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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2009

OR



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

For the transition period from              to             .

Commission file number: 001-33610





REX ENERGY CORPORATION

(Exact name of registrant as
specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 20-8814402                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification number)

476 Rolling Ridge Drive, Suite 300

State College, Pennsylvania 16801

(Address of principal executive offices) (Zip Code)

(814) 278-7267

(Registrants telephone number, including area code)





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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files)    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company (as defined in Rule 12b-2 of the Exchange Act). Check One:



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large Accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller Reporting Company |  |  ̈

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

36,817,812 common shares were outstanding on November 5, 2009.









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REX ENERGY CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD SEPTEMBER 30, 2009

INDEX



|                                                     |  |          |  |                                                                                                                                        |  |     
|---------------------------------------------------- |  | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                     |  |          |  |                                                                                                                                        |  | PAGE
|CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS |  | 3       
|                                                     | 
|PART I. FINANCIAL INFORMATION                        |  |         
|                                                     |  |          | 
|                                                     |  | Item 1.  |  | Financial Statements                                                                                                                   |  | 4   
|                                                     |  |          |  | Consolidated Balance Sheets As of September 30, 2009 (Unaudited) and December 31,
2008                                                 |  | 4   
|                                                     |  |          |  | Consolidated Statements of Operations (Unaudited) For the three and nine month periods ended September 30,
2009 and September 30, 2008 |  | 5   
|                                                     |  |          |  | Consolidated Statement of Changes in Owners Equity (Unaudited) For the nine month period ended September
 30, 2009                    |  | 6   
|                                                     |  |          |  | Consolidated Statements of Cash Flows (Unaudited) For the nine month periods ended September 30, 2009 and
 September 30, 2008          |  | 7   
|                                                     |  |          |  | Notes to Consolidated Financial Statements (Unaudited)                                                                                 |  | 8   
|                                                     |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                                                 |  | 29  
|                                                     |  | Item 3.  |  | Quantitative and Qualitative Disclosure About Market Risk                                                                              |  | 38  
|                                                     |  | Item 4.  |  | Controls and Procedures                                                                                                                |  | 38  
|                                                     | 
|PART II. OTHER INFORMATION                           |  |         
|                                                     |  |          | 
|                                                     |  | Item 1.  |  | Legal Proceedings                                                                                                                      |  | 39  
|                                                     |  | Item 1A. |  | Risk Factors                                                                                                                           |  | 39  
|                                                     |  | Item 6.  |  | Exhibits                                                                                                                               |  | 40  
|                                                     | 
|SIGNATURES                                           |  | 41      
|                                                     | 
|EXHIBIT INDEX                                        |  | 42      



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q may contain forward-looking statements within the meaning of sections 27A of the
Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this report, including but not limited to, statements regarding our future financial
position, business strategy, budgets, projected costs, savings and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking
terminology such as may, will, expect, intend, estimate, anticipate, believe or continue or the negative thereof or variations thereon or similar
terminology.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors which may
cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by us in those statements include, among others, the following:



| |  |  | adverse economic conditions in the United States and globally;
| | - |  | --------------------------------------------------------------



| |  |  | the difficult and adverse conditions in the domestic and global capital and credit markets;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | domestic and global demand for oil and natural gas;
| | - |  | ---------------------------------------------------



| |  |  | sustained declines in the prices we receive for our oil and natural gas adversely affecting our operating results and cash flow;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of government regulation, permitting and other legal requirements;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the quality of our properties with regard to, among other things, the existence of reserves in economic quantities;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | uncertainties about the estimates of our oil and natural gas reserves;
| | - |  | ----------------------------------------------------------------------



| |  |  | our ability to increase our production and oil and natural gas income through exploration and development;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully apply horizontal drilling techniques and tertiary recovery methods;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the number of well locations to be drilled, the cost to drill and the time frame within which they will be drilled;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | drilling and operating risks;
| | - |  | -----------------------------



| |  |  | the availability of equipment, such as drilling rigs and transportation pipelines;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | changes in our drilling plans and related budgets;
| | - |  | --------------------------------------------------



| |  |  | the adequacy of our capital resources and liquidity including, but not limited to, access to additional borrowing capacity; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | other factors discussed under Risk Factors in Item 1A of our Annual Report on Form 10-K/A for the year ended December 31, 2008
filed with the U.S. Securities and Exchange Commission.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because such statements are subject to risks and
uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this report. Unless otherwise
required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



3



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|Item 1. | Financial Statements.
|------- | ---------------------

REX ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

($ in Thousands, Except per Share Amounts)



|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                             |  | September 30, 2009(unaudited) |         |   | December 31, 2008 |  
|ASSETS                                                                                                                                                                                                       |  |                               |         |   |                   |   |         |  
|Current Assets                                                                                                                                                                                               |  |                               |         |   |                   |   |         |  
|Cash and Cash Equivalents                                                                                                                                                                                    |  | $                             | 4,741   |   |                   | $ | 7,046   |  
|Accounts Receivable                                                                                                                                                                                          |  |                               | 9,589   |   |                   |   | 5,840   |  
|Short-Term Derivative Instruments                                                                                                                                                                            |  |                               | 2,304   |   |                   |   | 8,153   |  
|Current Deferred Tax Asset                                                                                                                                                                                   |  |                               | 691     |   |                   |   |        |  
|Inventory, Prepaid Expenses and Other                                                                                                                                                                        |  |                               | 1,195   |   |                   |   | 3,068   |  
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|Total Current Assets                                                                                                                                                                                         |  |                               | 18,520  |   |                   |   | 24,107  |  
|Property and Equipment (Successful Efforts Method)                                                                                                                                                           |  |                               |         |   |                   |   |         |  
|Evaluated Oil and Gas Properties                                                                                                                                                                             |  |                               | 200,437 |   |                   |   | 185,108 |  
|Unevaluated Oil and Gas Properties                                                                                                                                                                           |  |                               | 76,417  |   |                   |   | 65,564  |  
|Other Property and Equipment                                                                                                                                                                                 |  |                               | 23,352  |   |                   |   | 19,388  |  
|Wells and Facilities in Progress                                                                                                                                                                             |  |                               | 29,158  |   |                   |   | 29,629  |  
|Pipelines                                                                                                                                                                                                    |  |                               | 5,166   |   |                   |   | 3,457   |  
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|Total Property and Equipment                                                                                                                                                                                 |  |                               | 334,530 |   |                   |   | 303,146 |  
|Less: Accumulated Depreciation, Depletion and Amortization                                                                                                                                                   |  |                               | (70,018 | ) |                   |   | (53,288 | )
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|Net Property and Equipment                                                                                                                                                                                   |  |                               | 264,512 |   |                   |   | 249,858 |  
|Assets Held for Sale                                                                                                                                                                                         |  |                               |        |   |                   |   | 18,852  |  
|Other Assets  Net                                                                                                                                                                                           |  |                               | 147     |   |                   |   | 122     |  
|Intangible Assets  Net                                                                                                                                                                                      |  |                               | 1,227   |   |                   |   | 1,506   |  
|Investment in RW Gathering                                                                                                                                                                                   |  |                               | 516     |   |                   |   |        |  
|Long-Term Derivative Instruments                                                                                                                                                                             |  |                               | 2,030   |   |                   |   | 7,561   |  
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|Total Assets                                                                                                                                                                                                 |  | $                             | 286,952 |   |                   | $ | 302,006 |  
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|LIABILITIES AND EQUITY                                                                                                                                                                                       |  |                               |         |   |                   |   |         |  
|Current Liabilities                                                                                                                                                                                          |  |                               |         |   |                   |   |         |  
|Accounts Payable                                                                                                                                                                                             |  | $                             | 9,943   |   |                   | $ | 7,180   |  
|Accrued Expenses                                                                                                                                                                                             |  |                               | 6,165   |   |                   |   | 7,388   |  
|Short-Term Derivative Instruments                                                                                                                                                                            |  |                               | 3,131   |   |                   |   |        |  
|Current Deferred Tax Liability                                                                                                                                                                               |  |                               |        |   |                   |   | 2,785   |  
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|Total Current Liabilities                                                                                                                                                                                    |  |                               | 19,239  |   |                   |   | 17,353  |  
|Senior Secured Line of Credit and Long-Term Debt                                                                                                                                                             |  |                               | 15,056  |   |                   |   | 15,000  |  
|Long-Term Derivative Instruments                                                                                                                                                                             |  |                               | 1,924   |   |                   |   | 1,476   |  
|Long-Term Deferred Tax Liability                                                                                                                                                                             |  |                               | 7,756   |   |                   |   | 11,995  |  
|Other Deposits and Liabilities                                                                                                                                                                               |  |                               | 5,799   |   |                   |   | 7,322   |  
|Liabilities Related to Assets Held for Sale                                                                                                                                                                  |  |                               |        |   |                   |   | 1,838   |  
|Future Abandonment Cost                                                                                                                                                                                      |  |                               | 16,166  |   |                   |   | 15,174  |  
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|Total Liabilities                                                                                                                                                                                            |  | $                             | 65,940  |   |                   | $ | 70,158  |  
|Commitments and Contingencies (See Note 11)                                                                                                                                                                  |  |                               |         |   |                   |   |         |  
|Owners Equity                                                                                                                                                                                               |  |                               |         |   |                   |   |         |  
|Common Stock, $.001 par value per share, 100,000,000 shares authorized and 36,817,812 shares issued and outstanding on
September 30, 2009 and 36,589,712 shares issued and outstanding on December 31, 2008. |  |                               | 37      |   |                   |   | 37      |  
|Additional Paid-In Capital                                                                                                                                                                                   |  |                               | 291,945 |   |                   |   | 291,133 |  
|Accumulated Deficit                                                                                                                                                                                          |  |                               | (70,970 | ) |                   |   | (59,322 | )
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|Total Owners Equity                                                                                                                                                                                         |  |                               | 221,012 |   |                   |   | 231,848 |  
|                                                                                                                                                                                                             |  |                               |         |   |                   |   |         |  
|Total Liabilities and Owners Equity                                                                                                                                                                         |  | $                             | 286,952 |   |                   | $ | 302,006 |  

See accompanying notes to the consolidated financial statements



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REX ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, $ and Shares in Thousands, Except per Share Data)



|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                |  | For the Three Months EndedSeptember 30, |        |   | For the Nine Months EndedSeptember 30, |  
|                                                                |  | 2009                                    |        |   | 2008                                   |   |         | 2009 |  |   | 2008    |  
|OPERATING REVENUE                                               |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Oil and Natural Gas Sales                                       |  | $                                       | 13,012 |   |                                        | $ | 25,275  |      |  | $ | 33,326  |   |  | $ | 70,765  |  
|Other Revenue                                                   |  |                                         | 43     |   |                                        |   | 29      |      |  |   | 100     |   |  |   | 93      |  
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|TOTAL OPERATING REVENUE                                         |  |                                         | 13,055 |   |                                        |   | 25,304  |      |  |   | 33,426  |   |  |   | 70,858  |  
|OPERATING EXPENSES                                              |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Production and Lease Operating Expense                          |  |                                         | 5,660  |   |                                        |   | 7,637   |      |  |   | 16,050  |   |  |   | 20,416  |  
|General and Administrative Expense                              |  |                                         | 2,799  |   |                                        |   | 3,759   |      |  |   | 10,942  |   |  |   | 10,882  |  
|Loss on Disposal of Assets                                      |  |                                         | 17     |   |                                        |   | 6,274   |      |  |   | 417     |   |  |   | 6,426   |  
|Impairment Expense                                              |  |                                         | 477    |   |                                        |   |        |      |  |   | 865     |   |  |   |        |  
|Exploration Expense                                             |  |                                         | 370    |   |                                        |   | 1,113   |      |  |   | 1,204   |   |  |   | 2,395   |  
|Depreciation, Depletion, Amortization and Accretion             |  |                                         | 6,059  |   |                                        |   | 4,710   |      |  |   | 18,423  |   |  |   | 14,361  |  
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|TOTAL OPERATING EXPENSES                                        |  |                                         | 15,382 |   |                                        |   | 23,493  |      |  |   | 47,901  |   |  |   | 54,480  |  
|INCOME (LOSS) FROM OPERATIONS                                   |  |                                         | (2,327 | ) |                                        |   | 1,811   |      |  |   | (14,475 | ) |  |   | 16,378  |  
|OTHER INCOME (EXPENSE)                                          |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Interest Income                                                 |  |                                         | 2      |   |                                        |   | 137     |      |  |   | 3       |   |  |   | 320     |  
|Interest Expense                                                |  |                                         | (207   | ) |                                        |   | (207    | )    |  |   | (612    | ) |  |   | (844    | )
|Gain (Loss) on Derivatives, Net                                 |  |                                         | 394    |   |                                        |   | 60,020  |      |  |   | (4,853  | ) |  |   | (29,998 | )
|Other Expense                                                   |  |                                         | (7     | ) |                                        |   | (79     | )    |  |   | (38     | ) |  |   | (61     | )
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|TOTAL OTHER INCOME (EXPENSE)                                    |  |                                         | 182    |   |                                        |   | 59,871  |      |  |   | (5,500  | ) |  |   | (30,583 | )
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX      |  |                                         | (2,145 | ) |                                        |   | 61,682  |      |  |   | (19,975 | ) |  |   | (14,205 | )
|Income Tax Benefit (Expense)                                    |  |                                         | 959    |   |                                        |   | (24,899 | )    |  |   | 8,004   |   |  |   | 5,789   |  
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                        |  |                                         | (1,186 | ) |                                        |   | 36,783  |      |  |   | (11,971 | ) |  |   | (8,416  | )
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Income (Loss) From Discontinued Operations, Net of Income Taxes |  |                                         |       |   |                                        |   | (28     | )    |  |   | 323     |   |  |   | 37      |  
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|NET INCOME (LOSS)                                               |  | $                                       | (1,186 | ) |                                        | $ | 36,755  |      |  | $ | (11,648 | ) |  | $ | (8,379  | )
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Earnings per common share:                                      |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Basic  income (loss) from continuing operations                |  | $                                       | (0.03  | ) |                                        | $ | 1.01    |      |  | $ | (0.33   | ) |  | $ | (0.25   | )
|Basic  income from discontinued operations                     |  |                                         |       |   |                                        |   |        |      |  |   | 0.01    |   |  |   |        |  
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Basic  net income (loss)                                       |  | $                                       | (0.03  | ) |                                        | $ | 1.01    |      |  | $ | (0.32   | ) |  | $ | (0.25   | )
|Basic  Weighted average shares of common stock outstanding     |  |                                         | 36,834 |   |                                        |   | 36,570  |      |  |   | 36,802  |   |  |   | 33,914  |  
|Diluted  income (loss) from continuing operations              |  | $                                       | (0.03  | ) |                                        | $ | 1.00    |      |  | $ | (0.33   | ) |  | $ | (0.25   | )
|Diluted  income from discontinued operations                   |  |                                         |       |   |                                        |   |        |      |  |   | 0.01    |   |  |   |        |  
|                                                                |  |                                         |        |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Diluted  net income (loss)                                     |  | $                                       | (0.03  | ) |                                        | $ | 1.00    |      |  | $ | (0.32   | ) |  | $ | (0.25   | )
|Diluted  Weighted average shares of common stock outstanding   |  |                                         | 36,834 |   |                                        |   | 36,699  |      |  |   | 36,802  |   |  |   | 33,914  |  

See accompanying notes to the consolidated financial statements



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REX ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN OWNERS EQUITY

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2009

(Unaudited, $ in
Thousands)



|                                  |  |              |  |          |    |                          |   |                    |  |   |                    |   |  |   |         |  
|--------------------------------- |  | ------------ |  | -------- | -- | ------------------------ | - | ------------------ |  | - | ------------------ | - |  | - | ------- | -
|                                  |  | Common Stock |  |          |    |                          |   |                    |  |  
|                                  |  | Shares       |  | ParValue |    | AdditionalPaid-InCapital |   | AccumulatedDeficit |  |   | TotalOwnersEquity |  
|BALANCE December 31, 2008         |  | 36,589,712   |  | $        | 37 |                          | $ | 291,133            |  | $ | (59,322            | ) |  | $ | 231,848 |  
|Non-cash compensation expense     |  |             |  |          |   |                          |   | 812                |  |   |                   |   |  |   | 812     |  
|Issuance of Restricted Stock, Net |  | 228,100      |  |          |   |                          |   |                   |  |   |                   |   |  |   |        |  
|Net Loss                          |  |             |  |          |   |                          |   |                   |  |   | (11,648            | ) |  |   | (11,648 | )
|                                  |  |              |  |          |    |                          |   |                    |  |   |                    |   |  |   |         |  
|BALANCE September 30, 2009        |  | 36,817,812   |  | $        | 37 |                          | $ | 291,945            |  | $ | (70,970            | ) |  | $ | 221,012 |  
|                                  |  |              |  |          |    |                          |   |                    |  |   |                    |   |  |   |         |  

See accompanying notes to the consolidated financial statements



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REX ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, $ in Thousands)



|                                                                               |  |                                        |         |   |      |   |         |  
|------------------------------------------------------------------------------ |  | -------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                               |  | For the Nine Months EndedSeptember 30, |        
|                                                                               |  | 2009                                   |         |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                           |  |                                        |         |   |      |   |         |  
|Net Loss                                                                       |  | $                                      | (11,648 | ) |      | $ | (8,379  | )
|Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities |  |                                        |         |   |      |   |         |  
|Non-cash Expenses                                                              |  |                                        | 1,252   |   |      |   | 1,692   |  
|Depreciation, Depletion, Amortization and Accretion                            |  |                                        | 18,423  |   |      |   | 15,961  |  
|Unrealized Loss on Derivatives                                                 |  |                                        | 14,400  |   |      |   | 12,112  |  
|Deferred Income Tax Benefit                                                    |  |                                        | (7,716  | ) |      |   | (5,763  | )
|Exploration Expense (dry hole costs)                                           |  |                                        | 47      |   |      |   | 2,176   |  
|Impairment Expense                                                             |  |                                        | 865     |   |      |   |        |  
|Loss on Sale of Oil and Gas Properties                                         |  |                                        | 417     |   |      |   | 6,467   |  
|Changes in operating assets and liabilities, net of effects from acquisitions  |  |                                        |         |   |      |   |         |  
|Accounts Receivable                                                            |  |                                        | (3,024  | ) |      |   | (957    | )
|Inventory, Prepaid Expenses and Other Assets                                   |  |                                        | 261     |   |      |   | (295    | )
|Accounts Payable and Accrued Expenses                                          |  |                                        | (1,771  | ) |      |   | 4,264   |  
|Net Changes in Other Assets and Liabilities                                    |  |                                        | 1,294   |   |      |   | (502    | )
|                                                                               |  |                                        |         |   |      |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                      |  |                                        | 12,800  |   |      |   | 26,776  |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                           |  |                                        |         |   |      |   |         |  
|Proceeds from Joint Venture                                                    |  |                                        | 3,120   |   |      |   |        |  
|Proceeds from the Sale of Oil and Gas Properties, Prospects and Other Assets   |  |                                        | 17,792  |   |      |   | 8,826   |  
|Acquisitions of Undeveloped Acreage                                            |  |                                        | (12,572 | ) |      |   | (41,241 | )
|Capital Expenditures for Development of Oil & Gas Properties and Equipment     |  |                                        | (23,351 | ) |      |   | (56,113 | )
|                                                                               |  |                                        |         |   |      |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                          |  |                                        | (15,011 | ) |      |   | (88,528 | )
|CASH FLOWS FROM FINANCING ACTIVITIES                                           |  |                                        |         |   |      |   |         |  
|Repayments of Long-Term Debts and Lines of Credit                              |  |                                        | (19,000 | ) |      |   | (41,296 | )
|Proceeds from Long-Term Debts and Lines of Credit                              |  |                                        | 19,000  |   |      |   | 14,000  |  
|Repayments of Loans and Other Notes Payable                                    |  |                                        | (94     | ) |      |   |        |  
|Proceeds from Lease Incentives                                                 |  |                                        |        |   |      |   | 636     |  
|Proceeds from Secondary Offering                                               |  |                                        |        |   |      |   | 113,537 |  
|Offering Costs                                                                 |  |                                        |        |   |      |   | (544    | )
|                                                                               |  |                                        |         |   |      |   |         |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                            |  |                                        | (94     | ) |      |   | 86,333  |  
|                                                                               |  |                                        |         |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH                                                |  |                                        | (2,305  | ) |      |   | 24,581  |  
|CASH  BEGINNING                                                               |  |                                        | 7,046   |   |      |   | 1,085   |  
|                                                                               |  |                                        |         |   |      |   |         |  
|CASH  ENDING                                                                  |  | $                                      | 4,741   |   |      | $ | 25,666  |  
|SUPPLEMENTAL DISCLOSURES                                                       |  |                                        |         |   |      |   |         |  
|Interest Paid                                                                  |  |                                        | 997     |   |      |   | 1,019   |  
|                                                                               |  |                                        |         |   |      |   |         |  
|NON-CASH ACTIVITIES                                                            |  |                                        |         |   |      |   |         |  
|Acquisitions of Undeveloped Acreage                                            |  |                                        |        |   |      |   | 7,970   |  
|Acquisitions of Equipment                                                      |  |                                        | 543     |   |      |   |        |  

See accompanying notes to the consolidated financial statements



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REX ENERGY CORPORATION AND PREDECESSOR COMPANIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

Rex Energy Corporation (the Company) is an independent oil and gas company operating in the Illinois Basin and the Appalachian
Basin of the United States. We have pursued a balanced growth strategy of exploiting our sizeable inventory of lower risk developmental drilling locations and our higher potential exploration drilling prospects and have actively sought to acquire
complementary oil and natural gas properties.

Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) and include the accounts of all of our wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Unless otherwise indicated, all references to Rex Energy Corporation, our, we, us and similar terms refer to Rex Energy Corporation and its subsidiaries together.

The interim consolidated financial statements of the Company are unaudited and contain all adjustments (consisting primarily of normal
recurring accruals) necessary for a fair statement of the results for the interim periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the
financial statements and disclosures of contingencies. Actual results may differ from those estimates and results for interim periods are not necessarily indicative of results to be expected for a full year or for previously reported periods due in
part, but not limited to, the volatility in prices for crude oil and natural gas, future commodity prices for financial derivative instruments, interest rates, estimates of reserves, drilling risks, geological risks, transportation restrictions, the
timing of acquisitions, product demand, market consumption, interruption in production, our ability to obtain additional capital, and the success of oil and natural gas recovery techniques.

Certain amounts and disclosures have been condensed or omitted from these consolidated financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Therefore, these interim financial statements should be read in conjunction with the audited consolidated and combined financial statements and related notes thereto included
in our Annual Report on Form 10-K/A for the year ended December 31, 2008.

Certain prior year amounts have been
reclassified to conform to the report classifications for the three and nine month periods ended September 30, 2009, with no effect on previously reported net income, net income per share, retained earnings or stockholders equity.
Approximately $11.0 million of valuation allowance related to the impairment of our evaluated oil and gas assets at December 31, 2008 was reclassified from Evaluated Oil and Gas Properties on the balance sheet to Accumulated Depreciation,
Depletion and Amortization (DD&A). Losses of approximately $6.6 million and $17.7 million for the three and nine month periods ending September 30, 2008, respectively, have been reclassified from Realized Loss on Derivatives on
the Statement of Operations to Loss on Derivatives, Net. Additionally, approximately $0.1 million and $0.2 million for the three and nine month periods ending September 30, 2008, respectively, have been reclassified from Interest Expense on the
Statement of Operations to Loss on Derivatives, Net. Previously, we had recorded realized settlements on commodity derivatives as a source of revenue and realized settlements on our interest rate swap as interest expense.

We adhere to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 932 for
recognizing impairment of capitalized costs related to unproved properties. These costs are capitalized and periodically evaluated as to recoverability based on changes brought about by economic factors and potential shifts in business strategy
employed by management. We consider time, geographic, geologic and engineering factors to evaluate the need for impairment of these costs. During the third quarter of 2009, we identified certain geographic regions, predominantly in areas prospective
for the Marcellus Shale, that were outside of the scope of our current plans, increasing the probability of future lease expiration. As such, we recorded impairment expense on these unproved properties of $0.5 million and $0.9 million for the three
and nine month periods ended September 30, 2009 as compared to $0 during the same periods in 2008. These expenses are recorded as Impairment Expense on our Statement of Operations. As economic and strategic conditions change and we continue to
develop unproved properties, our estimates of impairment will likely change and we may increase or decrease expense.

On
May 5, 2008, we completed a public offering of 9.8 million shares of common stock at an offering price of $20.75 per share. These shares included 5.8 million shares offered by us (which includes 1.3 million shares sold pursuant
to the exercise of an over-allotment option granted to the underwriters of the offering) and 4.0 million shares sold by certain selling stockholders. The net proceeds to us from the underwritten public offering, after underwriting
discounts and offering expenses of approximately $6.8 million, were approximately $113.0 million.

On March 24, 2009, we
completed the sale of certain oil and gas leases, wells and related assets predominantly located in the Permian Basin in the states of Texas and New Mexico. In accordance with FASB ASC 360 we have reflected the results of operations of the above
divestiture as discontinued operations, rather than a component of continuing operations. See Note 12 for additional information regarding discontinued operations.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



We entered a Participation and Exploration Agreement on June 18, 2009, effective as
of May 5, 2009, with Williams Production Company, LLC and Williams Production Appalachia, LLC (together, Williams). Under the terms and conditions of the agreement, Williams may acquire, through a drill-to-earn
structure, 50% of our working interest in certain oil and gas leases covering approximately 43,672 net acres in Centre, Clearfield and Westmoreland Counties, Pennsylvania. See Note 2 for additional information regarding the agreement with Williams.

2. ACQUISITIONS AND DISPOSITIONS

Acquisitions are accounted for as purchases, and accordingly, the results of operations are included in our Consolidated Statements of Operations from the closing date of acquisition. Purchase prices are
allocated to the acquired assets and assumed liabilities based on their estimated fair value at the time of the acquisition. Acquisitions are funded with internal cash flow, bank borrowings and the issuance of debt and equity securities.

In the first quarter of 2009, we completed the sale of certain oil and gas leases, wells and related assets located primarily in the
Permian Basin in the states of Texas and New Mexico for net proceeds of approximately $17.3 million and recorded a loss of $0.4 million. We have reflected the results of these divested operations as discontinued operations rather than a component of
continuing operations. See Note 12 for additional information.

In the second quarter of 2009, we completed the acquisition of
a 50% interest from our joint venture partner in certain oil and gas leases covering lands in Butler County, Pennsylvania for approximately $4.2 million. This acquisition gives us a 100% interest in these areas and increases our acreage holdings by
approximately 6,500 net acres in this project region. In the transaction, we acquired only undeveloped acreage and we did not assume any liabilities.

In the second quarter of 2009, we also entered into a Participation and Exploration Agreement (the PEA) with Williams that was effective as of May 5, 2009. Under the terms and conditions
of the PEA, Williams may acquire, through a drill-to-earn structure, 50% of our working interest in certain oil and gas leases covering approximately 43,672 net acres in Centre, Clearfield and Westmoreland Counties, Pennsylvania (the
Project Area). The PEA effectively provides that, for Williams to earn its 50% interest in the Project Area, Williams will bear 90% of all costs and expenses incurred in the drilling and completion of all wells jointly drilled in the
Project Area until such time as Williams has invested approximately $74.0 million (approximately $33.0 million on behalf of us and $41.0 million for Williams 50% share of the wells). In addition, Williams committed to participate in drilling a
minimum of 10 horizontal wells in the Project Area to a depth sufficient to test the Marcellus Shale formation. Subject to certain termination rights, Williams agreed to fund its carry obligation prior to December 31, 2011 or make a cash
payment to us for the remaining carry amount that has not been incurred at that time. Once Williams has completed its carry obligation and acquired 50% of our working interest in the leases within the Project Area, the parties will share all costs
of the joint venture operations within an area of mutual interest (including the Project Area) in accordance with their participating interests, which are expected to be on a 50/50basis. We believe this agreement will allow us to accelerate our
activities in the Marcellus Shale while conserving capital at the same time.

In accordance with the terms of the PEA,
Williams reimbursed us for approximately $3.1 million for Williams share of certain expenses incurred in the acquisition and development of oil and gas leases within the Project Area that we had previously paid. The PEA provides that we will
continue to serve as operator of the Project Area until December 31, 2009, and thereafter, Williams will become the operator of the Project Area.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



3. FUTURE ABANDONMENT COST

We account for future abandonment costs using FASB ASC 410. This statement applies to obligations associated with the retirement of tangible
long-lived assets that result from the acquisition and development of the asset. FASB ASC 410 requires that the fair value of a liability for a retirement obligation be recognized in the period in which the liability is incurred. For natural gas and
oil properties, this is the period in which the natural gas or oil well is acquired or drilled. The future abandonment cost is capitalized as part of the carrying amount of our natural gas and oil properties at its discounted fair value. The
liability is then accreted each period until the liability is settled or the natural gas or oil well is sold, at which time the liability is reversed. Accretion expense during the nine month period ended September 30, 2009 totaled approximately
$1.1 million and is recorded as DD&A expense on the Statement of Operations. In accordance with the terms of the PEA with Williams that was discussed in Note 2, we account for asset retirement obligations that relate to wells in the Project Area
based on our 50% interest in those wells.

According to FASB ASC 410, if the estimate of fair value of a recorded asset
retirement obligation changes, a revision is to be recorded to both the asset retirement obligation and the asset retirement cost. During the fourth quarter of 2008, we recognized an increase of $9.2 million in the estimated present value of the
asset retirement obligations. The primary factors underlying the 2008 fair value revisions were an overall increase in abandonment cost estimates, the effect of changes in inflation and discount rates used in calculations and changes to the
estimated useful life assumptions.



|                                                              |  |                   |        |   |                   |   |       |  
|------------------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ----- | -
|                                                              |  | September 30,2009 |        |   | September 30,2008 |  
|                                                              |  | ($ in Thousands)  |        |   | ($ in Thousands)  |  
|Beginning Balance at December 31                              |  | $                 | 16,283 |   |                   | $ | 6,396 |  
|Asset Retirement Obligation Incurred                          |  |                   | 196    |   |                   |   | 186   |  
|Asset Retirement Obligation Settled                           |  |                   | (339   | ) |                   |   | (313  | )
|Asset Retirement Obligation Cancelled on Sold Well Properties |  |                   | (1,094 | ) |                   |   | (116  | )
|Asset Retirement Obligation Accretion Expense                 |  |                   | 1,120  |   |                   |   | 642   |  
|                                                              |  |                   |        |   |                   |   |       |  
|Total Asset Retirement Obligation                             |  | $                 | 16,166 |   |                   | $ | 6,795 |  
|                                                              |  |                   |        |   |                   |   |       |  

4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2008, the SEC adopted rule changes to modernize its oil and gas reporting disclosures. The changes are intended to provide
investors with a more meaningful and comprehensive understanding of oil and gas reserves. The updated disclosure requirements are designed to align with current practices and changes in technology that have taken place in the oil and gas industry
since the adoption of the original reporting requirements more than 25 years ago.

New disclosure requirements include:
permitting the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes; enabling companies to also disclose their probable and possible
reserves to investors (currently, the rules limit disclosure to only proved reserves); allowing previously excluded resources, such as oil sands, to be classified as oil and gas reserves; requiring companies to report on the independence and
qualifications of a preparer or auditor and requiring companies to file reports when a third party is relied upon to prepare reserve estimates or conduct a reserves audit; requiring companies to report oil and gas reserves using an average price
based upon the prior 12-month period, rather than the year-end price, to maximize the comparability of reserve estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date.

The new requirements are effective for registration statements filed on or after January 1, 2010, and for annual reports on Form 10-K
for fiscal years ending on or after December 31, 2009. We expect the new guidance to change our disclosures, DD&A calculations and other fair value measurements. We are currently evaluating the impact for our annual report for the year
ending December 31, 2009 and related financial statements.

On January 1, 2009, we adopted the provisions of FASB
ASC 815-10, which requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves the transparency of financial reporting. Entities are required to provide enhanced disclosures about: (a) how and why
an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under FASB ASC 815 and its related interpretations; and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance and cash flows. See Note 7,Fair Value of Financial Instruments and Derivative Instruments for our disclosures required under FASB 815-10.

Effective January 1, 2009, we adopted FASB ASC 805-10, which establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FASB ASC 805-10 also provides guidance for recognizing
changes in an acquirers existing tax valuation allowances and tax uncertainty accruals that result from a business combination transaction as adjustments to income tax expense. We believe FASB 805-10 may have a material impact on future
consolidated financial



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



statements, depending on the size and nature of any future business combinations that we may enter into, any future adjustments made to tax valuation allowances and uncertainty accruals related
to business combinations entered into prior to January 1, 2009. During the nine months ended September 30, 2009, the adoption did not have an impact on adjustments made to tax valuation allowances and uncertainty accruals related to
business combinations entered into prior to January 1, 2009.

Effective January 1, 2008, we adopted FASB ASC 820-10
with respect to our financial assets and liabilities. In February 2008, the FASB issued further provisions to FASB 820-10, which provided a one year deferral of the effective date of FASB ASC 820-10 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we adopted the new provisions of FASB ASC 820-10 for non-financial assets and non-financial liabilities effective
January 1, 2009. However, adoption of FASB ASC 820-10 for non-financial assets and non-financial liabilities did not have a material impact on our consolidated results of operations or financial condition.

In April 2009, the FASB issued FASB ASC 805-20, which amends and clarifies FASB ASC 805 to address application issues regarding initial
recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FASB ASC 805-20 is effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Although we did not enter into any significant business combinations during the
first nine months of 2009, we believe FASB ASC 805-20 may have a material impact on our future financial statements depending on the size and nature of any future business combinations that we may enter into.

In April 2009, the FASB issued FASB ASC 825-10-65-1. This ASC amends FASB 825, to require disclosures about fair value of financial
instruments not measured on the balance sheet at fair value in interim financial statements, as well as, in annual financial statements. Prior to this ASC, fair values for these assets and liabilities were only disclosed annually. This ASC applies
to all financial instruments within the scope of FASB ASC 825 and requires all entities to disclose the method(s) and significant assumption(s) used to estimate the fair value of financial instruments. This ASC is effective for interim periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this ASC only if it also elects to early adopt FASB ASC 820-10-65-4 and FASB ASC 320-10-65-1. This ASC does not
require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this ASC requires comparative disclosures only for periods ending after initial adoption. Adoption of FASB ASC
825-10-65-1 did not have a material impact on our financial position or results of operations.

In May 2009, the FASB issued
FASB ASC 855-10 which establishes general standards for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FASB ASC 855-10 identifies the period after the balance sheet date that management
should evaluate transactions that may occur for potential recognition or disclosure. This statement also provides circumstances under which an entity should recognize events or transactions occurring after the balance sheet in its financial
statements and identifies disclosures that an entity should make about events or transactions that occur after the balance sheet date. This statement is in effect for interim or annual financial reports ending after June 15, 2009. Adoption of
FASB ASC 855-10 did not have a material impact on our financial position or results of operations.

In June 2009, the FASB
issued SFAS No. 166, Accounting for Transfers of Financial Assets(SFAS 166). This statement was issued as a means to improve the relevance, representational faithfulness and comparability of the information that a reporting
entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position; financial performance; and cash flows; and a transferors continuing involvement, if any, in transferred
financial assets. This statement takes effect as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim
and annual reporting periods thereafter. We are currently evaluating this new statement, but do not believe that it will have a significant impact on the determination or reporting of our financial results.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167) which was
issued to improve financial reporting by enterprises involved with variable interest entities. This statement addresses the effects of certain provisions of FASB Interpretation No. 46(R) and constituent concerns about the application of certain
key provisions of FASB Interpretation No. 46(R), including those in which the accounting and disclosures do not always provide timely and useful information about an enterprises involvement in a variable interest entity. This statement takes
effect as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim reporting periods thereafter. We are
currently evaluating this new statement, but do not believe that it will have a significant impact on the determination or reporting of our financial results.

In June 2009, the FASB issued FASB ASC 105-10. This statement officially dictates that the FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting
principles. Following this statement, new standards will no longer be issued in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. FASB ASC 105-10 is effective for financial statements issued for reporting periods
that end after September 15, 2009. Adoption of this statement did not have a material impact on our financial positions or results of operations.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05,
Fair Value Measurements and Disclosures (Topic 820)  Measuring Liabilities at Fair Value (ASU 2009-05). This update provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures  Overall, for
the fair value measurement of liabilities. The update provides that a reporting entity, in circumstances in which a quoted price in an active market for the identical liability is not available, is required to measure fair value using a valuation
technique that uses the quoted price of the identical liability when traded as an asset and/or another valuation technique that is consistent with the principles of Topic 820. Furthermore, this update clarifies that when estimating the fair value of
a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update also states that both a quoted price in an
active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. This update is effective for our fourth quarter of 2009. We do not anticipate that adoption of this update will have a material impact on our financial position or results of operations.

5. CONCENTRATIONS OF CREDIT RISK

At times during the three and nine month periods ended September 30, 2009, our cash balance has exceeded the Federal Deposit Insurance Corporations limit of $250,000. There were no losses incurred due to such concentrations.

By using derivative instruments to hedge exposure to changes in commodity prices, we are exposed to credit risk and market
risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of the derivative is positive, the counterparty owes us, which creates repayment risk. We minimize the credit or
repayment risk in derivative instruments by entering into transactions with a high-quality counterparty. Our counterparty is an investment grade financial institution, and a lender in our senior credit facility. We have a master netting agreement in
place with our counterparty that provides for the offsetting of payables against receivables from separate derivative contracts. None of our derivative contracts have a collateral provision that would require funding prior to the scheduled cash
settlement date. See Note 7 for further discussion on our derivative instruments.

We also depend on a relatively small number
of purchasers for a substantial portion of our revenue. At September 30, 2009, we carried approximately $4.2 million in production receivables, of which approximately $3.8 million were production receivables due from a single customer,
Countrymark Cooperative LLP (Countrymark). At September 30, 2008, we carried approximately $8.0 million in production receivables, of which approximately $6.5 million were production receivables from Countrymark. During the first
quarter of 2009, we placed into operation an oil offload facility in the Illinois Basin that we believe will enable us to diversify the purchasers of our oil in the future if we choose to do so. Additionally, we believe the growth in our Appalachian
Basin proved reserve base will help us to minimize our future risks by diversifying our ratio of oil and gas sales as well as the quantity of purchasers.

6. LONG-TERM DEBT

Our credit agreement is with KeyBank, as Administrative
Agent; BNP Paribas, as Syndication Agent; Sovereign Bank, as Documentation Agent; and lenders from time to time parties thereto (the Senior Credit Facility). Borrowings under the Senior Credit Facility are limited by a borrowing base
that is determined in regard to our oil and gas properties. The initial borrowing base was $75.0 million; however, the Senior Credit Facility provides that the revolving credit facility may be increased up to $200.0 million upon re-determinations of
the borrowing base, consent of the lenders and other conditions prescribed in the agreement. Within that borrowing base, outstanding letters of credit are permitted up to $10.0 million. Loans made under the Senior Credit Facility mature on
September 28, 2012, and in certain circumstances, we will be required to prepay the loans. At our election, borrowings under the Senior Credit Facility bear interest at a rate per annum equal to (a) LIBOR for one, two, three, six or nine
months (Adjusted LIBOR) plus an applicable margin ranging from 100 to 175 basis points plus a commitment fee ranging from 25 to 37.5 basis points, or (b) the higher of KeyBanks announced prime rate (Prime Rate) and
the federal funds effective rate from time to time plus 0.5% in each case, plus an applicable margin ranging from 0 to 25 basis points plus a commitment fee ranging from 25 to 37.5 basis points. Interest is payable on the last day of each relevant
interest period in the case of loans bearing interest at the Adjusted LIBOR and quarterly in the case of loans bearing interest at the Prime Rate. The Senior Credit Facility provides that the borrowing base will be re-determined semi-annually by the
lenders, in good faith, based on, among other things, reports regarding our oil and gas reserves attributable to our oil and gas properties, together with a projection of related production and future net income, taxes, operating expenses and
capital expenditures. On or before March 1 and September 1 of each year, we are required to furnish to the lenders a reserve report evaluating our oil and gas properties as of the immediately preceding January 1 and July 1. The
reserve report as of January 1 of each year must be prepared by one or more independent petroleum engineers approved by the Administrative Agent. Any re-determined borrowing base will become effective on the subsequent April 1 and
October 1. We may, or the Administrative Agent at the direction of a majority of the lenders may, each elect once per calendar year to cause the borrowing base to be re-determined between the scheduled re-determinations. In addition, we may
request interim borrowing base re-determinations upon our proposed acquisition of proved developed producing oil and gas reserves with a purchase price for such reserves greater than 10% of the then borrowing base.

On April 14, 2008, we entered into a First Amendment to the Senior Credit Facility (the First Amendment). The First
Amendment provides that the borrowing base under the Senior Credit Facility was increased from $75.0 million to $90.0 million



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



effective April 14, 2008. The increased borrowing base remained in effect until the next borrowing base re-determination date. The First Amendment also amended the Senior Credit Facility to
provide that, upon an increase in the borrowing base, we will pay to the lenders a borrowing base increase fee equal to 25 basis points on the amount of any increase of the borrowing base over the highest borrowing base previously in effect, payable
on the effective date of any such increase. In addition, the First Amendment amended the Senior Credit Facility with respect to our ability to enter into commodity and swap agreements. The First Amendment provided that we may enter into commodity
swap agreements with counterparties approved by the lenders, provided that the notional volumes for such agreements, when aggregated with other commodity swap agreements then in effect (other than basis differential swaps on volumes already hedged
pursuant to other swap agreements), do not exceed, as of the date the swap agreement is executed, 85% of the reasonably anticipated projected production from our proved developed producing reserves for the 36 months following the date such agreement
is entered into, and 75% thereafter, for each of crude oil and natural gas, calculated separately. Prior to the First Amendment, the volumes for commodity swap agreements under the Senior Credit Facility could not exceed, as of the date the
swap agreement was executed, 75% of the reasonably anticipated projected production from our proved developed producing reserves, for each of crude oil and natural gas for each month during the period in which the swap agreement was in effect for
each of crude oil and natural gas, calculated separately.

The First Amendment also amended the Senior Credit Facility to
provide that we may enter into interest rate swap agreements with counterparties approved by the lenders that convert interest rates from floating to fixed provided that the notional amounts of those agreements, when aggregated with all other
similar interest rate swap agreements then in effect, do not exceed the greater of $20.0 million and 75% of the then outstanding principal amount of our debt for borrowed money which bears interest at a floating rate. Prior to the First Amendment,
our interest rate swap agreements under the Senior Credit Facility were limited to 75% of the then outstanding principal amount of our debt for borrowed money which bears interest at a floating rate.

On January 5, 2009, we entered into a Second Amendment to the Senior Credit Facility effective December 23,
2008 (the Second Amendment). The Second Amendment provided that the borrowing base under our Senior Credit Facility of $90.0 million will remain in effect until the next borrowing base re-determination date. Upon the completion of the
sale of our Southwest Region properties on March 24, 2009, our borrowing base under the Senior Credit Facility was reduced to $80.0 million. In addition, the Second Amendment amended the Senior Credit Facility to amend the definition of
Alternate Base Rate. The Second Amendment provided that the Alternate Base Rate means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective
Rate in effect on such day plus1/2of 1% and (c) (i) LIBOR plus (ii) the Applicable
Margin for Euro Dollar Loans minus (iii) the Applicable Margin for ABR Loans each on such day. Prior to the Second Amendment, Alternate Base Rate meant, for any day, a rate per annum equal to the greater of (a) the Prime Rate
in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus1/2of
1%.

On April 24, 2009, we entered into a Third Amendment to Credit Agreement to the Senior Credit Facility
effective as of April 20, 2009 (the Third Amendment) and amended certain provisions of our Senior Credit Facility. The Third Amendment provides that the borrowing base under our Senior Credit Facility of $80.0 million will remain in
effect until the next borrowing base re-determination date. In addition, the Third Amendment amended the borrowing base utilization grid in the definition of Alternate Base Rate. The revised borrowing base utilization grid increases the
margin interest rate for Eurodollar loans from a range of 1.00% to 1.75% per annum to a range of 1.75% to 2.50% per annum, increases the base margin rate from a set rate of 0.50% per annum to a range of 0.50% to 1.25% per annum,
and increases the unused commitment fee rate from a range of 0.25% to 0.375% per annum to a range of 0.375% to 0.50% per annum. Rates charged from time to time under the borrowing base utilization grid within each applicable range are
determined by our percentage of utilization of the then established borrowing base.

The Senior Credit Facility contains
covenants that restrict our ability to, among other things, materially change our business; approve and distribute dividends; enter into transactions with affiliates; create or acquire additional subsidiaries; incur indebtedness; sell assets; make
loans to others; make investments; enter into mergers; incur liens; and enter into agreements regarding swap and other derivative transactions (see Note 7 for further information on our derivative instruments). The Senior Credit Facility also
requires we meet, on a quarterly basis, minimum financial requirements of consolidated current ratio, EBITDAX to interest expense and total debt to EBITDAX. Borrowings under the Senior Credit Facility have been used to finance our working capital
needs and for general corporate purposes in the ordinary course of business, including the exploration, acquisition and development of oil and gas properties. Obligations under the Senior Credit Facility are secured by mortgages on the oil and gas
properties of our subsidiaries located in the states of Illinois and Indiana. We are required to maintain liens covering our oil and gas properties representing at least 80% of our total value of all oil and gas properties.

At September 30, 2009, we had $15.0 million borrowed under the Senior Credit Facility and had $65.0 million available for future
borrowings.



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##### Table of Contents

REX ENERGY CORPORATION AND PREDECESSOR COMPANIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



In addition to our Senior Credit Facility, we may, from time to time in the normal
course of business, finance assets such as vehicles, office equipment and leasehold improvements through debt financing at favorable terms. Long-term debt and lines of credit consisted of the following at September 30, 2009 and
December 31, 2008:



|                                       |  |                   |        |   |                  |   |       
|-------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------
|                                       |  | September 30,2009 |        |   | December 31,2008
|                                       |  | ($ in Thousands)  |        |   | ($ in Thousands)
|Senior Credit Facility1                |  | $                 | 15,000 |   |                  | $ | 15,000
|Other Loans and Notes Payable          |  |                   | 449    |   |                  |   |      
|                                       |  |                   |        |   |                  |   |       
|Total Debts                            |  |                   | 15,449 |   |                  |   | 15,000
|Less Current Portion of Long-Term Debt |  |                   | (393   | ) |                  |   |      
|                                       |  |                   |        |   |                  |   |       
|Total Long-Term Debts                  |  | $                 | 15,056 |   |                  | $ | 15,000
|                                       |  |                   |        |   |                  |   |       



|1 | The Senior Credit Facility requires us to make monthly payments of interest on the outstanding balance of loans made under the agreement. Loans made
under the Senior Credit Facility mature on September 28, 2012, and in certain circumstances, we will be required to prepay the loans.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7. FAIR VALUE OF FINANCIAL AND DERIVATIVE INSTRUMENTS

Our results of
operations and operating cash flows are impacted by changes in market prices for oil and natural gas. To mitigate a portion of the exposure to adverse market changes, we enter into oil and natural gas commodity derivative instruments to establish
price floor protection. As such, when commodity prices decline to levels that are less than our average price floor, we receive payments that supplement our cash flows. Conversely, when commodity prices increase to levels that are above our average
price ceiling, we make payments to our counterparty. We do not enter into these arrangements for speculative trading purposes. As of September 30, 2009 and September 30, 2008, our oil and natural gas derivative commodity instruments
consisted of fixed rate swap contracts and collars. We did not designate these instruments as cash flow hedges for accounting purposes. Accordingly, associated unrealized gains and losses are recorded directly as other income or expense.

Swap contracts provide a fixed price for a notional amount of sales volumes. Collars contain a fixed floor price (put) and
ceiling price (call). The put options are purchased from the counterparty by our payment of a cash premium. If the put strike price is greater than the market price for a calculation period, then the counterparty pays us an amount equal
to the product of the notional quantity multiplied by the excess of the strike price over the market price. The call options are sold to the counterparty, for which we receive a cash premium. If the market price is greater than the call strike price
for a calculation period, then we pay the counterparty an amount equal to the product of the notional quantity multiplied by the excess of the market price over the strike price.

We enter into the majority of our derivative arrangements with two counterparties and have a netting agreement in place with each of these
counterparties. We do not obtain collateral to support the agreements, but monitor the financial viability of our counterparties and believe our credit risk is minimal on these transactions. See Note 5 for additional discussion the credit risk
regarding our counterparties.

None of our derivatives are designated for hedge accounting but are, to a degree, an economic
offset to our oil and natural gas price exposure. We utilize the mark-to-market accounting method to account for these contracts. We recognize all unrealized and realized gains and losses related to these contracts in the Consolidated Statements of
Operations as Gain (Loss) on Derivatives, Net under Other Income (Expense).

We received net cash receipts of $0.8 million and
$10.7 million under these commodity derivative instruments during the three and nine month periods ended September 30, 2009, respectively. We made net payments of approximately $6.6 million and $17.7 million under these commodity derivative
instruments during three and nine month periods ended September 30, 2008, respectively. During the first quarter of 2009, we redeemed our oil hedges related to production in 2011 for net cash proceeds of approximately $4.6 million. Unrealized
gains and losses associated with our commodity derivative instruments from continuing operations amounted to a loss of $0.3 million and a gain of $66.8 million for the three month periods ended September 30, 2009 and 2008, respectively, and
losses of $15.3 million and $11.8 million for the nine month periods ending September 30, 2009 and 2008, respectively.



14



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##### Table of Contents

REX ENERGY CORPORATION AND PREDECESSOR COMPANIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



The following table summarizes the location and amounts of gains and losses on
derivative instruments, none of which are designated as hedges for accounting purposes, in our accompanying Consolidated Statements of Operations for the three and nine month periods ended September 30, 2009 and 2008 ($ in thousands):



|                                                                                          |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | - | ------------------------------------- | - | ------ | ----- |  | - | --------------------- | - |  | ----------------------- | ------ | - | ----- | - | ------ | - |  | - | ------ | -
|                                                                                          |  | Three Months Ended September 30, 2009 |       |   | Three Months Ended September 30, 2008 |  
|                                                                                          |  | RealizedGains(Losses)                 |       |   | UnrealizedGains(Losses)               |   |        | Total |  |   | RealizedGains(Losses) |   |  | UnrealizedGains(Losses) |        |   | Total |  
|Crude Oil                                                                                 |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Reclassification of settled contracts included in prior periods mark-to-market adjustment |  | $                                     |      |   |                                       | $ | 555    |       |  | $ | 555                   |   |  | $                       |       |   |       | $ | 9,793  |   |  | $ | 9,793  |  
|Mark-to-market fair value adjustments                                                     |  |                                       |      |   |                                       |   | 535    |       |  |   | 535                   |   |  |                         |       |   |       |   | 49,992 |   |  |   | 49,992 |  
|Settlement of contracts (a)                                                               |  |                                       | (305  | ) |                                       |   |       |       |  |   | (305                  | ) |  |                         | (6,353 | ) |       |   |       |   |  |   | (6,353 | )
|                                                                                          |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Crude Oil Total                                                                           |  |                                       | (305  | ) |                                       |   | 1,090  |       |  |   | 785                   |   |  |                         | (6,353 | ) |       |   | 59,785 |   |  |   | 53,432 |  
|                                                                                          |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Natural Gas                                                                               |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Reclassification of settled contracts included in prior periods mark-to-market adjustment |  |                                       |      |   |                                       |   | (621   | )     |  |   | (621                  | ) |  |                         |       |   |       |   | 1,020  |   |  |   | 1,020  |  
|Mark-to-market fair value adjustments                                                     |  |                                       |      |   |                                       |   | (756   | )     |  |   | (756                  | ) |  |                         |       |   |       |   | 5,987  |   |  |   | 5,987  |  
|Settlement of contracts (a)                                                               |  |                                       | 1,089 |   |                                       |   |       |       |  |   | 1,089                 |   |  |                         | (287   | ) |       |   |       |   |  |   | (287   | )
|                                                                                          |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Natural Gas Total                                                                         |  |                                       | 1,089 |   |                                       |   | (1,377 | )     |  |   | (288                  | ) |  |                         | (287   | ) |       |   | 7,007  |   |  |   | 6,720  |  
|                                                                                          |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Interest Rate                                                                             |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Reclassification of settled contracts included in prior periods mark-to-market adjustment |  |                                       |      |   |                                       |   | 170    |       |  |   | 170                   |   |  |                         |       |   |       |   | 32     |   |  |   | 32     |  
|Mark-to-market fair value adjustments                                                     |  |                                       |      |   |                                       |   | (75    | )     |  |   | (75                   | ) |  |                         |       |   |       |   | (80    | ) |  |   | (80    | )
|Settlement of contracts (a)                                                               |  |                                       | (198  | ) |                                       |   |       |       |  |   | (198                  | ) |  |                         | (84    | ) |       |   |       |   |  |   | (84    | )
|                                                                                          |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Interest Rate Total                                                                       |  |                                       | (198  | ) |                                       |   | 95     |       |  |   | (103                  | ) |  |                         | (84    | ) |       |   | (48    | ) |  |   | (132   | )
|                                                                                          |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Gain (Loss) on Derivatives, Net                                                           |  | $                                     | 586   |   |                                       | $ | (192   | )     |  | $ | 394                   |   |  | $                       | (6,724 | ) |       | $ | 66,744 |   |  | $ | 60,020 |  
|                                                                                          |  |                                       |       |   |                                       |   |        |       |  |   |                       |   |  |                         |        |   |       |   |        |   |  |   |        |  



|(a) | These amounts represent the realized gains and losses on settled derivatives, which before settlement are included in the mark-to-market fair value adjustments.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                          |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------ | - | ------- | ----- |  | - | --------------------- | - |  | ----------------------- | ------- | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                                          |  | Nine Months Ended September 30, 2009 |        |   | Nine Months Ended September 30, 2008 |  
|                                                                                          |  | RealizedGains(Losses)                |        |   | UnrealizedGains(Losses)              |   |         | Total |  |   | RealizedGains(Losses) |   |  | UnrealizedGains(Losses) |         |   | Total |  
|Crude Oil                                                                                 |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Reclassification of settled contracts included in prior periods mark-to-market adjustment |  | $                                    |       |   |                                      | $ | (5,590  | )     |  | $ | (5,590                | ) |  | $                       |        |   |       | $ | 8,247   |   |  | $ | 8,247   |  
|Mark-to-market fair value adjustments                                                     |  |                                      |       |   |                                      |   | (9,511  | )     |  |   | (9,511                | ) |  |                         |        |   |       |   | (20,819 | ) |  |   | (20,819 | )
|Settlement of contracts (a)                                                               |  |                                      | 8,250  |   |                                      |   |        |       |  |   | 8,250                 |   |  |                         | (17,044 | ) |       |   |        |   |  |   | (17,044 | )
|                                                                                          |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Crude Oil Total                                                                           |  |                                      | 8,250  |   |                                      |   | (15,101 | )     |  |   | (6,851                | ) |  |                         | (17,044 | ) |       |   | (12,572 | ) |  |   | (29,616 | )
|                                                                                          |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Natural Gas                                                                               |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Reclassification of settled contracts included in prior periods mark-to-market adjustment |  |                                      |       |   |                                      |   | (819    | )     |  |   | (819                  | ) |  |                         |        |   |       |   | 7       |   |  |   | 7       |  
|Mark-to-market fair value adjustments                                                     |  |                                      |       |   |                                      |   | 654     |       |  |   | 654                   |   |  |                         |        |   |       |   | 809     |   |  |   | 809     |  
|Settlement of contracts (a)                                                               |  |                                      | 2,423  |   |                                      |   |        |       |  |   | 2,423                 |   |  |                         | (660    | ) |       |   |        |   |  |   | (660    | )
|                                                                                          |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Natural Gas Total                                                                         |  |                                      | 2,423  |   |                                      |   | (165    | )     |  |   | 2,258                 |   |  |                         | (660    | ) |       |   | 816     |   |  |   | 156     |  
|                                                                                          |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Interest Rate                                                                             |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Reclassification of settled contracts included in prior periods mark-to-market adjustment |  |                                      |       |   |                                      |   | 458     |       |  |   | 458                   |   |  |                         |        |   |       |   |        |   |  |   |        |  
|Mark-to-market fair value adjustments                                                     |  |                                      |       |   |                                      |   | (152    | )     |  |   | (152                  | ) |  |                         |        |   |       |   | (356    | ) |  |   | (356    | )
|Settlement of contracts (a)                                                               |  |                                      | (566   | ) |                                      |   |        |       |  |   | (566                  | ) |  |                         | (182    | ) |       |   |        |   |  |   | (182    | )
|                                                                                          |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Interest Rate Total                                                                       |  |                                      | (566   | ) |                                      |   | 306     |       |  |   | (260                  | ) |  |                         | (182    | ) |       |   | (356    | ) |  |   | (538    | )
|                                                                                          |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  
|Gain (Loss) on Derivatives, Net                                                           |  | $                                    | 10,107 |   |                                      | $ | (14,960 | )     |  | $ | (4,853                | ) |  | $                       | (17,886 | ) |       | $ | (12,112 | ) |  | $ | (29,998 | )
|                                                                                          |  |                                      |        |   |                                      |   |         |       |  |   |                       |   |  |                         |         |   |       |   |         |   |  |   |         |  



|(a) | These amounts represent the realized gains and losses on settled derivatives, which before settlement are included in the mark-to-market fair value adjustments.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

As of September 30, 2009, we had entered into an interest rate swap derivative instrument which hedged our
interest rate risk associated with changes in LIBOR on $20.0 million of notional value. We use the interest rate swap agreement to manage the risk associated with interest payments on amounts outstanding from variable rate borrowings under our
Senior Credit Facility. Under our interest rate swap agreement, we agree to pay an amount equal to a specified fixed rate of interest times a notional principal amount, and to receive in return, a specified variable rate of interest times the same
notional principal amount. The interest rate under the swap is 4.15% and the agreement expires in November 2010. The fair value of the swap at September 30, 2009 was a liability of $0.9 million, a decrease of $0.1 million and $0.3 million
for the three and nine month periods ended September 30, 2009, respectively, based on current LIBOR quotes. We have accounted for the interest rate swap by recording the unrealized and realized gains for the three and nine months ended
September 30, 2009 in Gain (Loss) on Derivatives, Net on our Consolidated Statements of Operations.



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##### Table of Contents

REX ENERGY CORPORATION AND PREDECESSOR COMPANIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



Our derivative instruments are recorded on the balance sheet as either an asset, or a
liability, measured at its fair value. The fair value associated with our derivative instruments from continuing operations was a liability of approximately $0.7 million and an asset of $14.2 million at September 30, 2009 and September 30,
2008, respectively. The fair value is based on the valuation methodologies of our counterparties. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

Our open asset/(liability) financial commodity derivative instrument positions at September 30, 2009 consisted of:



|            |  |               |  |               |  |                         |  |                                  |        |  
|----------- |  | ------------- |  | ------------- |  | ----------------------- |  | -------------------------------- | ------ | -
|Period      |  | Contract Type |  | Volume        |  | AverageDerivative Price |  | Fair MarketValue($ in Thousands) |       
|Oil         |  |               |  |               |  |                         |  |                                  |        |  
|2009        |  | Swaps         |  | 48,000 Bbls   |  | $64.00                  |  | $                                | (317   | )
|2009        |  | Collars       |  | 99,000 Bbls   |  | $63.97  81.43          |  | $                                | (119   | )
|2010        |  | Swaps         |  | 180,000 Bbls  |  | $62.20                  |  | $                                | (2,188 | )
|2010        |  | Collars       |  | 408,000 Bbls  |  | $62.94  86.85          |  | $                                | (436   | )
|2011        |  | Collars       |  | 156,000 Bbls  |  | $65.00  100.50         |  | $                                | 225    |  
|            |  |               |  |               |  |                         |  |                                  |        |  
|            |  | Total         |  | 891,000 Bbls  |  |                         |  | $                                | (2,835 | )
|            |  |               |  |              
|Natural Gas |  |               |  |               |  |                         |  |                                  |        |  
|2009        |  | Swaps         |  | 30,000 Mcf    |  | $6.00                   |  | $                                | 3      |  
|2009        |  | Collars       |  | 300,000 Mcf   |  | $6.80  8.71            |  | $                                | 491    |  
|2010        |  | Swaps         |  | 120,000 Mcf   |  | $6.00                   |  | $                                | 10     |  
|2010        |  | Collars       |  | 1,680,000 Mcf |  | $6.61  9.48            |  | $                                | 1,434  |  
|2011        |  | Collars       |  | 1,560,000 Mcf |  | $6.62  11.03           |  | $                                | 1,099  |  
|2012        |  | Collars       |  | 600,000 Mcf   |  | $5.60  7.86            |  | $                                | (60    | )
|            |  |               |  |               |  |                         |  |                                  |        |  
|            |  | Total         |  | 4,290,000 Mcf |  |                         |  | $                                | 2,977  |  



16



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##### Table of Contents

REX ENERGY CORPORATION AND PREDECESSOR COMPANIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



The combined fair value of derivatives, none of which are designated or qualifying as
hedges, included in our Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 is summarized below ($ in thousands).



|                                          |  |                   |        |   |                  |   |        |  
|----------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                          |  | September 30,2009 |        |   | December 31,2008 |  
|Short-Term Derivative Assets:             |  |                   |        |   |                  |   |        |  
|Crude Oil  Swaps                         |  | $                 |       |   |                  | $ | 1,821  |  
|Crude Oil  Collars                       |  |                   | 629    |   |                  |   | 5,241  |  
|Natural Gas  Swaps                       |  |                   | 10     |   |                  |   |       |  
|Natural Gas  Collars                     |  |                   | 1,665  |   |                  |   | 1,091  |  
|                                          |  |                   |        |   |                  |   |        |  
|Total Short Term Derivative Assets       |  | $                 | 2,304  |   |                  | $ | 8,153  |  
|                                          |  |                   |        |   |                  |   |        |  
|Long-Term Derivative Assets:              |  |                   |        |   |                  |   |        |  
|Crude Oil  Swaps                         |  | $                 |       |   |                  | $ |       |  
|Crude Oil  Collars                       |  |                   | 409    |   |                  |   | 5,511  |  
|Natural Gas  Swaps                       |  |                   | 3      |   |                  |   |       |  
|Natural Gas  Collars                     |  |                   | 1,618  |   |                  |   | 2,050  |  
|                                          |  |                   |        |   |                  |   |        |  
|Total Long  Term Derivative Assets       |  | $                 | 2,030  |   |                  | $ | 7,561  |  
|                                          |  |                   |        |   |                  |   |        |  
|Total Derivative Assets                   |  | $                 | 4,334  |   |                  | $ | 15,714 |  
|                                          |  |                   |        |   |                  |   |        |  
|Short-Term Derivative Liabilities:        |  |                   |        |   |                  |   |        |  
|Crude Oil  Swaps                         |  | $                 | (1,957 | ) |                  | $ |       |  
|Crude Oil  Collars                       |  |                   | (1,077 | ) |                  |   |       |  
|Natural Gas  Swaps                       |  |                   |       |   |                  |   |       |  
|Natural Gas  Collars                     |  |                   | (97    | ) |                  |   |       |  
|                                          |  |                   |        |   |                  |   |        |  
|Total Short  Term Derivative Liabilities |  | $                 | (3,131 | ) |                  | $ |       |  
|                                          |  |                   |        |   |                  |   |        |  
|Long-Term Derivative Liabilities:         |  |                   |        |   |                  |   |        |  
|Crude Oil  Swaps                         |  | $                 | (546   | ) |                  | $ | (303   | )
|Crude Oil  Collars                       |  |                   | (293   | ) |                  |   | (2     | )
|Natural Gas  Swaps                       |  |                   |       |   |                  |   |       |  
|Natural Gas  Collars                     |  |                   | (222   | ) |                  |   |       |  
|Interest Rate  Swap                      |  |                   | (863   | ) |                  |   | (1,171 | )
|                                          |  |                   |        |   |                  |   |        |  
|Total Long  Term Derivative Liabilities  |  | $                 | (1,924 | ) |                  | $ | (1,476 | )
|                                          |  |                   |        |   |                  |   |        |  
|Total Derivative Liabilities              |  | $                 | (5,055 | ) |                  | $ | (1,476 | )
|                                          |  |                   |        |   |                  |   |        |  

Effective January 1, 2008, we adopted FASB ASC 820-10, which among other things,
requires enhanced disclosures about assets and liabilities carried at fair value. As defined in FASB ASC 820-10, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). We



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(UNAUDITED)



utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to utilize the best available information. FASB ASC 820-10
establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest
priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy defined by FASB ASC 820-10 are as follows:

Level 1Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

Level 2Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial
instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and
current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist primarily of commodity swaps and collars, are valued using commodity market data which is derived by
combining raw inputs and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level
2.

Level 3Pricing inputs include significant inputs that are generally less observable from objective sources. These
inputs may be used with internally developed methodologies that result in managements best estimate of fair value. At September 30, 2009, we have no significant Level 3 measurements.

The following table presents the fair value hierarchy table for assets and liabilities measured at fair value ($ in thousands):



|                                          |  |                                           |         |   |                                                           |   |                                           |  |   |                                        |  |      |   |  |  |  |   |         |  
|----------------------------------------- |  | ----------------------------------------- | ------- | - | --------------------------------------------------------- | - | ----------------------------------------- |  | - | -------------------------------------- |  | ---- | - |  |  |  | - | ------- | -
|                                          |  |                                           |         |   | Fair Value Measurements at September 30, 2009 Using:      |  
|                                          |  | TotalCarryingValue as ofSeptember 30,2009 |         |   | Quoted Pricesin
ActiveMarkets forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|Derivatives  commodity swaps and collars |  | $                                         | 142     |   |                                                           | $ |                                          |  | $ |                                        |  | 142  |   |  |  |  | $ |        |  
| interest rate swaps                     |  | $                                         | (863    | ) |                                                           | $ |                                          |  | $ |                                        |  | (863 | ) |  |  |  | $ |        |  
|Asset Retirement Obligations              |  | $                                         | (16,166 | ) |                                                           | $ |                                          |  | $ |                                        |  |     |   |  |  |  | $ | (16,166 | )

Our derivative commodity swaps and collars and interest rate swaps are valued by a
third-party using valuation models that are primarily industry-standard models that consider various inputs including: quoted forward prices; time value; volatility factors; and current market and contractual prices for the underlying instruments,
as well as other relevant economic measures. We classify our derivatives as Level 2 if the inputs used in the valuation models are directly observable for substantially the full term of the instrument; however, if the significant inputs were not
observable for substantially the full term of the instrument, we would classify those derivatives as Level 3. We categorize our measurements as Level 2 because the valuation of our derivative commodity swaps and collars and interest rate swaps are
based on similar transactions observable in active markets or industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the
full term of the instruments.

Asset Retirement Obligations

We report the fair value of asset retirement obligations on a nonrecurring basis in our Balance Sheets. We estimate the fair value of asset
retirement obligations based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an asset retirement obligation; estimated probabilities, amounts
and timing of settlements; the credit-adjusted risk-free rate to be used; and inflation rates. These inputs are unobservable, and thus result in a Level 3 classification. Refer to Note 3 for a summary of changes in the asset retirement obligation.
See Note 3 for further information on asset retirement obligations.



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8. INCOME TAXES

We account for income taxes in accordance with FASB ASC 740. Under FASB ASC 740, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect of any tax rate change on deferred taxes is recognized in the period that includes the enactment date of the tax rate change. Realization of
deferred tax assets is assessed and, if not more likely than not, a valuation allowance is recorded to write down the deferred tax assets to their net realizable value.

Income tax included in continuing operations was as follows ($ in thousands):



|                             |  |                                  |      |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|---------------------------- |  | -------------------------------- | ---- | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                             |  | Three Months Ended September 30, |      |   | Nine Months Ended September 30, |  
|                             |  | 2009                             |      |   | 2008                            |   |        | 2009 |  |   | 2008   |  
|Income Tax Expense (Benefit) |  | $                                | (959 | ) |                                 | $ | 24,899 |      |  | $ | (8,004 | ) |  | $ | (5,789 | )
|Effective Tax Rate           |  |                                  | 44.7 | % |                                 |   | 40.4   | %    |  |   | 40.1   | % |  |   | 40.8   | %

For the three and nine months ended September 30, 2009, our overall effective
tax rate on pre-tax losses from continuing operations was different than the statutory rate of 35% due primarily to state income taxes, valuation allowances and other permanent differences. For the three and nine months ended September 30,
2008, our overall effective tax rate on pretax income and loss from continuing operations was different than the statutory rate of 35% due primarily to state income taxes and other permanent differences.

Effective August 1, 2007, we adopted FASB ASC 740-10, which clarifies the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with FASB ASC 740. FASB ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be
taken, in a tax return. FASB ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Our practice is to recognize interest related to income tax
expense in Interest Expense and Penalties in General and Administrative expense.

We also adopted FASB ASC 740-10-25-9 as of
August 1, 2007. FASB ASC 740-10-25-9 provides that a companys tax position will be considered settled if the taxing authority has completed its examination, the company does not plan to appeal and it is remote that the taxing authority
would reexamine the tax position in the future.

The adoption of FASB ASC 740-10 and FASB ASC 740-10-25-9 did not have a
significant effect on our financial position, results of operations or cash flows.

At December 31, 2008, we had net
operating loss (NOL) carryforwards of $8.1 million that expire between 2027 and 2028. Our management continuously evaluates the facts and circumstances representing positive and negative evidence in the determination of our ability to
realize the deferred tax assets, which consist primarily of NOLs and deductible temporary differences. We recorded a valuation allowance for certain deferred tax assets as of September 30, 2009 of approximately $1.0 million based on our
evaluation of available positive and negative evidence. During this evaluation, we considered the scheduled reversal of deferred tax liabilities (including the impact of carryback and carryforward periods), projected future taxable income and
tax-planning strategies. A valuation allowance is recorded for deferred tax assets when it is not more likely than not that a deferred tax asset will be realized. The amount of the deferred tax assets considered realizable could be reduced if
estimates of future taxable income during the carryforward period are reduced.

We file a consolidated federal income tax
return and separate or consolidated state income tax returns in the United States Federal jurisdiction and in many state jurisdictions. We are subject to U.S. Federal income tax examinations and to various state tax examinations for periods after
August 1, 2007.

9. CAPITAL STOCK

We have authorized capital stock of 100,000,000 shares of common stock and 100,000 shares of preferred stock. As of September 30, 2009 and December 31, 2008, we had 36,817,812 and 36,589,712
shares of common stock outstanding, respectively.

On May 5, 2008, we completed a public offering of 9.8 million
shares of common stock at an offering price of $20.75 per share. These shares included 5.8 million shares offered by us (which includes 1.3 million shares sold pursuant to the exercise of an over-allotment option granted to the
underwriters of the offering) and 4.0 million shares sold by certain selling stockholders. The net proceeds to us from the underwritten public offering, after underwriting discounts and offering expenses of approximately $6.8 million,
were approximately $113.0 million. We used a portion of the net proceeds from this offering to fund, in part, our capital expenditure program for 2008, including our enhanced oil recovery project in the Lawrence Field in Lawrence County, Illinois
(which we refer to as our alkali-surfactant-polymer (ASP) project) and our leasing and drilling activities in the Marcellus Shale and for other corporate purposes. Additionally, we used a portion of the net proceeds to repay borrowings
under our Senior Credit Facility and made investments in short-term, investment grade, interest-bearing securities. We will re-borrow amounts from time-to-time under our Senior Credit Facility as capital expenditures exceed overnight investments and
cash flow from operations in periods subsequent to the offering.



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(UNAUDITED)



10. EMPLOYEE BENEFIT AND EQUITY PLANS

401(k) Plan

We sponsor a 401(k) plan for eligible employees who have satisfied age and service requirements. Employees can make contributions to the plan up to allowable limits. Our matching contributions to the plan are discretionary and we ceased to
provide a matching contribution to the 401(k) plan beginning in January 2009. During June 2009, our management made the decision to resume our matching contributions to the 401(k) plan beginning in July 2009. Our contributions to the plan were
$49,000 and $69,000 for the three months ended September 30, 2009 and 2008 and $99,000 and $198,000 for the nine months ended September 30, 2009 and 2008, respectively.

Equity Plans

In December 2004, the FASB issued ASC 718. FASB ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their grant-date fair values, using
prescribed option-pricing models. The fair value is expensed over the requisite service period of the individual grantees, which generally equals the vesting period.

Effective August 1, 2007, we adopted the FASB ASC 718 fair value method of accounting for share-based payment. Prior to August 1, 2007, we did not have any share-based payments to employees or
directors.

FASB ASC 718 also requires the benefits of tax deductions in excess of recognized compensation to be reported as a
financing cash flow, rather than as an operating cash flow as required under previous literature. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. There were no tax benefits
recognized during the three and nine month periods ended September 30, 2009 and 2008.

2007 Long-Term Incentive Plan

We have granted stock options, stock appreciation rights and restricted stock awards to various employees and non-employee
directors under the terms of our 2007 Long-Term Incentive Plan (the Plan). The Plan is administered by the Compensation Committee of our Board of Directors (the Compensation Committee). Among the Compensation Committees
responsibilities are: selecting participants to receive awards; determining the form, amount and other terms and conditions of awards; interpreting the provisions of the Plan or any award agreement; and adopting such rules, forms, instruments and
guidelines for administering the Plan as it deems necessary or proper. All actions, interpretations and determinations by the Compensation Committee are final and binding. The composition of the Compensation Committee is intended to permit the
awards under the Plan to qualify for exemption under Rule 16b-3 of the Exchange Act. In addition, awards under the Plan, including annual incentive awards paid to executive officers subject to section 162(m) of the Code or covered employees,
are intended to satisfy the requirements of section 162(m) to permit the deduction by us of the associated expenses for federal income tax purposes.

All awards granted under the Plan have been issued at the prevailing market price at the time of the grant. All outstanding stock options have been awarded with five or ten year expiration at an exercise
price equal to our closing price on the NASDAQ Global Market on the day the award was granted. A forfeiture rate based on a blended average of individual participant terminations and number of awards cancelled is used to estimate forfeitures
prospectively.

Stock Options

During the nine month period ended September 30, 2009, the Compensation Committee awarded nonqualified options to purchase a total of 68,888 shares of our common stock to one employee and four
non-employee directors. The nonqualified stock option granted to our employee has an exercise price equal to the closing price of our common stock on the NASDAQ Global Market on the date of the grant, and vests and become exercisable on the third
anniversary of the grant date, provided that the option holder remains our employee until that date. The nonqualified stock options granted to our non-employee directors have an exercise price equal to the closing price of our common stock on the
NASDAQ Global Market on the date of the grant, and vest and become exercisable in one-third increments on the first, second and third year anniversaries of the date of grant. All options will vest and become immediately exercisable upon a
change in control of us, as such term is defined in the Plan.

Stock options represent the right to purchase
shares of common stock in the future at the fair market value of the stock on the date of grant. In the event that any outstanding award expires, is forfeited, cancelled or otherwise terminated without the issuance of shares of our common stock or
is otherwise settled in cash, shares of our common stock allocable to such award, including the unexercised portion of such award, shall again be available for the purposes of the Plan. If any award is exercised by tendering shares of our common
stock to us, either as full or partial payment, in connection with the exercise of such award under the Plan or to satisfy our withholding obligation with respect to an award, only the number of shares of our common stock issued net of such shares
tendered will be deemed delivered for purposes of determining the maximum number of shares of our common stock then available for delivery under the Plan.



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(UNAUDITED)



A summary of the stock option activity is as follows:



|                                  |  |          |   |  |                               |      
|--------------------------------- |  | -------- | - |  | ----------------------------- | -----
|                                  |  | Shares   |   |  | WeightedAverageExercise Price
|Outstanding on December 31, 2008  |  | 993,700  |   |  | $                             | 13.75
|Granted                           |  | 68,888   |   |  |                               | 4.84 
|Exercised                         |  |         |   |  |                               |     
|Forfeited                         |  | (188,751 | ) |  |                               | 11.60
|                                  |  |          |   |  |                               |      
|Outstanding on September 30, 2009 |  | 873,837  |   |  | $                             | 13.41

Stock-based compensation expense relating to stock options for the three and nine
month periods ended September 30, 2009 totaled a credit of $0.3 million and expense of $0.7 million, respectively, compared to $0.5 million and $1.4 million, respectively, for the same periods in 2008. We recognized a credit during the three
months ended September 30, 2009 due to the true-up of our annualized forfeiture rate. In accordance with the provisions of FASB ASC 718, we will record additional expense if the actual forfeiture rate is lower than we estimate, and will record
a recovery of expense if the actual forfeiture rate is higher than we estimate. The expense related to stock option grants was recorded on our Consolidated Statements of Operations under the heading of General and Administrative Expense.

A summary of the status of our issued and outstanding stock options as of September 30, 2009 is as follows:



|               |  |                             |  |                                                  |  |                               |       |                             |         |                               |   |      
|-------------- |  | --------------------------- |  | ------------------------------------------------ |  | ----------------------------- | ----- | --------------------------- | ------- | ----------------------------- | - | -----
|               |  | Outstanding                 |  | Exercisable                                     
|Exercise Price |  | NumberOutstandingAt 9/30/09 |  | Weighted-AverageRemainingContractualLife (Years) |  | Weighted-AverageExercisePrice |       | NumberExercisableAt 9/30/09 |         | Weighted-AverageExercisePrice
|$9.50          |  | 125,000                     |  | 8.11                                             |  | $                             | 9.50  |                             | 41,667  |                               | $ | 9.50 
|$9.99          |  | 363,749                     |  | 8.10                                             |  | $                             | 9.99  |                             | 58,749  |                               | $ | 9.99 
|$13.56         |  | 33,200                      |  | 8.39                                             |  | $                             | 13.56 |                             |        |                               |   |     
|$22.34         |  | 50,000                      |  | 8.55                                             |  | $                             | 22.34 |                             | 12,000  |                               | $ | 22.34
|$23.00         |  | 75,000                      |  | 8.60                                             |  | $                             | 23.00 |                             |        |                               |   |     
|$23.88         |  | 75,000                      |  | 3.64                                             |  | $                             | 23.88 |                             |        |                               |   |     
|$23.28         |  | 10,000                      |  | 3.78                                             |  | $                             | 23.28 |                             |        |                               |   |     
|$19.92         |  | 26,000                      |  | 3.87                                             |  | $                             | 19.92 |                             |        |                               |   |     
|$21.10         |  | 30,000                      |  | 3.90                                             |  | $                             | 21.10 |                             |        |                               |   |     
|$5.60          |  | 17,000                      |  | 4.12                                             |  | $                             | 5.60  |                             |        |                               |   |     
|$3.24          |  | 7,500                       |  | 4.28                                             |  | $                             | 3.24  |                             |        |                               |   |     
|$5.04          |  | 61,388                      |  | 4.60                                             |  | $                             | 5.04  |                             |        |                               |   |     
|               |  |                             |  |                                                  |  |                               |       |                             |         |                               |   |      
|Total          |  | 873,837                     |  | 7.12                                             |  | $                             | 13.41 |                             | 112,416 |                               | $ | 11.13

The weighted average remaining contractual term and the aggregate intrinsic value for
options outstanding at September 30, 2009 were 7.12 years and $0.3 million, respectively. As of September 30, 2009, unrecognized compensation expense related to stock options totaled approximately $2.0 million, which will be recognized
over a weighted average period of 1.27 years.

Stock Appreciation Rights

Stock appreciation rights (SARs) represent the right to receive cash or shares of common stock in the future equivalent to the
difference between the fair market value at the time of exercise and the exercise price. The Compensation Committee awarded 109,500 SARs during 2008, which have an exercise price of $13.56, the closing price of our common stock on the NASDAQ Global
Market on the date of the grant, and vest and become exercisable on the third anniversary of the grant date, provided that the holder



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(UNAUDITED)



remains our employee until that date. The SARs also provide that all unvested SARs vest and become immediately exercisable upon a change in control of us, as such term is defined in
the Plan. The outstanding SARs issued may only be exercised for cash settlement. Compensation expense relating to SARs for the three and nine month periods ending September 30, 2009 totaled $89,000 and $157,000, respectively, compared to a
credit of $106,000 and expense of $121,000 for the same periods in 2008. The expense related to SARs was recorded on our Consolidated Statements of Operations under the heading of General and Administrative Expense.



|             |  |                      |  |                           |  |                 |  |                                                  |  |                             |       |      |   |                                 |  
|------------ |  | -------------------- |  | ------------------------- |  | --------------- |  | ------------------------------------------------ |  | --------------------------- | ----- | ---- | - | ------------------------------- | -
|             |  | Outstanding          |  | Exercisable              
|Strike Price |  | Number ofSARsGranted |  | SARsForfeited orCancelled |  | SARsOutstanding |  | Weighted-AverageRemainingContractualLife (Years) |  | Weighted-AverageStrikePrice |       | SARs |   | Weighted- AverageExercise Price
|$ 13.56      |  | 109,500              |  | 36,000                    |  | 73,500          |  | 8.38                                             |  | $                           | 13.56 |      |  |                                 | 
|             |  |                      |  |                           |  |                 |  |                                                  |  |                             |       |      |   |                                 |  
|Total        |  | 109,500              |  | 36,000                    |  | 73,500          |  | 8.38                                             |  | $                           | 13.56 |      |  |                                 | 

Restricted Stock Awards

During the nine month period ended September 30, 2009, the Compensation Committee issued 261,850 shares of restricted common stock to 15
employees, with all restrictions on transfer associated with such shares scheduled to terminate in February 2012. The restricted common stock is valued at the closing price of our common stock on the NASDAQ Global Market on the date of the grant.
Restrictions on the transfer associated with vesting schedules were determined by the Compensation Committee on an individual award basis. The restrictions on the stock lapse immediately upon a change in control of us, as such term is
defined in the Plan. Compensation expense associated with the restricted stock award is recognized on a straight-line basis over the vesting period and totaled $47,000 and $159,000 for the three and nine month periods ended September 30, 2009,
respectively, compared to $23,000 and $37,000 for the same periods in 2008. As of September 30, 2009, total unrecognized compensation cost related to the restricted common stock grant was approximately $668,000.

A summary of the restricted stock activity for the nine months ended September 30, 2009 is as follows ($ in thousands, except per share
data):



|                                                  |  |                 |   |  |                                     |      
|------------------------------------------------- |  | --------------- | - |  | ----------------------------------- | -----
|                                                  |  | Number ofShares |   |  | WeightedAverage GrantDate FairValue
|Restricted stock awards, as of December 31, 2008  |  | 20,000          |   |  | $                                   | 23.00
|Awards                                            |  | 261,850         |   |  |                                     | 2.05 
|Forfeitures                                       |  | (33,750         | ) |  |                                     | 2.05 
|Restrictions released                             |  |                |   |  |                                     |     
|                                                  |  |                 |   |  |                                     |      
|Restricted stock awards, as of September 30, 2009 |  | 248,100         |   |  | $                                   | 3.74 

11. COMMITMENTS AND CONTINGENCIES

Legal Reserves

At September 30, 2009, our Consolidated Balance Sheet included approximately $599,000 in reserve for legal accruals relating to legal costs and expenses associated with lawsuits filed relating to our Marcellus Shale leasing activities
in the Commonwealth of Pennsylvania and the legal costs and expenses associated with the class action lawsuit pending in the United States District Court for the Southern District of Illinois. At December 31, 2008, our Consolidated Balance
Sheet included $327,000 in reserve for various legal matters and proceedings. The accrual of reserves for legal matters is included in Accrued Expenses on the Consolidated Balance Sheets. The establishment of a reserve involves an estimation process
that includes the advice of legal counsel and subjective judgment of management. While we believe that these reserves are adequate, it is reasonably possible that we could incur an additional loss, the amount of which is not currently estimable, in
excess of the amounts currently accrued with respect to those matters in which reserves have been established. Future changes in the facts and circumstances could result in actual liability exceeding the estimated ranges of loss and the amounts
accrued. Based on currently available information, we believe that it is remote that future costs related to known contingent liability exposures for legal proceedings will exceed current accruals by an amount that would have a material adverse
effect on our consolidated financial position or results of operations, although cash flow could be significantly impacted in the reporting periods in which such costs are incurred.



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(UNAUDITED)



Drilling and Development

At September 30, 2009, we had three drilling commitments in our Appalachian Basin. The first commitment requires us to drill five
natural gas wells and complete one natural gas well, which has already been started, by April, 2014. We estimate an average investment in each well to be $1.9 million for a total drilling commitment of $11.4 million over the next 5 years. Our second
drilling commitment requires us to drill one natural gas well by December 11, 2009 at an estimated cost of $1.9 million. Our third drilling commitment requires that we build one well location and proceed with the drilling of one vertical test
well, subject to rig availability, at an estimated cost of $1.9 million. If for any reason we do not meet this commitment we may be required to pay an amount equal to $100,000 upon the request of the landowner(s).

Leasing

At
September 30, 2009, we had committed to make three installment payment commitments on oil and gas interests that were previously leased. The first commitment provides that we pay $350 per mineral acre for 5,722 acres, or a total commitment of
$2.0 million, in 2012. The second commitment requires that we pay $250 per mineral acre for 5,761 acres, or $1.4 million, in each of the next three years for a total commitment of $4.3 million. The third commitment requires that we pay $350 per
mineral acre for 762 acres, or $267,000, in each of the next four years for a total commitment of $1.1 million. Amounts due within the next 12 months have been recorded on the Balance Sheets as Accrued Expenses and amounts due beyond 12 months have
been recorded on the Balance Sheets as Other Deposits and Liabilities.

Environmental

Due to the nature of the oil and natural gas business, we are exposed to possible environmental risks. We have implemented various policies
and procedures to avoid environmental contamination and risks from environmental contamination. We conduct periodic reviews of our policies and properties to identify changes in the environmental risk profile. These reviews evaluate whether there is
a probable liability, its amount and the likelihood that the liability will be incurred. The amount of any potential liability is determined by considering, among other matters, incremental direct costs of any likely remediation and the
proportionate cost of employees who are expected to devote a significant amount of time directly to any remediation effort.

We manage our exposure to environmental liabilities on properties to be acquired by identifying existing problems and assessing the potential liability. Except for contingent liabilities associated with
the enforcement action initiated by the U.S. EPA and the class action litigation filed in the U.S. District Court of the Southern District of Illinois relating to alleged H2S emissions in the Lawrence Field, we know of no significant probable or possible environmental contingent liabilities.

Contract Wells

In March 2004, we purchased from Standard Steel, LLC certain contractual rights associated with various gas purchase contracts relating to 19 natural gas wells located in Westmoreland County,
Pennsylvania. Under the terms of the contracts, we buy 100.0% of the production from these wells from third parties at contracted, fixed prices. The prices we pay may range from $1.10 per Mcf to 55.0% of the market price, plus a $0.10 per Mcf
surcharge. There is no loss on these commitments. We have recorded the gross revenue and costs in the Consolidated Statements of Operations. We sell the natural gas extracted from these contract wells to parties unrelated to these natural gas wells
and contracts.

Letters of Credit

At September 30, 2009, we had posted $0.8 million in various letters of credit to secure our drilling and related operations.

Lease Commitments

At September 30, 2009, we had lease commitments for two different office locations. Rent expense has been recorded in General and Administrative expense on our Consolidated Statements of Operations for continued operations as $0.1
million and $0.3 million for the three and nine month periods ended September 30, 2009, respectively, and $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2008, respectively. Lease commitments by year
for each of the next five years are presented in the table below ($ in thousands):



|           |  |   |      
|---------- |  | - | -----
|2009       |  | $ | 112  
|2010       |  |   | 452  
|2011       |  |   | 454  
|2012       |  |   | 456  
|2013       |  |   | 479  
|Thereafter |  |   |     
|           |  |   |      
|Total      |  | $ | 1,953



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REX ENERGY CORPORATION AND PREDECESSOR COMPANIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



PennTex Illinois and Rex OperatingH2S Class Action Litigation

PennTex Illinois and Rex Operating are defendants in a class action lawsuit that has been filed in the United States
District Court for the Southern District of Illinois. This action was commenced on October 17, 2006, by plaintiffs Julia Leib and Lisa Thompson, individually and as putative class representatives on behalf of all persons and non-governmental
entities that own property or reside on property located in the towns of Bridgeport and Petrolia, Illinois. The complaint asserts that the operation of oil wells that are controlled owned or operated by PennTex Illinois and Rex Operating has
resulted in serious contamination of the class area with H2S. The complaint asserts several causes of action, including violation of the Illinois Environmental Protection Act, negligence, private nuisance, trespass, and willful and wanton misconduct. The complaint was amended in March 2007 to add a
claim for alleged violation of Section 7002(a)(1) of the Resource Conservation And Recovery Act. The complaint seeks, among other things, injunctive relief under the Illinois Environmental Protection Act and Illinois common law, compensatory
and other damages, punitive damages, and attorneys fees and costs. In addition, the complaint seeks the creation of a court-supervised, defendant-financed fund to pay for medical monitoring for the plaintiffs and others in the class area.
PennTex Illinois and Rex Operating have filed a joint answer to the amended complaint denying virtually all of the allegations in the amended complaint and asserting affirmative defenses thereto.

The plaintiffs filed an amended motion for class certification on January 22, 2008 and PennTex Illinois and Rex
Operating filed a joint motion opposing class certification on February 22, 2008. On December 19, 2008, the district court issued a preliminary ruling on certification, indicating its conclusion that several of the class action
prerequisites were met and that it was likely to certify a class to adjudicate two issues relating to the emission of H2S in the putative class area, while reserving all remaining issues for subsequent individual adjudications. The district
court denied the plaintiffs motion to certify a class in reference to the plaintiffs medical monitoring claim. The district court requested that the plaintiffs submit a revised class definition consistent with its order, which was
submitted by the plaintiffs on January 16, 2009. On January 28, 2009, PennTex Illinois and Rex Operating filed an objection to the plaintiffs revised class definition and requested that the district court deny the plaintiffs
motion for class certification.

On February 26, 2009, the district court issued an order approving the geographic scope
of the plaintiffs revised class definition. In its order, the district court denied plaintiffs request to include all residents and landowners within the geographic area of the class owning property since October 17, 2006, the date
the lawsuit was filed, and limited the class to only current property owners. On March 11, 2009, PennTex Illinois and Rex Operating filed a petition for leave to appeal with the United States Court of Appeals for the Seventh Circuit to appeal
the district courts class certification order on an interlocutory basis. On April 2, 2009, the United States Court of Appeals for the Seventh Circuit denied the petition for leave to appeal filed by PennTex Illinois and Rex Operating.

On July 21, 2009, the district court issued an order approving the plaintiffs proposed class notification plan and
providing that plaintiffs have 30 days from the date of the order to mail the approved class notice to the class members. The order provides that class members have until October 16, 2009 to decide whether to opt out of the class. The district
court further ordered that a trial date and discovery schedule be set by a magistrate judge of the district. On August 18, 2009, the magistrate judge issued an order adopting a joint report and proposed scheduling and discovery order and set a
trial date for September 2010.

We intend to vigorously defend against the claims that have been asserted against PennTex
Illinois and Rex Operating in this lawsuit. Because this lawsuit is in its initial phase, however, and because it is usually difficult to predict the outcome of litigation, we are unable to express an opinion with respect to the likelihood of an
unfavorable outcome or to estimate the amount or the range of potential loss should the outcome be unfavorable to us.

PennTex ResourcesWood Arbitration and Confirmation of Arbitration Award

PennTex Resources was a litigant
in an appeal in the United States Court of Appeals for the Fifth Circuit entitled Scott Y. Wood v. PennTex Resources, L.P., Case No. 08-20462. The case was an appeal of a final judgment that was signed on June 27, 2008
by the United States District Court for the Southern District of Texas, Houston Division. The final judgment confirmed an award issued on August 20, 2007 by an arbitration panel convened by the American Arbitration Association in Houston,
Texas. The principal claim in the arbitration proceeding was PennTex Resources claim that Wood, and his wholly owned corporation, ERG Illinois Holdings, Inc., should be ordered to comply with a claim release obligation contained in
a stock purchase agreement signed in 2005 that required Wood, under certain designated circumstances, to dismiss or release the individual claims that he was prosecuting against Tsar Energy II, LLC (Tsar) and Richard A. Cheatham
(Cheatham) in the 334th Judicial District Court of Harris County, Texas (the Tsar Case). PennTex Resources became obligated to file this arbitration proceeding seeking to enforce Woods claim release
obligation by reason of an agreement that PennTex Illinois and PennTex Resources entered into on March 2, 2006 with Tsar and Cheatham in order to resolve certain procedural issues relating to the Tsar Case.

On August 20, 2007, the arbitration panel ordered Wood to promptly provide PennTex Resources with a signed release or dismissal of his
claims filed in the Tsar Case and required Wood to pay PennTex Resources a total of $141,003. On September 8, 2008, Scott Y. Wood (Wood) filed an appeal with the United States Court of Appeals for the Fifth Circuit requesting the
appellate court to reverse the district courts prior decision compelling Wood to participate in the arbitration proceeding and its order confirming the arbitration award. In connection with his appeal, Wood deposited into the registry of the
district court an amount equal to the judgment against him and a fully executed release of his claims against Tsar and Cheatham. On October 10, 2008, PennTex Resources filed its response brief opposing Woods appeal and requesting the
appellate court to affirm the district courts final judgment against Wood. On April 23, 2009, the United States Court of Appeals for the Fifth Circuit held that the district court



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



properly ordered Wood to arbitration and affirmed the district courts confirmation of the arbitration award. Wood did not appeal the decision of the United States Court of Appeals for the
Fifth Circuit. As a result, on August 27, 2009, all funds held by the court to satisfy the judgment against Wood, along with Woods release of his claims against Tsar and Cheatham, were released to PennTex Resources by the district court,
thus concluding the matter.

Litigation Related to Proposed Oil and Gas Leases in Westmoreland and Clearfield Counties,
Pennsylvania

On July 2, 2009, Rex Energy Corporation and its wholly-owned subsidiary, Rex Energy I, LLC (Rex
I), were named as defendants in a proposed class action lawsuit filed on that date in the Court of Common Pleas of Westmoreland County, Pennsylvania (the Snyder Case). The named plaintiffs are Clyde J. Snyder and Janelle Snyder,
William L. Snyder II, and Ray E. White and Sandra K. White, who have sued on behalf of themselves and all persons who are alleged to be similarly situated to such named plaintiffs by reason of having signed in 2008 alleged oil and gas
lease agreements with Rex I relating to property located in Westmoreland County, Pennsylvania or elsewhere in Pennsylvania as to which Duncan Land & Energy, Inc. (Duncan Land) allegedly acted as land agent for Rex I or Rex
Energy Corporation, and as to which the rental or bonus payments described in the alleged oil and gas leases have not been paid. The alleged oil and gas leases at issue in the lawsuit are on forms that provide for execution by Rex I. The
plaintiffs filing of the complaint followed Rex Is election not to execute or accept the plaintiffs proposed oil and gas leases and Rex Is written notification to the plaintiffs and other proposed lessors that their proposed
oil and gas leases had been rejected.

The complaint in the Snyder Case generally asserts that a binding contract was formed
between Rex I and the plaintiffs, and other persons within the proposed class, when defendants landmen/Duncan Land presented a form of proposed oil and gas lease to each such person, and each such person signed the proposed oil and
gas lease form and delivered the executed proposed lease to defendants landmen/Duncan Land. The plaintiffs make this assertion notwithstanding that none of defendants employees are believed to have negotiated directly with
any of the named plaintiffs or proposed class members. In addition, the plaintiffs make this assertion notwithstanding that Duncan Land acted as an independent contractor for Rex I pursuant to an agreement that explicitly states that Duncan Land has
no authority to bind Rex I to an oil and gas lease, and notwithstanding that each of the proposed leases on its face contemplates the execution of the lease by Rex I, which the defendants will assert put each of the lessors of the proposed leases on
notice that no binding lease would be created unless Rex I elected to accept and sign each of the proposed oil and gas leases. Despite the foregoing, the complaint in the Snyder Case alleges that defendants landmen/Duncan Land had
the authority to offer and/or accept each of the proposed oil and gas leases on behalf of Rex I, and also pleads causes of action against Rex I and Rex Energy Corporation premised on theories of breach of contract, tortious interference with
contract and civil conspiracy. The plaintiffs seek a judgment declaring that each of the proposed oil and gas leases transferred an interest in real estate to Rex I, and that each of such proposed leases constitutes a binding contract enforceable
against Rex I and Rex Energy Corporation, and further declaring the rights of the parties with respect to those proposed leases, as well as damages and other relief as may be established by plaintiffs at trial, together with interest, costs,
expenses and attorneys fees.

We intend to vigorously defend against the plaintiffs attempts to certify the
proposed class and to vigorously defend against all of the claims that have been asserted against Rex I and Rex Energy Corporation in this lawsuit. Because this lawsuit was only recently initiated, we are currently unable to express an opinion with
respect to the likelihood of an unfavorable outcome. However, because we have information that allows us to identify the total number of proposed leases that Rex I has rejected that could potentially be within the scope of the proposed class as
described in the complaint, we are able to estimate the aggregate acreage and aggregate amount of prepaid rentals or bonuses that could potentially be at issue in the event that the plaintiffs were to be successful in their efforts to certify their
proposed class, and in thereafter obtaining a judgment that each of the proposed oil and gas leases constitutes a binding obligation of Rex I or Rex Energy Corporation, and assuming that all persons who signed rejected oil and gas leases related to
lands located in Westmoreland County were to elect to submit claims in the Snyder Case. Specifically, we estimate that in such event the amount in controversy would encompass rentals or bonuses for oil and gas leases covering approximately 7,362
acres and a potential obligation for payment of prepaid rentals or bonuses totaling approximately $17.7 million. We are unable to estimate the amount or range of any potential losses that might be associated with other aspects of the
plaintiffs breach of contract claims in the Snyder Case, or with respect to the plaintiffs tort claims in the event of an unfavorable outcome with respect thereto.

Rex I is also a defendant in six other lawsuits involving oil and gas leasing activity that were filed during the Winter of 2008 and the
Spring of 2009 by individual plaintiffs in the Court of Common Pleas of Westmoreland County, Pennsylvania. These lawsuits involve similar claims and requests for relief as those made in the Snyder Case described above. The plaintiffs who have filed
these other lawsuits are represented by an attorney who is also representing the named plaintiffs in the Snyder Case. In general, the complaints in these other lawsuits assert that the plaintiffs, by executing and delivering their respective
proposed oil and gas leases to Rex I, sold to Rex I the right to produce oil and gas from their respective properties and created a binding obligation on Rex I to pay the rental consideration set forth in each of the proposed oil and gas leases. The
plaintiffs make this assertion notwithstanding that each of the proposed leases specifically contemplated the execution of the lease by Rex I, and notwithstanding that Rex I elected not to accept or sign each of the proposed oil and gas leases. The
complaints in these other lawsuits seek a judgment in favor of each set of plaintiffs in the amount of the rental or bonus consideration described in each of the proposed oil and gas leases, plus interest thereon and costs. We believe that the
plaintiffs claims in these other lawsuits are also without merit, and we intend to vigorously



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



defend against the claims asserted in each of these other lawsuits. Because these other lawsuits are in the initial stages of litigation, we are unable to express an opinion with respect to the
likelihood of an unfavorable outcome. In the event that the plaintiffs in each of these other lawsuits were to obtain a judgment that their respective proposed oil and gas lease constitutes a binding obligation of Rex I, we estimate that Rex
Is resulting responsibility for rentals or bonuses for the proposed oil and gas leases would cover a total of approximately 552 acres and amount to approximately $1.4 million. We are unable to estimate the amount or range of any other
potential losses in the event of an unfavorable outcome on the plaintiffs claims in these other lawsuits.

On
June 5, 2009, R.E. Gas Development, LLC (R.E. Gas), a wholly owned subsidiary of the Company, was named as a defendant in a lawsuit that was filed on that date in the Court of Common Pleas of Clearfield County, Pennsylvania (the
Liegey Case). The Liegey Case was brought by eight individuals who signed proposed oil and gas leases relating to approximately 127 acres of jointly-owned property located in Clearfield County, Pennsylvania. R.E. Gas elected not to
accept the plaintiffs proposed oil and gas lease, and as a result, did not pay to each of the plaintiffs the rental consideration set forth in the lease. The complaint in the Liegey Case asserts that binding contracts between R.E. Gas and the
plaintiffs were created when each of the plaintiffs executed a proposed oil and gas lease and delivered the executed proposed lease to a representative of Western Land Services, Inc. The complaint in the Liegey Case asserts causes of action against
R.E. Gas premised on theories of breach of contract, unjust enrichment and detrimental reliance. The complaint seeks a judgment in favor of the plaintiffs in the amount of $397,933.75, plus interest, costs and attorneys fees. We intend to
vigorously defend against these claims; however, because this lawsuit is in the initial stages of litigation, we are unable to express an opinion with respect to the likelihood of an unfavorable outcome. In the event that the plaintiffs were
successful in the Liegey Case, we estimate that R.E. Gas would be required to pay the plaintiffs an amount no greater than the damages sought in the plaintiffs complaint, plus interest, costs and attorneys fees.

Other

In
addition to the Asset Retirement Obligation discussed in Note 3, we have withheld from distributions to certain other working interest owners amounts to be applied towards their share of those retirement costs. These amounts total $302,000 at
September 30, 2009 and December 31, 2008 and are included in Other Liabilities on our Consolidated Balance Sheets.

12.
DISCONTINUED OPERATIONS/ASSETS HELD FOR SALE

On March 24, 2009, we completed the sale of certain oil and gas leases,
wells and related assets predominantly located in the Permian Basin in the states of Texas and New Mexico. We received net cash proceeds of approximately $17.3 million, which may be adjusted by certain post-closing adjustments, plus the assumption
of certain liabilities, based on an effective date of October 1, 2008. Upon closing of the sale, we used the proceeds to pay down our long-term borrowings on our Senior Credit Facility.

Pursuant to the accounting rules for discontinued operations, these assets were classified as Assets Held for Sale on our Balance Sheet as
of December 31, 2008, and results of operations are reflected in discontinued operations in our Consolidated Statements of Operations. At March 31, 2009, we recorded a loss on sale of assets of approximately $0.4 million in our
Consolidated Statement of Operations. Upon closing of the sale, we recorded severance wages in discontinued operations of approximately $0.2 million for our former employees in the Southwest Region. Summarized financial information for discontinued
operations is set forth in the table below, and does not reflect the costs of certain services provided. Such costs, which were not allocated to the discontinued operations were for services, including legal counsel, insurance, external audit fees,
payroll processing, certain human resource services and information technology systems support.



|                                                             |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------- | - | ---- | ---------------------------------------------------------------------------- | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                             |  | For the Three MonthsEnded September 30,($ in Thousands, Exceptper Share Data) |   |      | For the Nine MonthsEnded September 30,($ in Thousands, Exceptper Share Data) |       
|                                                             |  | 2009                                                                          |   | 2008 |                                                                              |        | 2009 |  |   | 2008   |  
|Revenues:                                                    |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Oil and Natural Gas Sales                                    |  | $                                                                             |  |      | $                                                                            | 1,934  |      |  | $ | 193    |   |  | $ | 6,041   |  
|Other Revenue                                                |  |                                                                               |  |      |                                                                              | 112    |      |  |   |       |   |  |   | 304     |  
|                                                             |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Total Operating Revenue                                      |  |                                                                               |  |      |                                                                              | 2,046  |      |  |   | 193    |   |  |   | 6,345   |  
|                                                             |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Costs and Expenses:                                          |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Production and Lease Operating Expense                       |  |                                                                               |  |      |                                                                              | 631    |      |  |   | 237    |   |  |   | 1,769   |  
|General and Administrative Expense (Income)                  |  |                                                                               |  |      |                                                                              | 207    |      |  |   | (97    | ) |  |   | 680     |  
|Exploration Expense of Oil and Gas Properties                |  |                                                                               |  |      |                                                                              | 1,074  |      |  |   |       |   |  |   | 2,195   |  
|Depreciation, Depletion, Amortization and Accretion          |  |                                                                               |  |      |                                                                              | 181    |      |  |   |       |   |  |   | 1,600   |  
|Loss on Sale of Assets                                       |  |                                                                               |  |      |                                                                              |       |      |  |   |       |   |  |   | 41      |  
|Gain on Derivatives                                          |  |                                                                               |  |      |                                                                              |       |      |  |   | (558   | ) |  |   |        |  
|Other Income                                                 |  |                                                                               |  |      |                                                                              |       |      |  |   |       |   |  |   | (2      | )
|                                                             |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Total Costs and Expenses                                     |  |                                                                               |  |      |                                                                              | 2,093  |      |  |   | (418   | ) |  |   | 6,283   |  
|                                                             |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Income (Loss) from Discontinued Operations Before Income Tax |  |                                                                               |   |      |                                                                              | (47    | )    |  |   | 611    |   |  |   | 62      |  
|Income Tax Expense (Benefit)                                 |  |                                                                               |  |      |                                                                              | (19    | )    |  |   | 288    |   |  |   | 25      |  
|                                                             |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Income (Loss) from Discontinued Operations, Net of Taxes     |  | $                                                                             |  |      | $                                                                            | (28    | )    |  | $ | 323    |   |  | $ | 37      |  
|                                                             |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Earnings per Common Share:                                   |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Basic and Diluted Income                                     |  | $                                                                             |  |      | $                                                                            |       |      |  | $ | 0.01   |   |  | $ |        |  
|Production:                                                  |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Crude Oil (Bbls)                                             |  |                                                                               |  |      |                                                                              | 11,085 |      |  |   | 7,507  |   |  |   | 34,452  |  
|Natural Gas (Mcf)                                            |  |                                                                               |  |      |                                                                              | 80,379 |      |  |   | 61,661 |   |  |   | 259,835 |  
|                                                             |  |                                                                               |   |      |                                                                              |        |      |  |   |        |   |  |   |         |  
|Total (BOE)                                                  |  |                                                                               |  |      |                                                                              | 24,482 |      |  |   | 17,784 |   |  |   | 77,758  |  



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



13. EARNINGS PER COMMON SHARE

Basic income per common share is calculated based on the weighted average number of common shares outstanding at the end of the period.
Diluted income per common share includes the speculative exercise of stock options and SARs, given that the hypothetical effect is not anti-dilutive. Due to our net loss from continuing operations for the three and nine months ended
September 30, 2009, we excluded all 873,837 of outstanding stock options and 73,500 of SARs because the effect would have been anti-dilutive to the computations. Stock appreciation rights for 73,500 shares and the option to purchase
1.1 million shares for the three months ended September 30, 2009 were not included in the computations of diluted net income per share because the grant prices were greater than the average market price of the common shares and would be
anti-dilutive to the computations. Due to our net loss from continuing operations for the nine months ended September 30, 2008, we excluded all 1.2 million of outstanding stock options and 73,500 SARs because the effect would have been
anti-dilutive to the computations. The following table sets forth the computation of basic and diluted earnings per common share (in thousands except per share amounts):



|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                       |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                       |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008    |  
|Numerator:                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net Income (Loss) From Continuing Operations           |  | $                               | (1,186 | ) |                                | $ | 36,783 |      |  | $ | (11,971 | ) |  | $ | (8,416 | )
|Net Income (Loss) From Discontinued Operations         |  |                                 |       |   |                                |   | (28    | )    |  |   | 323     |   |  |   | 37     |  
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net Income (Loss)                                      |  |                                 | (1,186 | ) |                                |   | 36,755 |      |  |   | (11,648 | ) |  |   | (8,379 | )
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Denominator:                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Weighted Average Common Shares Outstanding - Basic     |  |                                 | 36,834 |   |                                |   | 36,570 |      |  |   | 36,802  |   |  |   | 33,914 |  
|Effect of Dilutive Securities:                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Employee Stock Options and SARs                        |  |                                 |       |   |                                |   | 129    |      |  |   |        |   |  |   |       |  
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Weighted Average Common Shares Outstanding - Diluted   |  |                                 | 36,834 |   |                                |   | 36,699 |      |  |   | 36,802  |   |  |   | 33,914 |  
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                       |  |                                 |        |  
|Earnings per Common Share:                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic  Net Income (Loss) From Continuing Operations   |  | $                               | (0.03  | ) |                                | $ | 1.01   |      |  | $ | (0.33   | ) |  | $ | (0.25  | )
| Net Income From Discontinued Operations              |  |                                 |       |   |                                |   |       |      |  |   | 0.01    |   |  |   |       |  
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
| Net Income (Loss)                                    |  | $                               | (0.03  | ) |                                | $ | 1.01   |      |  | $ | (0.32   | ) |  | $ | (0.25  | )
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Diluted  Net Income (Loss) From Continuing Operations |  | $                               | (0.03  | ) |                                | $ | 1.00   |      |  | $ | (0.33   | ) |  | $ | (0.25  | )
| Net Income From Discontinued Operations              |  |                                 |       |   |                                |   |       |      |  |   | 0.01    |   |  |   |       |  
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
| Net Income (Loss)                                    |  | $                               | (0.03  | ) |                                | $ | 1.00   |      |  | $ | (0.32   | ) |  | $ | (0.25  | )
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



14. RELATED PARTY

Pursuant to the terms of the PEA signed with Williams, as discussed in Note 2, we agreed, with Williams, to form RW Gathering, LLC, a Delaware limited liability company (RW Gathering), to own
any gas gathering assets which we agree to jointly construct in order to facilitate the development of our Project Area. The initial members of RW Gathering are Williams Production Appalachia, LLC and R.E. Gas Development, LLC, our wholly owned
subsidiary, with each party owning an equal interest in the company. R.E. Gas Development, LLC will serve as the manager of RW Gathering until December 31, 2009. Beginning on January 1, 2010, Williams Production Appalachia, LLC will be the
manager of the company. We own 50% of RW Gathering and have the ability to exercise significant influence over its operating and financial policies, therefore we account for this investment via the equity method. Under the equity method, we recorded
our investment in RW Gathering of approximately $0.5 million on the Consolidated Balance Sheet as Investment in RW Gathering. RW Gathering recorded net losses from continuing operations of $657 and $746 during the three and nine month periods ended
September 30, 2009, respectively. The losses incurred were due to bank fees and DD&A expenses. Our share of the net loss from continuing operations is recorded on the Statement of Operations as Other Expense.

15. SUSPENDED EXPLORATORY WELL COSTS

We follow FASB ASC 932-235-50, which permits the continued capitalization of exploratory well costs if a well finds a sufficient quantity of reserves to justify its completion as a producing well and we
are making sufficient progress towards assessing the reserves and the economic and operating viability of the project.

The
following table reflects the net change in capitalized exploratory well costs for the nine months ended September 30, 2009 and the year ended December 31, 2008 ($ in thousands):



|                                                                                                   |  |                   |        |   |                  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                   |  | September 30,2009 |        |   | December 31,2008 |  
|Beginning Balance at January 1,                                                                    |  | $                 | 3,716  |   |                  | $ | 5,877  |  
|Additions to capitalized exploratory well costs pending the determination of proved reserves       |  |                   | 4,191  |   |                  |   | 2,324  |  
|Divested Wells                                                                                     |  |                   |       |   |                  |   | (4,485 | )
|Reclassification of wells, facilities, and equipment based on the determination of proved reserves |  |                   |       |   |                  |   |       |  
|Capitalized exploratory well costs charged to expense                                              |  |                   |       |   |                  |   |       |  
|                                                                                                   |  |                   |        |   |                  |   |        |  
|Ending Balance at December 31,                                                                     |  |                   | 7,907  |   |                  |   | 3,716  |  
|Less exploratory well costs that have been capitalized for a period of one year or less            |  |                   | (6,404 | ) |                  |   | (2,310 | )
|                                                                                                   |  |                   |        |   |                  |   |        |  
|Capitalized exploratory well costs for a period of greater than one year                           |  | $                 | 1,503  |   |                  | $ | 1,406  |  
|Number of projects that have exploratory well costs capitalized for a period of more than one year |  |                   | 1      |   |                  |   | 1      |  

The $1.5 million in capitalized well costs that have been capitalized for a period of
greater than one year were incurred in 2007 and 2008. These costs all relate to our ASP project in the Illinois Basin. Proved reserve quantities for tertiary recovery projects, such as the ASP project, typically take a longer period of time to
evaluate than conventional operations due to their capital intensive nature and longer lead time of producing results. We are continuously undergoing an analysis of various stimulation techniques, with the assistance of an outside third-party
consultant, to determine if economic quantities of crude oil can be produced from this project.

16. INTANGIBLE ASSETS

Our intangible assets are primarily comprised of sales agreements and we amortize our intangible assets on the straight-line method over
their respective estimated lives, which is, on average, five years. We amortize any costs incurred to renew or extend the



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REX ENERGY CORPORATION AND PREDECESSOR COMPANIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



terms of existing intangible assets over the contract term or estimated useful life, as applicable, using the straight-line method. Amortization expense for our intangible assets was $0.1 million
and $0.3 million for the three and nine month periods ending September 30, 2009, respectively, and $0.1 million and $0.3 million for the three and nine month periods ending September 30, 2008, respectively. The aggregate estimated annual
amortization expense the remainder of 2009, and for each of the next five calendar years is as follows: 2009 - $0.1 million; 2010 - $0.4 million; 2011 - $0.4 million; 2012 - $0.3 million; 2013 - $0; and 2014 - $0.

The following is a summary of intangible assets at the dates indicated (in thousands):



|                          |  |                   |       |   |                  |   |       |  
|------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                          |  | September 30,2009 |       |   | December 31,2008 |  
|Intangible Assets  Gross |  | $                 | 2,130 |   |                  | $ | 2,097 |  
|Accumulated Amortization  |  |                   | (903  | ) |                  |   | (591  | )
|                          |  |                   |       |   |                  |   |       |  
|Intangible Assets  Net   |  | $                 | 1,227 |   |                  | $ | 1,506 |  
|                          |  |                   |       |   |                  |   |       |  

17. SUBSEQUENT EVENTS

We have evaluated events or transactions that occurred subsequent to September 30, 2009 through the date and time this quarterly report
on Form 10-Q was filed. No additional events or transactions occurred that require recognition or disclosure at September 30, 2009.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

The following is managements discussion and analysis of certain significant factors that have affected aspects of our financial
position and results of operations during the periods included in the accompanying unaudited financial statements. You should read this in conjunction with the discussion under Managements Discussion and Analysis of Financial Condition
and Results of Operations and the audited financial statements for the year ended December 31, 2008 included in our Annual Report on Form 10-K/A and the unaudited financial statements included elsewhere herein.

We use a variety of financial and operational measurements at interim periods to analyze our performance. These measurements include an
analysis of production and sales revenue for the period; EBITDAX, a non-GAAP financial measurement; lease operating expenses per barrel of oil equivalent (LOE per BOE); and general and administrative (G&A) expenses as a
percentage of operating revenue.

Results of Continuing Operations



|                              |  |                                          |         |                                        |   |         |  |      |           |  |   |        
|----------------------------- |  | ---------------------------------------- | ------- | -------------------------------------- | - | ------- |  | ---- | --------- |  | - | -------
|                              |  | For the Three Months EndingSeptember 30, |         | For the Nine Months EndedSeptember 30,
|                              |  | 2009                                     |         | 2008                                   |   | 2009    |  | 2008
|Production:                   |  |                                          |         |                                        |   |         |  |      |           |  |   |        
|Oil and Condensate (Bbls)     |  |                                          | 177,589 |                                        |   | 196,780 |  |      | 542,467   |  |   | 574,690
|Natural Gas (Mcf)             |  |                                          | 405,001 |                                        |   | 250,704 |  |      | 1,026,409 |  |   | 764,293
|Natural Gas Liquids (Bbls)    |  |                                          | 1,845   |                                        |   |        |  |      | 1,845     |  |   |       
|                              |  |                                          |         |                                        |   |         |  |      |           |  |   |        
|Total (BOE)a                  |  |                                          | 246,934 |                                        |   | 238,564 |  |      | 715,380   |  |   | 702,072
|Average daily production:     |  |                                          |         |                                        |   |         |  |      |           |  |   |        
|Oil and Condensate (Bbls)     |  |                                          | 1,930   |                                        |   | 2,139   |  |      | 1,987     |  |   | 2,097  
|Natural Gas (Mcf)             |  |                                          | 4,402   |                                        |   | 2,725   |  |      | 3,760     |  |   | 2,789  
|Natural Gas Liquids (Bbls)    |  |                                          | 20      |                                        |   |        |  |      | 7         |  |   |       
|                              |  |                                          |         |                                        |   |         |  |      |           |  |   |        
|Total (BOE)a                  |  |                                          | 2,684   |                                        |   | 2,593   |  |      | 2,620     |  |   | 2,562  
|Average sales price:          |  |                                          |         |                                        |   |         |  |      |           |  |   |        
|Oil and Condensate (per Bbl)  |  | $                                        | 64.77   |                                        | $ | 115.32  |  | $    | 53.52     |  | $ | 109.65 
|Natural Gas (per Mcf)         |  | $                                        | 3.64    |                                        | $ | 10.30   |  | $    | 4.15      |  | $ | 10.14  
|Natural Gas Liquids (per Bbl) |  | $                                        | 18.91   |                                        | $ |        |  | $    | 18.91     |  | $ |       
|                              |  |                                          |         |                                        |   |         |  |      |           |  |   |        
|Total (per BOE)a              |  | $                                        | 52.69   |                                        | $ | 105.95  |  | $    | 46.58     |  | $ | 100.79 
|Average NYMEX pricesb:        |  |                                          |         |                                        |   |         |  |      |           |  |   |        
|Oil (per Bbl)                 |  | $                                        | 68.25   |                                        | $ | 118.52  |  | $    | 57.09     |  | $ | 113.48 
|Natural Gas (per Mcf)         |  | $                                        | 3.42    |                                        | $ | 9.00    |  | $    | 3.90      |  | $ | 9.73   



|a | Natural gas is converted at the rate of six Mcf to one BOE and oil, condensate and natural gas liquids are converted at a rate of one Bbl to one BOE.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|b | Based upon the average of bid week prompt month prices.
|- | -------------------------------------------------------



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|                                            |  |                                                           |            |   |                                    |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------- |  | --------------------------------------------------------- | ---------- | - | ---------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                            |  | Production and Revenue by Basin                           |           
|                                            |  | For Three Months EndedSeptember 30,                       |            |   | For Nine Months EndedSeptember 30, |  
|                                            |  | 2009                                                      |            |   | 2008                               |   |            | 2009 |  |   | 2008       |  
|Appalachian                                 |  |                                                           |            |   |                                    |   |            |      |  |   |            |   |  |   |            |  
|Revenues  Natural Gas                      |  | $                                                         | 1,473,793  |   |                                    | $ | 2,582,720  |      |  | $ | 4,257,581  |   |  | $ | 7,747,630  |  
|Volumes (Mcf)                               |  |                                                           | 405,001    |   |                                    |   | 250,704    |      |  |   | 1,026,409  |   |  |   | 764,293    |  
|Average Price                               |  | $                                                         | 3.64       |   |                                    | $ | 10.30      |      |  | $ | 4.15       |   |  | $ | 10.14      |  
|Revenues  Condensate                       |  | $                                                         | 13,020     |   |                                    | $ |           |      |  | $ | 13,020     |   |  | $ |           |  
|Volumes (Bbl)                               |  |                                                           | 253        |   |                                    |   |           |      |  |   | 253        |   |  |   |           |  
|Average Price                               |  | $                                                         | 51.46      |   |                                    | $ |           |      |  | $ | 51.46      |   |  | $ |           |  
|Revenues  Natural Gas Liquids              |  | $                                                         | 34,880     |   |                                    | $ |           |      |  | $ | 34,880     |   |  | $ |           |  
|Volumes (Bbl)                               |  |                                                           | 1,845      |   |                                    |   |           |      |  |   | 1,845      |   |  |   |           |  
|Average Price                               |  | $                                                         | 18.91      |   |                                    | $ |           |      |  | $ | 18.91      |   |  | $ |           |  
|Illinois                                    |  |                                                           |            |   |                                    |   |            |      |  |   |            |   |  |   |            |  
|Revenues  Oil                              |  | $                                                         | 11,490,245 |   |                                    | $ | 22,692,083 |      |  | $ | 29,020,431 |   |  | $ | 63,016,941 |  
|Volumes (Bbl)                               |  |                                                           | 177,336    |   |                                    |   | 196,780    |      |  |   | 542,214    |   |  |   | 574,690    |  
|Average Price                               |  | $                                                         | 64.79      |   |                                    | $ | 115.32     |      |  | $ | 53.52      |   |  | $ | 109.65     |  
|                                            | 
|                                            |  | Other Performance Measurements From Continuing Operations |           
|                                            |  | For Three Months EndedSeptember 30,                       |            |   | For Nine Months EndedSeptember 30, |  
|                                            |  | 2009                                                      |            |   | 2008                               |   |            | 2009 |  |   | 2008       |  
|EBITDAX $ (in Thousands)                    |  | $                                                         | 5,245      |   |                                    | $ | 7,653      |      |  | $ | 18,037     |   |  | $ | 23,362     |  
|LOE per BOE $                               |  | $                                                         | 22.92      |   |                                    | $ | 32.01      |      |  | $ | 22.44      |   |  | $ | 29.08      |  
|G&A as a Percentage of Operating Revenue(a) |  |                                                           | 20.2       | % |                                    |   | 20.1       | %    |  |   | 27.7       | % |  |   | 20.5       | %



|(a) | Includes realized commodity derivatives during the period, which are recorded as Other Income (Expense). For the nine-month period ended September 30, 2009, we
excluded the early settlement of 2011 oil derivatives that totaled approximately $4.6 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

General
Overview

Operating revenue for the three and nine month periods ended September 30, 2009 decreased 48.4% and
52.8%, respectively, when compared to the same periods in 2008. These decreases are primarily due to lower oil and gas prices and lower oil production when compared to 2008, which was partially offset by an increase in natural gas production. The
average sales price per BOE during the three and nine month periods ended September 30, 2009 was $52.69 and $46.58, respectively, as compared to $105.95 and $100.79 during the comparable periods of 2008. Partially offsetting the decrease in
commodity prices was an increase in natural gas production. Total production for the three and nine month periods ended September 30, 2009 increased approximately 3.5% and 1.9%, respectively, when compared to the same periods in 2008.

Operating expenses decreased $8.1 million, or 34.5%, for the third quarter of 2009 as compared to the same period in 2008 and
decreased $6.6 million, or 12.1%, for the first nine months of 2009 as compared to the same period in 2008. Operating expenses are primarily comprised of: production expenses; G&A expenses; exploration expenses; gains and losses on the disposal
of assets; impairment expense; and DD&A expenses. The decrease in operating expenses during the three months ended September 30, 2009 can be primarily attributable to a loss sustained from the sale of our New Albany Shale assets in the
Illinois Basin during 2008 of approximately $6.3 million. Also contributing to the decrease in operating expenses were lower production and lease operating expenses, a decrease in G&A expenses and a decrease in exploration expenses. These
reductions in operating expenses were partially offset by increases in impairment expense and DD&A. The increase in impairment expense is attributable to the impairment of capitalized costs related to our unproved properties in accordance with
FASB ASC 932. The increase in our DD&A expenses can be primarily explained by the downward revision in the estimated lives of our proved reserves at December 31, 2008. We calculate our depletion on a units-of-production basis, which
accelerated in relation to our lower proved reserves base. The decrease in operating expenses for the first nine months of 2009 as compared to the same period in 2008 was primarily due to the loss recognized in relation to the sale of our New Albany
Shale assets in the Illinois Basin during 2008, which was partially offset by reductions in production and lease operating expenses.



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EBITDAX, is used as a financial measure by us and by other users of our financial
statements, such as our commercial bank lenders, to analyze such things as:



| |  |  | Our operating performance and return on capital in comparison to those of other companies in our industry, without regard to financial structure;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The financial performance of our assets and valuation of the entity, without regard to financing methods, capital structure or historical costs basis;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to generate cash sufficient to pay interest costs, support our indebtedness and make cash distributions to our stockholders; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

EBITDAX decreased approximately $2.4 million to $5.2 million for the three-month period ended
September 30, 2009 as compared to the same period in 2008. The decrease in EBITDAX can be primarily attributed to lower commodity prices, partially offset by lower production and lease operating expenses. EBITDAX decreased approximately $5.3
million to $18.0 million for the nine-month period ended September 30, 2009 as compared to the same period in 2008. The decrease in EBITDAX can be primarily attributed to lower commodity prices, partially offset by lower production and lease
operating expenses as well as the early settlement of certain oil derivatives relating to 2011.

LOE per BOE measures the
average cost of extracting oil and natural gas from our basin reserves during the period. This measurement is also commonly referred to in the industry as our lifting cost. It represents the average cost of extracting one barrel of oil
equivalent from our oil and natural gas reserves in the ground. LOE per BOE decreased by $9.09 for the three months ended September 30, 2009 as compared to the same period in 2008 and $6.64 for the nine months ended September 30, 2009 as
compared to the same period in 2008. The expenses decreased as a result of decreased activity levels, primarily in the Illinois Basin, and several cost reduction measures implemented during the fourth quarter of 2008.

G&A expenses as a percentage of operating revenue, which includes realized derivatives, measures overhead costs associated with our
management and operations. G&A expenses as a percentage of revenue increased to approximately 20.2% for the three-month period ended September 30, 2009, as compared to 20.1% for the same period in 2008. G&A expenses increased as a
percentage of revenue to approximately 27.7% for the nine-month period ended September 30, 2009, as compared to 20.5% for the same period in 2008. The increase in G&A expenses as a percentage of revenue for the three-month period ending
September 30, 2009 as compared to the same period in 2008 was primarily due to a decrease in operating revenue, which was a function of lower commodity prices. Overall, G&A expenses decreased when compared to last year, primarily due to a
true up of non-cash compensation expenses of approximately $0.6 million. The increase in G&A expenses as a percentage of revenue for the nine-month period ended September 30, 2009 as compared to the same period in 2008 was largely a
function of lower operating revenue, which was directly attributable to a decrease in commodity prices. Overall, G&A expenses increased less than 1% from 2008.



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Comparison of the Three Months Ended September 30, 2009 to the Three Months Ended
September 30, 2008.

Oil and gas revenue for the three month periods ended September 30, 2009 and 2008 ($
in thousands, except total BOE production and price per BOE) is summarized in the following table:



|                                                          |  |                                      |         |   |      |   |         |        |  |   |         |   |  |       |   
|--------------------------------------------------------- |  | ------------------------------------ | ------- | - | ---- | - | ------- | ------ |  | - | ------- | - |  | ----- | --
|                                                          |  | For Three Months Ended September 30, |        
|                                                          |  | 2009                                 |         |   | 2008 |   |         | Change |  |   | %       |  
|Oil and Gas Revenues:                                     |  |                                      |         |   |      |   |         |        |  |   |         |   |  |       |   
|Oil and condensate sales revenue                          |  | $                                    | 11,503  |   |      | $ | 22,692  |        |  | $ | (11,189 | ) |  | (49.3 | )%
|Oil derivatives realized(a)                               |  | $                                    | (305    | ) |      | $ | (6,353  | )      |  | $ | 6,048   |   |  | 95.2  | % 
|                                                          |  |                                      |         |   |      |   |         |        |  |   |         |   |  |       |   
|Total oil and condensate revenue and derivatives realized |  | $                                    | 11,198  |   |      | $ | 16,339  |        |  | $ | (5,141  | ) |  | (31.5 | )%
|Gas sales revenue                                         |  | $                                    | 1,474   |   |      | $ | 2,583   |        |  | $ | (1,109  | ) |  | (42.9 | )%
|Gas derivatives realized(a)                               |  | $                                    | 1,089   |   |      | $ | (287    | )      |  | $ | 1,376   |   |  | 479.4 | % 
|                                                          |  |                                      |         |   |      |   |         |        |  |   |         |   |  |       |   
|Total gas revenue and derivatives realized                |  | $                                    | 2,563   |   |      | $ | 2,296   |        |  | $ | 267     |   |  | 11.6  | % 
|Total natural gas liquid revenue                          |  | $                                    | 35      |   |      | $ |        |        |  | $ | 35      |   |  | 100.0 | % 
|Consolidated sales                                        |  | $                                    | 13,012  |   |      | $ | 25,275  |        |  | $ | (12,263 | ) |  | (48.5 | )%
|Consolidated derivatives realized(a)                      |  | $                                    | 784     |   |      | $ | (6,640  | )      |  | $ | 7,424   |   |  | 111.8 | % 
|                                                          |  |                                      |         |   |      |   |         |        |  |   |         |   |  |       |   
|Total oil and gas revenue and derivatives realized        |  | $                                    | 13,796  |   |      | $ | 18,635  |        |  | $ | (4,839  | ) |  | (26.0 | )%
|Total BOE Production                                      |  |                                      | 246,934 |   |      |   | 238,564 |        |  |   | 8,370   |   |  | 3.5   | % 
|Average Realized Price per BOE                            |  | $                                    | 55.87   |   |      | $ | 78.11   |        |  | $ | (22.24  | ) |  | (28.5 | )%



|(a) | Realized derivatives are included in Other Income (Expense) on the Consolidated Statements of Operations.
|--- | ---------------------------------------------------------------------------------------------------------

Average realized price received for oil and gas during the third quarter of 2009 was $55.87 per BOE, a decrease of 28.5%, or $22.24
per BOE, from the same quarter in 2008. The average price for oil and condensate, after the effect of derivative activities, decreased 24.1%, or $19.98 per barrel, to $63.06 per barrel. The average price for natural gas, after the effect of
derivative activities, decreased 30.9%, or $2.83 per Mcf, to $6.33 per Mcf. Our derivative activities effectively increased net realized price by $3.17 per BOE in the third quarter of 2009 and decreased net realized prices by $27.83 per BOE in the
third quarter of 2008.

Production volumes in the third quarter of 2009 increased 3.5% from the third quarter of 2008.
Natural gas production increased approximately 61.5%, primarily due to the success of our Marcellus Shale drilling operations in the counties of Butler and Westmoreland in the Commonwealth of Pennsylvania. This increase was partially offset by
significant pipeline curtailments affecting our conventional shallow gas operations in Westmoreland County, Pennsylvania. Oil production decreased approximately 9.8% in the third quarter of 2009 as compared to the same period in 2008, primarily due
to decreased development and activity levels thus far in 2009. We initiated a conventional oil drilling program during the third quarter of 2009 to attempt to offset our year-over-year decrease in production. Overall, our production for the three
months ending September 30, 2009 averaged 2,684 BOE per day, of which 71.9% was attributable to oil and 27.3% to natural gas, the remainder was a result of natural gas liquids production.

Other operating revenue for the three months ended September 30, 2009 and September 30, 2008 were approximately $43,000 and
$29,000, respectively. We generate other operating revenue from various activities such as revenue from the transportation of third-party natural gas in the Appalachian Basin.

Production and lease operating expenses decreased approximately $2.0 million, or 25.9%, in the third quarter of 2009 from the same
period in 2008. These expenses have decreased year-over-year primarily due to decreased activity levels, primarily in the Illinois Basin, and several cost reduction measures implemented during the fourth quarter of 2008 to mitigate discretionary
spending and to lower overall operating expenses.

G&Aexpenses for the third quarter of 2009 decreased
approximately $1.0 million, or 25.5%, to $2.8 million from the same period in 2008. These expenses decreased year-over-year primarily due to a recovery of expense recognized during the third quarter of 2009 due to the true-up of our annualized
forfeiture rate as it relates to our non-cash compensation expense. In accordance with the provisions of FASB ASC 718, we will record additional expense if the actual forfeiture rate is lower than we estimate, and will record a recovery of expense
if the actual forfeiture rate is higher than we estimate.

Loss on disposal of assets for the three months ended
September 30, 2009 was a loss of approximately $17,000 as compared to a loss of $6.3 million for the same period in 2008. During the third quarter of 2008, we sold our New Albany Shale acreage holdings in areas of the Illinois Basin, which
resulted in a loss of approximately $6.3 million. We, from time to time, sell or dispose of property and equipment in the normal course of business and recognize a gain or loss based on the price received for those assets compared to the book
carrying value at the time of sale or disposal.



Impairment expenses for the third quarter of 2009 totaled approximately $0.5 million as compared to $0 during the comparable period of 2008. We recorded these expenses in accordance with FASB ASC 932 to recognize impairment of
capitalized costs related to unproved properties. During the third quarter of 2009, we identified certain geographic regions, predominately in areas prospective for the Marcellus Shale, that were outside of the scope of our current plans, increasing
the probability of future lease expiration. Capitalized costs associated with these properties are periodically evaluated as to their recoverability based on changes brought about by economic factors and potential shifts in our business strategy. As
economic and strategic conditions change and we continue to develop unproved properties, our estimates of impairment will likely change and we may increase or decrease expense.



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Exploration expense of oil and gas properties for the third quarter of 2009 decreased
approximately $0.7 million from an expense of $1.1 million for the same period in 2008. These expenses are primarily associated with seismic data acquisitions and related activities, reservoir characterization and geologic modeling activities, and
oil and gas lease delay rental payments. Expenses during the third quarter of 2008 were higher than the current quarter primarily due to geological modeling activities associated with our ASP project in the Illinois Basin, as well as seismic data
acquisitions and related activities associated with our Marcellus Shale program in the Appalachian Basin.

DD&A
expenses for the three months ended September 30, 2009 increased approximately $1.3 million, or 28.6%, from $4.7 million for the same period in 2008. This increase is primarily attributable to the decrease in our proved reserves as of
December 31, 2008. We calculate our depletion on a units-of-production basis, which accelerated in relation to our lower proved reserves base.

Interest expense, net of interest income, for the three months ended September 30, 2009 was approximately $0.2 million as compared to $0.1 million for the same period in 2008. The increase of
$135,000 was primarily due to the decrease in the amount of cash on hand, for which we receive interest income, as well as depressed interest rates when compared to last year.

Gain on derivatives, net includes a gain of approximately $0.4 million for the third quarter of 2009 as compared to a gain of $60.0
million for the same period in 2008. These changes were attributable to the volatility of oil and gas commodity prices in the marketplace along with changes in our portfolio of outstanding collars and swap derivatives. Losses from derivative
activities generally reflect higher oil and gas prices in the marketplace than were in effect at the end of the last period while gains generally reflect the opposite. Our derivative program is designed to provide us with greater reliability of
future cash flows at expected levels of oil and gas production volumes given the highly volatile oil and gas commodities market.

Other expense was an expense of approximately $7,000 in the third quarter of 2009 as compared to expense of approximately $79,000 for the same period in 2008. Our other expense is characterized by the recognition of gains or losses
on the sale of scrap inventory and physical yard inventory adjustments and fluctuates from period to period.

Net income
tax benefit (expense) was a benefit of approximately 1.0 million for the three months ended September 30, 2009 as compared to expense of approximately $24.9 million for the three months ended September 30, 2008. The change was
primarily due to net income during the third quarter of 2008 that was attributable to unrealized gains on our commodity derivatives.

Net income (loss) from continuing operations after income taxes for the three months ended September 30, 2009 was a loss of $1.2 million as compared to net gain of $36.8 million for the same period in 2008. The change was caused
by our unrealized gains on derivatives, which were significantly higher during the third quarter of 2008 than the same period in 2009. There were no other comprehensive income (loss) items recognized during the periods presented, therefore our
comprehensive net income (loss) is equal to our net income (loss).



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Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended
September 30, 2008.

Oil and gas revenue for the nine month periods ended September 30, 2009 and 2008 ($
in thousands, except price per BOE) is summarized in the following table:



|                                                          |  |                                     |         |      |   |         |        |  |   |         |   |  |       |   
|--------------------------------------------------------- |  | ----------------------------------- | ------- | ---- | - | ------- | ------ |  | - | ------- | - |  | ----- | --
|                                                          |  | For Nine Months Ended September 30, |        
|                                                          |  | 2009                                |         | 2008 |   |         | Change |  |   | %       |  
|Oil and Gas Revenues:                                     |  |                                     |         |      |   |         |        |  |   |         |   |  |       |   
|Oil and condensate sales revenue                          |  | $                                   | 29,033  |      | $ | 63,017  |        |  | $ | (33,984 | ) |  | (53.9 | )%
|Oil derivatives realized(a)(b)                            |  | $                                   | 3,764   |      | $ | (17,044 | )      |  | $ | 20,808  |   |  | 122.1 | % 
|                                                          |  |                                     |         |      |   |         |        |  |   |         |   |  |       |   
|Total oil and condensate revenue and derivatives realized |  | $                                   | 32,797  |      | $ | 45,973  |        |  | $ | (13,176 | ) |  | (28.7 | )%
|Gas sales revenue                                         |  | $                                   | 4,258   |      | $ | 7,748   |        |  | $ | (3,490  | ) |  | (45.0 | )%
|Gas derivatives realized(a)                               |  | $                                   | 2,544   |      | $ | (660    | )      |  | $ | 3,204   |   |  | 485.5 | % 
|                                                          |  |                                     |         |      |   |         |        |  |   |         |   |  |       |   
|Total gas revenue and derivatives realized                |  | $                                   | 6,802   |      | $ | 7,088   |        |  | $ | (286    | ) |  | (4.0  | )%
|Total natural gas liquid revenue                          |  | $                                   | 35      |      | $ |        |        |  | $ | 35      |   |  | 100.0 | % 
|Consolidated sales                                        |  | $                                   | 33,326  |      | $ | 70,765  |        |  | $ | (37,439 | ) |  | (52.9 | )%
|Consolidated derivatives realized(a)                      |  | $                                   | 6,308   |      | $ | (17,704 | )      |  | $ | 24,012  |   |  | 135.6 | % 
|                                                          |  |                                     |         |      |   |         |        |  |   |         |   |  |       |   
|Total oil and gas revenue and derivatives realized        |  | $                                   | 39,634  |      | $ | 53,061  |        |  | $ | (13,427 | ) |  | (25.3 | )%
|Total BOE Production                                      |  |                                     | 715,380 |      |   | 702,072 |        |  |   | 13,308  |   |  | 1.9   | % 
|Average Realized Price per BOE                            |  | $                                   | 55.40   |      | $ | 75.58   |        |  | $ | (20.18  | ) |  | (26.7 | )%



|(a) | Realized derivatives are included in Other Income (Expense) on the Consolidated Statements of Operations.
|--- | ---------------------------------------------------------------------------------------------------------

|(b) | Excludes approximately $4.6 million in proceeds that were received upon the early settlement of oil hedges during the first quarter of 2009 relating to the 2011
calendar year.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Average realized price received for oil and gas during the first nine months of 2009 was
$55.40 per BOE, a decrease of 26.7%, or $20.18 per BOE, from the same period in 2008. The average price for oil and condensate, after the effect of derivative activities, decreased 24.4%, or $19.54 per barrel, to $60.46 per barrel. The average price
for natural gas, after the effect of derivative activities, decreased 28.5%, or $2.65 per Mcf, to $6.63 per Mcf. Our derivative activities effectively increased net realized price by $8.82 per BOE in the first nine months of 2009 and decreased net
realized prices by $25.22 per BOE in the first nine months of 2008.

Production volumes in the first nine months of
2009 increased 1.9% from the first nine months of 2008. Natural gas production increased approximately 34.3%, primarily due to the success of our Marcellus Shale drilling operations in the counties of Butler and Westmoreland in the Commonwealth of
Pennsylvania. This increase was partially offset by significant pipeline curtailments affecting our conventional gas operations in Westmoreland County, Pennsylvania. Oil production decreased approximately 5.6% in the first nine months of 2009 as
compared to the same period in 2008, primarily due to decreased development and activity levels thus far in 2009. We initiated a conventional oil drilling program during the third quarter of 2009 to attempt to offset our year-over-year decrease in
production. Overall, our production for the nine months ending September 30, 2009 averaged 2,620 BOE per day, of which 75.8% was attributable to oil and 23.9% to natural gas, the remainder was from natural gas liquids production.

Other operating revenue for the nine months ended September 30, 2009 and September 30, 2008 was approximately $100,000 and
$93,000, respectively. We generate other operating revenue from various activities such as revenue from the transportation of third-party natural gas in the Appalachian Basin.

Production and lease operating expenses decreased approximately $4.4 million, or 21.4%, in the nine month period ended
September 30, 2009 from the same period in 2008. These expenses have decreased year-over-year primarily due to decreased activity levels, primarily in the Illinois Basin, and several cost reduction measures implemented during the fourth quarter
of 2008 to mitigate discretionary spending and to lower overall operating expenses.

G&Aexpenses for the first
nine months of 2009 increased approximately $60,000, or 0.6%, to $10.9 million from the same period in 2008. These expenses have increased year-over-year primarily due to legal, wages and benefits expenses. Legal expenses have increased due to
accruals associated with the pending actions related to our prior Marcellus Shale leasing projects (see Note 11 to our consolidated financial statements) and due to expenses incurred in relation to the PEA signed with Williams (see Note 2 to our
consolidated financial statements). Wages and benefits increased primarily due to the increase in total employees when compared to the prior year. These increases in G&A expense were partially offset by a decrease in non-cash compensation
expense that is related to a recovery of expense recognized during the third quarter of 2009 due to the true-up of our annualized forfeiture. In accordance with the provisions of FASB ASC 718, we will record additional expense if the actual
forfeiture rate is lower than we estimate, and will record a recovery of expense if the actual forfeiture rate is higher than we estimate.

Loss on sale assets for the nine months ended September 30, 2009 was a loss of $417,000 as compared to a loss of $6.4 million for the same period in 2008. The loss recognized during the first
nine months of 2009 was primarily due to the sale of our Southwest Region assets in Texas and New Mexico. During the third quarter of 2008, we sold our New Albany Shale acreage holdings in areas of the Illinois Basin, which resulted in a loss of
approximately $6.3 million. We, from time to time, sell or dispose of property and equipment in the normal course of business and recognize a gain or loss based on the price received for those assets compared to the book carrying value at the time
of sale or disposal.



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Impairment expenses for the first nine months of 2009 totaled approximately $0.9
million as compared to $0 during the comparable period of 2008. We recorded these expenses in accordance with FASB ASC 932 to recognize impairment of capitalized costs related to unproved properties. During 2009, we have identified certain
geographic regions, predominately in areas prospective for the Marcellus Shale, that were outside of the scope of our current plans, increasing the probability of future lease expiration. Capitalized Costs associated with these properties are
periodically evaluated as to their recoverability based on changes brought about by economic factors and potential shifts in our business strategy. As economic and strategic conditions change and we continue to develop unproved properties, our
estimates of impairment will likely change and we may increase or decrease expense.

Exploration expense of oil and gas
properties for the first nine months of 2009 decreased approximately $1.2 million from an expense of $2.4 million for the same period in 2008. These expenses are primarily associated with seismic data acquisitions and related activities,
reservoir characterization and geologic modeling activities, and oil and gas lease delay rental payments. Expenses during the nine month period ending September 30, 2008 were higher than the current period primarily due to geological modeling
activities associated with our ASP project in the Illinois Basin, as well as seismic data acquisitions and related activities associated with our Marcellus Shale program in the Appalachian Basin. Also contributing to the decrease was the
reimbursement of seismic acquisition and processing costs, incurred during 2009, as a part of the PEA signed with Williams during the second quarter of 2009 (see Note 2 to our consolidated financial statements).

DD&A expenses for the nine months ended September 30, 2009 increased approximately $4.1 million, or 28.3%, from $14.4
million for the same period in 2008. This increase is primarily attributable to the decrease in our proved reserves as of December 31, 2008. We calculate our depletion on a units-of-production basis, which accelerated in relation to our lower
proved reserves base.

Interest expense, net of interest income, for the nine months ended September 30, 2009 was
approximately $609,000 as compared to $524,000 for the same period in 2008. This increase is primarily attributable to the lower average balance of cash on hand during 2009, for which we receive interest income, as well as depressed interest rates
when compared to last year. During the second quarter of 2008 we paid off all of our outstanding long-term debt with a portion of the proceeds from our public offering of common stock.

Loss on derivatives, net includes a loss of approximately $4.9 million for the first nine months of 2009 as compared to a loss of
$30.0 million for the same period in 2008. These changes were attributable to the volatility of oil and gas commodity prices in the marketplace along with changes in our portfolio of outstanding collars and swap derivatives. Losses from derivative
activities generally reflect higher oil and gas prices in the marketplace than were in effect at the end of the last period while gains would suggest the opposite. Our derivative program is designed to provide us with greater reliability of future
cash flows at expected levels of oil and gas production volumes given the highly volatile oil and gas commodities market. In addition, we recognized a gain of approximately $4.6 million during the first six months of 2009 due to the early settlement
of oil hedges that related to 2011 production.

Other expense was an expense of approximately $38,000 in the first nine
months of 2009 as compared to expense of approximately $61,000 for the same period in 2008. Our other expense is characterized by the recognition of gains or losses on the sale of scrap inventory and physical yard inventory adjustments and
fluctuates from period to period.

Net income tax benefitincreased by approximately $2.2 million in the first nine
months of 2009 to $8.0 million as compared to $5.8 million for the same period in 2008. The increase was primarily due to the increase in the loss from continuing operations before taxes, which was primarily attributable to lower average commodity
prices, year-over-year.

Net loss from continuing operations after income taxes for the nine months ended
September 30, 2009 was $12.0 million as compared to a net loss of $8.4 million for the same period in 2008, an increase of approximately $3.6 million. The increase was primarily caused by lower average commodity prices, year-over-year. There
were no other comprehensive income (loss) items recognized during the periods presented, therefore, our comprehensive net income (loss) is equal to our net income (loss).



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Capital Resources and Liquidity

Our primary needs for cash are for exploration, development and acquisition of oil and gas properties. During the nine months ended
September 30, 2009, $35.9 million of capital was expended on drilling projects, facilities and related equipment and acquisitions of unproved acreage. The capital program was funded by net cash flow from operations, proceeds from
borrowings, and with proceeds from the sale of our Southwest Region assets. The 2009 capital budget of $48.6 million is expected to continue to be funded primarily by cash flow from operations and from borrowings under our Senior Credit
Facility. We currently believe we have sufficient liquidity and cash flow to meet our obligations for the next twelve months; however, a significant continuation of depressed commodity prices, particularly natural gas, or reduction in production or
reserves could adversely affect our ability to fund capital expenditures and meet our financial obligations. Also, our obligations may change due to acquisitions, divestitures and continued growth. We may also elect to issue additional shares of
stock, subordinated notes or other debt securities to fund capital expenditures, acquisitions, extend maturities or to repay debt.

Financial Condition and Cash Flows for the Nine Months Ended September 30, 2009 and 2008

The
following table summarizes our sources and uses of funds for the periods noted:



|                                                      |  |                                                |         |   |      |   |         |  
|----------------------------------------------------- |  | ---------------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | Nine Months EndedSeptember 30,($ in Thousands) |        
|                                                      |  | 2009                                           |         |   | 2008 |  
|Cash flows provided by operations                     |  | $                                              | 12,800  |   |      | $ | 26,776  |  
|Cash flows used in investing activities               |  |                                                | (15,011 | ) |      |   | (88,528 | )
|Cash flows provided by (used in) financing activities |  |                                                | (94     | ) |      |   | 86,333  |  
|                                                      |  |                                                |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents  |  | $                                              | (2,305  | ) |      | $ | 24,581  |  
|                                                      |  |                                                |         |   |      |   |         |  

Net cash provided by operating activities decreased by approximately $14.0
million in the first nine months of 2009 over the same period in 2008. The decrease in 2009 was affected by a combination of factors, but primarily due to decreased commodity prices; partially offset by decreased lease operating expenses and an
increase in realized gains from derivatives. Average sales prices, excluding realized derivatives, decreased from $100.79 per BOE in the first nine months of 2008 to $46.58 per BOE in the first nine months of 2009.

Net cash used in investing activities decreased by approximately $73.5 million, or 83.0%, from the first nine months of 2008 to $15.0
million in the first nine months of 2009. This change was primarily the result of the proceeds received from the sale of our Southwest Region assets as well as a decrease in oil and gas property development activities.

Net cash provided by (used in) financing activities decreased by approximately $86.4 million from the first nine months of 2008 to
the first nine months of 2009. The decrease is due to the issuance of common stock during the second quarter of 2008, from which we received net proceeds of approximately $113.1 million.

Effects of Inflation and Changes in Price

Our results of operations and cash flows are affected by changing oil and natural gas prices. If the price of oil and natural gas increases or decreases, there could be a corresponding increase or
decrease in the operating cost that we are required to bear for operations, as well as an increase or decrease in revenues.

Critical Accounting Policies and Recently Adopted Accounting Pronouncements

During the quarter ended
September 30, 2009, there were no material changes to the critical accounting policies previously reported by us in our Annual Report on Form 10-K/A for the year ended December 31, 2008. We discuss critical recently adopted and issued
accounting standards in Item 1. Financial StatementsNote 4, Recently Issued Accounting Pronouncements.

Non-GAAP Financial Measures

EBITDAX

EBITDAX means, for any period, the sum of net income for such period plus the following expenses, charges or income to the extent
deducted from or added to net income in such period: interest, income taxes, depreciation, depletion, amortization, unrealized losses from financial derivatives, exploration expenses and other similar non-cash charges, minus all non-cash income,
including but not limited to, income from unrealized financial derivatives, added to net income. EBITDAX, as defined above, is used as a financial measure by our management team and by other users of its financial statements, such as our
commercial bank lenders.



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EBITDAX is not a calculation based on GAAP financial measures and should not be considered
as an alternative to net income (loss) in measuring our performance, nor should it be used as an exclusive measure of cash flow, because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions, and
other sources and uses of cash, which are disclosed in our statements of cash flows.

We have reported EBITDAX because it is a
financial measure used by our existing commercial lenders, and because this measure is commonly reported and widely used by investors as an indicator of a companys operating performance and ability to incur and service debt. You should
carefully consider the specific items included in our computations of EBITDAX. While we have disclosed EBITDAX to permit a more complete comparative analysis of our operating performance and debt servicing ability relative to other companies, you
are cautioned that EBITDAX as reported by us may not be comparable in all instances to EBITDAX as reported by other companies. EBITDAX amounts may not be fully available for managements discretionary use, due to requirements to conserve
funds for capital expenditures, debt service and other commitments.

We believe that EBITDAX assists our lenders and investors
in comparing our performance on a consistent basis without regard to certain expenses, which can vary significantly depending upon accounting methods. Because we may borrow money to finance our operations, interest expense is a necessary
element of our costs and our ability to generate cash available for distribution. In addition, because we use capital assets, depreciation and amortization are also necessary elements of our costs. Finally, we are required to pay federal
and state taxes, which are necessary elements of our costs. Therefore, any measures that exclude these elements have material limitations.

To compensate for these limitations, we believe it is important to consider both net incomes determined under GAAP and EBITDAX to evaluate our performance.

The following table presents a reconciliation of our net income to EBITDAX for each of the periods presented ($ in thousands):



|                                                             |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                                             |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                             |  | 2009                            |        |   | 2008                           |   |         | 2009 |  |   | 2008    |  
|Net Income (Loss) From Continuing Operations                 |  | $                               | (1,186 | ) |                                | $ | 36,783  |      |  | $ | (11,971 | ) |  | $ | (8,416 | )
|Add Back Depletion, Depreciation, Amortization and Accretion |  |                                 | 6,059  |   |                                |   | 4,710   |      |  |   | 18,423  |   |  |   | 14,361 |  
|Add Back (Less) Non-Cash Compensation Expense (Income)       |  |                                 | (128   | ) |                                |   | 464     |      |  |   | 968     |   |  |   | 1,567  |  
|Add Back Interest Expense                                    |  |                                 | 207    |   |                                |   | 207     |      |  |   | 612     |   |  |   | 844    |  
|Add Back Impairment Expense                                  |  |                                 | 477    |   |                                |   |        |      |  |   | 865     |   |  |   |       |  
|Add Back Exploration Expenses                                |  |                                 | 370    |   |                                |   | 1,113   |      |  |   | 1,204   |   |  |   | 2,395  |  
|Less Interest Income                                         |  |                                 | (2     | ) |                                |   | (137    | )    |  |   | (3      | ) |  |   | (320   | )
|Add Back Loss on Interest Rate Swap                          |  |                                 | 198    |   |                                |   | 84      |      |  |   | 566     |   |  |   | 182    |  
|Add Back Loss on Disposal of Assets                          |  |                                 | 17     |   |                                |   | 6,274   |      |  |   | 417     |   |  |   | 6,426  |  
|Add Back (Less) Loss (Gain) from Financial Derivatives       |  |                                 | 192    |   |                                |   | (66,744 | )    |  |   | 14,960  |   |  |   | 12,112 |  
|Add Back (Less) Income Tax Expense (Benefit)                 |  |                                 | (959   | ) |                                |   | 24,899  |      |  |   | (8,004  | ) |  |   | (5,789 | )
|                                                             |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |        |  
|EBITDAX From Continuing Operations                           |  | $                               | 5,245  |   |                                | $ | 7,653   |      |  | $ | 18,037  |   |  | $ | 23,362 |  
|Add EBITDAX From Discontinued Operations                     |  |                                 |       |   |                                |   | 1,208   |      |  |   | 53      |   |  |   | 3,896  |  
|                                                             |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |        |  
|EBITDAX                                                      |  | $                               | 5,047  |   |                                | $ | 8,861   |      |  | $ | 18,090  |   |  | $ | 27,258 |  
|                                                             |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |        |  

Volatility of Oil and Natural Gas Prices

Our revenues, future rate of growth, results of operations, financial condition and ability to borrow funds or obtain additional capital, as
well as the carrying value of our properties, are substantially dependent upon prevailing prices of oil and natural gas. We account for our natural gas and oil exploration and production activities under the successful efforts method of accounting.
To mitigate some of our commodity price risk, we engage periodically in certain other limited derivative activities including price swaps and costless collars in order to establish some price floor protection.

For the three and nine month periods ended September 30, 2009, the net realized gain on oil and natural gas derivatives were
approximately $0.8 million and $10.7 million, respectively, as compared to net realized losses of approximately $6.6 million and $17.7 million, respectively, for the comparable periods in 2008. Included in the net realized gain in the nine months
ended September 30, 2009 are cash settlements of approximately $4.6 million which resulted from the early settlement of certain oil hedges related to production in 2011. These gains and losses are reported as Gain (Loss) on Derivatives, Net in
our Consolidated Statements of Operations.



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For the three and nine month periods ended September 30, 2009, the net unrealized loss
on oil and natural gas derivatives was $0.3 million and $15.3 million, respectively, as compared to a gain of $66.8 million and a loss of $11.8 million, respectively, for the comparable periods in 2008. The net unrealized losses are reported as Gain
(Loss) on Derivatives, Net in our Consolidated Statements of Operations.

While the use of derivative arrangements limits the
downside risk of adverse price movements, it may also limit our ability to benefit from increases in the prices of natural gas and oil. We enter into the majority of our derivatives transactions with two counterparties and have a netting agreement
in place with each of these counterparties. While we do not obtain collateral to support the agreements, we do monitor the financial viability of counterparties and believe our credit risk is minimal on these transactions. Under these arrangements,
payments are received or made based on the differential between a fixed and a variable commodity price. These agreements are settled in cash at expiration or exchanged for physical delivery contracts. In the event of nonperformance, we would be
exposed again to price risk. We have additional risk of financial loss because the price received for the product at the actual physical delivery point may differ from the prevailing price at the delivery point required for settlement of the
derivative transaction. Moreover, our derivatives arrangements generally do not apply to all of our production and thus provide only partial price protection against declines in commodity prices. We expect that the amount of our derivatives will
vary from time to time.

For a summary of our current oil and natural gas derivative positions at September 30, 2009
refer to Note 7 of our Consolidated Financial Statements, Fair Value of Financial Instruments and Derivative Instruments.



|Item 3. | Quantitative And Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

We are exposed to various risks, including energy commodity price risk. We expect energy prices to remain volatile and unpredictable. If energy prices were to decline significantly, revenues and cash flow
would significantly decline, and our ability to borrow to finance our operations could be adversely impacted. We have designed our hedging policy to reduce the risk of price volatility for our production in the natural gas and crude oil markets. Our
risk management policy provides for the use of derivative instruments to manage these risks. The types of derivative instruments that we use include swaps and collars. The volume of derivative instruments that we may use is governed by the risk
management policy and can vary from year to year, but under most circumstances will apply to only a portion of our current and anticipated production and provides only partial price protection against declines in oil and natural gas prices. We are
exposed to market risk on our open contracts, to the extent of changes in market prices of oil and natural gas. However, the market risk exposure on these hedged contracts is generally offset by the gain or loss recognized upon the ultimate sale of
the commodity that is hedged. Further, if our counterparties defaulted, this protection might be limited as we might not receive the benefits of the hedges. See also the discussion above under Item 2. Volatility of Oil and Natural
Gas Prices.

We are also exposed to market risk related to adverse changes in interest rates. Our interest rate
risk exposure results primarily from fluctuations in short-term rates, which are LIBOR and prime rate based, as determined by our lenders, and may result in reductions of earnings or cash flows due to increases in the interest rates we pay on these
obligations.



|Item 4. | Controls And Procedures.
|------- | ------------------------

Based on managements evaluation (with the participation of our Chief Executive Officer and Chief Financial Officer), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the Exchange Act)) are effective to provide reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including our
principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.



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##### Table of Contents

PART II

OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

The
information contained in Part I, Item 1, Note 11, Commitments and ContingenciesLitigation and Legal Proceedings in this Quarterly Report on Form 10-Q is incorporated herein by reference.



|Item 1A. | Risk Factors.
|-------- | -------------

During the
quarter ended September 30, 2009, there were no material changes to the risk factors previously reported in our Annual Report on Form 10-K/A for the year ended December 31, 2008.



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##### Table of Contents

|Item 6. | Exhibits.
|------- | ---------



|               |  |                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                                                                                                                          
|               | 
|3.1**          |  | Certificate of Incorporation of Rex Energy Corporation (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 (File No. 333-142430) as filed with the
SEC on April 27, 2007).             
|               | 
|3.2**          |  | Amendment to Certificate of Incorporation of Rex Energy Corporation (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1 (File No. 333-142430) as
filed with the SEC on April 27, 2007).
|               | 
|3.3**          |  | Amended and Restated Bylaws of Rex Energy Corporation (incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S-1 (File No. 333-142430) as filed with the SEC
on April 27, 2007).              
|               | 
|31.1*          |  | Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                                              
|               | 
|31.2*          |  | Certification of Chief Financial Officer (Principal Financial and Principal Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                     
|               | 
|32.1*          |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.                                                                                                        



|* | Filed herewith.
|- | ---------------

|** | Incorporated by reference hereto.
|-- | ---------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.



|                       |  |  |  |                        |  |                                             
|---------------------- |  |  |  | ---------------------- |  | --------------------------------------------
|                       |  |  |  | REX ENERGY CORPORATION
|                       |  |  |  | (Registrant)          
|                       |  |  | 
|Date: November 6, 2009 |  |  |  | By:                    |  | /S/    BENJAMIN W.
HULBURT                  
|                       |  |  |  |                        |  | President and Chief Executive Officer       
|                       |  |  |  |                        |  | (Principal Executive Officer)               
|                       |  |  | 
|Date: November 6, 2009 |  |  |  | By:                    |  | /S/    THOMAS C.
STABLEY                    
|                       |  |  |  |                        |  | Chief Financial Officer                     
|                       |  |  |  |                        |  | (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                                                                                                                          
|               | 
|3.1**          |  | Certificate of Incorporation of Rex Energy Corporation (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 (File No. 333-142430) as filed with the
SEC on April 27, 2007).             
|               | 
|3.2**          |  | Amendment to Certificate of Incorporation of Rex Energy Corporation (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1 (File No. 333-142430) as
filed with the SEC on April 27, 2007).
|               | 
|3.3**          |  | Amended and Restated Bylaws of Rex Energy Corporation (incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S-1 (File No. 333-142430) as filed with the SEC
on April 27, 2007).              
|               | 
|31.1*          |  | Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                                              
|               | 
|31.2*          |  | Certification of Chief Financial Officer (Principal Financial and Principal Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                     
|               | 
|32.1*          |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.                                                                                                        



|* | Filed herewith.
|- | ---------------

|** | Incorporated by reference hereto.
|-- | ---------------------------------



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