Summary of Operations

Hungary

The Company holds a long-term Mining Plot (the “Production License”) granted by the Hungarian Mining Authority. The lands within the Production License were formerly part of the Company’s two petroleum and natural gas exploration licenses – the Tisza License and the Mako License (collectively, the “Exploration Licenses”). The Production License and the Exploration Licenses, covering approximately 575,700 acres, give the Company the exclusive right to explore for petroleum and natural gas on properties located in south central Hungary near the town of Szolnok. The Production License further gives the Company the exclusive right to commercially develop

petroleum and natural gas within the area covered by that license. The Exploration Licenses expire on December 31, 2009, and are not eligible for extension. However, under the Hungarian laws applicable to oil and gas exploration licenses, the licensee has the first priority in obtaining a mining plot covering all or part of the area, but is not guaranteed that it will receive a mining plot. The process requires the filing of a “Closing Report” within six months from the expiration of the license, and filing an application for the mining plot within the second six-month period.

The Company is currently evaluating: (a) applications for one or more new exploration licenses that would include a portion of the lands currently included in the Exploration Licenses, (b) an application to extend the boundaries of the Production License to include a portion of the lands currently included in the Exploration Licenses , and/or (c) an application for a new production license, to include a portion of the lands currently included in the Exploration Licenses.

On April 10, 2008, Falcon and TXM entered into the Production and Development Agreement (the “PDA”), as amended, with ExxonMobil Corporation affiliate Esso Exploration International Limited (“ExxonMobil”) under which Falcon and ExxonMobil became joint owners in a specified portion (the “Contract Area”) of the Production License. Pursuant to a pre-existing agreement between ExxonMobil and MOL Hungarian Oil and Gas Plc. (“MOL”) and ExxonMobil’s rights under the PDA, ExxonMobil sold one-half of its interest in the Contract Area to MOL, effective April 10, 2008. ExxonMobil, MOL and TXM are also parties to a joint operating agreement (the “JOA”), dated April 10, 2008, which governs all operations of the Contract Area that are not expressly addressed in

the PDA. ExxonMobil is the operator of the Contract Area under the JOA.

The Contract Area consists of approximately 184,300 acres, or 75% of the Company’s 246,000-acre Production License. The Contract Area is now owned jointly, with the Company owning a 33% undivided working interest and ExxonMobil and MOL each owning a 33.5% undivided working interest. However, the Company’s Hungarian subsidiary, TXM, remains as the registered owner of the Production License under the records of the Hungarian Mining Authority.

The PDA provided for ExxonMobil and MOL to spend an aggregate of US$50 million to conduct an initial work program to test one or more of the Company’s existing well bores or drill one or more new wells for such tests (the “Initial Work Program”). After the Initial Work Program is completed (expected to be approximately one year after commencement), Falcon and ExxonMobil will evaluate the results over a period which could last up to four months, at which time ExxonMobil has the right to proceed to the next phase (the “Appraisal Work Program”). If ExxonMobil elects to proceed forward, ExxonMobil and MOL will pay the Company an aggregate of an additional

US$50 million and will be required to expend an aggregate of US$100 million. A portion of the work commitment may be applied to drill one or more wells based on the optimum location from a Makó Trough-wide standpoint. If ExxonMobil elects not to proceed beyond the Initial Work Program, ExxonMobil will relinquish and reassign all of its rights and ownership in the Contract Area to the Company.

After the Appraisal Work Program is completed, ExxonMobil has another election point – that is, to elect to proceed to full-scale development of the Contract Area (the “Development Program”). If ExxonMobil elects to proceed forward, ExxonMobil and MOL will pay the Company an aggregate of an additional US$37.5 million, and will expend US$37.5 million in a manner consistent with the Appraisal Work Program. If ExxonMobil elects not to proceed to the Development Program, it will have the option to relinquish and reassign all of its rights and ownership in the Contract Area or retain a wellbore interest in the wells drilled during the Appraisal Work Program. In either circumstance the Company will also resume operatorship of the Contract Area.

MOL has the right to retain and pay for its 33.5% working interest, including MOL’s 50% share of the abovedescribed payments to the Company and work commitments, regardless of ExxonMobil’s elections. Subject to the Company’s pre-emptive right to acquire and assume ExxonMobil’s participating interest upon relinquishment and reassignment by ExxonMobil at either the Appraisal Work Program election point or the Development Program election point, MOL has the option to acquire and assume all obligations related to ExxonMobil’s 33.5% initial participating interest at the relevant election point.

The Company will incur no development costs within the Contract Area during the Initial Work Program or the Appraisal Work Program up to the amount stipulated in the PDA. Beginning with the Development Program, the Company, ExxonMobil and MOL will each receive revenues and be responsible for their proportionate share of expenses within the Contract Area (that is, 33% the Company, 33.5% ExxonMobil and 33.5% MOL), under the JOA. In addition to the Company’s 33% undivided ownership in the ExxonMobil-operated Contract Area, the Company remains sole owner and operator of 391,400 acres outside the Contract Area boundaries, as well as shallow rights covering 184,300 acres within the Contract Area, as follows:

· Falcon Lands: The Company retains 100% ownership in the remaining 25% (61,400 acres) of the Production License that is not part of the Contract Area.

· Exploration Licenses: Under the original Exploration Licenses, the Company retains 100% ownership in 330,000 acres which are outside the boundaries of the Production License. The Company also retains 100% ownership in the portions of the Exploration Licenses which are above 2,800 meters within the boundaries of the Production License. The 330,000-acre area outside the Production License and the shallow depths are not part of the Production License.

Resource Estimates

In May 2008, Falcon received a resource estimate from RPS Scotia, Inc. (“RPS Scotia”) for the Makó Trough, Hungary effective March 31, 2008 (the “RPS Scotia Report”). The RPS Scotia Report is an update to the Company’s previous resource estimate of the Makó Trough dated and effective in 2006 (the “Scotia Report”).

The RPS Scotia Report is compliant with National Instrument 51-101 “Standards of Disclosure for Oil and Gas Activities”.

The RPS Scotia Report provides a probabilistic distribution of the potentially recoverable portion of “Contingent Resources” as defined by the Canadian Oil and Gas Exploration Handbook (“COGEH”) and does not represent an estimate of reserves.

Based on all available data, RPS Scotia has assigned the following probabilistic estimation of potentially recoverable contingent resources to the Company’s interests in the Szolnok formation, the Lower Endrod, the Basal Conglomerate and the Synrift Sequence. The RPS Scotia Report measures the Makó Trough in trillions of cubic feet of natural gas (“Tcf”) and millions of barrels of oil (“mmbo”):

Notes:

(1) The resource estimate has been conducted using the definitions specified by the COGEH. The Makó Trough resource falls under the “Discovered Resources” classification. The values refer to the probabilistically estimated recoverable fraction of “Contingent Resources” within that classification. Contingent resources are those quantities of oil and gas estimated on a given date to be potentially recoverable from known accumulations but are not currently economic. The economic nature of this resource has not yet been assessed due to the early stage of data gathering for the Makó Trough resource. The recoverable portion of this “Contingent Resource” is contingent upon the demonstration of productive capability of the various zones of interest through well testing and longer term production testing which has not occurred as of the effective date of the report.

(2) Estimates are as of March 31, 2008, the effective date of the RPS Scotia Report.

A copy of the RPS Scotia Report is available on SEDAR at www.sedar.com and Falcon’s website at www.falconoilandgas.com.

Operational Highlights

In June 2008, the Makó 6 well intervention was completed. The intervention included removal of the 3 ½ inch tubing down to 2,250 meters and the cementing of the well down to about 2,818 meters. A drillable plug was set above the cement in the 5 ½ inch casing, thereby concluding the Makó 6 well repair.

Operational activity for 2008 was limited to well site and well bore maintenance, and well intervention and repair of the Makó 6 well.

In May 2009, ExxonMobil reached total depth of 14,500 feet (4,421 meters) on the drilling of the Földeák-1 well, which is currently being evaluated for testing. This well is part of the Initial Work Program under the PDA. The primary focus of the Initial Work Program and the Földeák-1 well is to test the Szolnok Formation.

Evaluation Period

In 2008, Falcon substantially completed the work and studies undertaken in 2007 to evaluate the subsurface information, both geological and operational, with respect to the Company’s existing Makó Trough well. This data has been shared with the ExxonMobil and MOL and is also of value to the Company in the Falcon Lands portion of the Production License.