
$10 million facility which was funded on December 28, 2006. In September 2007, we repaid $5 million of the $25 million facility after the oil and natural gas properties in
the United States were sold. As of December 31, 2007, the International Finance Corporation reduced our borrowing base under both loans to $30 million from $35 million. Until the
next redetermination date in the first quarter of 2009, the Company has no additional borrowing capacity under these facilities. Both the $25 million and $10 million facility are to fund
our operations in Turkey and Romania. We do not believe that the loss of $5 million in the borrowing base will materially affect our business strategy for 2008 and 2009.

Interest
accrues on any loans under the $25 million facility at a rate of 2% over the six month LIBOR rate. Interest accrued on the $10 million facility at a rate of 1.5%
over the six month LIBOR rate until the $25 million facility funded on March 2, 2007 after which the rate for the $10 million facility was lowered to 0.5% over the six month LIBOR
rate. As of September 30, 2008 the interest rate on the $10 million facility was 3.634% and 5.134% on the $25 million facility. Interest is to be paid on each June 15 and
December 15.

The
$25 million facility is secured as follows: (i) the lender has a first ranking security interest in (a) in certain proceeds, receivables and contract rights
relating to and from the sale of oil or gas production in France, Turkey and Romania and (b) funds held in certain bank accounts; (ii) the lender has an assignment of all rights and
claims to any compensation or other special payments in respect of all concessions other than those arising in the normal course of operations payable by the government of Turkey and Romania; and
(iii) the lender has a first ranking pledge (a) by Toreador International Holding, LLC of all its shares in the borrowers; (b) by Madison Oil France SAS of all its shares
in Toreador France; and (c) by the Company of all its shares in Toreador International Holding, LLC.

On
December 31, 2011, the maximum amount available under the $25 million facility begins to decrease by $5 million every six months from $40 million (assuming
the projected borrowing base amount exceeds $50 million) until the final portion of the $25 million facility is due on December 15, 2014. On December 15, 2014,
$5 million of the $10 million facility is to be repaid with the remaining $5 million being due on June 15, 2015.

We
are to meet the following ratios on a consolidated basis: (i) the life of loan coverage ratio of not less than: (a) 1.2:1.0 in 2006 and 2007; (b) 1.3:1.0 in 2008;
and (c) 1.4:1.0 in 2009 and each subsequent year thereafter; (ii) reserve tail ratio of not less than 25%; (iii) adjusted financial debt to EBITDAX ratio of not more than 3.0:1.0;
(iv) liabilities to tangible net worth ratio of not more than 60:40; and (v) interest coverage ratio of not less than 3.0:1.0. On August 9, 2007, the ratios were amended to
replace the adjusted financial debt to EBITDA ratio not being more than 3.0:1.0 with the adjusted financial debt to EBITDAX ratio not being more than 3.0:1.0 and the definition of interest coverage
ratio was adjusted to include EBITDAX instead of EBITDA for calculation purposes. At December 31, 2007, we were not in compliance with the interest coverage ratio of not less than 3.0:1.0; the
actual ratio was 2.8:1.0. The International Finance Corporation has granted us a temporary waiver for the interest coverage ratio provided we maintain EBITDAX to net interest expense ratio of 2.7:1.0

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until
July 2, 2008 and EBITDA to net interest expense ratio of a least 2.7:1.0 during the remaining period of the waiver's effectiveness. The waiver is effective until March 8, 2009.

At
March 31, 2008, we were not in compliance with the adjusted financial debt to EBITDAX ratio threshold of not more than 3.0:1.0; the actual ratio was 4.5:1.00. The International
Finance Corporation has granted the Company a temporary waiver on the condition that the Company maintains the adjusted financial debt to EBITDA ratio for the (i) quarter ending
March 31, 2008 of 4.5:1.0; (ii) quarter ending June 30, 2008 of 4.0:1.0; (iii) quarter ending September 30, 2008 of 3.5:1.0, and (iv) quarter ending
December 31, 2008 of 3.25:1.0. We must be compliant with the original requirement of adjusted financial debt to EBITDA of not more than 3.0:1.0 starting from the end of the first quarter ending
March 31, 2009. The waiver is effective until April 1, 2009.

We
are in compliance with all covenants as of September 30, 2008, as modified by the waivers described above. However, based on our current projections, we may not be in
compliance with all covenants as of March 31, 2009. Additionally, our proposed sale of a 26.75% interest in the South Akcakoca Sub-Basin may require us to obtain waivers or
renegotiate our covenants. If we cannot satisfy or renegotiate these covenants in the future, we may be subject to remedies included in the loan agreement, including, but not limited to, mandatory
early repayment of the debt. The Company believes that, if necessary, it will be able to obtain the required waiver from the International Finance Corporation or renegotiate the covenants.

We
are subject to certain negative covenants, including, but not limited to, the following: (i) except as required by law or to pay the dividends on the
Series A-1 Convertible Preferred Stock, which is no longer outstanding, paying dividends; (ii) subject to certain exceptions, incurring debt, making guarantees or creating or
permitting to exist any liens, (iii) subject to certain exceptions, making or permitting to exist loans or advances to, or deposits, with other persons or investments in any person or
enterprise; (iv) subject to certain exceptions, selling, transferring, leasing or otherwise disposing of all or a material part of our borrowing base assets; and (v) subject to certain
exceptions, undertaking or permitting any merger, spin-off, consolidation or reorganization.

Included
in interest expense for the nine months ended September 30, 2008, is $701,625 of additional compensation due to the IFC related to the prior year. This amount should have
been recognized as additional interest expense in the prior year. Although the amount may be considered material to the financial results for the nine months ended September 30, 2008,
management does not believe that the error has a material effect on the financial results for the year ended December 31, 2007 or the correction of the error in the current period will have a
material effect on the financial results for the year ended December 31, 2008. Also included in interest expense for the three and nine months ended September 30, 2008 is an estimate of
$838,750 and $1.8 million, respectively of the fee to be paid in 2009 relating to 2008 operations.



On September 27, 2005, we sold $75 million of Convertible Senior Notes due October 1, 2025 to qualified
institutional buyers pursuant to Rule 144A of the Securities Act of 1933. We also granted the initial purchasers the option to purchase an additional $11.25 million aggregate principal
amount of Convertible Senior Notes to cover over-allotments. The option was exercised on September 30, 2005. The total principal amount of Convertible Senior Notes issued was
$86.25 million and total net proceeds were approximately $82.2 million.

The
Convertible Senior Notes bear interest at a rate of 5% per annum and can be converted into common stock at an initial conversion rate of 23.3596 shares of common stock per $1,000
principal amount of Convertible Senior Notes, subject to adjustment in the event of a fundamental change, as defined (equivalent to a conversion price of approximately $42.81 per share). We may redeem
the Convertible Senior Notes, in whole or in part, on or after October 6, 2008, and prior to October 1,

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2010,
for cash at a redemption price equal to 100% of the principal amount of Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest, if the closing price of our common stock
exceeds 130% of the conversion price over a specified period. On or after October 1, 2010, we may redeem the Convertible Senior Notes, in whole or in part, at a redemption price equal to 100%
of the principal amount of Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest, irrespective of the price of its common stock. Holders may convert their Convertible Senior
Notes at any time prior to the close of business on the business day immediately preceding their stated maturity, and holders may, (i) upon the occurrence of certain fundamental changes, and
also (ii) on October 1, 2010, October 1, 2015, and October 1, 2020, require us to repurchase all or a portion of their Convertible Senior Notes for cash in an amount equal
to 100% of the principal amount of such Convertible Senior Notes, plus any accrued and unpaid interest. On September 30, 2008, the outstanding principal amount of the Convertible Senior Notes
was $80.7 million.

Due
to our restating the consolidated financial statements for the years ended December 31, 2003, 2004 and 2005 and our consolidated financial statements for each of the quarters
ended March 31 and
June 30, 2006, we did not provide the trustee under the indenture of the Convertible Senior Notes with copies of our annual reports, information, documents and other reports that were required
to be filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 within thirty (30) days of when such reports were required
to be filed with the Securities and Exchange Commission.

On
December 15, 2006, we received a notice from the trustee for failure to provide the trustee with a copy of our Form 10-Q for the nine month period ended
September 30, 2006. Since we cured the covenant default within thirty (30) days after receiving the written notice from the trustee, we cured the default and an event of default did not
occur.

The
registration rights agreement covering the Convertible Senior Notes provided for a penalty if the registration statement was filed and declared effective but thereafter ceased to be
effective (a "Suspension Period") for an aggregate of forty-five (45) days in any three month period or ninety (90) days in any twelve month period (an "Event Date"). Such
penalty called for an additional 0.25% per annum in interest expense on the aggregate principal amount of the Convertible Senior Notes for the first ninety (90) days following an Event Date and
an additional 0.50% per annum in interest expense on the aggregate principal amount of the Convertible Senior Notes thereafter, until such Suspension Period ended upon the registration statement again
becoming effective or not being required to be effective pursuant to the registration rights agreement. Because we did not file our Quarterly Report on Form 10-Q for the nine month
period ended September 30, 2006 in a timely manner, the registration statement for the Convertible Senior Notes became ineffective and we entered a Suspension Period on November 15,
2006. Such Suspension Period ended on January 23, 2007 when we provided notice that the Form 10-Q had been filed and the Suspension Period was no longer in effect. Because
the Suspension Period exceeded forty-five (45) days in any three month period, we paid approximately $14,375 in additional interest expense. On March 16, 2007, the date we
filed our Form 10-K for the year ended December 31, 2006 we again entered a Suspension Period until all the Convertible Senior Notes became eligible for sale pursuant to
Rule 144(k) on September 30, 2007. On October 1, 2007, $155,000 was deposited with the trustee for the Convertible Senior Notes as the penalty for any holders of the Convertible
Senior Notes who were eligible on October 1, 2007 to receive a pro rata portion of such payment. Such eligible holders had to have registered their Convertible Senior Notes on the registration
statement and still held those Notes on October 1, 2007. On April 1, 2008, we requested that the trustee return $150,957 which represents the unclaimed portion of the penalty and on
April 3, 2008 we received the funds from the trustee. Through September 30, 2008, we released $4,043 of the penalty deposit to eligible holders of Convertible Senior Notes.

On
July 9, 2008, our Board of Directors authorized a program to repurchase up to $10 million of the Convertible Senior Notes by December 31, 2008. In August 2008, we
repurchased $5.5 million of

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the
Convertible Senior Notes for $4.9 million plus accrued interest of $106,180. Additionally, we expensed $222,995 of prepaid loan fees that are attributable to the repurchased notes. This
resulted in a $368,255 gain on the early extinguishment of debt. Any repurchases will be made in the open market or in privately negotiated transactions, subject to market conditions, applicable legal
requirements and
other factors. The plan does not obligate us to acquire any particular amount of the Convertible Senior Notes bonds and the plan may be suspended at any time at our discretion.



Dividends on our common stock may be declared and paid out of funds legally available when and as determined by our board of directors.
Our policy is to hold and invest corporate funds on a conservative basis, and, thus, we do not anticipate paying cash dividends on our common stock in the foreseeable future.

The
terms of the loan and guarantee agreement with the International Finance Corporation limit the payment of dividends only to those that are required by law.



The following table sets forth our contractual obligations in thousands at September 30, 2008 for the periods shown:

Total

Less Than
One Year

One to
Three Years

Four to
Five Years

More Than
Five YearsLong-term debt

$
110,750

$


$


$


$
110,750Lease commitments


3,925


611


1,330


1,378


606Total contractual obligations

$
114,675

$
611

$
1,330

$
1,378

$
111,356


Contractual
obligations for long-term debt above do not include amounts for interest payments.

At
December 31, 2007 and March 31, 2008 we were not in compliance with certain financial covenants relating to the loan with the International Finance Corporation. We
obtained waivers through March 8, 2009 and April 1, 2009 respectively. Accordingly, the amount is shown in the above table as maturing in accordance with the original terms of the loan
facility. At September 30, 2008, we were in compliance with all financial covenants.

In
conjunction with FIN 48, we have no certainty as to when unrecognized tax benefits of $321,000 will become due.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are described in Note 2 to our consolidated financial statements included in
Form 10-K for the year ended December 31, 2007. We have identified below policies that are of particular importance to the portrayal of our financial position and results of
operations and which require the application of significant judgment by management. We analyze our estimates on a periodic basis and base our estimates on experience and various other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ from these estimates

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using
different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial
statements:



We account for our oil and natural gas exploration and development activities utilizing the successful efforts method of accounting.
Under this method, costs of productive exploratory wells, development dry holes and productive wells and undeveloped leases are capitalized. Oil and natural gas lease acquisition costs are also
capitalized. Exploration costs, including personnel costs, certain geological and geophysical expenses and delay rentals for oil and natural gas leases, are charged to expense as incurred. Exploratory
drilling costs are initially capitalized, but such costs are charged to expense if and when the well is determined not to have found reserves in commercial quantities. In most cases, a gain or loss is
recognized for sales of producing properties.

The
application of the successful efforts method of accounting requires management's judgment to determine the proper designation of wells as either developmental or exploratory, which
will ultimately determine the proper accounting treatment of the costs incurred. The results from a drilling operation can take considerable time to analyze, and the determination that commercial
reserves have been discovered requires both judgment and application of industry experience. Wells may be completed that are assumed to be productive and actually deliver oil and natural gas in
quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. On occasion, wells are drilled which have targeted geologic structures that are both
developmental and exploratory in nature, and in such instances an allocation of costs is required to properly account for the results. Delineation seismic costs incurred to select development
locations within a productive oil and natural gas field are
typically treated as development costs and capitalized, but often these seismic programs extend beyond the proved reserve areas and therefore management must estimate the portion of seismic costs to
expense as exploratory. The evaluation of oil and natural gas leasehold acquisition costs requires management's judgment to estimate the fair value of exploratory costs related to drilling activity in
a given area. Drilling activities in an area by other companies may also effectively condemn leasehold positions.

The
successful efforts method of accounting can have a significant impact on the operational results reported when we enter a new exploratory area in hopes of finding oil and natural gas
reserves. The initial exploratory wells may be unsuccessful and the associated costs will be expensed as dry hole costs. Seismic costs can be substantial which will result in additional exploration
expenses when incurred.



Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are reserves that can be
expected to be recovered through existing wells with existing equipment and operating methods as well as oil and natural gas expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery after testing by a pilot project or after the operation of an installed program has been confirmed
through production response that increased recovery will be achieved. Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion. Proved undeveloped reserves on undrilled acreage are limited (i) to those drilling units offsetting productive units
that are reasonably certain of production when drilled and (ii) to other undrilled units where it can be demonstrated with certainty that there is continuity of production from the existing
productive formation. We emphasize that the volume of reserves are estimates that, by their nature, are subject to revision. The estimates are made using geological and

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reservoir
data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. These reserve
revisions result primarily from improved or a decline in performance from a variety of sources such as an addition to or a reduction in recoveries below or above previously established lowest known
hydrocarbon levels, improved or a decline in drainage from natural drive mechanisms, and the realization of improved or declined drainage areas. If the estimates of proved reserves were to decline,
the rate at which we record depletion expense would increase.

For
the year ended December 31, 2007, we had a downward reserve revision of 4.8% on a BOE basis. This was comprised of a 42.6% decline in the natural gas reserves and a 10.8%
increase in oil reserves.
This downward revision was due to the following factors: (i) in Hungary, due to the small volume of gas we were unable to secure a gas contract which caused a deletion of previously booked,
technically recoverable reserves of 159 MBOE; (ii) in Romania, one gas well watered out and another was under performing based on previous projections resulting in a downward revision of 305.6
MBOE; and (iii) in the South Akcakoca Sub-Basin in Turkey, new pressure information and early performance data refined the geological interpretation resulting in a downward revision
of 1,369.4 MBOE. These downward revisions were partially offset by improved performance in the Neocomian Field in France and the Cendere Field in Turkey.



We review our proved oil and natural gas properties for impairment on an annual basis or whenever events and circumstances indicate a
potential decline in the recoverability of their carrying value. We estimate the expected future cash flows from our proved oil and natural gas properties and compare these future cash flows to the
carrying value of the oil and natural gas properties to determine if the carrying value is recoverable. If the carrying value exceeds the estimated undiscounted future cash flows, we will adjust the
carrying value of the oil and natural gas properties to their fair value in the current period. The factors used to determine fair value include, but are not limited to, estimates of reserves, future
commodity prices, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected cash flows projected. Unproved
properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Given the complexities associated with oil
and natural gas reserve estimates and the history of price volatility in the oil and natural gas markets, events may arise that will require us to record an impairment of our oil and natural gas
properties and there can be no assurance that such impairments will not be required in the future nor that they will not be material. For the nine months ended September 30, 2008, we incurred
an impairment charge of $53.5 million on our Turkish natural gas producing properties and $2 million on our undeveloped leasehold in Trinidad, which is recorded in the reportable
operations of the United States.

The
impairment charge in Turkey is a result of a decline in the fair market value of the Company's interest in South Akcakoca Sub-Basin assets. The fair market value has been
determined based on a Letter of Intent to sell a 26.75% interest in the South Akcakoca Sub-Basin assets to Petrol Ofisi AS for $80.3 million. This sale price indicates that the fair
value of our 36.75% working interest is approximately $103.8 million. The net book value of the Black Sea asset at June 30, 2008 was $157.3 million, resulting in an impairment of
$53.5 million. No additional impairment was recorded on these properties for the quarter ending September 30, 2008.

The
impairment charge of $2 million for the undeveloped leasehold costs in Trinidad, is due to management's decision to exit Trinidad and discontinue our association with our
registered agent in the country.

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Future development costs include costs to be incurred to obtain access to proved reserves, including drilling costs and the
installation of production equipment. Future abandonment costs include costs to dismantle and relocate or dispose of our production equipment, gathering systems, wells and related structures and
restoration costs of land. We develop estimates of these costs for each of our properties based upon the type of production structure, depth of water, 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 upon numerous factors, including changing technology, the
ultimate settlement amount, inflation factors, credit adjusted discount rates, timing of settlement and changes in the political, legal, environmental and regulatory environment. We review our
assumptions and estimates of future abandonment costs on an annual basis. SFAS 143"Accounting for Asset Retirement Obligations"requires that
the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the
related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is
settled for an amount other than the recorded amount, a gain or loss is recognized.

Holding
all other factors constant, if our estimate of future abandonment costs is revised upward, earnings would decrease due to higher depreciation, depletion and amortization expense.
Likewise, if these estimates were revised downward, earnings would increase due to lower depreciation, depletion and amortization expense.



For financial reporting purposes, we generally provide taxes at the rate applicable for the appropriate tax jurisdiction. Because our
present intention is to reinvest the unremitted earnings in our foreign operations, we do not provide U.S. income taxes on unremitted earnings of foreign subsidiaries. Management periodically assesses
the need to utilize these unremitted earnings to finance our foreign operations. This assessment is based on cash flow projections that are the result of estimates of future production, commodity
prices and expenditures by tax jurisdiction for
our operations. Such estimates are inherently imprecise since many assumptions utilized in the cash flow projections are subject to revision in the future.

Management
also periodically assesses, by tax jurisdiction, the probability of recovery of recorded deferred tax assets based on its assessment of future earnings estimates. Such
estimates are inherently imprecise since many assumptions utilized in the assessments are subject to revision in the future.



We periodically utilize derivative instruments such as futures and swaps for purposes of hedging our exposure to fluctuations in the
price of crude oil. In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",we have elected not to
designate the derivative financial instruments to which we are a party as hedges, and accordingly, we record such contracts at fair value and recognize changes in such fair value in current earnings
as they occur. We determine the fair value of futures and swap contracts based on the difference between their fixed contract price and the underlying market price at the determination date. The
realized and unrealized gains and losses on derivatives are recorded as a derivative fair value gain or loss in the income statement.



The functional currency for Turkey, Romania and Hungary is the US Dollar and in France the functional currency is the Euro. Translation
gains or losses resulting from transactions in the New Turkish Lira in Turkey, the Lei in Romania and the Forint in Hungary are included in income available to common shares for the current period.
Translation gains and losses resulting from transactions in the Euro in France are included in other comprehensive income for the current period. We periodically review the operations of our entities
to ensure the functional currency of each entity is the currency of the primary economic environment in which we operate.

In
October 2007, we made a change in accounting method regarding intercompany accounts receivable due from our subsidiaries in Turkey, Romania and Hungary. Pursuant to a Board of
Directors resolution, we expect to be repaid the intercompany accounts receivable from our subsidiaries in Turkey, Romania and Hungary in the foreseeable future. Due to this resolution subsequent to
October 1, 2007, the foreign currency exchange change in the intercompany accounts receivable balance will be reflected in current earnings, as a foreign exchange gain or loss, rather than in
accumulated other comprehensive income.

30

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RESULTS OF OPERATIONS



The following table presents production and average unit prices for the geographic segments indicated:

For the Three
Months Ended
September 30,2008

2007Production:Oil (MBbls):France


89


94Turkey


14


17Romania


1


2Total


104


113Gas (MMcf):France





Turkey


471


423Romania


106


168Total


577


591MBOE:France


89


94Turkey


93


87Romania


18


30Total


200


211Average Price:Oil ($/Bbl):France

$
108.00

$
71.23Turkey


111.33


60.96Romania


68.80


47.64Total

$
108.22

$
69.26Gas ($/Mcf):France

$


$
Turkey


12.34


8.50Romania


5.99


5.28Total

$
11.17

$
7.58$/BOE:France

$
108.00

$
71.23Turkey


79.73


52.94Romania


37.06


32.78Total

$
88.42

$
58.21


31

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Oil and natural gas sales for the three months ended September 30, 2008 were $17.7 million, as compared to
$12.4 million for the comparable period in 2007. This increase is due to the higher oil price received for the French and Turkish oil production ($4 million), increased natural gas
prices in Turkey ($1.8 million), increased natural gas production from offshore Turkey ($592,000) and increased prices received for oil and natural gas in Romania ($98,000). These increases
were partially offset by oil production decreases in France, Turkey and Romania and natural gas production decreases in Romania ($1.2 million).

The
above table compares both volumes and prices received for oil and natural gas for the three months ended September 30, 2008 and 2007. Oil and natural gas prices are and will
continue to be extremely volatile and a significant change will have a material impact on our revenue.



Lease operating expense was $4.8 million, or $24.09 per BOE produced for the quarter ended September 30, 2008, as
compared to $2.9 million, or $13.95 per BOE produced for the comparable period in 2007. The $1.9 million increase is primarily due to workovers in France, increase in offshore Turkey
production, workovers performed on the East Ayazali wells and an overall increase in operating expense due to inflation in the oil and gas industry.



Exploration expense for the third quarter of 2008 was $926,000, as compared to $4.8 million in the third quarter of 2007. In the
third quarter of 2007, we were conducting a 2D seismic program in Romania.



Third quarter 2008 depreciation, depletion and amortization expense was $10 million or $49.93 per BOE produced, as compared to
$6.1 million, or $28.90 per BOE produced for the third quarter of 2007. This increase is primarily due to the start of natural gas production in offshore Turkey in May 2007, from two of the
three platforms and in May 2008 we began production from the third platform. The depreciation rate per BOE in Turkey is excessively high due to cost overruns in the development of the offshore gas
field, in addition to the reduction in proved reserves at December 31, 2007 as compared to December 31, 2006.



For three months ended September 30, 2008, we recorded zero dry hole expense, as compared to $4.3 million, for the three
months ended September 30, 2007, which represented the dry hole cost of a well in Turkey. Additionally, the Company has made a strategic decision to no longer drill 100% exploratory wells or
fund 100% seismic programs on exploratory acreage. We have begun a systematic process of farming out our exploratory prospects to industry partners. The terms of farm outs have been and will generally
be structured so that the farmee will pay at least a majority of all seismic costs and drill an exploratory well to casing point in order to earn a 50%-75% working interest in the prospect
or concession.

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General and administrative expense, not including stock compensation expense, was $2.4 million, for the third quarter of 2008
compared with $4.4 million for the third quarter of 2007. This decrease is due to the resignation of executives in June 2008, reduction of staff in Turkey after the completion of Phase I
development in the Black Sea, joint venture partners in Hungary reimbursing us for overhead and the strengthening of the U. S. Dollar compared to the currencies in the countries where we operate.



Stock compensation expense was $397,000, for the third quarter of 2008 compared with $635,000 for the third quarter of 2007. This
decrease is due primarily to the forfeiture of restricted stock grants upon the resignation of the executives in June 2008.



Gain on oil and gas derivative contracts of $2.4 million represents the recognized gain on the commodity derivative contracts
with Total Oil Trading. Presented in the table below is a summary of the contracts entered into with the gain in thousands:

Type

Period

Barrels

Floor

Ceiling

GainCollar

July 1September 30, 2008


48,000

$
91.75

$
99.75

$
2,405


In
the three months ended September 30, 2007, we recorded a loss of $207,000 for the net realized and unrealized loss on derivative financial instruments which fluctuate based on
changes in the fair value of underlying commodities. We entered into futures and swap contracts for approximately 15,000 Bbls per month for the months of June 2007 through December 2008 and
subsequently sold all contracts as of September 30, 2007.This resulted in a net derivative fair value loss of $207,000 for the three months ended September 30, 2007.



We recorded a gain on foreign currency exchange of $1.6 million in the third quarter of 2008 compared with a loss of
$13.6 million for the third quarter of 2007. This gain is primarily due to a change in accounting method regarding intercompany accounts receivable due from our subsidiaries in Turkey, Romania
and Hungary. Pursuant to a Board of Directors' resolution, we expect to be repaid the intercompany accounts receivable from our subsidiaries in Turkey, Romania and Hungary in the foreseeable future.
Due to this resolution subsequent to October 1, 2007, the foreign currency exchange change in the intercompany accounts receivable balance will be reflected in current earnings, as a foreign
exchange gain or loss rather than in accumulated other comprehensive income.



In August 2008, we repurchased $5.5 million of the Convertible Senior Notes for $4.9 million plus accrued interest of
$106,180. Additionally, we expensed $222,995 of prepaid loan fees that are attributable to the repurchased notes. This resulted in a $368,255 gain on the early extinguishment of debt.



Interest and other income was $457,000 in the third quarter of 2008 as compared with income of $283,000 in the comparable period of
2007. In the quarter ended September 30, 2008, our average cash

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balance
was larger than our average cash balance for the quarter ended September 30, 2007, which resulted in more interest income in the current period.



Interest expense was $2.1 million for the three months ended September 30, 2008, as compared to $1.6 million for
the comparable period of 2007. The increase in interest expense is primarily due to the additional accrual of the estimate of the fee to be paid to the IFC in 2009 for 2008 operations and partially
offset by lower interest rates.



On June 14, 2007, the Board of Directors authorized management to sell all our oil and gas properties in the United States. The
sale of these properties completed the divestiture of the company's non-core domestic assets and allows us to focus exclusively on our international operations. The sale was closed on
September 1, 2007. The sales price was $19.1 million which resulted in a pre-tax gain of $9.2 million. The table below compares discontinued operations for the three
and nine months ended September 30, 2008 and 2007:

Three Months Ended
September 30,2008

2007Revenue:Oil and natural gas sales

$


$
1,422Operating costs and expenses:Lease operating expense


(14
)

428Exploration expense





10Depreciation, depletion and amortization





61Dry hole expense





(69
)General and administrative expense





79Gain on sale of properties and other assets





(8,624
)Total operating costs and expenses


(14
)

(8,115
)Operating income


14


9,537Income tax provision





(3,516
)Income from discontinued operations

$
14

$
6,021




The most significant element of comprehensive income, other than net income, is foreign currency translation. For the three months
ended September 30, 2008, we had accumulated an unrealized loss of $7.1 million, as compared to an unrealized income of $15.7 million for the comparable period in 2007. This
decrease is primarily due to a change in accounting method regarding intercompany accounts receivable due from our subsidiaries in Turkey, Romania and Hungary and due to the strengthening of the
U.S. Dollar, in the third quarter of 2008, compared to the Euro which is the functional currency in our French subsidiary. Pursuant to a Board of Directors' resolution, we expect to be repaid
the intercompany accounts receivable from our subsidiaries in Turkey, Romania and Hungary in the foreseeable future. Due to this resolution subsequent to October 1, 2007, the foreign currency
exchange change in the intercompany accounts receivable balance will be reflected in current earnings, as a foreign exchange gain or loss rather than in accumulated other comprehensive income.

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RESULTS OF OPERATIONS



The following table presents production and average unit prices for the geographic segments indicated:

For the Nine
Months Ended
September 30,2008

2007Production:Oil (MBbls):France


278


288Turkey


42


51Romania


2


8Total


322


347Gas (MMcf):France





Turkey


1,448


625Romania


337


543Total


1,785


1,168MBOE:France


278


288Turkey


284


155Romania


58


98Total


620


541Average Price:Oil ($/Bbl):France

$
105.81

$
62.54Turkey


105.14


54.88Romania


67.36


54.58Total

$
105.43

$
61.24Gas ($/Mcf):France

$


$
Turkey


10.75


8.39Romania


5.63


4.79Total

$
9.78

$
6.72$/BOE:France

$
105.81

$
62.54Turkey


70.54


51.84Romania


35.14


30.81Total

$
83.02

$
53.71


35

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Oil and natural gas sales for the nine months ended September 30, 2008 were $51.5 million, as compared to
$29.2 million for the comparable period in 2007. This increase is due to the higher oil price received for the French and Turkish oil production ($14.1 million), increased natural gas
prices in Turkey ($3.4 million), increased natural gas production from offshore Turkey, which began in May 2007 ($8.8 million) and increased prices received for oil and natural gas in
Romania
($306,000). These increases were partially offset by oil production decreases in France, Turkey and Romania and natural gas production decreases in Romania ($4.3 million).

The
above table compares both volumes and prices received for oil and natural gas for the nine months ended September 30, 2008 and 2007. Oil and natural gas prices are and will
continue to be extremely volatile and a significant change will have a material impact on our revenue.



Lease operating expense was $13.1 million, or $21.18 per BOE produced for the nine months ended September 30, 2008, as
compared to $8.3 million, or $15.41 per BOE produced for the comparable period in 2007. The $4.8 million increase is primarily due to workovers in France, increased production in
offshore Turkey which started production in May 2007, workovers on the East Ayazli wells and an overall increase in operating expense due to the inflation in the oil and gas industry as a whole.



Exploration expense for the nine months ended September 30, 2008 was $2.9 million, as compared to $9.5 million for
the nine months ended September 30, 2007. This decrease is due to our farmout efforts that were started in the fourth quarter of 2007 and the 2D seismic program in Romania that was conducted in
2007.



For the nine months ended September 30, 2008 depreciation, depletion and amortization expense was $30 million or $48.31
per BOE produced, as compared to $13.5 million, or $25.00 per BOE produced for the nine months ended September 30, 2007. This increase is primarily due to the start of natural gas
production in offshore Turkey in May 2007, from two of the three platforms and in May 2008 we began production from the third platform. The depreciation rate per BOE in Turkey is excessively high due
to cost overruns in the development of the offshore gas field, in addition to the reduction in proved reserves at December 31, 2007 as compared to December 31, 2006.



For nine months ended September 30, 2008, we recorded zero dry hole expense, as compared to $21.4 million, for the nine
months ended September 30, 2007, which included two dry holes in France of $3.7 million, three dry holes in Romania totaling $10 million, one dry hole in Turkey totaling
$4.3 million and two dry holes in Hungary totaling $3.4 million. This decrease is due to the strategic decision to no longer drill 100% exploratory wells or fund 100% seismic programs on
exploratory acreage. We have begun a systematic process of farming out our exploratory prospects to industry partners. The terms of farm outs have been and will generally be structured so that the
farmee will pay at least a majority of all seismic costs and drill an exploratory well to casing point in order to earn a 50%-75% working interest in the prospect or concession.

36

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General and administrative expense, not including stock compensation expense and amounts due former executives upon their resignation,
was $9.6 million for the nine months ended September 30, 2008 as compared with $9.7 million for the nine months ended September 30, 2007.



Stock compensation expense was $1.9 million for the first nine months of 2008 as compared with $2.3 million for the first
nine months of 2007. This decrease is due to the forfeiture of restricted stock granted to the executives that resigned in June 2008.



In June 2008, Mr. Michael FitzGerald resigned as Executive Vice PresidentExploration and Production and
Mr. Edward Ramirez resigned as Senior Vice PresidentExploration and Production. The Separation and Release Agreements provide for one year of salary for each individual which
resulted in an expense of $600,000, and for Mr. FitzGerald the immediate vesting of 5,000 shares of restricted stock grants and for Mr. Ramirez the immediate vesting of 7,000 shares of
restricted stock grants which resulted in an expense of $35,000.

Also
in June 2008, three other employees resigned which resulted in an additional $304,000 of expense.

In
January 2007, Mr. G. Thomas Graves III resigned as President and Chief Executive Officer. The Separation Agreement between Mr. Graves and the Company called for the
immediate vesting of all restricted stock grants which resulted in an expense of $1.1 million and two years of salary and one year of bonus of $1.1 million.



In April 2007, we sold our interest in ePsolutions for $3.4 million in cash and 50,000 shares of preferred stock with a value of
$10.00 per share. Due to the rising cost of electricity and the deterioration of the deregulated electric market in Texas, ePsolutions has reduced their forecasted growth for the next several years.
Accordingly, we have reduced our carrying value of our investment in ePsolutions by $300,000 which we believe more accurately reflects the current market value of this investment.



In June 2008, we recorded an impairment to oil and gas properties totaling $55.5 million. We review our proved and unproved oil
and natural gas properties for impairment on an annual basis or whenever events and circumstances indicate a potential decline in the recoverability of their carrying value. As explained below, our
review at June 30, 2008, indicated a potential decline in the recoverability of our South Akcakoca Sub-Basin and Trinidad assets.

The
impairment charge in Turkey is a result of a decline in the fair market value of the Company's interest in South Akcakoca Sub-Basin assets. The fair market value has been
determined based on a Letter of Intent to sell a 26.75% interest in the South Akcakoca Sub-Basin properties for $80.3 million. This sale price indicates that the fair value of our
36.75% working interest is approximately $103.8 million. The net book value of the South Akcakoca Sub-Basin asset at June 30, 2008 was $157.3 million, resulting in an
impairment of $53.5 million.

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Table of Contents

The
impairment charge of $2 million for the undeveloped leasehold costs in Trinidad, is due to management's decision to exit Trinidad and discontinue our association with our
registered agent in the country.



Loss on oil and gas derivative contracts of $1.8 million represents the recognized loss on the commodity derivative contracts
with Total Oil Trading. Presented in the table below is a summary of the contracts entered into with the gain (loss) in thousands:

Type

Period

Barrels

Floor

Ceiling

Gain/(Loss)Collar

January 1March 31, 2008


48,000

$
84.75

$
92.75

$
(19
)Collar

April 1June 30, 2008


48,000

$
92.25

$
100.25


(2,239
)Collar

July 1September 30, 2008


48,000

$
91.75

$
99.75


452$
(1,806
)


For
the nine months ended September 30, 2007, we recorded a loss $813,000 for the net realized and unrealized loss on derivative financial instruments which fluctuate based on
changes in the fair value of underlying commodities. We entered into futures and swap contracts for approximately 15,000 Bbls per month for the months of June 2007 through December 2008 and
subsequently sold all contracts as of September 30, 2007. This resulted in a net derivative fair value loss of $813,000 for the nine months ended September 30, 2007.



For the nine months ended September 30, 2008, we recorded zero on the gain or loss on the sale of properties and other assets,
as compared to a gain of $3.5 million for the comparable period in 2007, when we recorded a gain on the sale of the ePsolutions, EnergyNet and
Capstone, all unconsolidated equity investments. There were no sale of properties or other assets during the nine months ended September 30, 2008



We recorded a gain on foreign currency exchange of $2.9 million for the nine months ended September 30, 2008 as compared
with a $29.3 million loss for the comparable period of 2007. This gain is primarily due to a change in accounting method regarding intercompany accounts receivable due from our subsidiaries in
Turkey, Romania and Hungary. Pursuant to a Board of Directors' resolution, we expect to be repaid the intercompany accounts receivable from our subsidiaries in Turkey, Romania and Hungary in the
foreseeable future. Due to this resolution subsequent to October 1, 2007, the foreign currency exchange change in the intercompany accounts receivable balance will be reflected in current
earnings, as a foreign exchange gain or loss rather than in accumulated other comprehensive income.



In August 2008, we repurchased $5.5 million of the Convertible Senior Notes for $4.9 million plus accrued interest of
$106,180. Additionally, we expensed $222,995 of prepaid loan fees that attributable to the repurchased notes. This resulted in a $368,255 gain on the early extinguishment of debt.



Interest and other income was $994,000 for the period ended September 30, 2008 as compared with $865,000 in the comparable
period of 2007. In the period ended September 30, 2008, our average cash balance was larger than our average cash balance for the period ended September 30, 2007, which resulted in more
interest income in the current period.

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Interest expense was $6.4 million for the nine months ended September 30, 2008, as compared to $2.5 for the comparable
period of 2007. The increase in interest expense is primarily due to a reduction in the amount of interest that could be capitalized due to the assets in Turkey commencing production in May 2007.



On June 14, 2007, the Board of Directors authorized management to sell all our oil and gas properties in the United States. The
sale of these properties completed the divestiture of the company's non-core domestic assets and allows us to focus exclusively on our international operations. The sale was closed on
September 1, 2007. The sales price was $19.1 million which resulted in a pre-tax gain of $9.2 million. The table below compares discontinued operations for the nine
months ended September 30, 2008 and 2007:

Nine Months Ended September 30,2008

2007Revenue:Oil and natural gas sales

$


$
4,441Operating costs and expenses:Lease operating expense


22


1,557Exploration expense





98Depreciation, depletion and amortization





611Dry hole expense





103General and administrative expense





378Gain on sale of properties and other assets





(9,244
)Total operating costs and expenses


22


(6,497
)Operating income (loss)


(22
)

10,938Income tax provision





(4,007
)Income (loss) from discontinued operations

$
(22
)
$
6,931




The most significant element of comprehensive income, other than net income, is foreign currency translation. For the nine months ended
September 30, 2008, we had accumulated an unrealized loss of $2.3 million, as compared to an unrealized income of $34.1 million for the comparable period in 2007. This decrease is
primarily due to a change in accounting method regarding intercompany accounts receivable due from our subsidiaries in Turkey, Romania and Hungary and due to the strengthening of the U. S. Dollar
compared to the Euro which is the functional currency of our French subsidiary. Pursuant to a Board of Directors' resolution, we expect to be repaid the intercompany accounts receivable from our
subsidiaries in Turkey, Romania and Hungary in the foreseeable future. Due to this resolution subsequent to October 1, 2007, the foreign currency exchange change in the intercompany accounts
receivable balance will be reflected in current earnings, as a foreign exchange gain or loss rather than in accumulated other comprehensive income.

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The
functional currency of our operations in France is the Euro, the functional currency in Romania, Turkey and in Hungary is the US Dollar. The exchange rates at September 30,
2008 and 2007 were:

September 30,2008

2007Euro

$
1.4303

$
1.4179New Turkish Lira

$
0.7887

$
0.8263Romanian Lei

$
0.3823

$
0.00004Hungarian Forint

$
0.0059

$
0.0057




We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on
our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the Company's market risk during the nine months ended September 30, 2008. For additional
information, refer to the market risk disclosure in Item 7A as presented in the Company's 2007 Annual Report on Form 10-K.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

We
carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Senior Vice PresidentChief
Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer
and Senior Vice PresidentChief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2008 were not effective since our accounting and
financial reporting systems and procedures were not sufficiently designed to ensure consistent and complete application of our accounting policies and to prepare financial statements in accordance
with generally accepted accounting principles. This includes not only the sufficiency of our review of sensitive calculations, reconciliations and spreadsheets but also the preparation and processing
of financial accounting information.

Changes in Internal Control over Financial Reporting

In the quarter ended September 30, 2008, we continued improving the computerized integrated financial reporting system in order
to automate the manual processes that are causing errors in spreadsheets and had a more thorough review by senior financial officers of the financial statements and underlying supporting documentation
and these changes have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION

ITEM 1A.RISK FACTORS

Due to the recent deterioration in the credit and equity markets, significantly lower oil and natural gas prices and foreign currency
fluctuations, we are updating certain of the risk factors that were included in our Annual Report on Form 10-K for the year-ended December 31, 2007.

Risks Related To Our Company



Effectuation of our business strategy will require substantial capital expenditures. In order to fund our future growth, we will need
to obtain additional capital. The amount and timing of our future capital requirements will depend upon a number of factors, including:



Our
ability to raise additional capital will depend on the results of our operations and the status of various capital and industry markets at the time we seek such capital. Our failure
or inability to obtain any required additional financing on favorable terms could materially and adversely affect our growth, cash flow and earnings, including our ability to meet our capital
expenditures budgets.

On
December 28, 2006, we entered a loan and guarantee agreement with International Finance Corporation for our operations in Turkey and Romania. The loan and guarantee agreement
provides for two separate facilities, the first of which is the $10 million facility which is unsecured and the second of which is the $25 million facility which is a secured revolving
facility. The $25 million facility has a current maximum facility amount of $25 million which maximum facility amount will increase to $40 million when the total borrowing base
amount exceeds $50 million.

We
also have outstanding $86.25 million of Convertible Senior Notes due October 1, 2025.

At
September 30, 2008, our debt to equity ratio was 1.18 to 1, and this ratio and our increased leverage may make it difficult for us to obtain additional funding on terms that
are acceptable to us, especially additional debt in light of the current credit market.

No
assurance can be given that we will have the needed additional capital to fund our future growth under these facilities or from existing operations.

In
addition, to the extent that we are not able to obtain additional capital by the incurrence of additional debt, we may need to issue additional equity which may be difficult in light
of the current equity market. Any such issuance of equity could be materially dilutive to our outstanding equity and equity holders.

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As noted above, our debt to equity ratio may limit our ability to obtain additional indebtedness. Additionally, our loan and guarantee
agreement with the International Finance Corporation restricts our ability to incur additional indebtedness because of financial ratios that we must meet.

Thus,
we may not be able to obtain sufficient capital to grow our business, effectuate our business strategy and may lose opportunities to acquire interests in oil and natural gas
properties or related businesses because of our inability to fund such growth.

Our
ability to comply with the restrictions and covenants of our indebtedness in the future is uncertain and is affected by the levels of cash flow from our operations and events or
circumstances beyond our control, including oil and natural gas prices Our failure to comply with any of the restrictions and covenants could result in a default, which could permit the lender to
accelerate repayments and foreclose on the collateral securing the indebtedness.

Any
additional future indebtedness may limit our financial and operating flexibility in a manner similar to and potentially more restrictive than the facility discussed above.



We currently have operations involving the U.S. dollar, Euro, New Turkish Lira, Forint and Romanian Lei. We are subject to fluctuations
in the value of the U.S. dollar as compared to the Euro, New Turkish Lira, Forint and Romanian Lei respectively. These fluctuations, including the recent fluctuations, may adversely affect our results
of operations.

Risks Related To Our Industry



Our revenues, cash flows and profitability are substantially dependent upon prevailing prices for oil and natural gas. In recent years,
oil and natural gas prices and, therefore, the level of drilling, exploration, development and production, have been extremely volatile. Any significant or extended decline in oil or natural gas
prices will have a material adverse effect on our business, financial condition and results of operations and could impair access to future sources of capital. Volatility in the oil and natural gas
industry results from numerous factors over which we have no control, including:



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Significant
declines in oil and natural gas prices for an extended period, including the recent decline in oil and natural gas prices, may:



We
expect oil and natural gas prices, as well as the oil and natural gas industry generally, to continue to be volatile.

Risks Related To Our Common Stock



Our total consolidated long-term debt as of September 30, 2008 was approximately $111 million and represented
approximately 1.18 of our total capitalization as of that date. Our level of indebtedness could have important consequences to investors, because:



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Table of Contents



ITEM 6.EXHIBITS

Exhibit
Number

Description

Incorporation by Reference2.1

Letter of Intent by and between Toreador Turkey Limited and Toreador Turkey Limited, Ankara Turkey Branch, and PETROL OFISI AS, dated August 8, 2008 (The attachments to the Letter of Intent have been omitted from
this filing. A list of attachments is contained in the Letter of Intent and the attachments are available to the Securities and Exchange Commission upon request).

Incorporated by reference from Exhibit 2.1 to Toreador Resources Corporation Form 8-K filed on August 13, 2008.2.2

Assignment Agreement between PETROL OFISI AS, PETROL OFISI ARAMA URETIM SANAYI ve TICARET ANONIM SIRKETI and Toreador Turkey Limited, Toreador Turkey Limited, Ankara Turkey Branch and Toreador Resources Corporation,
dated September 17, 2008 (The attachments to the Assignment Agreement have been omitted from this filing. A list of attachments is contained in the Assignment Agreement and the attachments are available to the Securities and Exchange Commission
upon request).

Filed Herewith.10.1

Parent Corporate Guaranty by PETROL OFISI AS in favor of Toreador Turkey Limited and Toreador Turkey Limited, Ankara Turkey Branch, dated September 17, 2008.

Filed Herewith.10.2

Form of Amendment to Employee Restricted Stock Agreement (August 2008)

Filed Herewith10.3

Form of Employee Restricted Stock Agreement (August 2008).

Filed Herewith10.4

Amended and Restated Summary Sheet regarding changes in Director Compensation (August 2008)

Filed Herewith31.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed Herewith31.2

Certification of Senior Vice PresidentFinance & Accounting and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002

Filed Herewith32.1

Certification of Chief Executive Officer and Senior Vice PresidentFinance & Accounting and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002

Filed Herewith


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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q
report to be signed on its behalf by the undersigned thereunto duly authorized.

TOREADOR RESOURCES CORPORATION,
RegistrantNovember 10, 2008

/s/ NIGEL J. LOVETT Nigel J. Lovett
President and Chief Executive OfficerNovember 10, 2008

/s/ CHARLES J. CAMPISE Charles J. Campise
Senior Vice President and Chief Financial Officer


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