Financial Results

Net income for the third quarter of 2008 was $3.0 million, or $0.01 per basic and diluted share, compared to a net loss of $5.5 million, or $0.03 per basic and diluted share, for the third quarter of 2007. The third quarter of 2008 included a $3.4 million, or $0.01 per share, unrealized natural gas hedging gain.

Net cash flow from operations for the third quarter of 2008 was $16.8 million, a 273% increase over $4.5 million for the third quarter of 2007. Net cash flow from operations for the first nine months of 2008 was $41.1 million, a 303% increase over $10.2 million for the first nine months of 2007.

Natural gas and oil revenues increased 28% to $12.5 million, excluding the unrealized hedging gain, for the third quarter of 2008, compared to revenues of $9.8 million for the third quarter of 2007. The increase in revenues was the result of a 44% increase in commodity prices, which was partially offset by an 11% decrease in production volumes, primarily in East Texas.

Average daily production was 20.2 MMcfe/d in the third quarter of 2008, compared to 22.5 MMcfe/d for the second quarter of 2008 and 22.7 MMcfe/d for the third quarter of 2007. Third quarter 2008 production was down from the prior periods due to the natural decline in production volumes, the temporary shut-in of five wells during recompletion operations and the fact that no new wells were completed during the third quarter of this year, as there were in both the prior periods.

During the third quarter of 2008, approximately 68% of our total natural gas production was hedged. The realized effect of hedging on natural gas sales was a decrease in revenues of $569,000, resulting in a decrease in the average price per Mcf received from $6.98 to $6.67, compared to an average realized price for natural gas of $4.65 per Mcf in the third quarter of 2007. The Company has approximately 55% of its remaining 2008 estimated natural gas production hedged and 41% of its 2009 estimated natural gas production hedged, as of September 30, 2008.

Lease operating expense (LOE) was $1.9 million, or $1.03 per Mcfe, for the third quarter of 2008, compared to $1.7 million, or $0.81 per Mcfe, for the third quarter of 2007. The increase in total LOE was due to an increase in ad valorem costs and lease operating costs due to additional wells in Texas and Wyoming. During the 2008 third quarter, expensed workover costs totaled $166,000, or $0.09 per Mcfe, as compared to $153,000, or $0.07 per Mcfe, for the same period in 2007.

Liquidity and Capital Budget

At September 30, 2008, we had cash and cash equivalents of $14.1 million. As a result of the turmoil in the credit markets and after completing a review of our capital programs for the next 15 months, we are reducing our previously announced capital spending by approximately $4.9 million for the fourth quarter and $30.1 for the year 2009. This capital plan consists of expenditures for the fourth quarter of 2008 of $11.2 million in East Texas, $6.4 million in the Marcellus Shale, $4.9 million in New South Wales, $400,000 in the Powder River Basin and an additional $4.7 million for capitalized interest and other capital costs. Capital expenditures for 2009 consist of $24.0 million in East Texas, $12.7 million in the Marcellus Shale, $28.9 million in New South Wales, $3.6 million in the Powder River Basin and an additional $18.7 million for capitalized interest and other capital costs. To supplement our cash flow and help fund this capital budget, we are seeking joint venture partners for the development of our properties, with immediate emphasis on securing a partner in our Marcellus Shale acreage, as well as the possibility of selected asset sales. If we are not successful in raising the additional capital required for our current plan, we may further reduce our drilling and development program. As the operator of our East Texas and Marcellus Shale properties, much of our budget can be adjusted at our discretion.

Operations Review and Update

For the three and nine months ended September 30, 2008, net production from the Hilltop area averaged 14.5 MMcfe per day and 17.2 MMcfe per day, respectively. Capital expenditures for the third quarter of 2008 in East Texas were approximately $20.7 million, including $3.5 million for the recompletion of five existing wells. During the third quarter, Gastar recompleted Bossier zones that were behind pipe in five wells; although it required that each well be temporarily shut in during the operation, this work substantially increased production rates in these wells at a nominal cost.

Currently, we are drilling one deep Bossier well, the Belin #1, (an offset to the Wildman #3) and one middle Bossier well, the Lone Oak Ranch #7, (an offset to the LOR #6). If successful, these wells are expected to begin producing natural gas close to year end. For the balance of 2008 and 2009, we will reduce our two-rig program in East Texas to one drilling rig focused on wells that provide high returns and early payouts. Our next well will be a Bossier well, with the location to be determined after review of the LOR #7 and Belin #1 results.

In the Marcellus Shale in northern West Virginia and southwestern Pennsylvania, we have now accumulated a total of approximately 42,000 net acres, and for the remainder of the year, we will focus on completing the acquisition of acreage that is currently under contract, as well as high grading our acreage as appropriate. While this unconventional shale play is developing and Gastar and other operators further evaluate the optimal development and production strategy for the play, we intend to continue to drill shallow wells, which will allow us to hold a portion of our leases with production. We expect to have drilled 10 shallow wells by year-end 2008 and another 13 shallow wells in 2009 at the cost of approximately $475,000 gross per well.