UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2000

                         Commission File Number: 0-25386

                                 FX ENERGY, INC.
             (Exact name of registrant as specified in its charter)

                 Nevada                                     87-0504461
     (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                     Identification No.)

   3006 Highland Drive, Suite 206, Salt Lake City, Utah         84106
        (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:     Telephone (801) 486-5555
                                                         Telecopy (801) 486-5575

Securities registered pursuant to Section 12(b) of the Act:

       Title of each class           Name of each exchange on which registered
           None                                      None

          Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, Par Value $0.001
                         Preferred Stock Purchase Rights
                                (Title of class)

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

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

         State the  aggregate  market value of the voting and  nonvoting  common
equity held by nonaffiliates of the registrant. The aggregate market value shall
be computed by  reference to the price at which the common  equity was sold,  or
the average bid and asked prices of such common  equity,  as of a specified date
within 60 days prior to the date of filing.  As of March 15, 2001, the aggregate
market value of the voting and nonvoting  common equity held by nonaffiliates of
the registrant was $89,217,000.

         Indicate the number of shares  outstanding of each of the  registrant's
classes of common stock, as of the latest practicable date. As of March 9, 2001,
FX Energy  had  outstanding  17,680,235  shares of its common  stock,  par value
$0.001.

DOCUMENTS  INCORPORATED BY REFERENCE.  FX Energy's definitive Proxy Statement in
connection  with the 2001 Annual  Meeting of  Stockholders  is  incorporated  by
reference in response to Part III of this Annual Report.

<PAGE>

--------------------------------------------------------------------------------
                                 FX ENERGY, INC.
              Form 10-K for the fiscal year ended December 31, 2000
--------------------------------------------------------------------------------

                                Table of Contents

  Item                                                                     Page
-----------                                                               ------
                                     Part I

   --       Special Note on Forward-Looking Statements....................     1
1. and 2.   Business and Properties.......................................     2
    3.      Legal Proceedings.............................................    28
    4.      Submission of Matters to a Vote of Security Holders...........    28

                                     Part II
    5.      Market for Common Equity and Related Stockholder Matters......    29
    6.      Selected Consolidated Financial Data..........................    30
    7.      Management's Discussion and Analysis of Financial Condition
                and Results of Operations.................................    32
    7A.     Qualitative and Quantitative Disclosure about Market Risk.....    40
    8.      Financial Statements and Supplementary Data...................    40
    9.      Changes and Disagreements with Accountants on Accounting
                 and Financial Disclosure.................................    40

                                    Part III
   10.      Directors and Officers of Registrant..........................    41
   11.      Executive Compensation........................................    41
   12.      Security Ownership of Certain Beneficial Owners
                 and Management...........................................    41
   13.      Certain Relationships and Related Transactions................    41

                                     Part IV
   14.      Exhibits, Financial Statement Schedules and Reports on
                 Form 8-K.................................................    42
   --       Signature Page................................................    49
   --       Report of  Independent Accountants............................   F-1


<PAGE>

--------------------------------------------------------------------------------
                   SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
--------------------------------------------------------------------------------

         This report contains statements about the future, sometimes referred to
as  "forward-looking"  statements.   Forward-looking  statements  are  typically
identified by the use of the words "believe," "may," "will," "should," "expect,"
"anticipate,"  "estimate,"  "project,"  "propose,"  "plan," "intend" and similar
words and  expressions.  We intend that the  forward-looking  statements will be
covered by the safe harbor provisions for forward-looking  statements  contained
in Section 27A of the  Securities  Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Statements that describe our future strategic plans, goals
or objectives are also forward-looking statements.

         Readers  of  this  report  are  cautioned   that  any   forward-looking
statements,  including those regarding us or our  management's  current beliefs,
expectations,  anticipations,  estimations,  projections,  proposals,  plans  or
intentions,  are not  guarantees of future  performance or results of events and
involve risks and uncertainties, such as:

         o        the future  results  of  drilling  individual  wells and other
                  exploration and development activities;

         o        future  variations in well  performance as compared to initial
                  test data;

         o        future  events  that may  result  in the  need for  additional
                  capital;

         o        the prices at which we may be able to sell oil or gas;

         o        fluctuations in prevailing prices for oil and gas;

         o        uncertainties  of certain terms to be determined in the future
                  relating to our oil and gas interests,  including exploitation
                  fees, royalty rates and other matters;

         o        future drilling and other exploration  schedules and sequences
                  for various wells and other activities;

         o        uncertainties    regarding   future    political,    economic,
                  regulatory, fiscal, taxation and other policies in Poland;

         o        the  cost  of  additional  capital  that  we may  require  and
                  possible  related  restrictions  on our  future  operating  or
                  financing flexibility;

         o        our future ability to attract strategic  partners to share the
                  costs   of   exploration,    exploitation,   development   and
                  acquisition activities; and

         o        future  plans and the  financial  and  technical  resources of
                  strategic partners.

         The forward-looking  information is based on present  circumstances and
on our predictions respecting events that have not occurred, which may not occur
or which may occur  with  different  consequences  from  those  now  assumed  or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking  statements as a result of various factors, including the
risk factors detailed in this report. The forward-looking statements included in
this report are made only as of the date of this report.

                                       1
<PAGE>

                                     PART I

--------------------------------------------------------------------------------
                     ITEMS 1. AND 2. BUSINESS AND PROPERTIES
--------------------------------------------------------------------------------

Introduction

         We are an  independent  oil and gas  company  focused  on  exploration,
development  and production  opportunities  in the Republic of Poland.  With the
help of our partners,  we were the first western company to discover and produce
gas in Poland.  We also hold rights to more oil and gas  exploration  acreage in
Poland than any other  western  company.  Our ongoing  activities  are conducted
under strategic  alliances with the Polish Oil and Gas Company,  or POGC, and/or
Apache  Corporation.  These  alliances  allow us to utilize  the  operating  and
technical   personnel  of  those  companies,   gain  access  to  geological  and
geophysical data, manage our exploration risk and obtain other necessary support
in Poland.

         We conduct  exploration  and  development  activities with our partner,
POGC, in the Fences project area in western Poland under an agreement  signed in
2000,  whereby  we will earn a 49.0%  interest  by  spending  $16.0  million  of
exploration costs to balance  expenditures already made by POGC. In and near the
Fences project area, POGC has developed and refined two exploration  models: one
model has resulted in four gas fields in the Rotliegendes  trend associated with
the Poznan  Depression in the Fences  project area; the other model has resulted
in six gas fields in the Zechstein Reef trend associated with the Wolsztyn Block
immediately  west of the Fences project area. All of these fields were developed
by POGC before our agreement started. Now, we are applying these two exploration
models to test several  structures  defined by 3-D seismic on those  portions of
the Rotliegendes and Zechstein Reef trends located in the Fences project area.

         The Kleka 11, our first  exploratory  well in the Fences  project area,
discovered  the  Kleka  East  field  and  brings  the  number  of  fields in the
Rotliegendes  trend to five.  The Kleka 11 commenced  producing in February 2001
and is currently  producing at a rate of  approximately  4 Mmcf per day into the
main POGC gas grid. The next  exploratory  well, the Mieszkow 1, reached planned
total depth structurally low to prognosis and is currently being sidetracked and
directionally drilled to a new bottom hole location. We anticipate following the
Mieszkow 1 with a development well in the same structure,  if warranted, or with
exploratory  wells based on the Zaniemysl or Donatowo 3-D seismic  grids,  which
are expected to be available for drill site  selection in the second  quarter of
2001.

         We also conduct oil and gas exploration  activities with Apache in four
project areas in Poland,  which we refer to as the Apache  Exploration  Program.
During  2000,  we and Apache  completed a 2-D seismic data  acquisition  program
covering  approximately  328  kilometers  and drilled an  exploratory  well, the
Tuchola 108-2, in the Pomeranian  project area. During January 2001, the Tuchola
108-2  tested at a flow  rate of 9.5 Mmcf of gas per day from the Main  Dolomite
Reef  formation at a depth between  2,535 meters and 2,595 meters.  The test was
limited by the capacity of the surface equipment. The Tuchola 108-2 is currently
being completed.

         Our immediate  goal in the Apache  Exploration  Program is to determine
whether a trend of  commercially  productive Main Dolomite Reef fields exists in
the  Pomeranian  project  area  similar  to the Main  Dolomite  Reef  trend that
produces from a number of fields on the southern side of Poland's Permian Basin.
Accordingly,  we will move the rig that drilled the Tuchola  108-2 to a location
(the Chojnice 108-6) three kilometers  northwest of the Tuchola 108-2,  where we
will test a Main Dolomite Reef target at a depth of approximately  2,500 meters.
We have also started a 2-D seismic  acquisition  program covering  approximately
280  kilometers  during  the  first  half of 2001 to  confirm  a number  of Main
Dolomite Reef leads that appear to be on trend with the Tuchola 108-2 discovery.
Under terms of the Apache Exploration Program, Apache will cover our 42.5% share
of costs to drill the Tuchola 108-2 and Chojnice  108-6  exploratory  wells.  We
will be responsible for our share of all further costs on the Pomeranian project
area.

                                       2
<PAGE>

         During the balance of 2001, we expect to continue acquiring seismic and
drilling wells in the Fences  project area with POGC and the Pomeranian  project
area with Apache and POGC,  in each case seeking to  capitalize  on successes in
identified  geological  trends.  We also expect to advance our discussions  with
POGC concerning the possible acquisition of an interest in producing properties.

Business Strategy

         Our business  strategy  remains focused on Poland,  where we compensate
for our small size by leveraging  the  financial and technical  resources of our
larger  partners  in what  have  become  strategic  relationships.  We seek  the
potential rewards of high potential exploration  opportunities while endeavoring
to minimize our exposure to the risks normally associated with exploration.  The
principal components of our business strategy are as follows:

         Focus on Poland

         We  believe  Poland  is an  attractive  oil  and  gas  exploration  and
production  opportunity  because of its known productive basins, its limited oil
and gas  exploration  and  development  and its heavy  dependence on oil and gas
imports.  Poland's  industrial  infrastructure  and fiscal  regime  favorable to
foreign investment reinforce the attractiveness of Poland.

         Apply Technical and Financial Leverage

         POGC has developed 3-D seismic-based  exploration models that have been
refined since the  mid-1990s in the  Rotliegendes  and Zechstein  Reef trends in
western  Poland.   We  are  using  these  models  to  explore  and  develop  the
Rotliegendes  and  Zechstein  Reef  trends in our Fences  project  area  without
incurring  the cost of  developing  those  models.  In addition,  we believe the
Fences project area is well suited to debt funding.  Accordingly, we are seeking
capital from power  development  companies,  banks and other lenders to fund the
majority of  development  costs in the Fences  project area.  The recent Tuchola
108-2 discovery in the Main Dolomite Reef formation,  if confirmed by additional
seismic and  drilling,  may give us a third such trend where we can apply mature
exploration  models and where the criteria for project  financing may be reached
at a relatively  early stage. It also represents the successful use of financial
leverage directly  resulting from Apache covering our share of costs for initial
exploratory wells under the Apache Exploration Program.

         Reduce our Exploration Risk Profile

         Historically,  we have  managed  exploration  risk by limiting  capital
exposure.  Now, we are also managing  exploration risk by focusing on the use of
tested  exploration  models in known producing  trends.  The Fences project area
represents a relatively  lower risk area because of its  production  history and
because we are able to use exploration  models  developed by POGC for this area.
The Main  Dolomite  Reef trend,  if confirmed in the  Pomeranian  project  area,
should  also have a lower risk  profile  because of its  similarity  to the more
fully explored analog trend along the southern edge of Poland's Permian Basin.

Strategic Relationships

         Polish Oil and Gas Company

         POGC is a fully integrated oil and gas company owned by the Treasury of
the Republic of Poland. Our strategic alliance with POGC provides us with access
to important exploration data as well as technical and operational support. POGC
has granted us and Apache  each the right to earn up to a one-third  interest in
POGC-controlled  acreage  near our Lublin,  Pomeranian  and  Carpathian  project
areas.  In turn,  we and  Apache  have  granted  POGC an  option to earn up to a
one-third  interest in our Lublin,  Pomeranian and Carpathian  project areas. As
previously  indicated,  we signed an agreement  during 2000 to participate  with
POGC in the Fences  project area,  where POGC is the operator.  In addition,  we
have made  proposals to  participate  in additional  appraisal,  development

                                       3
<PAGE>

or exploration  projects with POGC. We believe that our  relationship  with POGC
will provide additional opportunities in Poland.

         Apache Corporation

         Apache is a leading  independent  exploration  and  production  company
based in the United  States  with  extensive  operations  in the United  States,
Canada,  Australia,  Egypt, Poland and China. We and Apache have joint operating
agreements on our Pomeranian,  Warsaw West, Lublin and Carpathian  project areas
with Apache as  operator.  Apache does not  participate  in our Fences or Baltic
project areas.  Under the terms of the Apache  Exploration  Program,  Apache has
covered our share of the costs to drill the equivalent of nine exploratory wells
and to acquire over 1,661  kilometers of 2-D seismic data to date.  During 2001,
Apache will cover our share of costs to drill the Chojnice 108-6,  the tenth and
final carried exploratory well in Poland.

         Rolls Royce Power Ventures

         In March 2001, we signed an agreement with  Rolls-Royce  Power Ventures
Limited,  or RRPV,  London,  England,  that  provides RRPV with an option on gas
supplies  from  our  wells  in  Poland.  The gas  will be  used to  support  the
development of a planned RRPV power project in Poland.  While our agreement with
RRPV covers only a single planned power project, it is possible this arrangement
may grow to include  other  projects  and expand into a strategic  relationship.
Under the  agreement,  RRPV is  providing  us with $5.0  million  to be used for
exploration and development of gas reserves in Poland.  We do not expect RRPV to
require gas until 2002 or later.  In the  interim,  we expect to sell our Polish
gas production to POGC under our existing gas sales agreement.

Assumptions

         References  to  us  in  this  report  include  FX  Energy,   Inc.,  our
subsidiaries and the entities or enterprises organized under Polish law in which
we have an interest and through which we conduct our activities in that country.
As discussed,  we have entered into  arrangements  with POGC and Apache  through
which each company has separate rights to participate in various  activities and
projects in Poland.

         For the purposes of presenting  information  in this report,  all gross
and net well and acreage  positions in Poland assume the following:

         o        POGC  does not  exercise  its  rights  to  participate  in the
                  portions  of the areas  controlled  by us and  Apache,  except
                  where  it  has  elected  to  participate   with  the  interest
                  indicated prior to the date of this report; and

         o        We and Apache each will  exercise  our  respective  options to
                  participate in POGC-controlled acreage at 33.3% each.

         All historical  production and test data about Poland,  excluding wells
in which we have participated,  have been derived from information  furnished by
either  POGC  or  the  Polish  Ministry  of  Environmental  Protection,  Natural
Resources and Forestry.

The Republic of Poland

         The Republic of Poland,  with a population of  approximately 39 million
people,  peacefully  asserted  its  independence  in  1989  and  adopted  a  new
constitution that established a parliamentary democracy.  Since 1989, Poland has
enacted comprehensive  economic reform programs and stabilization  measures that
have  enabled it to form a  free-market  economy  that is  currently  one of the
fastest growing in eastern Europe,  with annual growth rates of approximately 5%
and estimated annual inflation rates ranging from 7.4% and 9.5% between 1998 and
2000.

         Poland's  international trade has also undergone  significant progress.
Since 1989,  Poland's  economic ties have turned from the east to the west, with
most of its current international trade with the countries of the European Union
and the United States.  The Polish  government  credits foreign  investment as a
forceful  growth  factor,

                                       4
<PAGE>

generating  over one third of the  country's  total  investment  and acting as a
powerful  restraint on unemployment.  According to the Polish Foreign Investment
Agency,  or PAIZ,  cumulative  foreign  direct  investment  flows into Poland is
estimated to have  aggregated  approximately  $43.0  billion  through  mid-2000,
including approximately $3.7 billion during the first half of 2000.

         Since  its  relatively  recent  transition  to a market  economy  and a
parliamentary democracy, Poland is continuing to experience significant economic
growth and political  changes.  Poland has  developed and is refining  legal and
regulatory   systems   characteristic   of   parliamentary    democracies   with
interpretation  and procedural  safeguards to ensure the rule of law. The Polish
government has generally taken steps to harmonize  Polish  legislation with that
of the European Union in  anticipation of Poland's entry into the European Union
and to facilitate interaction with European Union members.

         Poland's legal  framework and fiscal regime for oil and gas exploration
and production are attractive,  as Poland has actively encouraged  investment by
foreign  companies  to offset  its own lack of  sufficient  capital  to  further
explore and develop the country's oil and gas resources.  In July 1995, Poland's
Council of Ministers  approved a program to restructure and privatize the Polish
petroleum  sector.  Under this plan, the Plock refinery has been privatized as a
publicly  held  company  whose  stock  trades on the  London  and  Warsaw  stock
exchanges.  We  expect  that  the gas  distribution  segments  of  POGC  will be
privatized next,  followed by the exploration,  production and oilfield services
segment.  Increased  participation by Western companies using Western capital in
the oil and gas sector is consistent with the approved privatization policy.

         Since 1995,  the Polish  corporate  income tax rate has been reduced 2%
per year to 30% for 2000 and 28% for 2001.  Further reductions in the income tax
rate of 2% per year may be enacted down to a rate of 22%.  Additional tax relief
may be  available  for  certain  qualifying  capital  investments  that  provide
deductions during the initial years of operation under certain circumstances.

         Since the 1850s, when oil was first commercially produced in Poland, in
excess of 122  MMBbls of oil and 2.6 Tcf of gas in the  southeastern  Carpathian
region  and 24 MMBbls of oil and 2.3 Tcf of gas in the  western  Polish  Permian
Basin  trend have been  produced  to date.  Prior to  becoming  a  parliamentary
democracy  during 1989, the  exploration and development of Poland's oil and gas
resources  were  hindered by a  combination  of foreign  influence,  a centrally
controlled economy, limited financial resources and a lack of modern exploration
technology.  In the early 1990s, the World Bank lent Poland $250 million,  drawn
down over five years,  to fund the  purchase  of new  exploration  and  drilling
equipment.  Poland currently has estimated oil reserves of  approximately  115.0
MMBbls of oil and  imports,  approximately  98% of its  annual  oil  consumption
needs,  primarily from countries of the former Soviet Union and the Middle East.
Poland also  currently has estimated gas reserves of  approximately  5.0 Tcf and
imports  approximately  more  than  70% of its  annual  gas  consumption  needs,
primarily from countries of the former Soviet Union. Poland is about the size of
New Mexico and contains approximately 77.3 million acres. As of the date of this
report, we had exploration rights to approximately 14.4 million of those acres.

         During 1999, Poland joined NATO and has set an objective of joining the
European Union by 2003. In order to achieve member status in the European Union,
Poland must raise its environmental standards.  Currently,  coal is the dominant
energy source,  accounting for 94% of energy  production and 65% of energy usage
in Poland as  recently  as 1998.  Increased  consumption  of natural  gas, as an
alternative to coal, is considered to be a key component in meeting the European
Union's strict  environmental  guidelines for its members. The demand for gas in
Poland is expected to double over the next ten years, primarily due to increased
economic  growth and  conversion  to gas from coal as an energy source for power
plants.

         Poland  has crude oil  pipelines  serving  the major  refineries  and a
network of gas pipelines serving major metropolitan,  commercial, industrial and
gas production areas, including significant portions of our acreage.  Poland has
a well-developed  infrastructure of hard-surfaced  roads and railways over which
we believe oil produced could be transported  for sale.  There are refineries in
Gdansk and Plock in Poland and one in Germany  near the  western  Polish  border
that we believe  could  process  any crude oil we may  produce  in  Poland.  All
facilities  and pipelines  currently used to gather and transport oil and gas in
Poland are owned by POGC.

                                       5
<PAGE>

Exploration, Development and Production Activities in Poland

         Polish Exploration Rights

         As of December 31, 2000, our oil and gas  exploration  rights in Poland
were comprised of the following gross acreage components:
<TABLE>
<CAPTION>
                                                                  POGC-Controlled Areas (1)
                                               FX Energy      -----------------------------------     Total Gross
                                            Concessions (1)     Concessions         Exclusive          Acreage
                                            ----------------  -----------------  ----------------  -----------------
                                                            (Rounded to the nearest 100,000 acre)
         <S>                                   <C>                <C>                 <C>             <C>
         Project Area:
           Fences (2)......................            --            300,000                 --           300,000

           Apache Exploration Program (3)
             Lublin Basin..................     3,300,000            600,000                 --         3,900,000
             Carpathian....................     1,400,000            200,000          1,300,000         2,900,000
             Pomeranian....................     2,200,000                 --          1,300,000         3,500,000
             Warsaw West...................     2,900,000                 --                 --         2,900,000
                                            ----------------  -----------------  ----------------  -----------------
               Total.......................     9,800,000            800,000          2,600,000        13,200,000
                                            ----------------  -----------------  ----------------  -----------------

           Baltic Project Area (4).........       900,000                 --                 --           900,000
                                            ----------------  -----------------  ----------------  -----------------
             Total gross acreage...........    10,700,000          1,100,000          2,600,000        14,400,000
                                            ================  =================  ================  =================
</TABLE>
--------------------------

         (1)      In  the  Apache  Exploration  Program,  POGC-controlled  areas
                  include  approximately  0.8  million  acres of  existing  POGC
                  Concessions and approximately 2.6 million acres for which POGC
                  has been granted the exclusive right to obtain  concessions by
                  the  government  of Poland.  We and Apache each have  separate
                  options to participate in the  exploration of  POGC-controlled
                  areas, with up to a one-third interest each. In turn, POGC has
                  an  option to  participate  with up to a  one-third  interest,
                  determined on a  block-by-block  basis,  in the exploration of
                  the FX Energy Concession  portion of the respective areas. The
                  Warsaw  West and the Baltic  project  areas are not subject to
                  POGC options.
         (2)      On April 11, 2000,  we entered into an agreement  with POGC to
                  earn a 49.0%  interest in the Fences  project area by spending
                  $16.0 million of exploration costs.
         (3)      We and Apache each have a 50.0% beneficial  interest in all FX
                  Energy Concessions within the Apache Exploration Program.
         (4)      We own 100% of the Baltic project area.

         As we continually explore and evaluate our acreage in Poland, we expect
to increasingly  focus our operational and financial efforts on known productive
trends  and  recent  discoveries.  As we do so, we may  elect not to retain  our
interest in acreage that we determine carries a higher exploration risk.

         Fences Project Area

         Fences Project Area Exploration Agreement

         On April 11,  2000,  we agreed to spend  $16.0  million of  exploration
costs on the Fences  project area to earn a 49.0%  interest.  When  expenditures
exceed $16.0  million,  POGC will pay its 51.0% share of further  costs.  During
2000, we paid $6.7 million to POGC under this agreement, including approximately
$4.6  million  for  drilling   activities  and  $2.1  million  for  3-D  seismic
activities.  Upon completion of the Mieszkow 1 well and the 3-D seismic grids at
Donatowo and  Zaniemysl,  we will have  expended a total of  approximately  $9.6
million, leaving a remaining commitment of approximately $6.4 million.

         The Fences project area consists of  approximately  300,000 gross acres
in a region of west  central  Poland  encompassing  significant  portions of two
gas-producing  trends. The following description of POGC's prior activity in the
Rotliegendes  trend  associated with the Poznan  Depression and in the Zechstein
Reef trend associated with the Wolsztyn Block indicates the success POGC has had
with exploration models that we are now using:

                                       6
<PAGE>

         The Rotliegendes Trend

         In the Rotliegendes trend associated with the Poznan  Depression,  POGC
has discovered four fields:  Kaleje, Kleka, Radlin and Jarocin. Our recent Kleka
East discovery brings the number of fields in this trend to five; if successful,
the Mieszkow 1 well would raise the total to six fields.  The Rotliegendes trend
continues  for  approximately  45  kilometers  within the Fences  project  area.
Extensive  drilling by POGC shows that reservoir  quality is relatively  uniform
throughout the Rotliegendes  trend. All structural traps drilled by POGC to date
contain  gas  accumulations,  with  the size of the  accumulation  approximately
proportionate to the size of the structure.  During the past two years, POGC has
acquired 3-D seismic data over the entire trend within the Fences  project area,
except for a gap of approximately  100 square  kilometers in the Zaniemysl area.
During 2000,  we completed  field  acquisition  of 3-D seismic to fill this gap.
During 2001, we intend to finish  processing and  interpreting the Zaniemysl 3-D
seismic grid and, if warranted, drill an exploratory well as funding permits.

         Our first structural  target in the Fences project area was Kleka East,
a  3-D  seismic-defined   Rotliegendes  prospect  approximately  two  kilometers
southeast of POGC's three well Kleka field. Our Kleka 11 well began producing in
February 2001 and is currently  producing at a rate of  approximately 4 Mmcf per
day. The next  exploratory  well,  the Mieszkow 1, reached  planned  total depth
structurally   low  to  prognosis  and  is  currently   being   sidetracked  and
directionally  drilled to a new bottom hole location.  During the second quarter
of 2001,  we will  evaluate the results of the Mieszkow 1 and the  Zaniemysl 3-D
seismic grid to select sites for additional drilling.

         The Zechstein Reef Trend

         In the Zechstein  Reef trend,  POGC has discovered gas in six Zechstein
Reef buildups in a  35-kilometer  stretch along the Wolsztyn  Block  immediately
west of the Fences  project  area.  These  fields  consist of  Koscian,  Rensko,
Bonikowo, Wielichowo,  Ruchocice and Racot. When drilling on 3-D seismic data in
the Zechstein  Reef trend,  every  Zechstein  Reef prospect POGC has drilled has
contained  hydrocarbons,  and 24 of 27  wells  (89%)  have  been  completed  for
production.  We believe  this  success  rate is  attributable  to  specific  3-D
processing  techniques  that POGC has  developed  to identify  areas of probable
porosity   within  these  reefs.   The  Zechstein  Reef  trend  appears  to  run
approximately 45 kilometers  inside the Fences project area before continuing to
the southeast.

         We have  completed  field  acquisition on an  approximately  100 square
kilometer  3-D seismic grid in the Donatowo  area in the western  portion of the
Fences  project area.  This 3-D seismic grid covers several  apparent  Zechstein
Reef  buildups  identified  by 2-D seismic  data  acquired  by POGC.  As funding
permits,  we will  continue to acquire  additional  3-D  seismic  data along the
Zechstein  Reef trend in the Fences  project  area.  During  2001,  we intend to
finish  processing  and  interpreting  the  Donatowo  3-D  seismic  grid and, if
warranted, drill an exploratory well as funding permits.

         Apache Exploration Program

         The Apache  Exploration  Program  consists of various  agreements  that
govern our joint  operations  with Apache that were signed  between 1997 through
early 2001. The initial primary terms of the Apache Exploration Program included
a  commitment  by Apache  to cover  our share of costs to drill ten  exploratory
wells  and to  acquire  2,000  kilometers  of 2-D  seismic  data to earn a 50.0%
interest in our Lublin Basin and  Carpathian  project  areas.  The initial terms
were later modified to allow the ten exploratory wells to be drilled anywhere in
Poland. As of December 31, 2000, Apache has, in effect,  paid our share of costs
to drill an equivalent of nine exploratory  wells (including two that were being
drilled as of December 31, 2000) and to acquire 1,661  kilometers of 2-D seismic
data.

                                       7
<PAGE>

         The  following  table  shows the  detail and  status of  Apache's  work
commitment as of December 31, 2000, as it pertains to  exploratory  drilling and
2-D seismic data acquisition:
<TABLE>
<CAPTION>
                                                  Well Name or                             FX Energy's    Carried
                                                   Kilometers         Status of Apache      Working        Well
                    Project Area                 of 2-D Seismic        Work Commitment      Interest      Count
         ----------------------------------- ----------------------- -------------------- ------------- -----------
         <S>                                 <C>                     <C>                       <C>          <C>
         Exploratory drilling:
             Lublin Basin....................Czernic.277-2...........Fulfilled.................33.3%         1.0
             Lublin Basin....................Poniatowa.317-1.........Fulfilled.................47.5          1.0
             Lublin Basin....................Witkow.1................Fulfilled.................45.0          1.0
             Lublin Basin....................Siedliska.2.............Fulfilled.................33.3          1.0
             Lublin Basin....................Wilga.2.................Fulfilled.................45.0          1.0
             Lublin Basin....................Wilga.3.................Fulfilled.(1).............45.0          0.5
             Lublin Basin....................Wilga.4.................Fulfilled.(1).............45.0          0.5
             Pomeranian......................Tuchola.108-2...........Unfulfilled.(2)...........42.5          1.0
             Warsaw West.....................Annopol.254-1...........Unfulfilled.(2)...........50.0          1.0
             Pomeranian .....................Chojnice.108-6..........Unfulfilled.(2)...........42.5          1.0

         2-D Seismic data acquisition:
             Pomeranian......................300.kilometers..........Fulfilled.(3).............50.0          0.4
             Warsaw West.....................422.kilometers..........Fulfilled.(3).............50.0          0.6
             Lublin Basin....................1,650.kilometers........Fulfilled.................50.0          --
             Carpathian......................350.kilometers..........11.km.fulfilled.(4).......50.0          --
                                                                                                        -----------
         Total carried well count....................................................................       10.0
                                                                                                        ===========
</TABLE>
------------------------
         (1)      Apache agreed to cover one-half of our share of costs to drill
                  the Wilga 3 and 4 wells in  exchange  for the  release  of its
                  commitment   to  cover   our  share  of  costs  to  drill  one
                  exploratory well in Poland.
         (2)      As of December  31,  2000,  the Tuchola  108-2 and the Annopol
                  254-1  were  in  the  process  of  being   drilled.   Drilling
                  operations  on the  Chojnice  108-6 are  expected  to commence
                  during the first half of 2001.
         (3)      Apache  agreed  to cover  our  share  of  costs  to shoot  722
                  kilometers  of 2-D seismic data in the  Pomeranian  and Warsaw
                  West  project  areas  in  exchange  for  the  release  of  its
                  commitment   to  cover   our  share  of  costs  to  drill  one
                  exploratory well in Poland.
         (4)      Effective January 1, 2001, we signed the Poland 2001 Agreement
                  with Apache,  whereby we agreed to release Apache's  remaining
                  commitment  to pay for our  50.0%  share of costs to shoot 339
                  kilometers of 2-D seismic data on the Carpathian project area.
                  In  return,  Apache  agreed to issue us a credit  of  $932,000
                  against all  outstanding  and future  invoices billed to us by
                  Apache  pertaining to our joint  operations in Poland.  If our
                  actual  share  of costs to  shoot  the 339  kilometers  of 2-D
                  seismic data on the Carpathian  project area exceeds $932,000,
                  the excess will be covered by Apache.

         Additional  terms of the  Apache  Exploration  Program  include  Apache
covering our share of costs for the following  items:

         o        our  45.0%  share of  costs to  perform  a flow  test,  and if
                  warranted, complete the Wilga 2 well;

         o        all  concession  and  usufruct  fees in the  Lublin  Basin and
                  Carpathian project areas (approximately  $855,000),  which was
                  fulfilled by Apache during 2000; and

         o        all of Apache Poland general and administrative  costs through
                  June 30, 2000.  Thereafter,  we are  obligated to pay 35.0% of
                  Apache's monthly Polish general and  administrative  costs, to
                  be increased by 5.0% upon Apache  completing each of its three
                  remaining  drilling  requirements,  up to a maximum  of 50.0%.
                  Effective  with the  completion of drilling  operations on the
                  Tuchola 108-2, Annopol 254-1 and Chojnice 108-6 wells, we will
                  be  obligated  to pay  50.0%  of  Apache  Poland  general  and
                  administrative costs.

         The Apache Exploration Program also included an Area of Mutual Interest
Agreement,  or AMI,  between us and Apache,  whereby  each party was required to
offer the other a 50.0%  interest  in any new  activity  entered  into by either
party  within the AMI that  included  all of  Poland,  except for the Fences and
Baltic project areas, which began on January 1, 1999, and terminated on December
31, 2000. Apache is the operator of all areas controlled by us and Apache within
the acreage covered by the Apache Exploration Program.

                                       8
<PAGE>

         Pomeranian Project Area

         The 3.5 million acre Pomeranian project area is located in northwestern
Poland and consists of exploration  rights on 2.2 million gross acres held by us
and Apache and options on 1.3 million  gross acres  controlled  by POGC.  We and
Apache have an option to participate,  with up to a one-third  interest each, in
the  exploration  of the POGC option  acreage.  In turn,  POGC has the option to
participate in the  exploration of the acreage we and Apache hold,  with up to a
one-third  interest,  by  participating  in the first  exploratory  well on each
250,000 acre block.

         The Pomeranian project area lies along the under-explored northern edge
of the Permian Basin in  northwestern  Poland.  To date, the Pomeranian  project
area is relatively unexplored and has had no significant oil and gas production.
Geologic  survey test wells  previously  drilled by the Polish  government  have
recorded  oil and gas  shows.  POGC  has made  available  to us and  Apache  the
existing  seismic data and well logs and cores from the Pomeranian  project area
for  reprocessing and analysis.  We believe  portions of the Pomeranian  project
area may be geologically similar to the producing trends along the southern edge
of Poland's Permian Basin.

         During 2000, we and Apache  acquired  approximately  328  kilometers of
additional  2-D  seismic  data in the  Pomeranian  project  area  and  commenced
drilling an exploratory  well, the Tuchola 108-2,  to test the Main Dolomite and
other  objectives.  A  preliminary  open-hole  test in early January 2001 on the
Tuchola  108-2  resulted in a flow rate of 9.5 Mmcf of gas per day from the Main
Dolomite Reef  formation at a depth  between 2,535 meters and 2,595 meters.  The
flow rate was  limited by the  capacity of the  surface  equipment.  The Tuchola
108-2 well is being completed in an approximately  200 foot thick section of the
Main  Dolomite.  The Tuchola 108-2  discovery is the first  confirmation  on the
northern  margin of the Permian Basin of a commercial  accumulation  in the Main
Dolomite Reef trend that produces on the southern  margin from the BMB field and
other fields in Poland.

         The next well on the Pomeranian  project area, the Chojnice 108-6, will
test the Main Dolomite at a depth of approximately  2,500 meters at a drill site
located  approximately  three  kilometers  northwest of the Tuchola  108-2.  The
Chojnice  108-6 is  expected  to be drilled  during the second  quarter of 2001.
Drilling  will commence as soon as the rig that drilled the Tuchola 108-2 can be
moved to the  Chojnice  108-6  location.  During  2001,  a 2-D  seismic  program
covering  approximately  280 kilometers will be conducted to confirm a number of
additional Main Dolomite Reef leads.

         Under terms of the Apache Exploration  Program,  Apache is committed to
cover our 42.5% share of costs to drill the  Tuchola  108-2 and  Chojnice  108-6
exploratory  wells.  We will be  responsible  for our share of all other further
costs on the Pomeranian project area.

         Warsaw West Project Area

         The 2.9  million-acre  Warsaw West  project  area is located in central
Poland. We and Apache each own a 50.0% interest in the Warsaw West project area.
POGC has no option to participate in the Warsaw West project area.

         To date,  there has been no oil or gas production  from the Warsaw West
project area. During December 2000, we and Apache commenced drilling the Annopol
254-1 on the Warsaw West  project area to test lower  Permian and  Carboniferous
objectives.  The Annopol 254-1 was determined to be an  exploratory  dry hole in
February 2001. Under terms of the Apache Exploration Program, Apache covered our
50.0% share of costs to drill the Annopol 254-1. We and Apache are now currently
evaluating  whether to acquire an additional  520 kilometers of 2-D seismic data
by November  2001 on the Warsaw West project  area,  in order to hold the Warsaw
West project area beyond the first three year exploration period.

         Lublin Project Area

         The 3.9  million-acre  Lublin project area in central  southeast Poland
consists of exploration  rights on approximately 3.3 million gross acres held by
us and Apache and options to participate in 600,000 acres controlled by POGC. We
and Apache have an option to participate,  with up to a one-third interest each,
in the exploration of the

                                       9
<PAGE>

POGC  option  acreage.  In  turn,  POGC has the  option  to  participate  in the
exploration  of the  acreage  that we and Apache  hold,  with up to a  one-third
interest,  by participating  in the first  exploratory well on each 250,000 acre
block.

         The first four exploratory wells under the Apache Exploration  Program,
all drilled within the Lublin project area prior to 2000,  were  exploratory dry
holes. In accordance with the terms of the Apache  Exploration  Program,  Apache
covered  our share of costs for each of the four  wells.  The fifth  exploratory
well, Wilga 2, was a successful discovery. Initial production tests on the Wilga
2  yielded  a  combined  gross  flow  rate of 16.9  Mmcf of gas and 570  Bbls of
condensate  per day from the  Carboniferous  at a depth of  approximately  2,800
meters.  We and Apache each have a 45.0%  working  interest and POGC has a 10.0%
working interest in the 250,000 acre block containing the Wilga 2 discovery. The
Wilga  2 well  was  followed  by two  offsets,  the  Wilga 3 and 4,  which  were
exploratory  dry holes.  During the first half of 2001, we and our partners plan
an  extended  flow test on the Wilga 2 to assess the  potential  for  commercial
production  in  light  of  pipeline  and  facility  expenditures  that  would be
required.  Under terms of the Apache Exploration Program,  Apache will cover our
costs to test and complete the Wilga 2. The agreements covering the Wilga 2 also
specify that each partner has the right to propose  that certain  activities  be
undertaken  and elect  whether to  participate  in such  activities  proposed by
itself or others.  If a partner  elects to not  participate  in such  activities
relating  to the  Wilga 2, the  other  partners  nevertheless  have the right to
proceed.

         The  first  three-year  exploration  period of a  six-year  exploration
period  covering  approximately  3.3 million  acres held by us and Apache on the
Lublin project area expires during 2001. We anticipate  relinquishing all of the
approximately  3.3  million  acres  on  the  Lublin  project  area,  except  for
approximately  250,000  acres,  which  covers Block 255 and includes the Wilga 2
discovery.

         Carpathian Project Area

         The 2.9 million  acre  Carpathian  project  area is located in southern
Poland and  comprises  exploration  rights on 1.4 million gross acres held by us
and Apache and options on 1.5 million  gross acres  controlled  by POGC.  We and
Apache have an option to participate,  with up to a one-third  interest each, in
the  exploration  of the POGC option  acreage.  In turn,  POGC has the option to
participate in the exploration of the acreage that we and Apache own, with up to
a one-third  interest,  by participating  in the first  exploratory well on each
250,000-acre block.

         Oil and gas were first  discovered  in the  Carpathian  project area in
1854. A limited  number of deep wells  drilled in recent years by POGC  evidence
additional  possible  reservoir  potential  within  the area.  Over the past few
years,  there have been several new oil and gas  discoveries  in the  Carpathian
region.  Potential producing horizons within the Carpathian project area include
the Jurassic,  Miocene,  Cretaceous and Devonian.  We and Apache have identified
several new leads in the Carpathian  project area based on reprocessed  existing
seismic data.

         During  1999,  we and Apache each elected to  participate,  with a 5.0%
interest  each,  in  drilling  the  Andrychow 6 located  within  POGC-controlled
acreage on the  Carpathian  project area. The Andrychow 6, which was operated by
POGC,  was  determined  to be an  exploratory  dry hole after testing a Devonian
formation  yielded  noncommercial  results.  Also,  during  1999,  we and Apache
commenced  testing and  recompletion  operations  on the Lachowice  Farm-in,  an
undeveloped  gas discovery on a POGC  concession  located  within the Carpathian
project  area.  Under terms of the  agreement,  we and Apache  agreed to pay the
costs of testing three shut-in  wells and, if  warranted,  additional  wells and
production  infrastructure  in order to earn a  one-third  interest  each in the
project.  The test  results  from  this  project  did not  warrant  constructing
gathering and processing  facilities.  On May 4, 2000, we and Apache each turned
the project back to POGC and terminated the Lachowice Farm-in.

         The  first  three-year  exploration  period of a  six-year  exploration
period  covering  approximately  1.4 million  acres held by us and Apache on the
Carpathian project area expires at the end of 2001. In order to begin the second
three year exploration period on the aforementioned  acreage, we and Apache must
acquire  at least  339  kilometers  of 2-D  seismic  and  commence  drilling  an
exploratory  well by the end of 2001.  We and  Apache are  currently  evaluating
whether to continue exploration activities on the Carpathian project area.

                                       10
<PAGE>

         Other Polish Project Areas

         Baltic Project Area

         The Baltic project area, which was our first  exploration  project area
in Poland,  is located  onshore near the Baltic Sea and consists of  exploration
rights covering  approximately  900,000 gross and net acres in northern  Poland.
The Baltic project area is part of the Baltic  Platform  geological  region that
covers the  southeastern  portion of the Baltic Sea,  portions of the  bordering
onshore areas of northern  Poland and areas to the northeast in the  Kaliningrad
district of Russia, Lithuania and Latvia.  Approximately 34 onshore and offshore
fields have been discovered in the Baltic Platform. Industry sources report that
four of the largest  fields in this region had produced an aggregate of over 150
MMBbls of high-grade oil through 1994.

         During 1997,  we drilled two  exploratory  wells on the Baltic  project
area. Both wells, the Gladysze 1-A and the Orneta 1, were exploratory dry holes.
We hold a 100%  interest  in the Baltic  project  area and have no further  work
commitments.  We do not currently plan to conduct any exploratory  activities on
the Baltic  project  area  during  2001.  However,  recently  reported  Cambrian
successes  in southern  Kaliningrad  near the Polish  border,  coupled  with the
recent exploratory successes in our other project areas in Poland, may encourage
industry interest in participating with us on this project area in the future.

Polish Properties

         Legal Framework

         General Usufruct and Concession Terms

         In 1994,  Poland adopted the Geological and Mining Law, which specifies
the process for obtaining domestic  exploration and exploitation  rights. All of
our  rights  in  Poland  have  been  awarded  pursuant  to this  law.  Under the
Geological  and Mining Law, the  concession  authority  enters into oil, gas and
mining usufruct  agreements that grant the holder the exclusive right to explore
for and exploit the  designated  oil and gas or minerals for a specified  period
under  prescribed  terms and conditions.  The holder of the mining usufruct must
also  acquire  an  exploration  concession  to  obtain  surface  access  to  the
exploration  area by applying to the  concession  authority  and  providing  the
opportunity  for comment by local  governmental  authorities.  If a commercially
viable discovery is made in an exploration  concession area, it is necessary for
the  holder of the  exploration  concession  license  to obtain an  exploitation
concession  license  for a  specific  term by then  applying  to the  concession
authority and negotiating  with local  government  authorities.  The holder of a
usufruct and exploration and exploitation  concession licenses must also acquire
rights to use the land from the surface owner.

         The concession  authority has granted us oil and gas exploration rights
on the Lublin,  Carpathian,  Pomeranian and Baltic project areas, granted Apache
oil and gas exploration  rights on the Warsaw West project area and granted POGC
oil and gas  exploration  rights on the Fences  project  area and on POGC option
acreage.  The agreements  divide these areas into blocks,  generally  containing
approximately  250,000  acres each.  Concession  licenses have been acquired for
surface  access to all  areas  that lie  within  existing  usufructs.  The first
three-year  exploration  period  begins  after  the date of the last  concession
signed under each respective usufruct.  We believe all material concession terms
have been satisfied to date.

         Fences Project Area

         The Fences  project  area  consists  of  portions  of three oil and gas
exploration  concessions  (Koscian-Serem,  Solec-Jarocin and Jaraczewo-Pogorzela
concessions)   controlled  by  POGC.  Three  producing  fields  lie  within  the
concession  boundaries  (Radlin,  Kleka and Kaleje),  but are excluded  from the
Fences project area.

                                       11
<PAGE>

         The  following  table sets forth the  exploration  terms of each Fences
project area exploratory oil and gas concession:
<TABLE>
<CAPTION>
                                                                     Six-Year Exploration Period
                                                                  ----------------------------------    Optional
                                                                     Beginning           End            Extension
                                                                  ---------------- -----------------  --------------
         <S>                                                        <C>               <C>               <C>
         POGC concession:
           Koscian-Serem........................................      9/28/95          9/28/01          3 years
           Solec-Jarocin........................................      4/30/96          4/30/02          3 years
           Jaraczewo-Pogorzela..................................     11/19/96         11/19/02          3 years
</TABLE>

         We believe POGC has paid all required  usufruct and concession fees and
completed all material work  commitments to date for the three  exploratory  oil
and gas concessions included within the Fences project area.

         Apache Exploration Program and the Baltic Project Area

         For concessions controlled by us and/or Apache, each of the oil and gas
usufructs  divides  exploration  rights  into  successive   exploration  periods
expiring  in three  and six  years,  respectively,  after  the grant of the last
concession   agreements  covered  by  the  applicable   usufruct.  A  number  of
exploratory  wells are required to be drilled  during the first  three-year  and
second  three-year  exploration  periods,  a minimum  amount of 2-D seismic data
acquisition  must be completed  (except in the Baltic project  area),  and other
expenditures  must be made,  all as set forth in the  applicable  usufructs,  in
order to retain an interest in each usufruct.

         During each respective  six-year  exploration period, we have committed
to the following  obligations in Poland,  presented on a gross basis,  to retain
our  exploratory  concession  acreage,  excluding the Fences project area,  POGC
option acreage and POGC exclusive acreage:
<TABLE>
<CAPTION>
                                            Start of First       Exploratory Drilling
                                              Three Year     ------------------------------------
                                   Whole      Exploration      First Three       Second Three     2-D Seismic Data
                                   Blocks       Period       Year Period (1)    Year Period (2)    Acquisition (3)
         ---------------------------------- ---------------- ----------------- ------------------ ------------------
        <S>                         <C>         <C>                <C>          <C>                  <C>
         Project Area:
           Lublin Basin:
             Vistula (4).........     8         08/08/97           1 well       1 well per block        500 km
             Lublin Middle.......     7         06/30/98           2 wells      1 well per block        500 km
             Block 298...........     1         06/30/98           1 well           2 wells             150 km
             Kamarow.............     7         03/04/98           2 wells      1 well per block        500 km
           Carpathian............    12         12/31/98           1 well            2 wells            350 km
           Pomeranian............    10         12/31/98           1 well            2 wells            600 km
           Warsaw West...........    13         11/13/98           1 well            2 wells          1,500 km
           Baltic................     3         03/07/96           1 well            1 well             None
</TABLE>
-------------------
         (1)      As of December  31, 2000,  we had  fulfilled  our  exploratory
                  drilling  requirements  for the first  three-year  exploration
                  period on all  usufructs  except  for  Block 298 and  Kamarow,
                  where we had previously  drilled one exploratory well. We have
                  also  participated in drilling four exploratory wells (Czernic
                  277-2,  Siedliska  2, Witkow 1 and  Andrychow  6) that were on
                  concessions controlled by POGC.
         (2)      In the  Vistula,  Lublin  Middle and  Kamarow  usufructs,  one
                  exploratory well must be drilled in each previously  undrilled
                  block by the end of the second three-year  exploration  period
                  to retain  the  exploratory  acreage  within  each  particular
                  block.
         (3)      As of December 31, 2000, we had fulfilled all 2-D seismic data
                  requirements in the Vistula,  Lublin Middle and Kamarow areas,
                  acquired 11 kilometers  of 2-D seismic data in the  Carpathian
                  project  area,  328  kilometers  of 2-D  seismic  data  in the
                  Pomeranian project area and 480 kilometers of 2-D seismic data
                  in the Warsaw West project  area.  As of December 31, 2000, no
                  2-D  seismic  data had been  acquired  in Block  298.  All 2-D
                  seismic data  acquisition  must be completed  during the first
                  three-year  exploration  period,  except for the  Warsaw  West
                  project area,  which includes 1,000  kilometers of 2-D seismic
                  data  in the  first  three-year  exploration  period  and  500
                  kilometers in the second three-year exploration period.
         (4)      During 2000, we relinquished all of our Vistula acreage,  with
                  the  exception  of the  approximately  250,000 acre Block 255,
                  which includes the Wilga 2 discovery.

         As of December 31, 2000, all required  usufruct/concession payments had
been made in each of the above project areas,  including $695,000 for the Lublin
Basin project area,  $160,000 for the Carpathian project area,

                                       12
<PAGE>

$250,000 for the Pomeranian  project area,  $390,000 for the Warsaw West project
area and $149,000 for the Baltic project area. As of December 31, 2000, the only
outstanding  usufruct/concession  fee obligation was $15,666,  the final payment
due under the Baltic project area usufruct, which was paid during February 2001.

         During 2001, the first  three-year  exploration  period expires for the
Lublin  Middle,  Block 298,  Kamarow,  Carpathian,  Pomeranian  and Warsaw  West
usufructs.  We intend to relinquish all acreage pertaining to the Lublin project
area usufructs  that expire during 2001. We are  evaluating all other  usufructs
expiring  during 2001 to elect whether to relinquish or retain the acreage under
each usufruct and begin the second three-year exploration period.

         If commercially  viable oil or gas is developed,  the concession  owner
would be required to apply for an  exploitation  concession,  as provided by the
usufructs,  with  a term  of 30  years  and so  long  thereafter  as  commercial
production  continues.  Upon  the  grant  of the  exploitation  concession,  the
concession owner may become obligated to pay a fee, to be negotiated  within the
range  of  0.01% to 0.05%  of the  market  value  of the  estimated  recoverable
reserves in place,  payable in five equal annual  installments.  The  concession
owner would also be required to pay a royalty on any  production,  the amount of
which will be set by the concession authority, within a range established on the
base royalty rate for the mineral being extracted. The base royalty rate for oil
and gas is 6.0%.  This rate could be increased  unilaterally to up to 10.0% (the
current  statutory  maximum base royalty rate) by the Council of Ministers.  The
concession  authority  can set the royalty  rate for any  particular  commercial
production  in a range  between  50.0%  and  150.0%  of the base  royalty  rate,
depending on the economic  viability  of such  operation,  but not to exceed the
statutory  maximum rate.  Therefore,  with the current base rate of 6.0% for oil
and gas, the concession  authority could establish the royalty rate between 3.0%
and 9.0%.  If,  however,  the base rate were  increased  to 10.0%,  the  current
statutory maximum, the royalty rate would be between 5.0% and 15.0%. The royalty
rate could vary for different producing fields and could be changed from time to
time during the productive life of a field. Local governments will receive 60.0%
of any  royalties  paid on  production.  The usufruct  owner could be subject to
significant  delays in obtaining the consents of local authorities or satisfying
other governmental requirements prior to obtaining an exploitation concession.

Polish Production, Transportation and Marketing

         Poland has crude oil pipelines  traversing the country and a network of
gas pipelines serving major metropolitan,  commercial,  industrial areas and gas
production areas,  including  significant portions of our acreage.  Poland has a
well-developed  infrastructure of hard-surfaced roads and railways over which we
believe oil produced  could be  transported  for sale.  There are  refineries in
Gdansk and Plock in Poland and one in Germany  near the  western  Polish  border
that we believe could process crude oil produced in Poland.  Should we choose to
export  any  oil or gas  we  produce,  we  will  be  required  to  obtain  prior
governmental approval.

         During early 2001, we and POGC constructed a pipeline from the Kleka 11
well  approximately  four  kilometers  to POGC's  Radlin  field  gas  processing
facility and began  selling gas produced  from the Kleka 11 well to POGC under a
five-year contract that may be terminated by us with a 90-day written notice.

         We have granted RRPV an option  exercisable  until March 2002, to enter
into an  agreement  to  purchase  up to 17 Mmcf of gas per day from our wells in
Poland, subject to availability. The gas will be used to support the development
of a planned RRPV power project.  Contract prices will be adjustable  during the
term of the agreement,  based in part on the domestic price of electricity.  Gas
will be delivered at the POGC pipeline connection,  and RRPV will be responsible
for transportation  costs. RRPV will be required to take at least 80% of the gas
it agrees to  purchase.  We may sell to others  gas we  produce in excess of the
reserves required to supply the RRPV contract.

Domestic Properties

         Producing Properties

         We currently produce oil domestically in Montana and Nevada. All of our
producing  properties,  except  for the  Rattlers  Butte  field (an  exploratory
discovery  during 1997),  were  purchased  during 1994. A summary of our

                                       13
<PAGE>

average daily production,  average working interest and net revenue interest for
our domestic producing properties during 2000 follows:
<TABLE>
<CAPTION>
                                                     Average Daily Production
                                                              (Bbls)                Average           Average
                                                    ----------------------------    Working         Net Revenue
                                                       Gross           Net         Interest          Interest
                                                    ------------- -------------- -------------- --------------------
         <S>                                               <C>           <C>          <C>             <C>
         Domestic producing properties:
           Cut Bank..............................           269           231          99.5%           85.7%
           Bears Den.............................            24            10          48.0            39.2
           Rattlers Butte........................            30             2           6.3             5.1
           Trap Spring...........................            12             2          21.6            20.0
           Munson Ranch..........................            43            15          36.0            34.1
           Bacon Flat............................            43             5          16.9            12.5
                                                    ------------- --------------
             Total...............................           421           265
                                                    ============= ==============
</TABLE>

         In  Montana,  we operate  the Cut Bank and Bears Den fields and have an
interest in the Rattlers Butte field,  which is operated by an industry partner.
Production  in the Cut Bank field  commenced  with the  discovery  of oil in the
1940s at an average depth of  approximately  2,900 feet.  The Southwest Cut Bank
Sand Unit, which is the core of our interest in the field, was originally formed
by Phillips  Petroleum Company in 1963. An initial pilot waterflood  program was
started in 1964 by  Phillips  and  eventually  encompassed  the entire unit with
producing  wells on 40 and 80 acre  spacing.  In the Cut Bank  field,  we own an
average  working  interest  of 99.5%  in 104  producing  oil  wells,  18  active
injection  wells  and one  active  water  supply  well.  The Bears Den field was
discovered  in 1929 and has been under  waterflood  since 1990. In the Bears Den
field, we own a 48.0% working interest in three active water injection wells and
five producing oil wells,  which produce oil at a depth of  approximately  2,430
feet. The Rattlers Butte field was discovered during 1997. In the Rattlers Butte
field,  we own a 6.3% working  interest in two oil wells producing at a depth of
approximately 5,800 feet and one active water injection well.

         In Nevada,  we operate the Trap Spring and Munson Ranch fields and have
an interest in the Bacon Flat field,  which is operated by an industry  partner.
The Trap Spring  field was  discovered  in 1976.  In the Trap Spring  field,  we
produce  oil from a depth of  approximately  3,700  feet from one  well,  with a
working interest of 21.6%. The Munson Ranch field was discovered in 1988. In the
Munson Ranch field,  we produce oil at an average  depth of 3,800 feet from five
wells,  with an  average  working  interest  of 36.0%.  The Bacon Flat field was
discovered in 1981.  In the Bacon Flat field,  we produce oil from one well at a
depth of approximately 5,000 feet, with a 16.9% working interest.

Domestic Marketing and Production

         The  following  table sets forth our average net daily oil  production,
average sales price and average  production  costs  associated with our domestic
oil production during the periods indicated:
<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                              --------------------------------------
                                                                                 2000         1999         1998
                                                                              -----------  -----------  ------------
         <S>                                                                    <C>          <C>           <C>
         Domestic producing property data:
           Average daily net oil production (Bbls)..........................        265          279           315
           Average sales price per Bbl......................................    $ 26.14      $ 15.35        $ 9.78
           Average production costs per Bbl(1)..............................    $ 13.99      $  9.50        $ 9.11
</TABLE>
-------------------
         (1)      Production  costs include  lifting costs  (electricity,  fuel,
                  water, disposal, repairs, maintenance,  pumper, transportation
                  and similar items) and production  taxes.  Production costs do
                  not include such items as G&A costs, depreciation,  depletion,
                  state income taxes or federal income taxes.

         We sell oil at posted field prices to one of several purchasers in each
of our production  areas.  For the years ended December 31, 2000, 1999 and 1998,
over  85.0% of our  total  oil  sales  were to CENEX,  a  regional  refiner  and
marketer.  Posted prices are generally  competitive  among crude oil purchasers.
Our crude oil sales  contracts  may be  terminated by either party upon 30 days'
notice.

                                       14
<PAGE>

         Oilfield Services - Drilling Rig and Well Servicing Equipment

         In  Montana,  we perform a variety  of  third-party  contract  oilfield
services, including drilling, workovers, location work, cementing and acidizing.
During 2000, we purchased an idle drilling rig, which was subsequently converted
to a workover rig, cementing  equipment and other associated  oilfield equipment
costing  approximately  $250,000  in an effort to expand our  oilfield  services
business to take advantage of the current shortage of oilfield services.  We now
have a drilling  rig capable of drilling  to a vertical  depth of 6,000 feet,  a
workover rig, two service rigs,  cementing  equipment,  acidizing  equipment and
other associated  oilfield  servicing  equipment that we utilize in our oilfield
services  business.  We started our oilfield  services  business in 1998,  in an
effort to increase  our domestic  revenues,  which had declined due to depressed
oil prices during 1998. Our oilfield  services revenues have grown from $322,000
in 1998 to $1.3 million in 2000.

Proved Reserves

         Proved  reserves  are  the  estimated  quantities  of  crude  oil  that
geological and engineering  data  demonstrate  with  reasonable  certainty to be
recoverable  in future years from known  reserves  under  existing  economic and
operating  conditions.  Our proved oil and gas reserve quantities and values are
based on estimates prepared by independent  reserve engineers in accordance with
guidelines  established  by the  Securities  and  Exchange  Commission,  or SEC.
Operating  costs,  production  taxes and  development  costs  were  deducted  in
determining the quantity and value information.  Such costs were estimated based
on current costs and were not adjusted to anticipate  increases due to inflation
or other factors. No price escalations were assumed and no amounts were deducted
for general overhead, depreciation, depletion and amortization, interest expense
and income taxes. The proved reserve quantity and value  information is based on
the weighted average price on December 31, 2000 of $21.33 per bbl for oil in the
United States and $2.09 per MMbtu for gas in Poland.  The  determination  of oil
and gas reserves is based on estimates and is highly  complex and  interpretive,
as there are numerous  uncertainties inherent in estimated quantities and values
of  proved  reserves,  projecting  future  rates of  production  and  timing  of
development  expenditures.  The estimated  present value,  discounted at 10% per
annum, of the discounted  future net cash flows, or PV-10 Value,  was determined
in accordance with SFAS No. 69 "Disclosure  About Oil and Gas  Activities."  Our
proved  reserve  estimates  are subject to  continuing  revisions as  additional
information becomes available or assumptions change.

         Estimates of our proved  domestic oil reserves  were  prepared by Larry
Krause  Consulting,  an  independent  engineering  firm  in  Billings,  Montana.
Estimates of our proved Polish gas reserves were prepared by Troy-Ikoda Limited,
an  independent  engineering  firm in the United  Kingdom.  No  estimates of our
proved  reserves  have been  filed with or  included  in any report to any other
federal agency during 2000.

         The following summary of proved reserve  information as of December 31,
2000, represents estimates net to us only and should not be construed as exact:
<TABLE>
<CAPTION>
                                                  Domestic                       Poland
                                         ----------------------------  ----------------------------      Total
                                            Oil        PV-10 Value        Gas        PV-10 Value      PV-10 Value
                                         -----------  ---------------  -----------  ---------------  ---------------
                                          (MBbls)     (In thousands)     (Mmcf)     (In thousands)   (In thousands)
         <S>                                   <C>        <C>               <C>         <C>               <C>
         Proved reserves:
           Developed producing.........        1,161      $   4,505             --      $      --         $   4,505
           Undeveloped.................           59            404          2,381          2,511             2,915
                                         -----------  ---------------  -----------  ---------------  ---------------
             Total.....................        1,220      $   4,909          2,381      $   2,511         $   7,420
                                         ===========  ===============  ===========  ===============  ===============
</TABLE>

         Proved undeveloped Polish gas reserves in the above table relate to the
Kleka 11 well only,  which was  drilled  during  2000 and  commenced  production
during February 2001.

Drilling Activities

         The following  table sets forth the  exploratory  wells that we drilled
during the years ended  December 31, 2000,  1999 and 1998.  We did not drill any
development wells during 2000, 1999 or 1998:

                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                 -------------------------------------------------------------------
                                                         2000                   1999                   1998
                                                 ---------------------  ---------------------  ---------------------
                                                   Gross       Net       Gross        Net       Gross        Net
                                                 ---------- ----------  ---------  ----------  ---------  ----------
         <S>                                          <C>        <C>         <C>         <C>        <C>        <C>
         Discoveries:
           Poland..............................       1.0        0.5         1.0         0.5        --         --
           Domestic............................        --         --          --          --        --         --
                                                 ---------- ----------  ---------  ----------  ---------  ----------
             Total.............................       1.0        0.5         1.0        0.5         --         --
                                                 ---------------------  ---------  ----------  ---------  ----------

         Exploratory dry holes:
           Poland..............................       2.0        1.0         5.0        1.6         --         --
           Domestic............................        --         --          --         --         --         --
                                                 ---------- ----------  ---------  ----------  ---------  ----------
             Total.............................       2.0        1.0         5.0        1.6         --         --
                                                 ---------- ----------  ---------  ----------  ---------  ----------
         Total wells drilled...................        3.0       1.5         6.0        2.1         --         --
                                                 ========== ==========  =========  ==========  =========  ==========
</TABLE>

         As of December 31, 2000, there were three  exploratory  wells that were
being drilled in Poland and are excluded from the above table: the Tuchola 108-2
(an exploratory  success during January 2001; 42.5% working  interest);  Annopol
254-1  (exploratory dry hole during February 2001;  50.0% working  interest) and
Mieszkow 1 (still drilling at the date of this report; 49.0% working interest).

Wells and Acreage

         As of December 31,  2000,  we had 118 gross and 109 net  producing  oil
wells, all of which are located in Montana and Nevada.  As of December 31, 2000,
we did not have any producing wells in Poland.

                                       16
<PAGE>

         The following table sets forth our gross and net acres of developed and
undeveloped oil and gas acreage as of December 31, 2000:
<TABLE>
<CAPTION>
                                                                   Developed                    Undeveloped
                                                          ----------------------------  ----------------------------
                                                             Gross           Net           Gross           Net
                                                          ----------------------------  ----------------------------
         <S>                                                   <C>           <C>           <C>           <C>
         Domestic:
           North Dakota.................................           --            --           12,688        12,688
           Montana......................................       10,732        10,418            1,150         1,057

           Nevada.......................................          400           128               37            16
                                                          -------------  -------------  ------------- --------------
              Total.....................................       11,132        10,546           13,875        13,761
                                                          -------------  -------------  ------------- --------------

         Poland: (1)
           Apache Exploration Program (2)
             Lublin Basin...............................           --            --        3,300,000     1,650,000
             Carpathian.................................           --            --        1,400,000       700,000
             Pomeranian.................................           --            --        2,200,000     1,100,000
             Warsaw West................................           --            --        2,900,000     1,450,000
                                                          -------------  -------------  ------------- --------------
               Total....................................           --            --        9,800,000     4,900,000
                                                          -------------  -------------  ------------- --------------

           Baltic project area..........................           --            --          900,000       900,000
           Fences project area (3)......................          225           110          300,000       147,000
                                                          -------------  -------------  ------------- --------------
               Total Polish acreage.....................          225           110       11,000,000     5,947,000
                                                          -------------  -------------  ------------- --------------
         Total Acreage..................................       11,357        10,656       11,013,875     5,960,761
                                                          =============  =============  ============= ==============
</TABLE>
------------------
         (1)      All  undeveloped  Polish  acreage is  rounded  to the  nearest
                  100,000 acres.
         (2)      Gives  effect to 50.0%  beneficial  ownership of Apache in the
                  Lublin Basin, Carpathian,  Pomeranian and Warsaw West areas in
                  our  joint  exploration  arrangements  with  Apache  under the
                  Apache Exploration Program. Does not give effect to options on
                  POGC-controlled  areas  containing  approximately  0.6 million
                  acres in the  Lublin  Basin  area,  1.5  million  acres in the
                  Carpathian  area and 1.3 million acres in the Pomeranian  area
                  under the POGC option agreements.
         (3)      Developed  acreage in the Fences project area is  attributable
                  to the Kleka 11 well only.

Government Regulation

         Poland

         Our  activities in Poland are subject to political,  economic and other
uncertainties, including the adoption of new laws, regulations or administrative
policies  that  may  adversely  affect  us or the  terms of our  exploration  or
production rights;  political instability and changes in government or public or
administrative  policies;  export  and  transportation  tariffs  and  local  and
national taxes;  foreign exchange and currency  restrictions  and  fluctuations;
repatriation  limitations;   inflation;   environmental  regulations  and  other
matters. These operations in Poland are subject to the Geological and Mining Law
dated  as of  September  4,  1994  and  the  Protection  and  Management  of the
Environment  Act dated as of January 31,  1980,  which are the  current  primary
statutes governing environmental  protection.  Agreements with the government of
Poland  respecting  our  areas  create  certain  standards  to be met  regarding
environmental protection.  Participants in oil and gas exploration,  development
and  production  activities  generally  are  required  to  (1)  adhere  to  good
international petroleum industry practices,  including practices relating to the
protection  of the  environment;  and,  (2) prepare and submit  geological  work
plans,  with specific  attention to  environmental  matters,  to the appropriate
agency of state geological  administration for its approval prior to engaging in
field  operations  such as seismic data  acquisition,  exploratory  drilling and
field-wide development.  Poland's regulatory framework respecting  environmental
protection  is not as fully  developed  and detailed as that which exists in the
United States.  We intend to conduct our operations in Poland in accordance with
good international  petroleum  industry  practices and, as they develop,  Polish
requirements.

         As Poland  continues to progress  towards its stated goal of becoming a
member of the European Union, it is expected to pass further  legislation  aimed
at harmonizing Polish environmental law with that of the European Union.

                                       17
<PAGE>

         Domestic

         State and Local Regulation of Drilling and Production

         Our exploration and production  operations are subject to various types
of regulation at the federal,  state and local levels.  Such regulation includes
requiring permits for the drilling of wells, maintaining bonding requirements in
order to drill or operate wells and regulating the location of wells, the method
of drilling and casing wells, the surface use and restoration of properties upon
which wells are drilled and the plugging and abandoning of wells. Our operations
are also subject to various conservation laws and regulations. These include the
regulation of the size of drilling and spacing units or proration  units and the
density of wells that may be drilled and the  unitization  or pooling of oil and
gas  properties.  In this  regard,  some  states  allow the  forced  pooling  or
integration  of tracts to  facilitate  exploration  while  other  states rely on
voluntary  pooling of lands and leases.  In addition,  state  conservation  laws
establish maximum rates of production from oil and gas wells, generally prohibit
the  venting or flaring of gas and impose  certain  requirements  regarding  the
ratability of production.

         Our oil  production  is affected  to some degree by state  regulations.
States in which we operate have statutory  provisions  regulating the production
and sale of oil and gas, including  provisions  regarding  deliverability.  Such
statutes and related  regulations are generally intended to prevent waste of oil
and gas and to protect  correlative rights to produce oil and gas between owners
of a common  reservoir.  Certain state regulatory  authorities also regulate the
amount of oil and gas produced by assigning  allowable  rates of  production  to
each well or proration unit.

         Environmental Regulations

         The federal  government  and various state and local  governments  have
adopted  laws and  regulations  regarding  the control of  contamination  of the
environment.  These laws and regulations may require the acquisition of a permit
by operators  before  drilling  commences,  restrict the types,  quantities  and
concentration of various substances that can be released into the environment in
connection with drilling and production  activities,  limit or prohibit drilling
activities  on  certain  lands  lying  within  wilderness,  wetlands  and  other
protected areas and impose substantial  liabilities for pollution resulting from
our  operations.  These  laws and  regulations  may also  increase  the costs of
drilling  and  operation  of wells.  We may also be held liable for the costs of
removal and damages arising out of a pollution  incident to the extent set forth
in the Federal Water Pollution  Control Act, as amended by the Oil Pollution Act
of 1990,  or OPA '90.  In  addition,  we may be  subject to other  civil  claims
arising out of any such  incident.  As with any owner of  property,  we are also
subject to clean-up costs and liability for hazardous materials, asbestos or any
other  toxic  or  hazardous  substance  that may  exist  on or under  any of our
properties.  We believe that we are in compliance in all material  respects with
such laws,  rules and regulations and that continued  compliance will not have a
material adverse effect on our operations or financial  condition.  Furthermore,
we do not believe that we are affected in a  significantly  different  manner by
these laws and regulations than our competitors in the oil and gas industry.

         The Comprehensive  Environmental  Response,  Compensation and Liability
Act, or CERCLA,  also known as the "Superfund" law, imposes  liability,  without
regard to fault or the legality of the original  conduct,  on certain classes of
persons who are  considered  to be  responsible  for the release of a "hazardous
substance" into the environment.  These persons include the owner or operator of
the  disposal  site or sites  where the  release  occurred  and  companies  that
disposed or arranged for the disposal of the hazardous substances. Under CERCLA,
such  persons  may be subject to joint and  several  liability  for the costs of
cleaning  up  the  hazardous   substances  that  have  been  released  into  the
environment,  for  damages  to  natural  resources  and for the costs of certain
health studies.  Furthermore,  it is not uncommon for neighboring landowners and
other  third  parties to file claims for  personal  injury and  property  damage
allegedly caused by hazardous  substances or other pollutants  released into the
environment.

         The Resource  Conservation  and Recovery Act, or RCRA, and  regulations
promulgated thereunder govern the generation,  storage, transfer and disposal of
hazardous  wastes.  RCRA,  however,  excludes  from the  definition of hazardous
wastes "drilling  fluids,  produced waters and other wastes  associated with the
exploration, development, or production of crude oil, gas or geothermal energy."
Because  of  this  exclusion,  many  of our  operations  are  exempt  from  RCRA
regulation.  Nevertheless,  we must comply with RCRA  regulations for any of our
operations that do not fall within the RCRA exclusion.

                                       18
<PAGE>

         The OPA '90 and related  regulations impose a variety of regulations on
responsible  parties  related to the  prevention of oil spills and liability for
damages  resulting from such spills.  OPA '90 establishes  strict  liability for
owners of  facilities  that are the site of a release of oil into "waters of the
United  States." While OPA '90 liability  more  typically  applies to facilities
near substantial  bodies of water, at least one district court has held that OPA
'90 liability can attach if the  contamination  could enter waters that may flow
into navigable waters.

         Stricter  standards in environmental  legislation may be imposed on the
oil and gas industry in the future,  such as  proposals  made in Congress and at
the state  level from time to time,  that would  reclassify  certain oil and gas
exploration   and  production   wastes  as  "hazardous   wastes"  and  make  the
reclassified wastes subject to more stringent and costly handling,  disposal and
clean-up requirements. The impact of any such changes, however, would not likely
be any  more  burdensome  to us than to any  other  similarly  situated  company
involved in oil and gas exploration and production.

         Federal and Indian Leases

         A substantial  part of our producing  properties in Montana is operated
under oil and gas  leases  issued by the  Bureau  of Land  Management  or by the
Blackfeet  Tribe under the  supervision of the Bureau of Indian  Affairs.  These
activities  must comply with rules and orders that  regulate  aspects of the oil
and gas  industry,  including  drilling  and  operating  on leased  land and the
calculation and payment of royalties to the federal  government or the governing
Indian  nation.  Operations  on Indian  lands must also comply  with  applicable
requirements  of the governing  body of the tribe  involved  including,  in some
instances, the employment of tribal members. We believe we are currently in full
compliance with all material provisions of such regulations.

         Safety and Health Regulations

         We must also conduct our operations in accordance with various laws and
regulations  concerning  occupational  safety and health.  Currently,  we do not
foresee expending material amounts to comply with these occupational  safety and
health  laws and  regulations.  However,  since  such laws and  regulations  are
frequently changed, we are unable to predict the future effect of these laws and
regulations.

Title to Properties

         We rely on  sovereign  ownership  of  exploration  rights  and  mineral
interests by the Polish  government in connection  with our activities in Poland
and  have  not  conducted  and do not  plan to  conduct  any  independent  title
examination.  We  regularly  consult  with our Polish  legal  counsel when doing
business in Poland.

         Nearly all of our domestic working interests are held under leases from
third parties.  We typically  obtain a title opinion  concerning such properties
prior to the  commencement of drilling  operations.  We have obtained such title
opinions or other third party review on nearly all of our producing  properties,
and we believe that we have satisfactory title to all such properties sufficient
to meet standards  generally accepted in the oil and gas industry.  Our domestic
properties are subject to typical burdens, including customary royalty interests
and liens for current  taxes,  but we have  concluded  that such  burdens do not
materially  interfere with the use of such properties.  Further,  we believe the
economic  effects  of such  burdens  have been  appropriately  reflected  in our
acquisition cost of such properties and reserve estimates.  Title  investigation
before the  acquisition  of  undeveloped  properties  is less thorough than that
conducted prior to drilling, as is standard practice in the industry.

Employees and Consultants

         As of December 31, 2000,  we had 34  employees,  consisting of eight in
Salt Lake City, Utah; 23 in Oilmont, Montana; one in Greenwich, Connecticut; and
two in  Houston,  Texas.  Our  employees  are not  represented  by a  collective
bargaining  organization.  We consider our relationship with our employees to be
satisfactory. We also regularly engage technical consultants to provide specific
geological, geophysical and other professional services.

                                       19
<PAGE>

Offices and Facilities

         Our corporate offices,  located at 3006 Highland Drive, Salt Lake City,
Utah, contain approximately 3,010 square feet and are rented at $2,960 per month
under a month to month  agreement.  In  Montana,  we own a  16,160  square  foot
building located at the corner of Central and Main in Oilmont,  where we utilize
4,800 square feet for our field office and rent the remaining space to unrelated
third  parties for $875 per month.  In Poland,  we rent a small office suite for
$1,400 per month in Warsaw,  at Al.  Jana Pawla II 29, as an office of record in
Poland.

Risk Factors

         Our business is subject to a number of material risks,  including,  but
not limited to, the following  factors  related  directly and  indirectly to our
business activities in the United States and Poland:

         Risks Relating to our Business

         Our success depends largely on our discovery of economic  quantities of
oil or gas in Poland.

         We currently  have a limited  amount of production in the United States
and Poland. We do not currently generate  sufficient revenues to cover our costs
of operation,  including our exploration and general and  administrative  costs,
and will  continue  to rely on funds from  external  sources  until we  generate
sufficient revenue to cover these costs. Our exploration  programs in Poland are
based on  interpretations of geological and geophysical data. The factors listed
below,  most of which are outside our control,  may prevent us from establishing
additional  commercial  production  or  substantial  reserves as a result of our
exploration, appraisal and development activities in Poland:

         o        we  cannot   assure  that  any  future  well  will   encounter
                  commercial quantities of oil or gas;

         o        there is no way to predict in advance of drilling  and testing
                  whether any prospect encountering oil or gas will yield oil or
                  gas in sufficient  quantities to cover  drilling or completion
                  costs or to be economically viable;

         o        one or more  appraisal  wells may be  required  to confirm the
                  commercial potential of an oil or gas discovery;

         o        we may continue to incur  exploration  costs in specific areas
                  even if initial  appraisal wells are plugged and abandoned or,
                  if completed  for  production,  do not result in production of
                  commercial quantities of oil or gas; and

         o        drilling operations may be curtailed, delayed or canceled as a
                  result  of  numerous  factors,  including  operating  problems
                  encountered during drilling,  weather  conditions,  compliance
                  with  governmental  requirements,  shortages  or delays in the
                  delivery of  equipment or  availability  of services and other
                  factors.

         We have had limited exploratory success in Poland.

         We have  participated  in  drilling  14  exploratory  wells in  Poland,
including three exploratory successes (the Wilga 2, Kleka 11 and Tuchola 108-2),
ten exploratory dry holes and one  exploratory  well that is currently  drilling
(Mieszkow 1) as of the date of this report.  In the Fences project area, we have
drilled one exploratory  success and are currently drilling another  exploratory
well.  In the Apache  Exploration  Program,  Apache has, in effect,  covered our
share of costs to drill an equivalent of nine exploratory  wells,  including two
exploratory  successes and seven exploratory dry holes. We have also drilled two
exploratory  dry  holes in the  Baltic  project  area and one in the  Carpathian
project area. In addition, we participated in testing and appraising two shut-in
gas wells in the Lachowice Farm-in that did not result in commercial production.

         Of our three exploratory successes in Poland, only the Kleka 11 well is
currently producing. The Wilga 2 is located approximately 19 kilometers from the
nearest  pipeline and has yet to be completed for  production.  During the first
half of 2001,  we and our partners  plan an extended flow test on the Wilga 2 to
assess  the  potential  for  commercial  production,  in light of  pipeline  and
facility  expenditures  that would be  required.  The  Tuchola  108-2 is

                                       20
<PAGE>

located approximately five kilometers from the nearest pipeline and is currently
being tested and completed for production.

         We have limited control over our exploration and development activities
in Poland.

         We  rely  to a  significant  extent  on  the  expertise  and  financial
capabilities of our strategic  partners,  POGC and Apache. The failure of either
POGC or Apache to perform its  obligations  under  contracts  with us would most
likely have a material adverse effect on us. In particular, we have prepared our
exploration  budget through 2002 based on the participation of and funding to be
provided by Apache and POGC. In the future, we may become even more reliant upon
the operational expertise and financial  capabilities of our strategic partners.
Apache has worldwide oil and gas interests  outside of Poland in which we do not
participate.  Apache is only committed to drilling one additional well in Poland
under the Apache  Exploration  Program.  If Apache's  separately  held interests
should become more  promising to Apache than  interests  held with us in Poland,
Apache may focus its efforts, funds, expertise and other resources elsewhere. In
addition,  should our relationship with POGC or Apache deteriorate or terminate,
our oil and gas activities in Poland may be adversely affected.

         Although we have rights to participate in exploration  and  development
activities on some  POGC-controlled  acreage,  we have no right to initiate such
activities.  Further, we have no interest in the underlying agreements, licenses
and grants from the Polish  agencies  governing the  exploration,  exploitation,
development  or production of acreage  controlled by POGC.  Thus, our program in
Poland  involving  POGC-controlled  acreage would be adversely  affected if POGC
should  elect not to pursue  activities  on such  acreage,  if the  relationship
between us, POGC or Apache  should  deteriorate  or  terminate or if POGC or the
government  agencies  should  fail to fulfill  the  requirements  of or elect to
terminate such agreements, licenses or grants.

         We may not achieve the  results  anticipated  in placing our current or
future discoveries into production.

         We may encounter  delays in commencing  the  production and the sale of
gas in Poland,  including our recent gas  discoveries  and other possible future
discoveries.  The possible delays may include obtaining rights-of-way to connect
to the POGC pipeline system, construction permits, availability of materials and
contractors,  the signing of an oil or gas purchase  contract and other factors.
Such delays would  correspondingly  delay the  commencement of cash flow and may
require us to obtain additional  short-term  financing  pending  commencement of
production.  Further,  we may design  proposed  surface and pipeline  facilities
based on possible  estimated  results of additional  drilling.  We cannot assure
that additional  drilling will establish  additional reserves or production that
will provide an economic return for planned expenditures for facilities.  We may
have to change our  anticipated  expenditures  if costs of placing a  particular
discovery  into  production  are  higher,  if the  project  is smaller or if the
commencement of production takes longer than expected.

         We cannot  assure the  exploration  models we are using in Poland  will
         improve our chances of finding oil or gas in Poland.

         We cannot  assure  the  exploration  models  we,  POGC or  Apache  have
developed  will provide a useful or effective  guide for  selecting  exploration
prospects  and  drilling  targets.  We will  have to  revise  or  replace  these
exploration models as a guide to further exploration if ongoing drilling results
do not  confirm  their  validity.  These  exploration  models  may be  based  on
incomplete or unconfirmed data and theories that have not been fully tested. The
seismic data,  other  technologies and the study of producing fields in the area
do not enable us to know conclusively  prior to drilling that oil or gas will be
present in commercial  quantities.  We cannot assure that the analogies  that we
draw from  available  data from other wells,  more fully  explored  prospects or
producing fields will be applicable to our drilling prospects.

         We cannot accurately predict the size of exploration targets or foresee
all related risks.

         Notwithstanding the accumulation and study of 2-D and 3-D seismic data,
drilling logs, production information from established fields and other data, we
cannot predict  accurately the oil or gas potential of individual  prospects and
drilling  targets  or  the  related  risks.  Our  predictions  are  only  rough,
preliminary geological estimates of

                                       21
<PAGE>

the forecasted volume and  characteristics of possible reservoirs and are not an
estimate of reserves.  In some cases,  our estimates may be based on a review of
data from  other  exploration  or  producing  fields in the area that may not be
similar to our  exploration  prospects.  We may require  several  test wells and
long-term  analysis of test data and history of  production to determine the oil
or gas potential of individual prospects.

         Privatization   of  POGC  could  affect  our  relationship  and  future
opportunities in Poland.

         Our  activities in Poland have  benefited  from our  relationship  with
POGC,  which  has  provided  us  with  exploration  acreage,  seismic  data  and
production  data under our agreements.  The Polish  government has commenced the
privatization  of POGC by  selling  POGC's  refining  assets  and has stated its
intent to privatize other segments of POGC. The timing of such  privatization is
unclear  and  beyond our  control.  Privatization  may  result in new  policies,
strategies or ownership that could  adversely  affect our existing  relationship
and agreements,  as well as the availability of  opportunities  with POGC in the
future.

         We have a  history  of  operating  losses  and may  require  additional
         capital in the future to fund our operations.

         From our  inception in January 1989 through  December 31, 2000, we have
incurred  cumulative net losses of $40.0 million. We expect that our exploration
and  production  activities  may  continue  to result in net losses and that our
accumulated deficit may increase. We anticipate that we may incur losses through
2001 and possibly beyond,  depending on whether our activities in Poland and the
United States result in sufficient revenues to cover related operating expenses.

         Until  sufficient cash flow from operations can be obtained,  we expect
we will need additional  capital to fully fund our ongoing planned  exploration,
appraisal,  development and property acquisition programs in Poland.  Outside of
the $5.0 million of financing we received  from RRPV during March 2001,  we have
no current arrangement for any such additional financing,  but may seek required
funds  from the  issuance  of  additional  debt or  equity  securities,  project
financing, strategic alliances or other arrangements.  Although we are currently
negotiating with commercial lenders to establish a credit facility, we can offer
no  assurances  that  we  will be able to  obtain  financing  on  acceptable  or
favorable terms.  Obtaining  additional financing may dilute the interest of our
existing stockholders or our interest in the specific project being financed. We
cannot assure that additional funds could be obtained or, if obtained,  would be
on terms  favorable to us. In addition to planned  activities in Poland,  we may
require additional funds for general corporate purposes.

         Our initial production in Poland is encumbered to secure repayment of a
$5.0 million loan due RRPV.

         We have agreed to encumber a portion of our gas  reserves in Poland and
the related  proceeds from gas sales to secure  repayment of a $5.0 million loan
from RRPV.  If RRPV  elects to buy gas we  produce  in Poland,  the loan will be
repayable over eight years.  If RRPV elects not to buy our gas, the loan will be
repayable in March 2003,  unless converted to common stock.  Unless converted to
common  stock,  the loan  will have to be  repaid  notwithstanding  the level of
production  from our producing  properties,  our other cash  requirements or the
potentially greater financial return from other expenditures.  In addition,  our
agreements  with  RRPV  contain  financial  and  operating  covenants  that  are
customary for transactions of this nature,  including  limitations on additional
indebtedness.  Our agreement with RRPV also specifies usual and customary events
of default.  If the loan is not repaid  timely or a default  occurs,  RRPV would
have the right to obtain possession of our encumbered property interests.

         The  loss  of  key  personnel  could  have  an  adverse  impact  on our
operations.

         We  rely  on our  officers  and  key  employees  and  their  expertise,
particularly David N. Pierce,  Chairman,  President and Chief Executive Officer;
Thomas B. Lovejoy,  Vice-Chairman and Chief Financial Officer; Andrew W. Pierce,
Vice-President   and  Chief   Operating   Officer;   and   Jerzy  B.   Maciolek,
Vice-President  of  Exploration.  The  loss  of the  services  of  any of  these
individuals  may  materially  and  adversely  affect  us. We have  entered  into
employment

                                       22
<PAGE>

agreements with Mr. David Pierce,  Mr. Andrew Pierce, Mr. Maciolek and other key
executives. We do not maintain key man insurance on any of our employees.

         The price we  receive  for gas we sell will  likely be lower  than free
         market gas prices in western Europe.

         The limited volume and single source of our production  means we cannot
assure  uninterruptible  production  or  production  in  amounts  that  would be
meaningful  to industrial  users,  which may depress the price we may be able to
obtain.  There is currently no competitive market for the sale of gas in Poland.
Accordingly, we expect that the prices we receive for the gas we produce will be
lower  than  would be the case in a  competitive  setting  and may be lower than
prevailing  western European prices, at least until a fully  competitive  market
develops  in Poland.  Similarly,  there is no  established  market  relationship
between  gas  prices  in  short-term  and  long-term   sales   agreements.   The
availability  of abundant  quantities  of gas from former  members of the Soviet
Union and the low cost of electricity from coal-fired  generating facilities may
also tend to depress gas prices in Poland.

         Oil and gas price decreases and volatility  could adversely  affect our
         operations and our ability to obtain financing.

         Oil and gas prices  have been and are likely to continue to be volatile
and subject to wide  fluctuations  in response to the following  factors:

         o        the market and price structure in local markets;

         o        changes in the supply of and demand for oil and gas;

         o        market uncertainty;

         o        political  conditions in  international  oil and gas producing
                  regions;

         o        the extent of production  and  importation of oil and gas into
                  existing or potential markets;

         o        the level of consumer demand;

         o        weather conditions  affecting  production,  transportation and
                  consumption;

         o        the competitive  position of oil or gas as a source of energy,
                  as compared with coal, nuclear energy, hydroelectric power and
                  other energy sources;

         o        the availability, proximity and capacity of gathering systems,
                  pipelines and processing facilities;

         o        the refining and processing capacity of prospective oil or gas
                  purchasers;

         o        the  effect  of  government   regulation  on  the  production,
                  transportation and sale of oil and gas; and

         o        other factors beyond our control.

         We have not  entered  into any  agreements  to  protect  us from  price
fluctuations and may not do so in the future.

         Our industry is subject to numerous operating risks.  Insurance may not
         be adequate to protect us against all these risks.

         Our oil and gas  drilling  and  production  operations  are  subject to
hazards incidental to the industry.  These hazards include blowouts,  cratering,
explosions,  uncontrollable flows of oil, gas or well fluids, fires,  pollution,
releases of toxic gas and other  environmental  hazards and risks. These hazards
can cause personal injury and loss of life,  severe damage to and destruction of
property and  equipment,  pollution or  environmental  damage and  suspension of
operations.  To lessen the effects of these  hazards,  we maintain  insurance of
various  types to cover  our  domestic  operations.  We cannot  assure  that the
general  liability  insurance of $9.0 million carried by us or the $25.0 million
carried by  Apache,  as the  operator  of the Apache  Exploration  Program,  can
continue to be obtained on  reasonable  terms.  POGC,  as operator of the Fences
project area, is self-insured. We do not plan to purchase well control insurance
on wells we drill in the Fences  project area and may elect not to purchase such
insurance on wells  drilled in

                                       23
<PAGE>

other areas in Poland as well. The current level of insurance does not cover all
of the risks involved in oil and gas exploration, drilling and production. Where
additional  insurance  coverage  does exist,  the amount of coverage  may not be
sufficient  to pay the full  amount of such  liabilities.  We may not be insured
against all losses or liabilities  that may arise from all hazards  because such
insurance is unavailable at economic  rates,  because of limitations on existing
insurance coverage or other factors.  For example,  we do not maintain insurance
against risks related to violations of environmental laws. We would be adversely
affected by a significant  adverse event that is not fully covered by insurance.
Further, we cannot assure that we will be able to maintain adequate insurance in
the future at rates we consider reasonable.

         Risks Relating to Conducting Business in Poland

         Polish laws, regulations and policies may be changed in ways that could
adversely impact our business.

         Our oil and gas exploration,  development and production  activities in
Poland are and will continue to be subject to ongoing  uncertainties  and risks,
including:

         o        possible changes in government  personnel,  the development of
                  new  administrative   policies  and  practices  and  political
                  conditions  in Poland  that may affect the  administration  of
                  agreements with governmental agencies or enterprises;

         o        possible  changes  to  the  laws,   regulations  and  policies
                  applicable  to us and our partners or the oil and gas industry
                  in Poland in general;

         o        uncertainties  as to whether the laws and regulations  will be
                  applicable in any particular circumstance;

         o        uncertainties  as to whether  we will be able to  enforce  our
                  rights in Poland;

         o        uncertainty as to whether we will be able to  demonstrate,  to
                  the  satisfaction of the Polish  authorities,  our, POGC's and
                  Apache's compliance with governmental  requirements respecting
                  exploration    expenditures,     results    of    exploration,
                  environmental protection matters and other factors;

         o        the  inability  to  recover  previous  payments  to the Polish
                  government  made  under  the  exploration  rights or any other
                  costs incurred  respecting  those rights if we were to lose or
                  cancel our exploration and exploitation rights at any time;

         o        political instability and possible changes in government;

         o        export and transportation tariffs;

         o        local and national tax requirements;

         o        expropriation or  nationalization  of private  enterprises and
                  other risks arising out of foreign government sovereignty over
                  our acreage in Poland; and

         o        possible  significant  delays in  obtaining  opinions of local
                  authorities or satisfying other  governmental  requirements in
                  connection with a grant of an exploitation concession.

         Poland has a  developing  regulatory  regime,  regulatory  policies and
interpretations.

         Poland has a developing  regulatory  regime  governing  exploration and
development,  production, marketing,  transportation and storage of oil and gas.
These  provisions  were  recently   promulgated  and  are  relatively  untested.
Therefore,  there is little  or no  administrative  or  enforcement  history  or
established  practice that can aid us in evaluating  how the  regulatory  regime
will affect our operations.  It is possible that such governmental policies will
change or that new laws and regulations, administrative practices or policies or
interpretations  of existing laws and regulations  will materially and adversely
affect our  activities  in Poland.  For  example,  Poland's  laws,  policies and
procedures  may be changed to conform to the minimum  requirements  that must be
met before Poland is admitted as a full member of the European Union.

                                       24
<PAGE>

         Our  oil  and  gas   operations   are   subject  to  rapidly   changing
         environmental  laws and regulations  that could  negatively  impact our
         operations.

         Operations on our project areas are subject to  environmental  laws and
regulations in Poland that provide for  restrictions and prohibitions on spills,
releases or emissions of various substances produced in association with oil and
gas exploration and development.  Additionally, if significant quantities of gas
are produced with oil,  regulations  prohibiting  the flaring of gas may inhibit
oil  production.  In such  circumstances,  the  absence of a gas  gathering  and
delivering   system  may  restrict   production   or  may  require   significant
expenditures  to develop such a system prior to producing oil and gas. We may be
required to prepare and obtain approval of environmental  impact  assessments by
governmental  authorities in Poland prior to commencing  oil or gas  production,
transportation and processing functions.

         We and our  partners  cannot  assure  that we have  complied  with  all
applicable  laws and regulations in drilling  wells,  acquiring  seismic data or
completing other  activities in Poland to date. The Polish  government may adopt
more restrictive regulations or administrative  policies or practices.  The cost
of  compliance  with  current   regulations  or  any  changes  in  environmental
regulations could require significant  expenditures.  Further,  breaches of such
regulations  may result in the imposition of fines and  penalties,  any of which
may be material.  These environmental costs could have a material adverse effect
on our financial condition or results of operations in the future.

         Certain  risks of loss arise from our need to conduct  transactions  in
foreign currency.

         The amounts in our agreements  relating to our activities in Poland are
normally  expressed  and payable in United States  dollars or equivalent  Polish
zlotys.  Conversions between United States dollars and Polish zlotys are made on
the date amounts are paid or received.  In the future, our financial results and
cash flows in Poland may be affected by  fluctuations  in exchange rates between
the Polish zloty and the United  States  dollar.  We have not hedged our foreign
currency  activities in the past and do not plan to do so. Currencies used by us
may  not be  convertible  at  satisfactory  rates.  In  addition,  the  official
conversion rates between United States and Polish  currencies may not accurately
reflect  the  relative  value of goods and  services  available  or  required in
Poland. Further, inflation may lead to the devaluation of the Polish zloty.

         Under  Poland's  Foreign  Exchange  Law,  prior to making  transfers of
nonresident income (such as dividends,  interest, rent) abroad, a bank generally
must be furnished with documents  evidencing  title for the payment,  as well as
with  a  certificate  issued  by  the  Polish  tax  authorities  confirming  the
expiration of tax liability in Poland or a foreign exchange permit releasing the
transferor from this obligation.  If the income to be transferred is not subject
to taxation in Poland, a written declaration to this effect may be sufficient.

         Given that the Foreign  Exchange Law has come into effect  recently and
no  detailed  rules and  regulations  under it have  been  issued to date by the
Polish  authorities,  the  interpretation  of the law's  provisions  will remain
subject to considerable uncertainty in the near term.

         Risks Related to an Investment in our Common Stock

         Our stockholder rights plan and bylaws discourage  unsolicited takeover
         proposals and could prevent our  stockholders  from realizing a premium
         on our common stock.

         We  have a  stockholder  rights  plan  that  may  have  the  effect  of
discouraging  unsolicited  takeover  proposals.  The  rights  issued  under  the
stockholder  rights plan would cause  substantial  dilution to a person or group
that  attempts  to acquire us on terms not  approved  in advance by our board of
directors.  In  addition,  our  articles  of  incorporation  and bylaws  contain
provisions  that  may  discourage   unsolicited   takeover  proposals  that  our
stockholders may consider to be in their best interests that include:

         o        provisions  that members of the board of directors are elected
                  and retire in rotation; and

         o        the ability of the board of directors  to designate  the terms
                  of, and to issue new series of, preferred shares.

                                       25
<PAGE>

         Together,   these  provisions  and  our  stockholder  rights  plan  may
discourage transactions that otherwise could involve payment to our stockholders
of a premium over prevailing market prices for our common shares.

         Our  common  stock  price  has been and may  continue  to be  extremely
volatile.

         Our  common  stock  has  traded  as low as $2.88  and as high as $10.13
during  intra-day  trading between January 1, 1999, and the date of this report.
Some of the  factors  leading  to this  volatility  include:

 o the  outcome  of
individual wells or the timing of exploration efforts in Poland;

         o        the potential sale by us of newly issued common stock to raise
                  capital or by existing stockholders of restricted securities;

         o        price  and  volume  fluctuations  in  the  general  securities
                  markets that are unrelated to our results of operations;

         o        the investment  community's  view of companies with assets and
                  operations  outside the United States in general and in Poland
                  in particular;

         o        actions or announcements by POGC or Apache that may affect us;

         o        prevailing world prices for oil and gas;

         o        the potential of our current and planned activities in Poland;
                  and

         o        changes in stock market  analysts'  recommendations  regarding
                  us, other oil and gas companies or the oil and gas industry in
                  general.

         We may encounter  additional  exploration  failures in Poland that will
adversely affect the trading prices for our common stock.

                                       26
<PAGE>

Oil and Gas Terms

         The  following  terms  have the  indicated  meaning  when  used in this
Report:

         "Bbl" means barrel of oil.

         "Carried"  or  "Carry"  refers to an  agreement  under  which one party
         (carrying party) agrees to pay for all or a specified  portion of costs
         of another  party  (carried  party) on a property in which both parties
         own a portion of the working interest.

         "Condensate"  means  a  light  hydrocarbon  liquid,  generally  natural
         gasoline (C5 to C10),  that  condenses to a liquid (i.e.,  falls out of
         wet gas) as the wet gas is sent through a mechanical separator near the
         well.

         "Development  well" means a well  drilled  within the proved area of an
         oil or gas reservoir to the depth of a  stratigraphic  horizon known to
         be  productive.  "Exploratory  well"  means a well  drilled to find and
         produce oil or gas in an unproved  area,  to find a new  reservoir in a
         field  previously  found  to be  productive  of oil  or gas in  another
         reservoir or to extend a known reservoir.

         "Field"  means an area  consisting  of  single  reservoir  or  multiple
         reservoirs all grouped on or related to the same individual  geological
         structural feature and/or stratigraphic  conditions.  "Gross" acres and
         "gross" wells means the total number of acres or wells, as the case may
         be,  in which  an  interest  is  owned,  either  directly  or  though a
         subsidiary or other Polish enterprise in which we have an interest.

         "Horizon"  means  an  underground  geological  formation,  which is the
         portion  of the  larger  formation  that has  sufficient  porosity  and
         permeability to constitute a reservoir.  "MBbls" means thousand barrels
         of oil.

         "MMBbls" means million barrels of oil.

         "MMbtu" means million British thermal units, a unit of heat energy used
         to measure the amount of heat that can be  generated  by burning gas or
         oil. "Mmcf" means million cubic feet of natural gas.

         "Net" means, when referring to wells or acres, the fractional ownership
         working  interests held by us, either  directly or through a subsidiary
         or other Polish enterprise in which we have an interest,  multiplied by
         the gross wells or acres.

         "Proved reserves" means the estimated  quantities of crude oil, gas and
         gas liquids which  geological and  engineering  data  demonstrate  with
         reasonable  certainty  to be  recoverable  in future  years  from known
         reservoirs  under  existing  economic and operating  conditions,  i.e.,
         prices and costs as of the date the estimate is made. "Proved reserves"
         may be developed or undeveloped.

         "PV-10  Value" means the  estimated  future net revenue to be generated
         from the  production  of proved  reserves  discounted  to present value
         using an annual  discount rate of 10.0%.  These amounts are  calculated
         net of estimated  production costs and future  development costs, using
         prices and costs in effect as of a certain date, without escalation and
         without giving effect to non-property  related expenses such G&A costs,
         debt service, future income tax expense or depreciation,  depletion and
         amortization.

         "Reservoir"  means  a  porous  and  permeable   underground   formation
         containing a natural  accumulation of producible oil and/or gas that is
         confined by impermeable rock or water barriers and that is distinct and
         separate from other reservoirs.

         "Tcf" means trillion cubic feet of natural gas.

                                       27
<PAGE>

--------------------------------------------------------------------------------
                            ITEM 3. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------

         We are not a party to any material legal  proceedings,  and no material
legal  proceedings  have been threatened by us or, to the best of our knowledge,
against us.

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

         No matter was  submitted to a vote of our security  holders  during the
fourth quarter of the fiscal year ended December 31, 2000.

                                       28
<PAGE>

                                    PART II

--------------------------------------------------------------------------------
                      ITEM 5. MARKET FOR COMMON EQUITY AND
                          RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------

Price Range of Common Stock and Dividend Policy

         The following  table sets forth for the periods  indicated the high and
low closing prices for our common stock as quoted under the symbol "FXEN" on the
Nasdaq National Market:
<TABLE>
<CAPTION>
                                                                        Low          High
                                                                     ----------    ----------
        <S>                                                           <C>            <C>
        2001:
          First Quarter (through March 15, 2001).................     $  3.50        $  5.94

        2000:
          Fourth  Quarter........................................     $  3.19        $  4.81
          Third Quarter..........................................        3.28           5.69
          Second Quarter.........................................        4.44           8.31
          First Quarter..........................................        5.13           7.94

        1999:
          Fourth  Quarter........................................     $  4.00         $ 7.00
          Third Quarter..........................................        6.31           9.43
          Second Quarter.........................................        4.13           7.00
          First Quarter..........................................        4.00           9.75
</TABLE>

         On March 15, 2001,  the closing  price per share of our common stock on
the Nasdaq National Market was $5.32.

         The market price for our common stock has been volatile in the past and
could fluctuate significantly in response to the results of specific exploration
and  development   activities,   variations  in  quarterly   operating  results,
fluctuations in oil and gas prices and changes in  recommendations by securities
analysts. In addition,  the securities markets regularly experience  significant
price and volume  fluctuations that are often unrelated or  disproportionate  to
the results of operations of particular  companies.  In  particular,  securities
such as the common stock of companies doing  substantially all of their business
in emerging market countries such as Poland are, to varying degrees,  influenced
by economic and market conditions in other emerging market  countries.  Although
economic  conditions  are  different in each  country,  investors'  reactions to
developments  in one country may affect the securities of issuers doing business
in other countries, including Poland. There can be no assurance that the trading
price of our common stock would not be adversely  affected by events  elsewhere,
especially in emerging market countries.  These broad fluctuations may adversely
affect the market price of our common stock.

         We have  never  paid  cash  dividends  on our  common  stock and do not
anticipate  that we will pay dividends in the foreseeable  future.  We intend to
reinvest any future  earnings to further expand our business.  We estimate that,
as of March 15, 2001, we had approximately 4,200 stockholders.

                                       29
<PAGE>
--------------------------------------------------------------------------------
                  ITEM 6. SELECTED CONSOLIDATED FINANCILA DATA
--------------------------------------------------------------------------------

         The following selected  consolidated  financial data of FX Energy, Inc.
and its  subsidiaries  for the five years ended  December 31, 2000,  are derived
from the audited financial  statements and notes thereto of FX Energy,  Inc. and
its  subsidiaries,  certain of which are included in this  report.  The selected
consolidated  financial data should be read in conjunction with our Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                           ---------------------------------------------------------------
                                              2000         1999         1998         1997         1996
                                           ------------ ------------ ------------ ------------ -----------
                                                      (In thousands, except per share amounts)
      Statement of Operations Data

Revenues:
  Oil sales.............................   $     2,521  $     1,554  $     1,124  $     2,040  $     2,346
  Oilfield services revenues............        1,290          865          323           496           75
  Gain on sale of property interests....           --           --          467           272           --
                                           ------------ ------------ ------------ ------------ -----------
    Total revenues......................        3,811        2,419        1,914         2,808        2,421
                                           ------------ ------------ ------------ ------------ -----------
Operating costs and expenses:
  Lease operating costs (1).............        1,349          962        1,046         1,239        1,225
  Exploration costs (2).................        7,389        3,053        2,127         5,314        3,716
  Impairments (3).......................           --           --        5,885            --           --
  Oilfield services.....................        1,084          642          240           329          154
  Depreciation, depletion and
    amortization........................          386          494          672           635          558
  General and administrative............        2,654        2,962        2,572         2,566        1,715
  Apache Poland general and
    administrative......................          957           --           --            --           --
  Amortization of deferred
    compensation........................          652           --           --            --           --
                                           ------------ ------------ ------------ ------------ -----------
      Total operating costs and expenses       14,471        8,113       12,542        10,083        7,368
                                           ------------ ------------ ------------ ------------ -----------

Operating loss..........................      (10,660)      (5,694)     (10,628)       (7,275)      (4,947)
                                           ------------ ------------ ------------ ------------ -----------

Other income (expense):
  Interest and other income.............          557          511          506           662          370
  Interest expense......................           (2)          (7)          --           (83)        (333)
  Impairment of notes receivable from
    officers............................         (738)        (666)          --            --           --
                                           ------------ ------------ ------------ ------------ -----------
      Total other income (expense)......         (183)        (162)         506           579           37
                                           ------------ ------------ ------------ ------------ -----------
Net loss before extraordinary gain......      (10,843)      (5,856)     (10,122)       (6,696)      (4,910)
                                           ------------ ------------ ------------ ------------ -----------
  Extraordinary gain....................           --           --           --         3,076           --
                                           ------------ ------------ ------------ ------------ -----------
Net loss................................   $  (10,843)  $   (5,856)  $  (10,122)  $    (3,620) $    (4,910)
                                           ============ ============ ============ ============ ===========

Basic and diluted net loss per share:
  Net loss before extraordinary gain....   $    (0.66)  $    (0.41)  $    (0.78)  $    (0.53)  $     (0.49)
  Extraordinary gain....................           --           --           --         0.24            --
                                           ------------ ------------ ------------ ------------ -----------
    Net loss............................   $    (0.66)  $    (0.41)  $    (0.78)  $    (0.29)  $     (0.49)
                                           ============ ============ ============ ============ ===========

Basic and diluted weighted average
  shares outstanding....................       16,435       14,199       12,979        12,597       10,018

                                  - Continued -

                                       30
<PAGE>
<CAPTION>
                                                                        Years Ended December 31,
                                                        ---------------------------------------------------------
                                                          2000        1999       1998        1997        1996
                                                        ---------- ----------- ----------  ---------- -----------
                                                                             (In thousands)

               Cash Flow Statement Data
<S>                                                      <C>       <C>          <C>        <C>         <C>
Net cash used in operating activities (4).............   $ (6,082) $  (2,984)   $ (3,091)  $  (2,402)  $  (3,496)

Net cash provided by (used in) investing activities (4)    (3,834)    (3,678)      1,066      (3,110)     (7,160)
Net cash provided by (used in) financing activities...      9,375      6,469        (674)      1,679      18,259

<CAPTION>
                                                                              December 31,
                                                        ---------------------------------------------------------
                                                          2000        1999       1998        1997        1996
                                                        ---------- ----------- ----------  ---------- -----------
                                                                             (In thousands)

                  Balance Sheet Data
<S>                                                     <C>        <C>         <C>         <C>         <C>
Working capital.......................................  $     616  $   5,459   $   3,965   $   8,494   $  13,843
Total assets..........................................     10,570     10,470       8,253      18,555      22,994
Long-term debt........................................         --         --          --          --       1,500
Stockholders' equity..................................      8,231      8,367       6,920      17,612      20,908
</TABLE>
-----------------
(1)      Includes lease operating expenses and production taxes.
(2)      Includes  geophysical and geological costs,  exploratory dry hole costs
         and nonproducing leasehold impairments.
(3)      Includes domestic proved property write down.
(4)      The years ended  December  31,  1999,  1998,  1997 and 1996,  have been
         adjusted to include exploratory dry hole costs in investing  activities
         rather than as a component of operating activities.

                                       31
<PAGE>

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


         The following  discussion  of our  historical  financial  condition and
results  of  operations  should be read in  conjunction  with Item 6.  "Selected
Consolidated  Financial Data," our Consolidated Financial Statements and related
Notes contained in this report.

Introduction

         We  are an  independent  energy  company  engaged  in the  exploration,
development and production of oil and gas from properties  located in the United
States and Poland.  Through the end of 2000, all of our  production  revenue has
been from our United States producing properties.  In the western United States,
we produce oil from  fields in Montana and Nevada and have an oilfield  services
company in northern  Montana and oil and gas  exploration  prospects  in several
western states.

         We  conduct  substantially  all  of  our  exploration  and  development
activities in Poland jointly with others and, accordingly,  recorded amounts for
our  activities  in Poland  reflect  only our  proportionate  interest  in these
activities.

         Our  results of  operations  may vary  significantly  from year to year
based on the factors  discussed in "Risk  Factors" and on other  factors such as
our exploratory and development drilling success.  Therefore, the results of any
one year may not be indicative of future results.

         We follow the  successful  efforts method of accounting for our oil and
gas properties.  Under this method of accounting, all property acquisition costs
and costs of exploratory  and development  wells are capitalized  when incurred,
pending  determination  of whether  the well has found  proved  reserves.  If an
exploratory well has not found proved  reserves,  the costs of drilling the well
are expensed. The costs of development wells are capitalized, whether productive
or nonproductive.  Geological and geophysical costs on exploratory prospects and
the  costs of  carrying  and  retaining  unproved  properties  are  expensed  as
incurred.  An  impairment  allowance is provided to the extent that  capitalized
costs of unproved properties,  on a  property-by-property  basis, are considered
not to be  realizable.  An  impairment  loss is recorded if the net  capitalized
costs of proved oil and gas properties exceed the aggregate  undiscounted future
net revenues  determined on a  property-by-property  basis.  The impairment loss
recognized  equals the excess of net  capitalized  costs over the  related  fair
value, determined on a property-by-property basis. As a result of the foregoing,
our results of operations for any particular period may not be indicative of the
results that could be expected over longer periods.

         We have reviewed all recently issued,  but not yet adopted,  accounting
standards  in order to  determine  their  effects,  if any,  on our  results  of
operations or financial position.  Based on that review, we believe that none of
these  pronouncements  will  have a  significant  effect  on  current  or future
earnings or operations.

Results of Operations by Business Segment

         We  operate  within  two  segments  of the oil and  gas  industry:  the
exploration and production  segment,  or E&P, and the oilfield services segment.
Mining, which consisted solely of gold exploration on our Sudety project area in
Poland,  has been  discontinued  and is excluded from the following  discussion.
Depreciation,  depletion  and  amortization  costs,  or DD&A,  and  general  and
administrative costs, or G&A, directly associated with their respective segments
are  detailed  within  the  following   discussion.   Amortization  of  deferred
compensation,  interest income, other income,  officer loan impairment and other
costs,  which are not allocated to individual  operating segments for management
or segment  reporting  purposes,  are discussed in their entirety  following the
segment  discussion.  A  comparison  of the  results of  operations  by business
segment  and  information  regarding  nonsegmented  items  for the  years  ended
December 31, 2000, 1999 and 1998 follows:

                                       32
<PAGE>

         Exploration and Production Segment

         A summary of the amount and  percentage  change,  as  compared to their
respective prior year period, for oil revenues,  average oil prices,  production
volumes and lifting costs per barrel for the years ended December 31, 2000, 1999
and 1998, is set forth in the following table:
<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                         ------------------------------------------------------
                                                                               2000              1999               1998
                                                                         ----------------- -----------------  -----------------
                     <S>                                                    <C>               <C>                <C>
                     Oil revenues......................................     $2,521,000        $1,554,000         $1,124,000
                       Percent change versus prior year................         +62.2%            +38.3%

                     Average oil price.................................         $26.14            $15.35              $9.78
                       Percent change versus prior year................         +70.3%            +57.0%

                     Production volumes (Bbls).........................         96,416           101,275            114,909
                       Percent change versus prior year................          -4.8%            -11.9%

                     Lifting costs per barrel (1)......................         $12.13             $8.88              $8.41
                       Percent change versus prior year................         +36.6%             +5.5%
</TABLE>
------------------------
         (1)      Lifting  costs per  barrel  are  computed  by  dividing  lease
                  operating expenses by the total barrels of oil produced.

         Oil Revenues.  Oil revenues  were $2.5  million,  $1.6 million and $1.1
million for the years ended  December  31,  2000,  1999 and 1998,  respectively.
During these three years, our oil revenues fluctuated  primarily due to volatile
oil prices, the degree of maintenance  performed and declining  production rates
attributable to the natural production declines of our producing properties.

         Gain  on  Sale  of  Property  Interests.  There  was no gain on sale of
property interests for the years ended December 31, 2000 and 1999. We recognized
a gain on sale of property  interests of $467,000 during the year ended December
31,  1998.  During 1998,  Apache paid us $500,000 in initial cash  consideration
relating to its  participation in our Carpathian  project area, which was offset
by $33,000 of associated costs. The amount of gain on sale of property interests
will  continue to vary from year to year,  depending  on the timing of completed
deals and the amount of up-front cash consideration, if any.

         Lease  Operating  Costs.  Our lease  operating  costs consist of normal
recurring lease operating  expenses and production taxes.  Lease operating costs
were $1.3  million,  $962,000 and $1.0 million for the years ended  December 31,
2000, 1999 and 1998, respectively, or $13.99, $9.50 and $9.11, respectively, per
barrel of oil produced.

         Lease operating  expenses were $1.2 million,  $899,000 and $966,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.  During 2000, we
plugged  and  abandoned  ten  inactive  wells at a total  cost of  approximately
$92,000  on the Cut Bank  Sand  Unit,  our  principal  producing  property,  and
incurred  substantially  more  maintenance and repair costs as we completed work
that had been  postponed due to low oil prices during prior years.  As a result,
lifting  costs per barrel  were  $12.13  during  2000,  an  increase of $3.25 as
compared to the same period on 1999.  During 1999 and 1998,  we  performed  only
routine  maintenance on our producing  properties  and deferred  workovers in an
effort to  control  operating  costs due to low oil  prices.  Lifting  costs per
barrel were relatively  flat during 1999 and 1998,  amounting to $8.88 and $8.41
per barrel, respectively.

         Production taxes were $179,000, $63,000 and $80,000 for the years ended
December 31, 2000,  1999 and 1998,  respectively,  or 7.1%, 4.1% and 7.0% of oil
revenues, respectively.  During 1999, the state of Montana passed legislation to
reduce the  production  tax rate to as low as 0.5% for stripper  oil wells.  The
legislation  also  included a provision  whereby the  production  tax rate would
increase to as much as 12.8% for  stripper  wells if the  average  price of west
Texas  intermediate  crude  oil,  or WTI,  exceeded  $30 per  barrel  during any
calendar quarter. In the event the average price of WTI exceeded $30 per barrel,
the higher  tax rate  would  apply to all  production  during  the  then-current
calendar  quarter.  During the third and fourth  quarters  of 2000,  the average
price of WTI exceeded $30 per barrel, resulting in a higher effective production
tax rate during  2000,  as  compared  to 1999.  During  1999,  production  taxes
decreased  to an  average  of  approximately  4.1% of annual  oil  revenues,  as
compared to 7.0% during 1998,

                                       33
<PAGE>

primarily due to the reduction in the  production  tax rate on stripper wells in
Montana and the average  price of WTI not  exceeding  $30 per barrel  during any
quarter of 1999. The change in the amount of production  taxes from year to year
is  directly  attributable  to the  combination  of  fluctuating  of oil prices,
production tax rate changes and the amount of oil produced.

         DD&A  Expense  -  Producing  Operations.  DD&A  expense  for  producing
properties  was $73,000,  $51,000 and $231,000 for the years ended  December 31,
2000,  1999 and  1998,  respectively,  or $0.76,  $0.50  and  $2.01 per  barrel,
respectively.  The increase in DD&A expense of $0.26 per barrel  during 2000, as
compared to the same period of 1999, is primarily attributed to a 456,000 barrel
decrease in the amount of estimated  proved reserves as of December 31, 1999, as
compared to December  31,  1998.  The  decrease in DD&A  expense of $1.51 during
1999, as compared to the December 31, 1998, is directly attributable to the $5.9
million  write-down  of our domestic  proved  developed  oil and gas  properties
during 1998, which resulted in a substantially lower depreciable  property basis
during 1999, as compared to 1998.

         Domestic  Proved  Property  Impairment.  There were no domestic  proved
property impairments for the years ended December 31, 2000 or 1999. For the year
ended  December  31,  1998,  we incurred a domestic  proved  developed  property
impairment  of $5.9  million  due to low oil  prices  experienced  during  1998,
coupled with forecasted continuation of depressed oil prices and our decision to
focus our limited  resources on Poland.  As of December 31, 1998,  the estimated
net present value for our domestic proved properties was approximately $472,000,
consisting solely of proved developed reserves.  In accordance with SFAS No. 121
"Accounting  for the  Impairment  of  Long-Lived  Assets and for the  Long-Lived
Assets To Be Disposed of," we recorded total impairment  expense of $5.9 million
for the year ended December 31, 1998, which  represented the difference  between
the net book value of our domestic proved  developed  properties and the related
fair value, determined on a property-by-property basis, as of December 31, 1998.

         Exploration  Costs.  Our  exploration  costs consist of geological  and
geophysical  costs,  or G&G,  exploratory dry holes and  nonproducing  leasehold
impairments.  Exploration costs were $7.4 million, $3.1 million and $2.1 million
for the years ended December 31, 2000, 1999 and 1998, respectively. G&G costs of
$31,000 and $29,000  incurred during the years ended December 31, 1999 and 1998,
respectively,  relate to our discontinued  gold exploration in Poland,  which is
excluded from the following discussion of each component of exploration costs.

         G&G costs were $4.7 million,  $1.9 million and $2.1 million  during the
years ended  December 31, 2000,  1999 and 1998,  respectively.  During 2000,  we
spent  approximately  $2.1 million on  acquiring  3-D seismic data in the Fences
project area, approximately $477,000 on acquiring 2-D seismic data on the Lublin
Basin, Pomeranian and Warsaw West project areas and granted stock options valued
at  approximately  $81,000  to  a  Polish  consultant.  During  1999,  we  spent
approximately  $310,000  reprocessing  2-D seismic  data on the  Pomeranian  and
Warsaw  West  project  areas,  granted  stock  options  valued at  approximately
$119,000 to a Polish  consultant  and spent  approximately  $374,000  evaluating
potential   property   acquisitions   from  POGC.   During  1998,   we  incurred
approximately  $400,000 of cost relating to our share of the Lublin project area
2-D seismic  data  acquisition  program  with  Apache and $75,000  relating to a
geological and geophysical  study.  From January 1, 1998,  through  December 31,
2000, we spent an average amount of approximately $1.6 million annually relating
to analyzing  seismic data and the wages and  associated  expenses for employees
and  consultants  directly  engaged in geological  and  geophysical  activities.
Subject to available  funding,  G&G costs are expected to continue at current or
higher levels as we further our exploratory efforts in Poland.

         Exploratory dry hole costs were $2.0 million,  $1.0 million and $17,000
for the years ended December 31, 2000, 1999 and 1998, respectively. During 2000,
we  drilled  the Wilga 3 and Wilga 4 wells  near our  Wilga 2  discovery  on the
Lublin Basin  project  area,  both of which were  subsequently  determined to be
exploratory  dry  holes  costing  a net  amount of $1.1  million  and  $900,000,
respectively, after Apache covered one-half of our 45.0% share of costs to drill
the Wilga 3 and Wilga 4 wells  under  terms of the Apache  Exploration  Program.
During 1999, we participated in drilling three  exploratory dry holes in Poland.
Two of these wells, the Siedliska 2 and Witkow 1, were carried exploratory wells
under the Apache  Exploration  Program.  As such,  Apache covered all of our pro
rata share of costs for both wells.  We retained and paid for a 5.0% interest in
the Andrychow 6 well, an exploratory  dry hole on the  Carpathian  project area,
which cost $99,000.  On the Lachowice  Farm-in,  we spent $869,000 to recomplete
one

                                       34
<PAGE>

shut-in well and test another  shut-in well,  both of which were  noncommercial.
Also,  during  1999,  we spent  $33,000  associated  with the  Gladysze  1-A, an
exploratory  dry hole drilled on the Baltic  project  area during  1997.  During
1998, we participated  in drilling two exploratory dry holes,  the Czernic 277-2
and the Poniatowa  317-1, on the Lublin project area in Poland.  Both wells were
carried exploratory wells under the Apache Exploration  Program. As such, Apache
covered  all of  our  pro  rata  share  of  costs  for  both  wells.  All of the
exploratory  dry hole costs  recorded  during  1998 were  associated  with wells
drilled prior to 1998.

         Nonproducing  leasehold  impairments  were $674,000 and $93,000 for the
years ended December 31, 2000 and 1999, respectively. There were no nonproducing
leasehold  impairments  during the year ended December 31, 1998. During 2000, we
incurred a nonproducing  leasehold impairment $674,000 relating to the Williston
Basin in North Dakota,  where we no longer have exploration plans.  During 1999,
we  incurred a  nonproducing  leasehold  impairment  of $72,000  relating to the
Lachowice Farm-in, which was noncommercial after recompleting a shut-in well and
testing  another  shut-in  well  yielded  noncommercial   results,  and  $21,000
pertaining  to a prospect in Nevada where we no longer have  exploration  plans.
Nonproducing  leasehold impairments will vary from period to period based on our
determination   that   capitalized   costs   of   unproved   properties,   on  a
property-by-property basis, are not realizable.

         Apache  Poland G&A Costs.  Apache Poland G&A costs consist of our share
of direct  overhead  costs  incurred by Apache in Poland in accordance  with the
terms of the Apache Exploration  Program.  Apache Poland G&A costs were $957,000
for the year ended  December  31,  2000.  There were no Apache  Poland G&A costs
during the years  ended  December  31,  1999,  and 1998.  Prior to July 1, 2000,
Apache  covered all of our pro rata share of Apache Poland G&A costs.  Effective
July 1, 2000, we began paying approximately 35.0% of Apache Poland G&A costs, to
be adjusted as each of Apache's remaining  drilling  requirements are completed,
up to a maximum of 50.0%.  In addition to the  $957,000 of Apache  Poland G&A we
paid during 2000,  Apache  covered  approximately  $34,000 of Apache  Poland G&A
costs  incurred by us during the second half of 2000 under an  amendment  to the
Apache Exploration  Program effective January 1, 2001, referred to as the Poland
2001 Agreement,  whereby Apache agreed to issue us a credit of $923,000  against
any  outstanding  invoices as of December 31, 2000,  as well as any future costs
billed by Apache in return for the release of its  commitment to cover our share
of costs to shoot 339 kilometers of 2-D seismic data in the  Carpathian  project
area.  The  annual  budgeted  amount of Apache  Poland  G&A costs is  subject to
advance joint approval.

         Oilfield Services Segment

         Oilfield  Services  Revenues.  Oilfield  services  revenues  were  $1.3
million,  $865,000 and $323,000 for the years ended December 31, 2000,  1999 and
1998, respectively. During 2000, oilfield services revenues were $425,000 higher
than the same period of 1999,  primarily due to improved market  conditions as a
result  of higher  oil  prices.  During  all of 2000 and 1999,  we  focused  our
oilfield  servicing  equipment on third-party  contract  oilfield services in an
effort to  increase  our  domestic  revenues  rather  than  utilizing  it on our
company-owned properties.  During 1998, our oilfield services revenues consisted
of $323,000 from third-party  contract  oilfield  services work conducted in the
third and fourth  quarters as we began to shift the primary  focus of  utilizing
our oilfield servicing  equipment to third-party  contract work rather than work
performed on company-owned properties.  Oilfield services revenues will continue
to fluctuate year to year based on market  demand,  the number of wells drilled,
downtime for equipment repairs, the degree of emphasis on utilizing our oilfield
servicing equipment on our company-owned properties and other factors.

         Oilfield  Servicing Costs.  Oilfield servicing costs were $1.1 million,
$642,000  and $240,000  for the years ended  December  31, 2000,  1999 and 1998,
respectively,  or  84.0%,  74.2%  and  74.4%  of  oilfield  servicing  revenues,
respectively.  During 2000, oilfield servicing costs were a higher percentage of
oilfield  services  revenues,  as compared to 1999 and 1998,  due to higher than
normal  maintenance  and repair costs  associated  with our  oilfield  servicing
equipment.  During 1999,  oilfield  servicing  costs as a percentage of oilfield
services revenues,  were relatively flat as compared to the same period of 1998.
In general,  oilfield  servicing  costs are directly  associated  with  oilfield
services revenues.  As such, oilfield servicing costs will continue to fluctuate
year to year based on revenues  generated,  market  demand,  the number of wells
drilled, downtime for equipment repairs, the degree of emphasis on utilizing our
oilfield servicing equipment on our company-owned properties and other factors.

                                       35
<PAGE>

         DD&A Expense - Oilfield  Services.  DD&A expense for oilfield  services
was $247,000,  $334,000 and $322,000 for the years ended December 31, 2000, 1999
and 1998,  respectively.  We spent $779,000,  $138,000 and $156,000 on upgrading
our oilfield servicing equipment during 2000, 1999 and 1998, respectively.  DD&A
expense was $87,000  lower during 2000,  as compared to 1999,  due to prior year
capital  additions  becoming  fully  depreciated  during 2000.  DD&A expense was
$12,000  higher  during  1999,  as compared to 1998,  due to prior year  capital
additions being depreciated for an entire year.

         Nonsegmented Items

         DD&A Expense - Corporate.  DD&A expense for  corporate  activities  was
$66,000,  $110,000 and $118,000 for the years ended December 31, 2000,  1999 and
1998, respectively.  We spent $33,000, $20,000 and $85,000 during 2000, 1999 and
1998,  respectively,   on  software,  hardware  and  office  equipment  utilized
primarily for corporate  purposes.  DD&A expense for  corporate  activities  was
progressively  lower year to year,  primarily  due to assets  purchased in prior
years becoming fully depreciated coupled with a lesser amount of asset additions
in the ensuing years.

         G&A Costs.  G&A costs were $2.7 million,  $3.0 million and $2.6 million
for the years ended December 31, 2000, 1999 and 1998, respectively. During 2000,
G&A costs were $307,000 lower, as compared to the same period of 1999, primarily
due to lower payroll and associated costs.  During 1999, G&A costs were $390,000
higher, as compared to the same period of 1998,  primarily due to higher payroll
and other related costs associated with our increasing emphasis on expanding our
activities in Poland. Subject to available funding, G&A costs are expected to be
at current or higher  levels in future  periods  as we expand  our  presence  in
Poland.

         Amortization  of  Deferred   Compensation.   Amortization  of  deferred
compensation  was  $652,000 for the year ended  December 31, 2000.  There was no
amortization of deferred  compensation  during the years ended December 31, 1999
and 1998.  On August 4, 2000,  we extended  the term of options and  warrants to
purchase  678,000 shares of our common stock that were to expire during 2000 for
a period of two years, with a one-year vesting period. In accordance with FIN 44
"Accounting for Certain Transactions  Involving Stock Compensation," we incurred
deferred compensation cost of $1.6 million,  including $1.2 million covering the
intrinsic value  applicable to officers and employees and $378,000  covering the
fair market value calculated using the Black-Scholes model for a consultant,  to
be amortized to expense over the one-year vesting period.

         Interest and Other  Income.  Interest  and other income were  $557,000,
$512,000  and $506,000  for the years ended  December  31, 2000,  1999 and 1998,
respectively.  Our cash, cash equivalent and marketable debt securities balances
were $2.4 million,  $6.9 million and $4.7 million as of December 31, 2000,  1999
and 1998,  respectively.  The average cash and  marketable  securities  balances
during 2000,  1999,  and 1998 were  relatively  constant  from year to year.  We
earned interest income of $531,000,  $499,000 and $492,000 during 2000, 1999 and
1998,  respectively.  Accrued  interest  income  associated with officers' notes
receivable  was  $140,000,  $134,000  and $64,000  during  2000,  1999 and 1998,
respectively.

         Interest Expense.  Interest expense was $2,000 and $8,000 for the years
ended December 31, 2000 and 1999. We had no interest  expense for the year ended
December 31, 1998.  During 2000, we incurred $2,000 of interest expense relating
to financing  the purchase of five pickups used in our Montana  operations  with
one-year notes.  During 1999, we incurred $8,000 of interest  expense  primarily
relating to the settlement of an audit by the Blackfeet Tribe  pertaining to the
Cut Bank Field.  During the three years ended December 31, 2000,  1999 and 1998,
we had no long-term debt.

         Officer  Loan  Impairment.  Officer  loan  impairment  was $738,000 and
$666,000 for the years ended December 31, 2000 and 1999, respectively. There was
no officer loan  impairment  for the year ended December 31, 1998. In accordance
with SFAS No. 114  "Accounting by Creditors for Impairment of a Loan," the notes
receivable  from officers  carrying  value was $773,000 as of December 28, 2000,
including  principal  and  interest  of $2.2  million  reduced by an  impairment
allowance of $1.4 million based on the market value of 233,340 shares of the our
common stock held as collateral.  On December 28, 2000, the officers surrendered
the  collateral  shares  to us in  return  for  the

                                       36
<PAGE>

cancellation of the notes receivable from officers and we recorded the resulting
acquisition of 233,340 shares of treasury stock at a cost of $773,000.

         Income Taxes. We incurred net losses of $10.8 million, $5.9 million and
$10.1  million  for  the  years  ended   December  31,  2000,   1999  and  1998,
respectively, which can be carried forward to offset future taxable income. SFAS
No. 109  "Accounting  for Income Taxes"  requires that a valuation  allowance be
provided if it is more  likely  than not that some  portion or all of a deferred
tax asset  will not be  realized.  Our  ability to  realize  the  benefit of our
deferred  tax asset  will  depend on the  generation  of future  taxable  income
through  profitable   operations  and  the  expansion  of  our  exploration  and
development  activities.  The market and capital risks associated with achieving
the above requirement are considerable,  resulting in our conclusion that a full
valuation  allowance be provided.  Accordingly,  we did not recognize any income
tax benefit in our consolidated statement of operations for these years.

         Net Loss.  We incurred  net losses of $10.8  million,  $5.9 million and
$10.1  million  for  the  years  ended   December  31,  2000,   1999  and  1998,
respectively.  The net  loss in 2000  was due  principally  to $7.4  million  of
exploration  costs,  an officer loan  impairment of $738,000 and $2.7 million of
G&A  costs.  The net  loss  in  1999  was due  principally  to $3.1  million  of
exploration  costs,  an officer loan  impairment of $666,000 and $3.0 million of
G&A  costs.  The net  loss  in  1998  was due  principally  to $2.1  million  of
exploration  costs, a domestic  proved  property  impairment of $5.9 million and
$2.6 million of G&A costs.

Liquidity and Capital Resources

         Historically, we have relied primarily on proceeds from the sale of our
common stock to fund our operating and investing activities.  During March 2001,
we signed a $5.0 million loan  agreement with RRPV to partially fund our planned
ongoing  activities in Poland during 2001. During 2000 and 1999, we received net
proceeds of $9.3 million and $7.1  million,  respectively,  from the sale of our
common stock in private transactions. We also benefit from funds provided by our
industry partners, primarily Apache.

         Working Capital.  We had working capital of $616,000,  $5.5 million and
$4.0  million as of December  31,  2000,  1999 and 1998,  respectively.  Working
capital as of December 31, 2000, was $4.8 million lower,  as compared to the end
of 1999,  primarily  due to a net loss of $10.8 million  during 2000,  which was
partially  offset by net proceeds of $9.3  million  from a private  placement of
2,969,000  shares of our common stock.  Working capital as of December 31, 1999,
was $1.5 million  higher,  as compared to the end of 1998,  primarily due to net
proceeds of $7.1 million from the private  placement of 1,792,500  shares of our
common stock, which was partially offset by a $5.9 million net loss during 1999.

         Operating  Activities.  We used net cash of $6.1 million,  $3.0 million
and $3.1  million  in our  operating  activities  during  2000,  1999 and  1998,
respectively,  primarily as a result of the net losses  incurred in those years.
During  2000,  1999 and 1998,  we spent  $6.4  million,  $3.4  million  and $4.0
million,  respectively,  on operating activities exclusive of changes in working
capital  items.  Net changes in working  capital  items  increased  cash used in
operating  activities by $335,000  $450,000 and $869,000  during 2000,  1999 and
1998, respectively.

         Investing Activities. We used net cash of $3.9 million and $3.7 million
in investing  activities  during 2000 and 1999,  respectively.  During 1998,  we
received net cash from  investing  activities of $1.1  million.  During 2000, we
spent $2.0 million on exploratory dry holes, $2.6 million on additions to proved
properties,  $2.3  million on  additions  to  unproved  properties,  $779,000 on
additions to oilfield  servicing  equipment,  $33,000 on corporate assets,  $6.3
million on purchasing marketable debt securities and received $10.3 million from
maturing or sold marketable debt securities.  During 1999, we spent $1.0 million
on exploratory  dry holes,  $603,000 on additions to  properties,  equipment and
other assets,  received $6,000 from the sale of property  interests,  spent $6.6
million on purchasing  marketable debt securities and received $4.3 million from
maturing or sold  marketable debt  securities.  During 1998, we spent $17,000 on
exploratory dry holes, $441,000 on additions to properties,  equipment and other
assets,  received  $513,000 of proceeds from the sale of property  interests and
equipment,  spent $6.6 million on  purchasing  marketable  debt  securities  and
received $7.6 million from maturing or sold marketable debt securities.

                                       37
<PAGE>

         Financing  Activities.  We received  net cash of $9.4  million and $6.5
million from our financing activities during 2000 and 1999, respectively. During
1998, we used net cash of $674,000 in our financing activities.  During 2000, we
received  net proceeds of $9.3 million  ($10.4  million  gross) from the private
placement of 2,969,000 shares of our common stock and received  $103,000 in cash
and $156,000 in the form of a full  recourse  promissory  note secured by 52,000
shares of our common stock from the exercise of options and warrants to purchase
95,572 shares of our common stock. Also, during 2000, we acquired 233,340 shares
of treasury stock at a cost of $773,000 in a noncash  transaction.  During 1999,
we advanced  $598,000 to two  officers,  received  net  proceeds of $7.1 million
($7.2  million  gross) from a private  placement of  1,792,500  shares of common
stock and $13,000 from the exercise of options on 2,000 shares of common  stock.
During 1998, we advanced  $840,000 to officers and received $166,000 in cash and
a full  recourse  note  receivable  of $250,000 from the exercise of options and
warrants to purchase 382,622 shares of our common stock.

         In the past, our strategic  partners have provided a substantial amount
of  the  capital  required  under  our  exploration  agreements  with  them.  We
anticipate  they may  continue to do so in the future.  For  instance,  in 1997,
Apache  committed  to  cover  our  share of an  exploration  program  in  Poland
originally  estimated to cost $60.0 million gross  (approximately  $30.0 million
net). Based on the original  estimate,  Apache had spent  approximately of $48.0
million of those gross costs through December 31, 2000. As of December 31, 2000,
Apache  had a  remaining  commitment  to cover our share of  approximately  $5.1
million of net costs in Poland, comprised primarily of the following items:

         o        our share of costs to drill  three  exploratory  wells (two of
                  which were drilling as of December 31, 2000);

         o        the  first  $818,000  of  costs  (other  than  carried  costs)
                  incurred after December 31, 2000;

         o        our  45.0%  share of costs to flow  test  and,  if  warranted,
                  complete the Wilga 2 for production; and

         o        15.0% (to be  reduced  by 5.0% as each of the three  remaining
                  exploratory  wells are  drilled)  of  Apache's  G&A in Poland,
                  computed on a monthly basis.

         Other industry  partners have  previously  covered  approximately  $2.9
million of our share of costs in other projects during the last five years.

Capital Requirements

         General.  As of December 31, 2000, we had approximately $2.4 million of
cash, cash equivalents and marketable debt securities with no long-term debt. We
believe this amount, along with the proceeds of a $5.0 million loan agreement we
signed  during March 2001 with RRPV,  the  remaining  Apache  carried  costs and
positive cash flow generated from our E&P and oilfield services  segments,  will
be sufficient to cover our minimum exploration and operating  commitments during
2001.  We have  initiated  discussions  with  commercial  lenders  and other gas
purchasers for possible  project  funding  related to our recent  discoveries in
Poland as well as possible other future  discoveries.  In order to fully fund or
accelerate our current planned exploration and development  activities,  we will
need  additional  capital.  The  timing,  pace,  scope and amount of our capital
expenditures are largely dependent on the availability of capital.

         RRPV  Financing.   In  March  2001,  we  signed  a  $5.0  million  9.5%
convertible  note with RRPV.  The  proceeds are to be used for  exploration  and
development of additional gas reserves in Poland. In consideration for the loan,
we granted RRPV an option to purchase up to 17 Mmcf per day of gas we produce in
Poland.  If RRPV  elects  to buy gas we  produce  in  Poland,  the loan  will be
repayable over eight years.  If RRPV elects not to buy our gas, the loan will be
repayable in March 2003 unless converted to restricted common stock at $5.00 per
share, subject to adjustment in certain circumstances. As security for the loan,
we have granted RRPV a lien on a portion of our gas reserves in Poland.

         Fences  Project  Area.  We  have  agreed  to  spend  $16.0  million  of
exploration costs on the Fences project area to earn a 49.0% interest.  To date,
we have paid  approximately  $6.7  million of this  commitment,  including  $2.4
million to drill the Kleka 11, $2.2  million of drilling  costs  relating to the
Mieszkow 1 and $2.1 million to commence  two separate 3-D seismic data  surveys.
After we complete  our $16.0  million  commitment,  POGC will begin  bearing

                                       38
<PAGE>

its 51.0% share of further costs.  During 2001, we expect to spend approximately
$1.7 million to finish  processing the Zaniemysl and Donatowo 3-D seismic grids,
$1.2  million on Mieskow 1 and  approximately  $2.8  million each on one or more
additional exploratory wells, as warranted and as funding permits.

         Apache  Exploration  Program.  During  most of 2001,  we expect  that a
substantial  portion of our share of costs  relating  to the Apache  Exploration
Program  will be  covered by Apache.  We have  elected to utilize  our tenth and
final well carry on the Chojnice  108-6,  an exploratory  well on the Pomeranian
project area, where we have a 42.5% working interest.  In addition,  Apache must
cover the first  $818,000 of costs we incur  during  2001  (other  than  carried
costs) relating to our joint activities with Apache in Poland and the portion of
Apache Poland G&A that is attributable  to the  uncompleted  portion of Apache's
ten exploratory well work commitment.

         During 2001, on the Pomeranian  project area, we plan to participate in
an approximately  $1.2 million gross 2-D seismic program covering  approximately
280  kilometers to confirm Main Dolomite Reef leads on regional 2-D seismic data
and drill one or more exploratory wells (including the Chojnice 108-6),  costing
approximately $2.8 million gross each to drill and complete, as warranted and as
funding permits.

         During the first half of 2001, on the Lublin project area,  Apache will
cover our 45.0%  share of costs  for an  extended  flow test on the Wilga 2 well
and, if warranted,  completion of the well for production.  The Wilga 2 extended
flow test will  assess  the  potential  for  commercial  production  in light of
pipeline and facility expenditures that would be required.

         On the Warsaw West project area, we and Apache are currently evaluating
whether to acquire an additional  520 kilometers of 2-D seismic data by November
2001, in order to fulfill the remaining work  commitment  required for the first
three year exploration period on the Warsaw West project area usufruct.

         On the Carpathian project area, we and Apache are currently  evaluating
whether to acquire an additional 339 kilometers of 2-D seismic data and commence
drilling  an  exploratory  well by the end of  2001,  in order  to  fulfill  the
remaining work commitments  required for the first three year exploration period
on the usufruct.

         Other.  If  we  have  the  opportunity  to  participate  in  additional
appraisal,  development or exploration projects with POGC, we may be required to
obtain additional capital.  We expect to incur minimal exploration  expenditures
on our Baltic project area in Poland during 2001. Similarly,  we expect to incur
minimal  exploration,  appraisal and  development  expenditures  on our domestic
operations during 2001.

         We may  change  the  allocation  of  capital  among the  categories  of
anticipated  expenditures  depending upon future events that we cannot  predict.
For  example,  we may change the  allocation  of our  expenditures  based on the
actual  results  and  costs  of  future  exploration,   appraisal,  development,
production,  property acquisition and other activities. In addition, we may have
to change  our  anticipated  expenditures  if costs of  placing  any  particular
discovery  into  production  are  higher,  if the  field  is  smaller  or if the
commencement of production  takes longer than expected.  We may obtain funds for
future  capital  investments  from the sale of  additional  securities,  project
financing,  sale of partial property  interests,  strategic alliances with other
energy or financial partners or other arrangements,  all of which may dilute the
interest of our existing  stockholders  or our interest in the specific  project
financed.

                                       39
<PAGE>

--------------------------------------------------------------------------------
       ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
--------------------------------------------------------------------------------
Market Risk

         Our major market risk exposure continues to be the price we receive for
our production. Realized pricing is primarily driven by the prevailing worldwide
price of oil applicable to the United  States,  and the domestic price of gas in
Poland, subject to gravity,  energy content and other adjustments for the actual
oil and gas  sold.  Historically,  oil and gas  prices  have been  volatile  and
unpredictable.  Price  volatility  relating to our domestic oil  production  and
Polish gas production is expected to continue into the future. See "Items 1. and
2. Business and Properties: Risk Factors."

         We do not engage in any hedging activities to protect ourselves against
market risks  associated  with oil and gas price  fluctuations,  although we may
elect to do so if we achieve a significant  amount of  production in Poland.  We
currently do not have any derivative financial instruments.

Foreign Currency Risk

         We have entered into various  agreements  in Poland,  primarily in U.S.
Dollars or the U.S.  Dollar  equivalent  of the  Polish  Zloty.  We conduct  our
day-to-day  business  on this  basis as well.  The  Polish  Zloty is  subject to
exchange rate fluctuations  that are beyond our control.  The exchange rates for
the Polish  Zloty were 4.13,  4.14 and 3.51 per U.S.  dollar as of December  31,
2000, 1999 and 1998, respectively.

         We do not currently engage in hedging transactions to protect ourselves
against  foreign  currency  risks,  nor do we intend to do so in the foreseeable
future.

--------------------------------------------------------------------------------
              ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------

         Our  financial  statements,  including  the  accountant's  report,  are
included beginning at page F-1 immediately  following the signature page of this
report.

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

         We have not disagreed on any items of accounting treatment or financial
disclosure with our auditors.

                                       40
<PAGE>

                                    PART III

--------------------------------------------------------------------------------
                 ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
--------------------------------------------------------------------------------

         The information from the definitive proxy statement for the 2001 annual
meeting of  stockholders  under the caption  "ELECTION OF  DIRECTORS:  Executive
Officers,  Directors  and Nominees"  and  "Compliance  with Section 16(a) of the
Exchange Act" is incorporated herein by reference.

--------------------------------------------------------------------------------
                        ITEM 11. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------

         The information from the definitive proxy statement for the 2001 annual
meeting of  stockholders  under the caption  "ELECTION OF  DIRECTORS:  Executive
Compensation" is incorporated herein by reference.


--------------------------------------------------------------------------------
    ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------

         The information from the definitive proxy statement for the 2001 annual
meeting of  stockholders  under the caption  "ELECTION  OF  DIRECTORS:  Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein by
reference.

         As of December 31, 2000,  we had options and warrants  that were issued
and  outstanding  to purchase an aggregate  of up to 4,572,917  shares of common
stock at exercise prices ranging from $1.50 to $10.25 per share, with a weighted
average  exercise  price of $5.16 per  share.  Of those  warrants  and  options,
3,462,200 shares of common stock are issuable on the exercise of options held by
our officers and directors at exercise  prices  ranging from $1.50 to $10.25 per
share,  with a weighted  average  exercise  price of $4.87 per share,  including
options to purchase 2,284,207 shares that are not fully vested. The existence of
such warrants and options may prove to be a hindrance to future financing by us,
and the exercise of such  warrants and options may further  dilute the interests
of all other  stockholders.  The possible future resale of common stock issuable
on the  exercise  of such  warrants  and  options  could  adversely  affect  the
prevailing market price of our common stock. Further, the holders of options and
warrants may exercise  them at a time when we would  otherwise be able to obtain
additional equity capital on terms more favorable to us.

--------------------------------------------------------------------------------
            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------

         The information from the definitive proxy statement for the 2001 annual
meeting of  stockholders  under the  caption  "ELECTION  OF  DIRECTORS:  Certain
Relationships and Related Transactions" is incorporated herein by reference.

                                       41
<PAGE>

                                     PART IV

--------------------------------------------------------------------------------
    ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------------

(a)      The   following   documents  are  filed  as  part  of  this  report  or
         incorporated herein by reference.

         1.  Financial Statements. See the following beginning at page F-1:

                                                                           Page
                                                                           -----

             Report of Independent
               Accountants............................................     F-1
             Consolidated Balance Sheets as of December 31, 2000
               and 1999...............................................     F-2
             Consolidated Statements of Operations for each of
               the three years ended December 31, 2000, 1999 and
               1998, respectively.....................................     F-3
             Consolidated Statements of Cash Flows for each of
               the three years ended December 31, 2000, 1999 and
               1998, respectively.....................................     F-5
             Consolidated Statements of Stockholders' Equity for
               each of the three years ended December 31, 2000,
               1999 and 1998, respectively............................     F-6
             Notes to the Consolidated Financial
               Statements.............................................     F-7

         2.  Supplemental Schedules. The Financial Statement schedules have
             been omitted  because they are not  applicable or the required
             information   is  otherwise   included  in  the   accompanying
             Financial Statements and the notes thereto.

         3.  Exhibits.  The following exhibits are included as part of this
             report:
<TABLE>
<CAPTION>
                            SEC
               Exhibit   Reference
                Number     Number                         Title of Document                           Location
              ---------- ----------- ------------------------------------------------------------ -----------------
              <S>         <C>        <C>                                                          <C>
               Item 3.               Articles of Incorporation and Bylaws
              -----------------------------------------------------------------------------------
              3.1            3       Restated and Amended Articles of  Incorporation              Incorporated by
                                                                                                    Reference(11)

              3.2            3       Bylaws                                                       Incorporated by
                                                                                                    Reference(1)

               Item 4.               Instruments Defining the Rights of Security Holders
              -----------------------------------------------------------------------------------
              4.1            4       Specimen Stock Certificate                                   Incorporated by
                                                                                                    Reference(1)

              4.2            4       Form of Designation of Rights, Privileges, and Preferences   Incorporated by
                                       of Series A Preferred Stock                                  Reference(14)

              4.3            4       Form of Rights Agreement dated as of April 4, 1997,          Incorporated by
                                       between FX Energy, Inc. and Fidelity Transfer Corp.          Reference(14)

                                       42
<PAGE>
                            SEC
               Exhibit   Reference
                Number     Number                         Title of Document                           Location
              ---------- ----------- ------------------------------------------------------------ -----------------
              <S>         <C>        <C>                                                          <C>
               Item 10.              Material Contracts
              -----------------------------------------------------------------------------------
              10.1           10      Mining Usufruct Agreement between the State Treasury of      Incorporated by
                                       the Republic of Poland and Frontier Poland Exploration       Reference(3)
                                       and Producing Company, Sp. z o.o. dated August 22, 1995,
                                       relating to Blocks 51, 52, 71, 72, 91, 92, 93, 111, 112
                                       and 113 (Baltic)

              10.2           10      Amendment No. 1 to Mining Usufruct Agreement dated August    Incorporated by
                                       15, 1996 (Baltic)                                            Reference(4)

              10.3           10      Amendment No. 2 to Mining Usufruct Agreement dated August    Incorporated by
                                       22, 1996 (Baltic)                                            Reference(15)

              10.4           10      Form of concession dated December 20, 1995, relating to      Incorporated by
                                       Baltic Concessions granted pursuant to the Mining            Reference(5)
                                       Usufruct Agreement dated August 15, 1996, with related
                                       schedule

              10.5           10      Mining Usufruct Agreement between the State Treasury of      Incorporated by
                                       the Republic of Poland and Lubex Petroleum Company Sp. z     Reference(10)
                                       o.o. dated December 20, 1996, relating to concession
                                       blocks 255, 275, 295, 316, 336, 337 and 338 (Lublin)

              10.6           10      Mining Usufruct Agreement between the State Treasury of      Incorporated by
                                       the Republic of Poland and Apache Poland Sp. z o.o. and      Reference(12)
                                       FX Energy Poland Sp. z o.o. (East), commercial
                                       partnership dated October 14, 1997, related to
                                       concession blocks 257, 258, 277, 278, 297, 317 and 318
                                       (Lublin)

              10.7           10      Mining Usufruct Agreement between the State Treasury of      Incorporated by
                                       the Republic of Poland and Apache Poland Sp. z o.o. and      Reference(12)
                                       FX Energy Poland Sp. z o.o. (East), commercial
                                       partnership dated October 14, 1997, related to
                                       concession block 298 (Lublin)

              10.8           10      Mining Usufruct Agreement between the State Treasury of      Incorporated by
                                       the Republic of Poland and Apache Poland Sp. z o.o. and      Reference(12)
                                       FX Energy Poland Sp. z o.o. (East), commercial
                                       partnership dated October 14, 1997, related to
                                       concession blocks 319, 320, 339, 340, 340A, 359, 360,
                                       360A, 379, 380 and 380A (Lublin)

              10.9           10      Mining Usufruct Agreement between the State Treasury of      Incorporated by
                                       the Republic of Poland and FX Energy Poland Sp. z o.o.       Reference(12)
                                       (East) and Gasex Production Company Sp. z o.o.,
                                       commercial partnership, dated October 14, 1997, related
                                       to concession blocks 410, 411, 412, 413, 414, 415, 430,
                                       431, 432, 433, 452 and 453 (Western Carpathian)

                                       43
<PAGE>
                            SEC
               Exhibit   Reference
                Number     Number                         Title of Document                           Location
              ---------- ----------- ------------------------------------------------------------ -----------------
              <S>         <C>        <C>                                                          <C>
              10.10          10      Mining Usufruct Agreement between the State Treasury of      Incorporated by
                                       the Republic of Poland and FX Energy Poland Sp. z o.o.       Reference(12)
                                       and Partners, commercial partnership, dated October 30,
                                       1997, related to concession blocks 85, 86, 87, 88, 89,
                                       105,108, 109, 129 and 149 in northwestern Poland
                                       (Pomeranian)

              10.11          10      Option Agreement dated July 18, 1997, between Polish Oil     Incorporated by
                                       and Gas Company, FX Energy, Inc. and Apache Overseas,        Reference(12)
                                       Inc.

              10.12          10      Participation Agreement dated effective as of April 16,      Incorporated by
                                       1997, between Apache Overseas, Inc. and FX Energy, Inc.      Reference(13)
                                       pertaining to the Lublin Concessions

              10.13          10      Letter Agreement dated February 27, 1998, between FX         Incorporated by
                                       Energy, Inc. and Apache Overseas, Inc. regarding             Reference(15)
                                       modification to all agreements for acreage in Poland
                                       under established area of mutual interest

              10.14          10      Participation Agreement dated effective February 27, 1998,   Incorporated by
                                        between FX Energy, Inc. and Apache Overseas, Inc.           Reference(15)
                                        pertaining to the Western Carpathian Concession

              10.15          10      Participation Option Agreement dated effective               Incorporated by
                                        February 27, 1998, between FX Energy, Inc. and Apache       Reference(15)
                                        Overseas, Inc. pertaining to the Pomeranian Concession

              10.16          10      Prospect Agreement between Apache Poland Sp. z o.o. and FX   Incorporated by
                                       Energy Poland Sp. z o.o. dated April 17, 1998                Reference(18)

              10.17          10      Option Agreement dated effective as of February 2, 1998,     Incorporated by
                                       between POGC, FX Energy, Inc. and Apache Overseas, Inc.      Reference (15)
                                       pertaining to the Western Carpathian Concessions

              10.18          10      Option Agreement dated March 5, 1998, effective as of        Incorporated by
                                       April 16, 1997, between FX Energy, Inc., Apache              Reference(17)
                                       Overseas, Inc. and POGC, relating to FX Energy's
                                       Carpathian Area Concessions.

              10.19          10      Option Agreement between FX Energy Poland Sp. z o.o. and     Incorporated by
                                       POGC dated effective May 20, 1998, relating to               Reference(19)
                                       Pomeranian Concessions

              10.20          10      Agreement dated October 21, 1996, between Sudety Mining      Incorporated by
                                       Company Sp. z o.o. and the State Treasury of the             Reference(9)
                                       Republic of Poland, for the establishment of the mining
                                       usufruct for the purpose of gold exploration in the
                                       Sudety Concessions

              10.21          10      Earn-In and Exploration Letter of Intent dated June 13,      Incorporated by
                                       1997, between FX Energy, Inc. and Homestake Mining           Reference(12)
                                       Company of California

                                       44
<PAGE>
                            SEC
               Exhibit   Reference
                Number     Number                         Title of Document                           Location
              ---------- ----------- ------------------------------------------------------------ -----------------
              <S>         <C>        <C>                                                          <C>
              10.22          10      Form of Mining Usufruct Agreement between the State          Incorporated by
                                       Treasury of the Republic of Poland and FX Energy Poland      Reference(15)
                                       Sp. z o.o. Commercial Partnership, dated October 16,
                                       1997, relating to Sudety Concession blocks 43, 63, 64,
                                       65, with related schedule.

              10.23          10      Earn-in, Exploration, and Joint Venture Agreement between    Incorporated by
                                       Homestake Mining Company of California and FX Energy,        Reference(15)
                                       Inc., effective December 31, 1997, regarding exploration
                                       for precious metals in the Republic of Poland (Sudety)

              10.24          10      Agreement between Apache Overseas, Inc. and FX Energy,       Incorporated by
                                       Inc. dated effective January 1, 1999, pertaining to oil      Reference(20)
                                       and gas operations in Poland

              10.25          10      Agreement on Cooperation in the Lachowice Area between       Incorporated by
                                       POGC, Apache Overseas, Inc., Apache Poland, Sp. Z o.o.,      Reference(20)
                                       FX Energy, Inc. and FX Energy Poland Sp. Z o.o. dated
                                       February 26, 1999

              10.26          10      Frontier Oil Exploration Company 1995 Stock Option and       Incorporated by
                                       Award Plan*                                                  Reference(4)

              10.27          10      Form of FX Energy, Inc. 1996 Stock Option and Award Plan*    Incorporated by
                                                                                                    Reference(10)

              10.28          10      Form of FX Energy, Inc. 1997 Stock Option and Award Plan*    Incorporated by
                                                                                                    Reference(20)

              10.29          10      Form of FX Energy, Inc. 1998 Stock Option and Award Plan*    Incorporated by
                                                                                                    Reference(20)

              10.30          10      Employment Agreements between FX Energy, Inc. and each of    Incorporated by
                                       David Pierce and Andrew Pierce, effective January 1,         Reference(1)
                                       1995*

              10.31          10      Amendments to Employment Agreements between FX Energy,       Incorporated by
                                       Inc. and each of David Pierce and Andrew Pierce,             Reference(8)
                                       effective May 30, 1996*

              10.32          10      Form of Stock Option with related schedule (D. Pierce and    Incorporated by
                                       A. Pierce)*                                                  Reference(1)

              10.33          10      Form of Stock Option granted to D. Pierce and A. Pierce*     Incorporated by
                                                                                                    Reference(1)

              10.34          10      Form of Non-Qualified Stock Option with related schedule*    Incorporated by
                                                                                                    Reference(4)

              10.35          10      Letter Agreement dated effective August 3 , 1995, between    Incorporated by
                                       Lovejoy Associates, Inc. and FX Energy, Inc. re:             Reference(4)
                                       Financial Consulting Engagement*

                                       45
<PAGE>
                            SEC
               Exhibit   Reference
                Number     Number                         Title of Document                           Location
              ---------- ----------- ------------------------------------------------------------ -----------------
              <S>         <C>        <C>                                                          <C>
              10.36          10      Letter Agreement dated effective August 3, 1995, between     Incorporated by
                                       Lovejoy Associates, Inc. and FX Energy, Inc. re:             Reference(4)
                                       Indemnification

              10.37          10      Non-Qualified Stock Option granted to Thomas B. Lovejoy*     Incorporated by
                                                                                                    Reference(4)

              10.38          10      Letter Agreement dated effective December 31, 1997,          Incorporated by
                                       between FX Energy, Inc. and Lovejoy Associates, Inc. re:     Reference(15)
                                       Extension of Consulting Engagement*

              10.39          10      Employment Agreement between FX Energy, Inc. and Jerzy B.    Incorporated by
                                       Maciolek*                                                    Reference(8)

              10.40          10      Addendum to Employment Agreement between FX Energy, Inc.     Incorporated by
                                       and Jerzy B. Maciolek*                                       Reference(15)

              10.41          10      Second Addendum to Employment Agreement between FX Energy,   Incorporated by
                                       Inc. and Jerzy B. Maciolek*                                  Reference(15)

              10.42          10      Employment Agreement between FX Energy, Inc. and Scott J.    Incorporated by
                                       Duncan*                                                      Reference(15)

              10.43          10      Form of Indemnification Agreement between FX Energy, Inc.    Incorporated by
                                       and certain directors, with related schedule*                Reference(10)

              10.44          10      Form of Option granted to executive officers and             Incorporated by
                                       directors, with related schedule*                            Reference(10)

              10.45          10      Memorandum of Understanding regarding officer loans          Incorporated by
                                       (reformed June 19, 1998)                                     Reference(16)

              10.46          10      Limited Recourse Promissory Note of David N. Pierce in the   Incorporated by
                                       amount of $950,954 (reformed June 19, 1998)                  Reference(16)

              10.47          10      Pledge and Security Agreement between FX Energy, Inc. and    Incorporated by
                                       David N. Pierce (reformed June 19, 1998)                     Reference(16)

              10.48          10      Agreement To Hold Collateral between FX Energy, Inc. and     Incorporated by
                                       David N. Pierce and Kruse, Landa & Maycock, as agent to      Reference(16)
                                       hold collateral (reformed June 19, 1998)

              10.49          10      Limited Recourse Promissory Note of Andrew W. Pierce in      Incorporated by
                                       the amount of $769,924 (reformed June 19, 1998)              Reference(16)

              10.50          10      Pledge and Security Agreement between FX Energy, Inc. and    Incorporated by
                                       Andrew W. Pierce (reformed June 19, 1998)                    Reference(16)

              10.51          10      Agreement To Hold Collateral between FX Energy, Inc. and     Incorporated by
                                       Andrew W. Pierce and Kruse, Landa & Maycock, as agent to     Reference(16)
                                       hold collateral (reformed June 19, 1998)

              10.52          10      Form of Indemnification Agreement between FX Energy, Inc.    Incorporated by
                                       and certain directors, with related schedule                 Reference(20)

                                       46
<PAGE>
                            SEC
               Exhibit   Reference
                Number     Number                         Title of Document                           Location
              ---------- ----------- ------------------------------------------------------------ -----------------
              <S>         <C>        <C>                                                          <C>
              10.53          10      Agreement on Cooperation in Exploration of Hydrocarbons on   Incorporated by
                                       Foresudetic Monocline dated April 11, 2000, between          Reference(22)
                                       Polskie Gornictwo Naftowe I Gazownictwo S.A. (POGC) and
                                       FX Energy Poland, Sp. z o.o. relating to Fences project
                                       area

              10.54          10      Agreement effective as of January 1, 2000, between FX        Incorporated by
                                       Energy, Inc. and Apache Overseas, Inc.                       Reference(23)

              10.55          10      Option extensions with related schedules                     Incorporated by
                                                                                                    Reference(24)

              10.56          10      Poland 2001 Agreement dated as of January 1, 2001, between   This Filing
                                       Apache Overseas, Inc. and FX Energy, Inc.

              10.57          10      US$5,000,000 9.5% Convertible Secured Note dated as of       This Filing
                                       March 9, 2001

              10.58          10      Form of Pledge Agreement FX Energy Poland Sp. z o.o. and     This Filing
                                       Rolls Royce Power Ventures Limited dated March 9, 2001
                                       and related schedules


               Item 21               Subsidiaries of the Registrant
              -----------------------------------------------------------------------------------
              21.1                   Schedule of Subsidiaries                                     Incorporated by
                                                                                                    Reference(15)

               Item 23               Consents of Experts and Counsel
              -----------------------------------------------------------------------------------
              23.1           23      Consent of PricewaterhouseCoopers LLP, independent           This Filing
                                       accountants
              23.2           23      Consent of Larry D. Krause, Petroleum Engineer               This Filing
              23.3           23      Consent of Troy-Ikoda Limited, Petroleum Engineers           This Filing
</TABLE>
--------------------------------
              Incorporated by reference notes:

         *        Identifies  each management  contract or compensatory  plan or
                  arrangement required to be filed as an exhibit.
         (1)      Incorporated by reference from the  registration  statement on
                  Form SB-2, SEC File No. 33-88354-D.
         (2)      Incorporated  by  reference  from the report on Form 8-K dated
                  August 16, 1995.
         (3)      Incorporated  by  reference  from the report on Form 8-K dated
                  August 22, 1995.
         (4)      Incorporated  by reference  from the quarterly  report on Form
                  10-Q for the quarter ended September 30, 1995.
         (5)      Incorporated  by reference from the annual report on Form 10-K
                  for the year ended December 31, 1995.
         (6)      Incorporated  by reference  from the reports on Form 8-K dated
                  May 3, 1996.
         (7)      Incorporated  by  reference  from the report on Form 8-K dated
                  May 21, 1996.
         (8)      Incorporated by reference from the  registration  statement on
                  Form S-1, SEC File No.333-05583.
         (9)      Incorporated  by  reference  from the report on Form 8-K dated
                  October 1, 1996.
         (10)     Incorporated  by  reference  from the  annual  report  on Form
                  10-KSB for the year ended December 31, 1996.
         (11)     Incorporated by reference from the proxy statement  respecting
                  the 1997 annual meeting of shareholders.
         (12)     Incorporated  by reference  from the quarterly  report on Form
                  10-QSB for the quarter ended September 30, 1997.
         (13)     Incorporated  by  reference  from the report on Form 8-K dated
                  August 6, 1997.
         (14)     Incorporated  by  reference  from the report on Form 8-K dated
                  April 4, 1997.
         (15)     Incorporated  by  reference  from the  annual  report  on Form
                  10-KSB for the year ended December 31, 1997.
         Incorporated by reference notes (continued):

                                       47
<PAGE>

         (16)     Incorporated  by reference from the annual report on Form 10-Q
                  for the  quarter  ended  March 31,  1998,  as  amended on Form
                  10-Q/A filed July 15, 1998.
         (17)     Incorporated  by  reference  from the report on Form 8-K dated
                  March 23, 1998.
         (18)     Incorporated  by  reference  from the report on Form 8-K dated
                  April 20, 1998.
         (19)     Incorporated  by  reference  from the report on Form 8-K dated
                  June 2, 1998.
         (20)     Incorporated  by reference from the annual report on Form 10-K
                  for the year ended December 31, 1999.
         (21)     Incorporated  by  reference  from the report on Form 8-K dated
                  April 11, 2000.
         (22)     Incorporated  by reference  from the quarterly  report on Form
                  10-Q for the quarter ended March 31, 2000.
         (23)     Incorporated  by reference  from the quarterly  report on Form
                  10-Q for the quarter ended September 30, 2000

(b)      Reports on Form 8-K.

         During the quarter  ended  December  31, 2000,  we filed the  following
items on Form 8-K:

                    Date of Event Reported         Item(s) Reported
                  ---------------------------  --------------------------
                  October 23, 2000               Item 5. Other Events
                  November 3, 2000               Item 5. Other Events
                  December 8, 2000               Item 5. Other Events
                  December 18, 2000              Item 5. Other Events

                                       48
<PAGE>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


Dated:  March 15, 2001.                         FX ENERGY, INC.
                                                (Registrant)


                                                /s/ David N. Pierce
                                                -------------------------------
                                                David N. Pierce, President and
                                                Chief Executive Officer

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the date indicated.

Dated:  March 15, 2001

                          /s/ David N. Pierce
                          ----------------------------------------------------
                          David N. Pierce, Director and President
                          (Principal Executive and Financial Officer)

                          /s/ Andrew W. Pierce
                          ----------------------------------------------------
                          Andrew W. Pierce, Director, Vice President
                          (Principal Operations Officer)

                          /s/ Jerzy B. Maciolek
                          ----------------------------------------------------
                          Jerzy B. Maciolek, Vice President International
                          Exploration
                          and Director

                          /s/ Thomas B. Lovejoy
                          ----------------------------------------------------
                          Thomas B. Lovejoy, Director,
                          Chief Financial Officer and Vice Chairman

                          /s/ Scott J. Duncan
                          ----------------------------------------------------
                          Scott J. Duncan, Director, Vice President
                          Investor Relations and Secretary

                          /s/ Dennis L. Tatum
                          ----------------------------------------------------
                          Dennis L. Tatum, Director, Vice President
                          and Treasurer (Principal Accounting Officer)

                          /s/ Peter L. Raven
                          ----------------------------------------------------
                          Peter L. Raven, Director

                          /s/ Jay W. Decker
                          ----------------------------------------------------
                          Jay W. Decker, Director

                          /s/ Dennis B. Goldstein
                          ----------------------------------------------------
                          Dennis B. Goldstein, Director


                                       49
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
of FX Energy, Inc. and Subsidiaries:


In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of operations,  cash flows,  and  stockholders'  equity
present fairly, in all material respects, the consolidated financial position of
FX Energy,  Inc., and  Subsidiaries  (the "Company") as of December 31, 2000 and
1999, and the consolidated  results of their operations and their cash flows for
each of the three years in the period ended  December 31,  2000,  in  conformity
with accounting  principles  generally accepted in the United States of America.
These financial  statements are the responsibility of the Company's  management;
our responsibility is to express an opinion on these financial  statements based
on our audits.  We conducted our audits of these  statements in accordance  with
auditing  standards  generally  accepted in the United  States of America  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Salt Lake City, Utah
March 12, 2001

                                      F-1
<PAGE>
<TABLE>
<CAPTION>
                                       FX ENERGY, INC. AND SUBSIDIARIES
                                          Consolidated Balance Sheets
                                       As of December 31, 2000 and 1999

                                                                                                 2000              1999
                                                                                          -----------------  ----------------
ASSETS
<S>                                                                                       <C>                <C>
Current assets:
    Cash and cash equivalents...........................................................  $     1,079,038    $     1,619,237
    Investment in marketable debt securities............................................        1,281,993          5,249,003
    Receivables:
        Accrued oil sales...............................................................          250,954            243,183
        Joint interest and other receivables............................................          143,763             86,723
        Interest receivable.............................................................           31,935            171,242
    Inventory...........................................................................           87,920             66,361
    Other current assets................................................................           80,313            126,006
                                                                                          -----------------  ----------------
            Total current assets........................................................        2,955,916          7,561,755
                                                                                          -----------------  ----------------

Property and equipment, at cost:
    Oil and gas properties (successful efforts method):
        Proved..........................................................................        4,318,056          1,687,089
        Unproved........................................................................        3,031,863          1,382,880
    Other property and equipment........................................................        3,333,791          2,652,102
                                                                                          -----------------  ----------------
        Gross property and equipment....................................................       10,683,710          5,722,071

    Less accumulated depreciation, depletion and amortization...........................       (3,428,649)        (3,173,493)
                                                                                          -----------------  ----------------
        Net property and equipment......................................................        7,255,061          2,548,578
                                                                                          -----------------  ----------------
Other assets:
    Certificates of deposit.............................................................          356,500            356,500
    Deposits............................................................................            2,789              2,789
                                                                                          -----------------  ----------------
        Total other assets..............................................................          359,289            359,289
                                                                                          -----------------  ----------------

Total assets............................................................................   $   10,570,266     $   10,469,622
                                                                                          =================  ================

                                                  -Continued-

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

                                                       F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                       FX ENERGY, INC. AND SUBSIDIARIES
                                          Consolidated Balance Sheets
                                       As of December 31, 2000 and 1999
                                                  -Continued-

                                                                                                 2000              1999
                                                                                          -----------------  ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                                       <C>                <C>
Current liabilities:
    Accounts payable....................................................................  $        598,926   $        623,911
    Accrued liabilities.................................................................        1,740,604          1,478,862
            Total current liabilities...................................................        2,339,530          2,102,773
                                                                                          -----------------  ----------------

Commitments (Note 5)

Stockholders' equity:
    Preferred stock, $.001 par value, 5,000,000 shares authorized as of December
        31, 2000 and 1999; no shares outstanding........................................               --                 --
    Common stock, $.001 par value,  100,000,000 and 30,000,000 shares authorized
        as  of  December  31,  2000  and  1999,  respectively;   17,913,575  and
        14,849,003 shares issued as of December 31, 2000 and 1999, respectively.........           17,914             14,849
    Treasury stock, at cost, 233,340  shares as of December 31, 2000;
        no shares as of December 31, 1999...............................................         (773,055)                --
    Notes and interest receivable from officers.........................................               --         (1,370,873)
    Note receivable from stock option exercise..........................................         (156,000)                --
    Deferred compensation from stock option modifications...............................         (913,485)                --
    Additional paid in capital..........................................................       49,655,675         38,480,556
    Accumulated deficit.................................................................      (39,600,313)       (28,757,683)
                                                                                          -----------------  ----------------
        Total stockholders' equity......................................................        8,230,736          8,366,849
                                                                                          -----------------  ----------------

Total liabilities and stockholders' equity..............................................   $   10,570,266     $   10,469,622
                                                                                          =================  ================


              The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
                                                       F-3
<PAGE>
<TABLE>
<CAPTION>
                                       FX ENERGY, INC. AND SUBSIDIARIES
                                     Consolidated Statements of Operations
                             For the years ended December 31, 2000, 1999 and 1998

                                                                              2000               1999              1998
                                                                        ----------------  -----------------  ----------------
<S>                                                                     <C>               <C>                <C>
Revenues:
    Oil sales.........................................................  $     2,520,779   $     1,554,474    $     1,123,511
    Oilfield services.................................................        1,290,055           864,689            322,769
    Gain on sale of property interests................................               --                --            466,891
                                                                        ----------------  -----------------  ----------------
        Total revenues................................................        3,810,834         2,419,163          1,913,171
                                                                        ----------------  -----------------  ----------------

Operating costs and expenses:
    Lease operating expenses..........................................        1,169,478           899,258            966,732
    Production taxes..................................................          178,921            63,141             79,602
    Geological and geophysical costs..................................        4,679,391         1,959,422          2,109,375
    Exploratory dry hole costs........................................        2,034,206         1,001,433             17,422
    Impairment of oil and gas properties..............................          674,158            92,605          5,885,042
    Oilfield services.................................................        1,084,129           641,871            240,061
    Depreciation, depletion and amortization..........................          385,807           494,052            671,277
    General and administrative ("G&A") costs..........................        2,654,430         2,961,878          2,572,212
    Apache Poland G&A costs...........................................          956,936                --                 --
    Amortization of deferred compensation (G&A).......................          652,489                --                 --
                                                                        ----------------  -----------------  ----------------
        Total operating costs and expenses............................       14,469,945         8,113,660         12,541,723
                                                                        ----------------  -----------------  ----------------

Operating loss........................................................      (10,659,111)       (5,694,497)       (10,628,552)
                                                                        ----------------  -----------------  ----------------

Other income (expense):
    Interest and other income.........................................          557,080           511,636            506,209
    Interest expense..................................................           (2,422)           (7,997)                --
    Impairment of notes receivable from officers......................         (738,177)         (665,512)                --
                                                                        ----------------  -----------------  ----------------
        Total other income (expense)..................................         (183,519)         (161,873)           506,209
                                                                        ----------------  -----------------  ----------------

Net loss..............................................................    $ (10,842,630)   $   (5,856,370)     $ (10,122,343)
                                                                        ================  =================  ================

Basic and diluted net loss per share..................................  $          (.66)  $          (.41)   $         (.78)
                                                                        ================  =================  ================

Basic and diluted weighted average number of shares
   outstanding.......................................................       16,435,436        14,198,724         12,978,900
                                                                        ================  =================  ================

                The accompanying notes are an integral part of these consolidated financial statements
</TABLE>

                                                            F-4
<PAGE>
<TABLE>
<CAPTION>
                        FX ENERGY, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
              For the years ended December 31, 2000, 1999 and 1998

                                                                              2000               1999              1998
                                                                        ----------------  -----------------  ----------------
<S>                                                                       <C>              <C>                 <C>
Cash flows from operating activities:
    Net loss.........................................................     $ (10,842,630)   $   (5,856,370)     $ (10,122,343)
    Adjustments to reconcile net loss to net cash used
      in operating activities:
            Depreciation, depletion and amortization.................           385,807           494,052            671,277
            Impairment of oil and gas properties.....................           674,158            92,605          5,885,042
            Impairment of notes receivable from officers.............           738,177           665,512                 --
            Accrued interest income from officer loans...............          (140,359)         (134,295)           (64,170)
            Gain on sale of property interests.......................                --                --           (466,891)
            Exploratory dry hole costs...............................         2,034,206         1,001,433             17,422
            Common stock and stock options issued for services.......            80,813           302,687            119,375
            Amortization of deferred compensation (G&A)..............           652,489                --                 --
        Increase (decrease) from changes in working capital items:
            Receivables..............................................            74,496          (100,044)           260,024
            Inventory................................................           (21,559)            1,966               (945)
            Other current assets.....................................            45,693           (59,953)            20,960
            Accounts payable and accrued liabilities.................           236,757           608,285            588,908
                                                                        ----------------  -----------------  ----------------
                Net cash used in operating activities................        (6,081,952)       (2,984,122)        (3,091,341)
                                                                        ----------------  -----------------  ----------------
Cash flows from investing activities:
    Additions to oil and gas properties..............................        (6,988,314)       (1,224,688)          (197,187)
    Additions to other property and equipment........................          (812,340)         (137,094)          (260,877)
    Net change in other assets.......................................                --            (2,789)                --
    Proceeds from sale of property interests.........................                --             6,000            506,000
    Proceeds from sale of equipment..................................                --                --              6,928
    Purchase of marketable debt securities...........................        (6,314,990)       (6,617,089)        (6,578,332)
    Proceeds from marketable debt securities.........................        10,282,000         4,298,000          7,589,000
                                                                        ----------------  -----------------  ----------------
        Net cash provided by (used in) investing activities..........        (3,833,644)       (3,677,660)         1,065,532
                                                                        ----------------  -----------------  ----------------

Cash flows from financing activities:
    Notes receivable from officers...................................                --          (597,563)          (840,357)
    Proceeds from issuance of common stock, net of offering costs....         9,272,453         7,053,552                 --
    Proceeds from the exercise of options and warrants...............           102,944            13,250            166,027
                                                                        ----------------  -----------------  ----------------
            Net cash provided by (used in) financing activities......         9,375,397         6,469,239           (674,330)
                                                                        ----------------  -----------------  ----------------

Decrease in cash.....................................................          (540,199)         (192,543)        (2,700,139)
Cash and cash equivalents at beginning of year.......................         1,619,237         1,811,780          4,511,919
                                                                        ----------------  -----------------  ----------------
Cash and cash equivalents at end of year.............................   $     1,079,038   $     1,619,237    $     1,811,780
                                                                        ================  =================  ================

                The accompanying notes are an integral part of these consolidated financial statements
</TABLE>

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
                        FX ENERGY, INC. AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity
              For the years ended December 31, 2000, 1999 and 1998

                                                                              2000               1999              1998
                                                                        ----------------  -----------------  ----------------
<S>                                                                          <C>               <C>                <C>
Common shares issued:
    Beginning balance.................................................       14,849,003        13,054,503         12,661,881
    Sale of common stock..............................................        2,969,000         1,792,500                 --
    Exercise of options and warrants..................................           95,572             2,000            382,622
    Common stock issued for services..................................               --                --             10,000
                                                                        ----------------  -----------------  ----------------
        Total common shares outstanding...............................       17,913,575        14,849,003         13,054,503
                                                                        ================  =================  ================

Stockholders' equity:
    Common stock, $.001 par value:
        Beginning balance.............................................  $          14,849 $          13,055  $          12,662
        Sale of common stock..........................................            2,969             1,792                 --
        Exercise of options and warrants..............................               96                 2                383
        Common stock issued for services..............................               --                --                 10
                                                                        ----------------  -----------------  ----------------
            Total common stock........................................           17,914            14,849             13,055
                                                                        ----------------  -----------------  ----------------
    Treasury stock:
        Acquisition of treasury stock (233,340 shares at cost)........         (773,055)               --                 --
                                                                        ----------------  -----------------  ----------------
            Total treasury stock......................................         (773,055)               --                 --
                                                                        ----------------  -----------------  ----------------
    Notes receivable from officers:
        Beginning balance.............................................       (1,370,873)       (1,304,527)                --
        Advances to officers..........................................               --          (597,563)        (1,240,357)
        Interest......................................................         (140,359)         (134,295)           (64,170)
        Impairment....................................................          738,177           665,512                 --
        Shares tendered for payment of notes receivable from officers.          773,055                --                 --
                                                                        ----------------  -----------------  ----------------
            Total notes receivable from officers......................               --        (1,370,873)        (1,304,527)

    Notes receivable from stock option exercise:
        Recourse note receivable from stock option exercise...........         (156,000)               --                 --
                                                                        ----------------  -----------------  ----------------
            Total note receivable from stock option exercise..........         (156,000)               --                 --
                                                                        ----------------  -----------------  ----------------
    Deferred compensation from stock option modifications:
        Deferred compensation from stock option modifications.........       (1,565,974)               --                 --
        Amortization of deferred compensation (G&A)...................          652,489                --                 --
                                                                        ----------------  -----------------  ----------------
            Total deferred compensation from stock option modifications        (913,485)               --                 --
                                                                        ----------------  -----------------  ----------------
    Additional paid in capital:
        Beginning balance.............................................       38,480,556        31,112,861         30,377,852
        Sale of common stock, net of offering costs...................        9,269,484         7,051,760                 --
        Exercise of options and warrants..............................          258,848            13,248            615,644

        Common stock and stock options issued for services............           80,813           302,687            119,365

        Deferred compensation from stock option modifications.........        1,565,974                --                 --
                                                                        ----------------  -----------------  ----------------

            Total additional paid in capital..........................       49,655,675        38,480,556         31,112,861
                                                                        ----------------  -----------------  ----------------
    Accumulated deficit:
        Beginning balance.............................................      (28,757,683)      (22,901,313)       (12,778,970)

        Net loss for year.............................................      (10,842,630)       (5,856,370)       (10,122,343)
                                                                        ----------------  -----------------  ----------------

            Total accumulated deficit.................................      (39,600,313)      (28,757,683)       (22,901,313)

Total stockholders' equity............................................  $     8,230,736   $     8,366,849    $     6,920,076
                                                                        ================  =================  ================

              The accompanying notes are an integral part of these consolidated financial statements
</TABLE>

                                      F-6
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements

Note 1:  Summary of Significant Accounting Policies

         Organization

FX  Energy,  Inc.,  a Nevada  corporation,  and its  subsidiaries  (collectively
referred to hereinafter as the "Company") operate in the oil and gas industry in
Poland and the United States.  In Poland,  the Company is engaged in oil and gas
exploration,  appraisal, development and property acquisition activities. In the
United States, the Company is engaged in exploring, developing and producing oil
and gas properties and operates an oilfield services company.

          Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned  subsidiaries and the Company's  undivided interests in Poland.
All significant  inter-company accounts and transactions have been eliminated in
consolidation. At December 31, 2000, the Company owned 100% of the voting common
stock or other equity securities of its subsidiaries.

             Cash Equivalents

The Company  considers all  highly-liquid  debt  instruments  purchased  with an
original maturity of three months or less to be cash equivalents.

            Concentration of Credit Risk

The majority of the Company's  receivables  are within the oil and gas industry,
primarily  from  the  purchasers  of its  oil  and its  industry  partners.  The
receivables are not collateralized. To date, the Company has experienced minimal
bad debts.  The majority of the Company's  cash and cash  equivalents is held by
three financial institutions in Utah, Montana and New York.

         Inventory

Inventory  consists  primarily of tubular goods and production related equipment
and is valued at the lower of average cost or market.

         Oil and Gas Properties

The Company follows the successful  efforts method of accounting for its oil and
gas operations.  Under this method of accounting, all property acquisition costs
and costs of exploratory  and development  wells are capitalized  when incurred,
pending  determination  of whether an individual well has found proved reserves.
If it is determined that an exploratory well has not found proved reserves,  the
costs of drilling  the well are  expensed.  The costs of  development  wells are
capitalized whether productive or nonproductive.

Geological  and  geophysical  costs on  exploratory  prospects  and the costs of
carrying  and  retaining  unproved  properties  are  expensed  as  incurred.  An
impairment  allowance  is  provided  to the  extent  that  capitalized  costs of
unproved properties,  on a property-by-property  basis, are not considered to be
realizable.  Depletion,  depreciation and  amortization  ("DD&A") of capitalized
costs of proved oil and gas  properties  is provided  on a  property-by-property
basis using the  unit-of-production  method.  The computation of DD&A takes into
consideration   dismantlement,   restoration  and  abandonment   costs  and  the
anticipated  proceeds  from  equipment  salvage.  The  estimated  dismantlement,
restoration and abandonment costs are expected to be substantially offset by the
estimated residual value of lease and well equipment.

                                      F-7
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

An impairment  loss is recorded if the net  capitalized  costs of proved oil and
gas properties exceed the aggregate  undiscounted future net revenues determined
on a  property-by-property  basis.  The impairment  loss  recognized  equals the
excess of net  capitalized  costs over the related  fair value  determined  on a
property-by-property basis. (Note 12)

Gains and  losses  are  recognized  on sales of entire  interests  in proved and
unproved  properties.  Sales of partial  interests  are  generally  treated as a
recovery of costs.

         Other Property and Equipment

Other property and equipment, including oilfield servicing equipment, are stated
at cost.  Depreciation  of other property and equipment is calculated  using the
straight-line  method over the  estimated  useful  lives  (ranging  from 3 to 40
years) of the respective assets. The costs of normal maintenance and repairs are
charged to expense as incurred.  Material expenditures that increase the life of
an asset are  capitalized and depreciated  over the estimated  remaining  useful
life of the asset.  The cost of other property and equipment  sold, or otherwise
disposed  of, and the related  accumulated  depreciation  are  removed  from the
accounts and any gain or loss is reflected in current operations.

 Other property and equipment historical cost, presented on a gross basis before
accumulated depreciation, is summarized as follows:
<TABLE>
<CAPTION>

                                                                                     December 31,           Estimated
                                                                             ----------------------------  Useful Life
                                                                                 2000            1999       (in years)
                                                                             -------------  -------------  -------------
                                                                                     (In thousands)
         <S>                                                                 <C>            <C>              <C>
         Other property and equipment:
             Oilfield servicing equipment..................................  $      2,509   $      1,906         6
             Trucks........................................................          236            190          5
             Building......................................................           95             80         40
             Office equipment and furniture................................          494            476       3 to 6
                                                                             -------------  -------------
                 Total.....................................................  $      3,334   $      2,652
                                                                             =============  =============

         Supplemental Disclosure of Cash Flow Information

Non-cash investing and financing  transactions not reflected in the consolidated
statements of cash flows include the following:
<CAPTION>
                                                                                           Year Ended December 31,
                                                                                     -----------------------------------
                                                                                        2000         1999       1998
                                                                                     ----------  ----------- -----------
                                                                                                (In thousands)
         <S>                                                                         <C>         <C>         <C>
         Non cash investing and financing transactions:
             Shares tendered for payment of notes receivable from officers.........  $     773   $      --  $      --
             Bonus applied to stock option exercise by officers....................         --          --        200
             Recourse notes receivable from officers due to stock option exercise..         --          --        250
             Reclassification of notes receivable from officers....................         --          --        150
             Recourse note receivable from stock option exercise...................        156          --         --
             Non-cash consideration received from the sale of equipment............         23          --         --
             Additions to oil and gas properties financed with accrued liabilities.         --          63         --

Supplemental  disclosure  of cash paid for interest and income taxes include the
following:
<CAPTION>
                                                                                           Year Ended December 31,
                                                                                     -----------------------------------
                                                                                        2000         1999        1998
                                                                                     ----------  ----------- -----------
                                                                                                (In thousands)
         <S>                                                                         <C>         <C>          <C>
         Supplemental disclosure:
             Cash paid during the year for interest................................  $       2   $       8    $      --
             Cash paid during the year for income taxes............................         --          --           --
</TABLE>

                                      F-8
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

         Revenue Recognition

Revenues  associated  with oil sales are recorded  when the title passes and are
net of royalties.  Oilfield  service  revenues are  recognized  when the related
service is performed.

         Stock-Based Compensation

The Company accounts for employee  stock-based  compensation using the intrinsic
value method  prescribed by Accounting  Principles  Board ("APB") Opinion No. 25
and related  interpretations.  Nonemployee stock-based compensation is accounted
for using the fair value method in accordance  with SFAS No. 123 "Accounting for
Stock-based Compensation."

         Income Taxes

Deferred  income taxes are provided for the difference  between the tax basis of
an asset or liability and its reported amount in the financial statements.  Such
difference may result in taxable or deductible  amounts in future years when the
reported amount of the asset or liability is recovered or settled, respectively.

         Reclassifications

Certain   balances  in  the  1999  and  1998  financial   statements  have  been
reclassified to conform to the current year  presentation.  These changes had no
effect on total assets, total liabilities, stockholders' equity or net loss.

         Foreign Operations

The Company's  investments and operations in Poland are comprised of U.S. Dollar
expenditures.

         Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting  period.  Actual results could differ from those estimates.
Significant  estimates  with  regard to the  consolidated  financial  statements
include the unaudited estimates of proved oil and gas reserve quantities and the
related discounted future net cash flows. (Note 13)

         Net Loss Per Share

Basic  earnings  per share is computed by dividing  the net loss by the weighted
average  number of common  shares  outstanding.  Diluted  earnings  per share is
computed by dividing the net loss by the sum of the weighted  average  number of
common shares and the effect of dilutive  unexercised stock options and warrants
and convertible preferred stock. Outstanding options and warrants as of December
31, 2000, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
                                                                                      Options and
                                                                                       Warrants          Price Range
                                                                                   ------------------ ------------------
         <S>                                                                           <C>             <C>
         December 31, 2000.......................................................      4,572,917       $1.50 - $10.25
         December 31, 1999.......................................................      4,167,073       $1.50 - $10.25
         December 31, 1998.......................................................      3,684,239       $1.50 - $10.25
</TABLE>

The Company had a net loss in 2000, 1999 and 1998. The above options or warrants
were not included in the computation of diluted earnings per share for the years
ended  December  31,  2000,  1999 or 1998  because  the  effect  would have been
antidilutive.  On March 9, 2001, the Company entered into a financing  agreement
whereby an  additional  1.0 million  common  shares may be issued under  certain
circumstances. (Note 14)

                                      F-9
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

Note 2:  Investment in Marketable Debt Securities

The  Company  follows the  provisions  of SFAS No. 115  "Accounting  for Certain
Investments in Debt and Equity  Securities."  At December 31, 2000 and 1999, the
Company's marketable debt securities consisted of corporate bonds with remaining
contractual  maturities of less than twelve  months and a carrying  amount which
approximated market value. The Company has classified all of its marketable debt
securities as available for sale as of December 31, 2000 and held to maturity as
of December 31, 1999.

Note 3:  Performance Bond Deposits

As of December 31, 2000, the Company had a replacement  bond to a federal agency
in the amount of $463,000,  which was  collateralized by certificates of deposit
totaling  $231,500.  In addition,  there are  certificates  of deposit  totaling
$125,000 covering performance bonds in other states.

Note 4:  Accrued Liabilities

The Company's accrued  liabilities as of December 31, 2000 and 1999 are composed
of the following:
<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                             ----------------------------
                                                                                                 2000           1999
                                                                                             -------------  -------------
                                                                                                     (In thousands)
         <S>                                                                                 <C>            <C>
         Accrued liabilities:
             Compensation costs...........................................................   $      1,388   $        985
             Contractual bonus............................................................            300            200
             Unproved property additions..................................................             --             63
             Exploratory dry hole costs...................................................             --             99
             Seismic costs................................................................             --             28
             Other costs..................................................................             53            104
                                                                                             -------------  -------------
                 Total....................................................................   $      1,741   $      1,479
                                                                                             =============  =============
</TABLE>

The accrued compensation costs as of December 31, 2000 include $560,000 relating
to the 2000 bonuses and $828,000  pertaining  to unpaid 1999 bonuses and accrued
raises.  The accrued  compensation  costs as of December 31, 1999 include unpaid
1999 bonuses only.

Note 5:  Commitments

         Fences Project Area

On April 11, 2000,  the Company  signed an agreement with the Polish Oil and Gas
Company,  or POGC, under which the Company will earn a 49.0% working interest in
approximately  300,000 gross acres in west central Poland (the "Fences"  project
area) by spending $16.0 million for agreed  drilling,  seismic  acquisition  and
other related activities.

During 2000, the Company paid $6,689,000 to POGC under the agreement,  including
approximately  $4,586,000 for drilling activities and $2,103,000 for 3-D seismic
activities, leaving a remaining commitment of $9,311,000.

         Apache Exploration Program

The Apache  Exploration  Program  December  31,  consists of various  agreements
signed  between  the  Company  and Apache  Corporation,  or Apache,  during 1997
through January 1, 2001 (Note 14).

The  initial  primary  terms  of  the  Apache  Exploration  Program  included  a
commitment  by  Apache  to cover  the  Company's  share  of  costs to drill  ten
exploratory  wells and to  acquire  2,000  kilometers  of 2-D  seismic to earn a
fifty-percent  interest in the  Company's  Lublin Basin and  Carpathian

                                      F-10
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

project  areas.  The  initial  terms  were  later  modified  to  allow  the  ten
exploratory  wells to be drilled  anywhere in Poland.  As of December  31, 2000,
Apache has, in effect,  paid the Company's share of costs to drill an equivalent
of nine exploratory  wells (including two that were being drilled as of December
31, 2000) and to acquire 1,661 kilometers of 2-D seismic.

         Capital Requirements

As of December 31,  2000,  the Company had  approximately  $2.4 million of cash,
cash  equivalents  and marketable  debt  securities  with no long-term debt. The
Company  believes  this  amount,  along with the proceeds of a $5.0 million loan
agreement it signed  during March 2001 (Note 14), the remaining  Apache  carried
costs  and  positive  cash flow  generated  from its E&P and  oilfield  services
segments,  will be  sufficient to cover the Company's  minimum  exploration  and
operating  commitments  during 2001. The Company has initiated  discussions with
commercial lenders and other gas purchasers for possible project funding related
to  its  recent   discoveries  in  Poland  as  well  as  possible  other  future
discoveries.  In order to fully fund or accelerate the Company's current planned
exploration and development  activities,  it will need additional  capital.  The
timing, pace, scope and amount of the Company's capital expenditures are largely
dependent on the availability of capital.

         Employment and Consulting Agreements

Effective  January 1, 1995,  the  Company  entered  into  three-year  employment
agreements with David N. Pierce and Andrew W. Pierce, each of whom is an officer
and director. The terms of such employment agreements are automatically extended
for an additional  year on the anniversary  date of each such agreement.  In the
event of  termination  of employment  resulting  from a change in control of the
Company not approved by the Board of Directors,  each of the two officers  would
be entitled to a  termination  payment equal to 150% of his annual salary at the
time of  termination  and the value of  previously  granted  employee  benefits,
including stock options and stock awards.

On July 1, 1996, the Company entered into a three-year employment agreement with
Jerzy B. Maciolek,  an officer of the Company. The employment agreement provided
for a contractual  bonus of $100,000 to be issued annually on May 12, 1998, 1999
and 2000 to be applied against future stock option exercises.  In the event such
bonuses  are not used by Mr.  Maciolek  and his  employment  with the Company is
terminated,  the Company  must pay the  contractual  bonuses to Mr.  Maciolek in
cash. As of December 31, 2000, the Company had accrued $300,000  relating to the
contractual  bonuses.  In the event the employment contract is terminated by the
Company,  other than for  cause,  or by Mr.  Maciolek  for cause or because of a
change in control of the  Company,  Mr.  Maciolek is  entitled to a  termination
payment equal to any accrued but unpaid salary, unreimbursed expenses, benefits,
and his salary for the remaining term of the employment agreement. Additionally,
all options held by Mr.  Maciolek shall  immediately  vest and not be forfeited.
The agreement is  automatically  extended for an  additional  one year upon each
anniversary date of the effective date unless otherwise  terminated  pursuant to
the terms thereof.

Effective  August 3, 1995, the Company entered into a consulting  agreement with
Lovejoy and Associates, a consulting company owned by Tom Lovejoy, a director of
the  Company,  under  which  Lovejoy  and  Associates  would  advise the Company
respecting  future financing  alternatives,  possible sources of debt and equity
financing,  with  particular  emphasis  on  funding  for  the  Company's  Polish
activities and the Company's relationship with the investment community at a fee
of $10,000 per month commencing October 15, 1995 and continuing through December
31, 1997.  The  agreement  was extended  through  December 31, 1999 at a rate of
$15,000 per month for January and February 1998 and a subsequent rate of $17,000
per month thereafter.  The consulting  agreement was terminated effective May 1,
1999 when Mr. Lovejoy became the Company's Chief Financial Officer.

                                      F-11
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

Note 6: Income Taxes

The Company  recognized no income tax benefit from the losses  generated  during
2000, 1999 and 1998. The components of the net deferred tax asset as of December
31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                                                                                 2000           1999
                                                                                            -------------  -------------
                                                                                                   (In thousands)
         <S>                                                                                <C>            <C>
         Deferred tax liability:
             Property and equipment basis differences.....................................  $       (213)  $       (104)

         Deferred tax asset:
             Net operating loss carryforwards:                                                    11,340         10,203
                 United States............................................................         2,771            977
                 Poland...................................................................
             Oil and gas properties.......................................................         1,218          1,218
             Impairment of notes receivable from officers.................................           523            248
             Options issued for services..................................................           143            113
             Other........................................................................           331            193
             Valuation allowance..........................................................       (16,113)       (12,848)
                                                                                            -------------  -------------
                 Total....................................................................  $         --   $         --
                                                                                            =============  =============

<CAPTION>
The change in the valuation allowance during 2000, 1999 and 1998 is as follows:

                                                                                       Year Ended December 31,
                                                                             -------------------------------------------
                                                                                 2000           1999           1998
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
          <S>                                                                 <C>            <C>            <C>
          Valuation allowance:
              Balance, beginning of year..................................    $    (12,848)  $    (10,685)  $     (6,131)
              Decrease due to property and equipment basis differences....             109              4             22
              Increase due to impairment of oil and gas  properties.......              --             --         (2,196)
              Increase due to net operating loss..........................          (2,931)        (1,989)        (2,444)
              Other.......................................................            (443)          (178)            64
                                                                              ------------   ------------   ------------
                  Total...................................................    $    (16,113)  $    (12,848)  $    (10,685)
                                                                              ============   ============   ============
</TABLE>

SFAS No. 109 "Accounting  for Income Taxes" requires that a valuation  allowance
be provided if it is more likely than not that some portion or all of a deferred
tax asset will not be realized.  The Company's ability to realize the benefit of
its deferred tax asset will depend on the  generation of future  taxable  income
through  profitable  operations  and  expansion  of the  Company's  oil  and gas
producing  activities.  The risks  associated  with that growth  requirement are
considerable,  resulting  in the  Company's  conclusion  that  a full  valuation
allowance be provided at December 31, 2000 and 1999.

         United States NOL

At December 31, 2000, the Company had net operating  loss ("NOL")  carryforwards
in the United  States of  approximately  $30,402,000  available to offset future
taxable income,  of which  approximately  $18,749,000  expires from 2008 through
2012 and  $11,653,000  expires  subsequent to 2017.  The  utilization of the NOL
carryforwards  in the United States  against future taxable income in the United
States  may  become  subject  to an  annual  limitation  if there is a change in
ownership.  The  NOL  carryforwards  in the  United  States  include  $6,326,000
relating to tax deductions resulting from the exercise of stock options. The tax
benefit from  adjusting the valuation  allowance  related to this portion of the
NOL  carryforward  in the United States will be credited to  additional  paid-in
capital.

                                      F-12
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

         Polish NOL

As of December 31, 2000, the Company had NOL  carryforwards  in Poland  totaling
approximately $7,428,000,  including $4,809,000 and $2,619,000 generated in 2000
and 1999,  respectively.  The NOL carryforwards in Poland may be carried forward
five  years  in  Poland.   However,  no  more  than  fifty-percent  of  the  NOL
carryforwards  in Poland for any given year may be applied against Polish income
in succeeding years.

Note 7:  Private Placement of Common Stock

During June 2000, the Company  completed a private placement of 2,969,000 shares
of common  stock that  resulted  in net  proceeds  of  approximately  $9,272,000
($10,392,000  gross).  The proceeds from this  placement  were used to partially
fund ongoing  exploration  and  development  activities  in Poland and for other
general corporate purposes.

On April 8, 1999, the Company initiated a private placement that resulted in the
sale of  1,792,500  shares of common  stock for net  proceeds  of  approximately
$7,054,000  ($7,170,000  gross).  The proceeds from this  placement were used to
partially fund ongoing exploration and development  activities in Poland and for
other general corporate purposes.

Note 8:  Stock Options and Warrants

         Stock Options

 As of  December  31,  2000,  the  Company's  1999 Stock  Option Plan had issued
options to purchase 474,917 shares out of a maximum total of 500,000  authorized
shares  allowed  within the 1999 Stock Option Plan. As of December 31, 2000, all
other prior year stock option plans had issued the maximum allowed options under
each  respective  stock option plan.  The Company has  submitted  the 2000 Stock
Option  Plan,  which  includes  a maximum of 600,000  options,  for  shareholder
approval  at the  2001  annual  shareholders'  meeting.  As of the  date of this
report, no options had been issued under the 2000 Stock Option Plan.

All stock option plans are each  administered  by a committee (the  "Committee")
consisting of the board of directors or a committee thereof.  At its discretion,
the Committee may grant stock options to any employee,  including  officers,  in
the form of incentive stock options ("ISOs"), as defined in the Internal Revenue
Code, or options  which do not qualify as ISOs or stock  awards.  In addition to
the options  granted  under the stock  option  plans,  the  Company  also issues
non-qualified  options  outside the stock option  plans.  Options  granted under
these stock  option  plans have terms  ranging from five to seven years and vest
over periods ranging from the date of grant to three years.

As of December 31,  2000,  the Company had options  outstanding  under the stock
option plans as well as from other  individual  grants.  The Company applies APB
Opinion No. 25 and related  interpretations  in accounting  for options  granted
under the stock option plans and for other option  agreements.  Had compensation
cost for the Company's  options been  determined  based on the fair value at the
grant dates  consistent  with SFAS No. 123, the  Company's net loss and loss per
share  would  have been  increased  to the pro forma  amounts  indicated  in the
following table:
<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                             -------------------------------------------
                                                                                 2000           1999           1998
                                                                             -------------  -------------  -------------
                                                                              (In thousands, except per share amounts)
         <S>                                                                 <C>            <C>            <C>
         Net loss:
              As reported..................................................  $   (10,843)   $    (5,856)   $   (10,122)
              Pro forma....................................................      (12,733)        (7,930)       (11,680)

         Basic and diluted net loss per share:
              As reported..................................................  $     (0.66)   $     (0.41)   $    (0.78)
              Pro forma....................................................        (0.77)         (0.56)        (0.90)
</TABLE>

                                      F-13
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -


The effects of applying SFAS No. 123 are not necessarily  representative  of the
effects on the reported net income or loss for future years.

The fair value of each option granted to employees and consultants  during 2000,
1999 and 1998 is estimated on the date of grant using the  Black-Scholes  option
pricing model. The following weighted-average  assumptions were utilized for the
Black-Scholes  valuation:  (1) expected  volatility  of 79.8% to 86.6% for 2000,
80.5% for 1999 and 76.2% for 1998; (2) expected lives ranging from four to seven
years;  (3) risk-free  interest rates at the date of grant ranging from 4.44% to
6.43%; and, (4) dividend yield of zero for each year.

The  following  table  summarizes  fixed  option  activity  for the years  ended
December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
                                                                         December 31,
                                        --------------------------------------------------------------------------------
                                                   2000                       1999                      1998
                                        --------------------------------------------------------------------------------
                                                        Weighted                   Weighted                  Weighted
                                                        Average                    Average                    Average
                                          Number of     Exercise     Number of     Exercise    Number of     Exercise
                                           Shares        Price        Shares        Price        Shares        Price
                                        --------------------------------------------------------------------------------
          <S>                              <C>          <C>           <C>          <C>           <C>          <C>
          Fixed Options Outstanding:
              Beginning of year.........   3,896,501    $   5.248     3,413,667    $   5.183     3,357,500    $   4.473
              Granted...................     501,750    $   4.063       521,000        5.866       480,000        8.875
              Exercised.................     (75,000)   $   3.000       (2,000)        6.625      (303,000)       1.500
              Canceled..................        (334)   $   8.625      (36,166)        7.920      (120,833)       8.400
                                        --------------             --------------             -------------
                  End of year...........   4,322,917    $   5.149     3,896,501    $   5.248     3,413,667    $   5.183
                                        ==============             ==============             =============

          Exercisable at year-end.......   2,744,183    $   5.613     2,872,681    $   4.656     2,329,012    $   4.350
                                        ==============             ==============             =============
</TABLE>

The weighted  average fair value per share of options  granted during 2000, 1999
and 1998 was $2.56, $3.61 and $3.93, respectively.

The following table summarizes information about fixed stock options outstanding
at December 31, 2000:
<TABLE>
<CAPTION>
                                                                  December 31, 2000
                                ---------------------------------------------------------------------------------------
                                                     Outstanding                                 Exercisable
                                ------------------------------------------------------  -------------------------------
                                                  Weighted Average
                                  Number of           Remaining           Weighted         Number of      Weighted
                Exercise           Options        Contractual Life        Average           Options        Average
                 Prices          Outstanding         (in years)        Exercise Price     Exercisable   Exercise Price
         --------------------------------------  --------------------  ---------------  --------------  ---------------
         <S>                         <C>                       <C>           <C>            <C>                <C>
         $   1.500                     178,000                 1.59          $ 1.500               --          $    --
              3.000                  1,625,000                 1.73            3.000        1,225,000            3.000
              4.063 - 5.750            988,750                 6.33            4.894          166,341            5.750
              6.625 - 7.375            554,500                 5.64            6.802          530,500            6.781
              8.250 - 8.875            970,667                 3.53            8.700          816,342            8.714
             10.250                     6,000                  4.13           10.250            6,000           10.250
                                ---------------  --------------------  ---------------  --------------  ---------------
                Total.........       4,322,917                 4.72          $ 5.149        2,744,183          $ 5.613
                                ===============  ====================  ===============  ==============  ===============
</TABLE>

                                      F-14
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

         Warrants

The following table summarizes  changes in outstanding and exercisable  warrants
during the years ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                    -----------------------------------------------------------------------------------
                                               2000                        1999                        1998
                                    --------------------------- --------------------------- ---------------------------
                                     Number of    Price Range    Number of    Price Range    Number of    Price Range
                                      Shares                      Shares                       Shares
                                    ------------ -------------- ------------ -------------- ------------  -------------
          <S>                           <C>       <C>               <C>       <C>              <C>          <C>
          Warrants outstanding:
            Beginning of year.....      270,572   $1.65 - 6.90      270,572   $1.65 - 6.90     350,194      $1.10 - 6.90
            Exercised.............       20,572          $1.65           --             --      79,622       1.10 - 2.60
                                    ------------                ------------                ------------

                  End of year.......    250,000   $3.00 - 6.90      270,572   $1.65 - 6.90     270,572      $1.10 - 6.90
                                    ============                ============                =============
</TABLE>

The 250,000  warrants  outstanding  as of December  31,  2000 are  comprised  of
150,000  warrants  with an exercise  price of $6.90 per share and an  expiration
date of August 7, 2001 and 100,000  warrants with an exercise price of $3.00 per
share and an expiration date of August 3, 2002.

         Option and Warrant Extensions

On August 4, 2000,  the Company  extended  the term of options  and  warrants to
purchase 678,000 shares of the Company's common stock that were to expire during
2000 for a period of two years,  with a one-year  vesting period.  In accordance
with FIN 44 "Accounting for Certain Transactions  Involving Stock Compensation,"
the Company incurred deferred compensation costs of $1.6 million, including $1.2
million  covering the intrinsic  value  applicable to officers and employees and
$378,000 covering the fair market value calculated using the Black-Scholes model
for a consultant, to be amortized to expense over the one-year vesting period.

         Note Receivable From Stock Option Exercises

On November 8, 2000, a former  employee  exercised an option to purchase  52,000
shares of the Company's  common stock at a price of $3.00 per share.  The former
employee  elected to pay for the cost of the exercise by signing a full recourse
promissory  note with the Company  for  $156,000.  Terms of the note  receivable
include a  three-year  term with  annual  principal  payments  of  $52,000  plus
interest accrued at 9.5%.

Note 9:  Related Party Transactions

         Notes Receivable from Officers

On  February  17,  1998,  two of the  Company's  officers  exercised  options to
purchase  300,000  shares of the Company's  common stock at $1.50 per share that
were  scheduled  to expire on May 6,  1998.  The  officers  paid for the cost of
exercising the options by utilizing a contractual  bonus of $100,000 each issued
to them during 1997 and signing a full  recourse note payable to the Company for
$125,000 each with interest accrued at 7.7%. On April 10, 1998, in consideration
of the agreement of the two officers to not sell the  Company's  common stock in
market  transactions,   the  Company  agreed  to  advance  the  officers,  on  a
non-recourse  basis,  additional  funds to cover their tax liabilities and other
considerations.  As of December 31, 1999, the officers had been advanced a total
amount of $1,838,000.  The carrying value of the notes  receivable from officers
was $773,000 as of December  28, 2000,  including  principal of  $1,838,000  and
accrued  interest of $339,000,  which was reduced by an impairment  allowance of
$1,404,000  based on the market value of 233,340 shares of the Company's  common
stock held as  collateral.  On December 28, 2000, the officers  surrendered  the
collateralized shares to the Company in return for the cancellation of the notes
receivable  from officers and the Company  recorded  233,340  shares of treasury
stock at a cost of $773,000.

                                      F-15
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -


Note 10:  Quarterly Financial Data (Unaudited)

Summary quarterly  information for the years ended December 31, 2000 and 1999 is
as follows:
<TABLE>
<CAPTION>
                                                                          Quarter Ended
                                             ---------------------------------------------------------------------------
                                               December 31        September 30          June 30              March 31
                                             -----------------  -----------------  ------------------ ------------------
                                                             (In thousands, except per share amounts)
         <S>                                    <C>                 <C>               <C>                <C>
         2000:
             Revenues......................     $        965        $     1,251       $        925       $        670
             Net operating loss............           (3,646)            (3,370)            (2,778)              (865)
             Net loss......................           (3,548)            (3,788)            (2,771)              (736)
             Basic and diluted net loss per
               common share................     $       (.22)      $       (.21)      $       (.18)      $       (.05)

         1999:
             Revenues......................     $        785       $        862       $        451       $        321
             Operating loss................           (2,746)            (1,228)              (895)              (825)
             Net loss......................           (3,272)            (1,072)              (789)              (723)
             Basic and diluted net loss per
                 common share..............     $       (.21)      $       (.08)      $       (.06)      $       (.06)
</TABLE>

Note 11:  Business Segments

The Company  operates within two business  segments of the oil and gas industry:
exploration  and  production  ("E&P") and oilfield  services.  Mining,  which is
comprised  solely of gold  exploration  on the Company's  Sudety project area in
Poland, has been discontinued and is excluded from the discussion herein.

The Company's  revenues  associated with its E&P activities are comprised of oil
sales from its producing  properties in Montana and Nevada and gains on the sale
of partial property interests of the Company's exploratory properties in Poland.
During 2000,  1999 and 1998, over 85.0% of the Company's total oil sales were to
one purchaser  located in Montana.  The Company believes this purchaser could be
replaced,  if  necessary,  without a loss in revenue.  E&P  operating  costs are
comprised  of:  (1)  exploration  costs   (geological  and  geophysical   costs,
exploratory dry holes, non-producing leasehold impairments and Apache Poland G&A
costs),  and, (2) lease operating costs (lease operating expenses and production
taxes).  Substantially  all  exploration  costs  are  related  to the  Company's
operations in Poland and all lease  operating costs are related to the Company's
domestic  production.  The  Company's  revenues  associated  with  its  oilfield
services  segment are  comprised of contract  drilling and well  servicing  fees
generated by the Company's  oilfield  servicing  equipment in Montana.  Oilfield
servicing  costs are  comprised  of direct  costs  associated  with its oilfield
services.  DD&A  directly  associated  with a  respective  business  segment  is
disclosed  within that business  segment.  The Company does not allocate current
assets,  corporate  DD&A,  general and  administrative  costs,  amortization  of
deferred compensation,  interest income,  interest expense,  impairment of notes
receivable  from  officers,  other  income  or other  expense  to its  operating
business  segments for management and business segment reporting  purposes.  All
material inter-company  transactions between the Company's business segments are
eliminated for management and business segment reporting purposes.

Information on the Company's  operations by business segment for the years ended
December 31, 2000, 1999 and 1998 is summarized as follows:

                                      F-16
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

<TABLE>
<CAPTION>

                                                                                    Year Ended December 31, 2000
                                                                             -------------------------------------------
                                                                                              Oilfield
                                                                                 E&P          Services        Total
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
          <S>                                                                <C>            <C>            <C>
          Operations summary:
              Revenues.....................................................  $     2,521    $     1,290    $      3,811
              Cash operating costs.........................................        8,710          1,084           9,794
              Non-cash operating costs (1).................................          983             --             983
                                                                             -------------  -------------  -------------
                  Operating income or (loss) before DD&A...................       (7,172)           206          (6,966)
              DD&A expense.................................................           73            247             320
                                                                             -------------  -------------  -------------
                  Operating loss...........................................  $    (7,245)   $       (41)   $     (7,286)
                                                                             =============  =============  =============

          Identifiable net property and equipment:
              Unproved property -  Poland (2)..............................  $     3,014    $        --    $      3,014
              Unproved property - Domestic.................................           18             --              18
              Proved properties - Domestic.................................          623             --             623
              Proved properties - Poland...................................        2,429             --           2,429
              Equipment and other..........................................           --          1,045           1,045
                                                                             -------------  -------------  -------------

                  Total....................................................  $     6,084    $      1,045   $      7,129
                                                                             =============  =============  =============

          Property and equipment capital expenditures (3)..................  $      6,988   $       780    $      7,768
                                                                             =============  =============  =============
---------------------
(1)      Includes stock options valued at $81,000 issued to a Polish citizen for
         consulting  services,  accrued  bonuses of $228,000 and a non-producing
         property impairment of $674,000.
(2)      Includes  $2,157,000  relating  to the  Mieszkow  1,  which  was in the
         process of being drilled as of December 31, 2000.
(3)      E&P includes $2,034,000 of costs that were reclassed to exploratory dry
         hole expense, $2,631,000 of proved property additions and $2,323,000 of
         unproved property additions.

<CAPTION>
                                                                                    Year Ended December 31, 1999
                                                                             -------------------------------------------
                                                                                              Oilfield
                                                                                 E&P          Services        Total
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
          <S>                                                                <C>            <C>            <C>
          Operations summary:
              Revenues.....................................................  $     1,554    $       865    $      2,419
              Cash operating costs (1).....................................        3,500            642           4,142
              Non-cash operating costs (2).................................          484             --             484
                                                                             -------------  -------------  -------------
                  Operating income or (loss) before DD&A...................       (2,430)           223          (2,207)

              DD&A expense.................................................           51            334             385
                                                                             -------------  -------------  -------------
                  Operating loss...........................................  $    (2,481)   $      (111)   $     (2,592)
                                                                             =============  =============  =============

          Identifiable net property and equipment:
              Unproved property -  Poland..................................  $       691    $        --    $        691
              Unproved property - Domestic.................................          692             --             692
              Proved properties - Domestic.................................          494             --             494
              Equipment and other..........................................           --            581             581
                                                                             -------------  -------------  -------------
                  Total....................................................  $     1,877    $       581    $      2,458
                                                                             =============  =============  =============

          Property and equipment capital expenditures (3)..................  $     1,386    $         138  $      1,524
                                                                             =============  =============  =============
------------------------
</TABLE>
(1)      Excludes  $31,000 of  exploratory  costs relating to the Company's gold
         concessions.
(2)      Includes  stock options  valued at $119,000  issued to a Polish citizen
         for  consulting  services,  accrued  bonuses of  $344,000  and  $21,000
         non-producing leasehold impairment comprised of costs incurred prior to
         1999.
(3)      E&P  includes  $1,073,000  of costs  that were  reclassed  to  expense,
         including  $1,001,000  of  exploratory  dry hole  costs and  $72,000 of
         non-producing  property  impairments,  and,  $81,000 of proved property
         additions and $232,000 of unproved property additions.

                                      F-17
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

<TABLE>
<CAPTION>

                                                                                    Year Ended December 31, 1998
                                                                             -------------------------------------------
                                                                                              Oilfield
                                                                                 E&P          Services        Total
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
          <S>                                                                <C>            <C>            <C>
          Operations summary:
              Revenues (1).................................................  $      1,590   $       323    $      1,913
              Cash operating costs (2).....................................         3,025           240           3,265
              Non-cash operating costs (3)................................            119            --             119
                                                                             -------------  -------------  -------------
                  Operating income or (loss) before DD&A...................        (1,554)           83          (1,471)
              DD&A expense.................................................           231           322             553
                                                                             -------------  -------------  -------------
                 Operating loss............................................  $     (1,785)  $      (239)   $     (2,024)
                                                                             =============  =============  =============

          Identifiable net property and equipment:
              Unproved property -  Poland..................................  $        461   $        --    $        461
              Unproved property - Domestic.................................           717            --             717
              Proved properties - Domestic.................................           463            --             463
              Equipment and other..........................................            --           780             780
                                                                             -------------  -------------  -------------
                  Total....................................................  $      1,641   $       780    $      2,421
                                                                             =============  =============  =============

          Property and equipment capital expenditures (4)..................  $        197   $       156    $        353
                                                                             =============  =============  =============
</TABLE>
---------------------

(1)      E&P revenues  include  $1,123,000  generated  domestically and $467,000
         generated in Poland.
(2)      Excludes  $29,000 of  exploratory  costs relating to the Company's gold
         concessions.
(3)      Includes  Company  common  stock  issued for  services of $119,000  and
         excludes  non-cash  impairment charge of $5,885,000 for domestic proved
         properties.
(4)      E&P  property   includes  $17,000  of  costs  that  were  reclassed  to
         exploratory dry hole costs,  $132,000 of proved property  additions and
         $48,000 of unproved property additions.

                                      F-18
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

A reconciliation of the segment information to the consolidated totals for 2000,
1999 and 1998 follows:
<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                             -------------------------------------------
                                                                                 2000           1999           1998
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
         <S>                                                                 <C>            <C>            <C>
         Revenues:
           Reportable segments.............................................  $      3,811   $      2,419   $     1,913

           Non-reportable segments.........................................            --             --            --
                                                                             -------------  -------------  -------------

            Total revenues.................................................  $      3,811   $      2,419   $     1,913
                                                                             =============  =============  =============

         Operating loss:
           Reportable segments.............................................  $    (7,286)   $    (2,592)   $    (2,024)
           Expense or (revenue) adjustments:
             Non-reportable segments.......................................           --             31             29
             Impairment of domestic proved property........................           --             --          5,885
             Corporate DD&A expense........................................           66            109            118
             General and administrative expenses...........................        2,654          2,962          2,572
             Amortization of deferred compensation (G&A)...................          652             --             --
                                                                                       1             --
             Other.........................................................            1             --              1
                                                                             -------------  -------------  -------------
               Total net operating loss....................................    $ (10,659)   $    (5,694)    $  (10,629)
                                                                             =============  =============  =============

         Net property and equipment:
           Reportable segments.............................................  $     7,129    $     2,458    $     2,421
           Corporate assets................................................          126             91            178
                                                                             -------------  -------------  -------------
             Net property and equipment....................................  $     7,255    $     2,549    $     2,599
                                                                             =============  =============  =============

         Property and equipment capital expenditures:
           Reportable segments.............................................  $     7,768    $     1,524    $      197
           Corporate assets................................................           33             19           105
                                                                             -------------  -------------  -------------
             Net property and equipment capital expenditures...............  $     7,01     $     1,543    $      302
                                                                             =============  =============  =============
</TABLE>

Note 12:  Disclosure about Oil and Gas Properties and Producing Activities

         Impairment of Unproved Oil and Gas Properties


During 2000, the Company recorded an impairment  expense of $674,000 relating to
the Williston  Basin in North Dakota where it no longer has further  exploration
plans.  During  1999,  the  Company  recorded an  impairment  expense of $21,000
relating  to a  prospect  located in Nevada  where it no longer has  exploration
plans  and  $72,000  relating  to the  Lachowice  Farm-in  in  Poland  after the
recompletion of one shut-in well and the testing of another shut-in well yielded
non-commercial results.

         Impairment of Domestic Proved Oil and Gas Properties

In accordance  with SFAS No. 121  "Accounting  for the  Impairment of Long-Lived
Assets and for the Long-Lived Assets to be disposed of," the Company must record
an impairment expense if the Company determines the net book value of its proved
oil and gas properties,  on a property-by-property  basis, exceeds the aggregate
future net revenues from such properties. As of December 31, 1998, the Company's
future  undiscounted net revenues from its domestic proved developed  properties
was  $1,015,000  and its  discounted  future net  revenues  (PV-10  Value) of it
domestic proved  developed  properties was $472,000.  The future net revenues at
December 31, 1998 were computed  using a price of $8.11 per barrel,  the average
price at December  31, 1998.  Accordingly,  the Company  recorded an  impairment
expense of $5,885,000 in 1998,  which reduced the carrying value of its domestic
proved  properties to $463,000,  an amount which  approximated the fair value of
its domestic  proved  developed  reserves  determined on a  property-by-property
basis.

                                      F-19
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -


         Capitalized Oil and Gas Property Costs

Capitalized costs relating to oil and gas exploration and production  activities
as of December 31, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
                                                                               Domestic        Poland         Total
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
         <S>                                                                 <C>            <C>            <C>
         December 31, 2000:
             Proved properties.............................................  $     1,889    $      2,429   $      4,318
             Unproved properties...........................................           18           3,014          3,032
                                                                             -------------  -------------  -------------
               Total gross properties......................................        1,907           5,443          7,350
             Less accumulated depreciation, depletion and amortization.....       (1,266)             --         (1,266)
                                                                             -------------  -------------  -------------
                    Total..................................................  $       641    $      5,443   $      6,084
                                                                             =============  =============  =============

         December 31, 1999:
             Proved properties.............................................  $     1,687    $         --   $      1,687
             Unproved properties...........................................          692             691          1,383
                                                                             -------------  -------------  -------------
               Total gross properties......................................        2,379             691          3,070
             Less accumulated depreciation, depletion and amortization.....       (1,193)             --         (1,193)
                                                                             -------------  -------------  -------------
                    Total..................................................  $     1,186    $        691   $       1,877
                                                                             =============  =============  =============
<CAPTION>

         Property Acquisition, Exploration and Development Activities

Costs incurred in property acquisition,  exploration and development  activities
during 2000, 1999 and 1998, whether  capitalized or expensed,  are summarized as
follows:

                                                                               Domestic        Poland         Total
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
         <S>                                                                 <C>            <C>            <C>
         Year ended December 31, 2000:
             Acquisition of properties:
                 Proved....................................................  $        --    $         --   $         --
                 Unproved..................................................           --              21            21

             Exploration costs (1).........................................          692          11,200        11,892
             Development costs.............................................          202              --           202
                                                                             -------------  -------------  -------------
                 Total.....................................................  $       894    $     11,221   $    12,115
                                                                             =============  =============  =============
         ----------------------------
         (1)      Includes  $2,429,000  relating  to the  Kleka  11,  which  was
                  categorized as proved property as of December 31, 2000.
<CAPTION>
                                                                               Domestic        Poland         Total
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
         <S>                                                                 <C>            <C>            <C>
         Year ended December 31, 1999:
             Acquisition of properties:
                 Proved....................................................  $        --    $         --   $         --
                 Unproved..................................................            1             230           231
             Exploration costs.............................................           38           3,016         3,054
             Development costs.............................................           82              --            82
                                                                             -------------  -------------  -------------
                 Total.....................................................  $       121    $      3,246   $     3,367
                                                                             =============  =============  =============

                                      F-20
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

<CAPTION>
                                                                               Domestic        Poland         Total
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
         <S>                                                                 <C>            <C>            <C>
         Year ended December 31, 1998:
             Acquisition of properties:
                 Proved....................................................  $        --    $         --   $         --
                 Unproved..................................................           15              33            48
             Exploration costs.............................................           34           2,092         2,126
             Development costs.............................................          132              --           132
                                                                             -------------  -------------  -------------
                 Total.....................................................  $       181    $      2,125   $     2,306
                                                                             =============  =============  =============
</TABLE>

Note 13:  Summary Oil and Gas Reserve Data (Unaudited)

         Estimated Quantities of Proved Reserves


Proved reserves are the estimated  quantities of crude oil which  geological and
engineering  data  demonstrate  with  reasonable  certainty to be recoverable in
future  years  from  known  reserves  under  existing   economic  and  operating
conditions.  The Company's proved oil and gas reserve  quantities and values are
based on estimates prepared by independent  reserve engineers in accordance with
guidelines  established  by the Securities  and Exchange  Commission.  Operating
costs,  production taxes and development  costs were deducted in determining the
quantity and value information. Such costs were estimated based on current costs
and were not adjusted to anticipate increases due to inflation or other factors.
No price  escalations  were  assumed and no amounts  were  deducted  for general
overhead, depreciation,  depletion and amortization, interest expense and income
taxes.  The  proved  reserve  quantity  and  value  information  is based on the
weighted  average  price  on  December  31,  2000  of  $21.33  per  bbl  for oil
domestically and $2.09 per MMbtu for gas in Poland. The determination of oil and
gas reserves is based on estimates and is highly  complex and  interpretive,  as
there are numerous  uncertainties inherent in estimated quantities and values of
proved reserves, projecting future rates of production and timing of development
expenditures.  The estimates  are subject to continuing  revisions as additional
information becomes available or assumptions change.

Estimates of the  Company's  proved  domestic  reserves  were  prepared by Larry
Krause  Consulting,  an  independent  engineering  firm  in  Billings,  Montana.
Estimates of the Company's  proved  Polish  reserves were prepared by Troy-Ikoda
Limited,  and independent  engineering firm in the United Kingdom. The following
unaudited  summary of proved developed reserve quantity  information  represents
estimates only and should not be construed as exact:
<TABLE>
<CAPTION>
                                                                       Crude Oil                    Natural Gas
                                                              ----------------------------  ----------------------------
                                                                Domestic        Poland        Domestic        Poland
                                                              -------------  -------------  -------------  -------------
                                                              (In thousand barrels of oil)   (In millions of cubic feet)
         Proved Developed Reserves:
         <S>                                                        <C>               <C>            <C>            <C>
           December 31, 2000................................        1,161             --             --             --
           December 31, 1999................................        1,080             --             --             --
           December 31, 1998................................        1,535             --             --             --
</TABLE>


                                      F-21
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -


The following  unaudited  summary of proved  developed and  undeveloped  reserve
quantity  information  represents  estimates only and should not be construed as
exact:
<TABLE>
<CAPTION>
                                                                       Crude Oil                    Natural Gas
                                                              ----------------------------  ----------------------------
                                                                Domestic        Poland        Domestic        Poland
                                                              -------------  -------------  -------------  -------------
                                                               (In thousands of barrels)    (In millions of cubic feet)
         <S>                                                        <C>               <C>            <C>         <C>
         December 31, 2000:
             Beginning of year.............................         1,080             --             --             --
             Extensions and discoveries....................            --             --             --          2,381
             Revisions of previous estimates...............           236             --             --             --
             Production....................................           (96)            --             --             --
                                                              -------------  -------------  -------------  -------------
                 End of year...............................         1,220             --             --          2,381
                                                              -------------  -------------  -------------  -------------

         December 31, 1999:
             Beginning of year.............................         1,535             --             --             --
             Revisions of previous estimates...............          (354)            --             --             --
             Production....................................          (101)            --             --             --
                                                              -------------  -------------  -------------  -------------
                 End of year...............................         1,080             --             --             --
                                                              -------------  -------------  -------------  -------------

         December 31, 1998:
             Beginning of year.............................         4,760             --             --             --
             Revisions of previous estimates...............        (3,110)            --             --             --
             Production....................................          (115)            --             --             --
                                                              -------------  -------------  -------------  -------------
                 End of year...............................         1,535             --             --             --
                                                              -------------  -------------  -------------  -------------
</TABLE>

         Standardized  Measure of Discounted  Future Net Cash Flows ("SMOG") and
         Changes Therein Relating to Proved Oil Reserves

Estimated  discounted  future net cash flows and changes therein were determined
in  accordance  with SFAS No.  69  "Disclosure  About  Oil and Gas  Activities."
Certain  information  concerning the assumptions used in computing the valuation
of proved  reserves and their  inherent  limitations  are discussed  below.  The
Company  believes such information is essential for a proper  understanding  and
assessment of the data  presented.  The  assumptions  used to compute the proved
reserve  valuation do not  necessarily  reflect the  Company's  expectations  of
actual  revenues to be derived  from those  reserves  nor their  present  worth.
Assigning  monetary values to the reserve quantity  estimation  process does not
reduce  the  subjective  and  ever-changing  nature of such  reserve  estimates.
Additional  subjectivity occurs when determining present values because the rate
of producing the reserves must be estimated.  In addition to errors  inherent in
predicting the future,  variations from the expected production rates also could
result directly or indirectly from factors outside the Company's  control,  such
as unintentional  delays in development,  environmental  concerns and changes in
prices or regulatory  controls.  The reserve valuation assumes that all reserves
will be  disposed of by  production.  However,  if  reserves  are sold in place,
additional  economic  considerations  also  could  affect  the  amount  of  cash
eventually  realized.  Future  development and production  costs are computed by
estimating  expenditures  to be incurred in developing  and producing the proved
oil reserves at the end of the period,  based on  period-end  costs and assuming
continuation of existing economic conditions.  A discount rate of 10.0% per year
was used to reflect  the timing of the future  net cash  flows.  The  discounted
future net cash flows for the Company's Polish reserves are based on a gas sales
contract  with a term of five years that the  Company  signed  with POGC  during
December 2000.

                                      F-22
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

The components of SMOG are detailed below:
<TABLE>
<CAPTION>
                                                                               Domestic        Poland         Total
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
         <S>                                                                 <C>            <C>             <C>
         December 31, 2000:
             Future cash flows.............................................  $    26,025    $     3,532     $   29,557
             Future production costs.......................................      (16,216)          (476)       (16,692)
             Future development costs......................................         (195)            --           (195)
             Future income tax expense.....................................           --             --             --
                                                                             -------------  -------------  -------------
             Future net cash flows ........................................        9,614          3,056         12,670
             10% annual discount for estimated timing of cash flows........       (4,705)          (545)        (5,250)
                                                                             -------------  -------------  -------------
             Discounted net future cash flows..............................  $     4,909    $     2,511    $     7,420
                                                                             =============  =============  =============

         December 31, 1999:
             Future cash flows.............................................  $    24,229    $        --    $    24,229
             Future production costs.......................................      (15,240)            --        (15,240)
             Future development costs......................................         (105)            --           (105)
             Future income tax expense.....................................           --             --             --
                                                                             -------------  -------------  -------------
             Future net cash flows ........................................        8,884             --          8,884
             10% annual discount for estimated timing of cash flows........       (3,424)            --         (3,424)
                                                                             -------------  -------------  -------------
             Discounted net future cash flows..............................  $     5,460    $        --    $     5,460
                                                                             =============  =============  =============

         December 31, 1998:
             Future cash flows.............................................  $    12,518    $        --    $    12,518
             Future production costs.......................................      (11,408)            --        (11,408)
             Future development costs......................................          (95)            --            (95)
             Future income tax expense.....................................           --             --             --
                                                                             -------------  -------------  -------------
             Future net cash flows ........................................        1,015             --          1,015
             10% annual discount for estimated timing of cash flows........         (543)            --           (543)
                                                                             -------------  -------------  -------------
             Discounted net future cash flows..............................  $        472   $        --    $        472
                                                                             =============  =============  =============

The principal sources of changes in SMOG are detailed below:
<CAPTION>
                                                                                      Year Ended December 31,
                                                                             -------------------------------------------
                                                                                 2000           1999           1998
                                                                             -------------  -------------  -------------
                                                                                           (In thousands)
         <S>                                                                <C>             <C>            <C>
         SMOG sources:
             Balance, beginning of year.................................... $       5,460   $        472   $     13,575
             Sales of oil produced, net of production costs................        (1,172)          (592)           (77)
             Net changes in prices and production costs....................          (159)         5,032         (4,482)
             Extensions and discoveries, net of future costs...............         2,511             --             --
             Changes in estimated future development costs.................           (53)            (6)         2,875
             Previously estimated development costs incurred during
                 the year..................................................           202             82            132
             Revisions in previous quantity estimates......................           (31)        (1,650)        (9,076)
             Accretion of discount.........................................           546             47          1,357
             Net change in income taxes....................................            --             --           (952)
             Changes in rates of production and other......................           116          2,075         (2,880)
                                                                             -------------  -------------  -------------
                 Balance, end of year......................................  $      7,420   $      5,460   $        472
                                                                             =============  =============  =============
</TABLE>

                                      F-23
<PAGE>

                        FX ENERGY, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                                  - Continued -

Note 14:  Subsequent Events

         Poland 2001 Agreement

Effective January 1, 2001, the Company signed an agreement with Apache,  whereby
both parties  agreed to terminate  their AMI in Poland,  effective  December 31,
2000. The Company also agreed to release  Apache's  remaining  commitment to pay
for the Company's  fifty-percent  share of costs to shoot 339  kilometers of 2-D
seismic on the  Carpathian  project area. In return,  Apache agreed to issue the
Company a credit of $932,000  against any then  current  outstanding  unpaid and
future  invoices  billed to the Company by Apache  pertaining  to the  Company's
joint  operations  in Poland with Apache.  As of December  31,  2000,  there was
$114,000 of outstanding  Apache invoices which had not been paid by the Company,
leaving a net credit of $818,000 as of January 1, 2001. If the  Company's  share
of actual  costs to shoot the 339  kilometers  of 2-D seismic on the  Carpathian
project area exceeds $932,000, the excess will be covered by Apache.

         Financing with Rolls Royce Power Ventures

On March 9, 2001,  the Company signed a $5.0 million 9.5%  convertible  note and
gas purchase  option  agreement  with Rolls Royce Power Ventures  ("RRPV").  The
proceeds  from  the  loan  are to be used for  exploration  and  development  of
additional gas reserves in Poland.

In consideration for the loan, the Company granted RRPV an option to purchase up
to 17 Mmcf of gas per day  from  the  Company's  Polish  properties  in  Poland,
subject to  availability.  The Company's gas  production  will be delivered at a
POGC pipeline connection and RRPV will be responsible for transportation  costs.
RRPV will be required to take at least 80% of the gas it agrees to purchase. The
Company may sell to others gas it produces in excess of the reserves required to
supply the RRPV agreement.

If RRPV elects to purchase gas from the Company, the loan will be repayable over
eight  years.  If RRPV  elects not to buy the  Company's  gas,  the loan will be
repayable in February 2003 unless converted to restricted  common stock at $5.00
per share,  subject to adjustment under certain  circumstances.  As security for
the loan,  the Company will grant RRPV a lien on a portion of the  Company's gas
reserves in Poland.

                                      F-24