Operational Update

October 2008

The wet season is about to start in Madagascar and as a result much of the drilling and operational activities will soon wind down from their peak. As we began the year, we had some very aggressive objectives to move the company forward. The company has been successful in meeting those objectives.

Bemolanga
We recently announced the closure on the farm out of 60-percent interest and operatorship in the license for this vast oil sands accumulation to French super major TOTAL. Congratulations to the negotiations team and all other personnel involved in striking this significant transaction for the Company.

The Bemolanga field is one of the largest undeveloped bitumen reserves in the world, with more than 16 billion barrels of oil in place according to an independent appraisal study by DeGolyer & McNaughton.

TOTAL will bring their world class expertise which will greatly benefit the project and position it forward for potential development. This also frees up the Madagascar Oil team to focus our efforts on advancing the large heavy oil Tsimiroro field and our four licensed exploration blocks.

During the initial appraisal phase, additional core drills will be drilled to determine the license's potential. A production pilot will be set up in a second phase to confirm the development parameters before considering a large scale development of the license. . If successful, it is anticipated that the partnership’s mining project will develop 2.5 billion barrels of recoverable resources and have the capability to produce 180,000 barrels of oil per day for more than 30 years.

Tsimiroro
As we began the year, we recognized that for Tsimiroro to become a viable project, we needed to (1) increase through exploration drilling the oil in place beyond the 300 MMBO central pool known as TO-1 and (2) prove that the oil could be efficiently extracted through the use of thermal stimulation by completing a steam pilot project using Cyclical Steam Simulation (CSS). I am pleased to report that we have been very successful in meeting and exceeding our expectations.

Drilling Update: Our drilling plan for the 2008 dry season involved the drilling of fourteen new structures identified by technical studies. Many of the structures were fine tuned using surface geology conducted by our Malagasy personnel. Eleven of the fourteen structures drilled found oil ranging from columns of 8 meters to 60 meters resulting in a potential from these new structures of 700 million to 1.0 billion barrels of resources in place. Congratulations to the Exploration and Drilling team on their efforts. We plan to use the remaining days of the dry season to drill several new wells in the structures to confirm and appraise the discoveries.

Steam Pilot Project The pilot response was very promising. We drilled and completed four wells in a 5 acre-spacing and conducted one steam injection cycle in three of the four. These three cycle steam simulations (CSS) represent the first conducted in the country of Madagascar. The pilot produced 2000 BO at a Steam/Oil Ratio (SOR) just above 4. The SOR potential for CSS is likely to be better than these results as the stimulation of Well P1-4 was compromised by generator down time and low quality steam injection. Also, the artificial lift equipment proved to be under-designed for the deliverability of the wells. The pilot was successful in demonstrating injectivity, producability, oil characteristics for marketing, and thermal suitability of Tsimiroro

We are currently designing a continuous steam injection (steam flood) pilot for 2009. This pilot will demonstrate overall Tsimiroro recovery and improve our organizational and producing capability.

Exploration
We have loaded all available seismic and well data onto a workstation for every block and have been performing a detailed review of all four exploration blocks. The seismic data quality ranges from poor to good on several key areas. This review has highlighted the need for additional seismic data (mainly as infill to shore up existing prospects), but several large prospects or leads have been indentified and mapped with detail. Several of these leads occur on several lines in both the strike and dip orientation and are located either directly updip of previously drilled wells or on the same trend (i.e., well drilled off of the structural crest). At the end of the review a series of recommendations will be made to management in order to proceed with the planning of the next phase work program which will most likely consist of seismic reprocessing and acquisition.

Additionally we have been on touch with an established seismic contractor that is new to Madagascar. This contractor is currently in country acquiring data for another operator at acquisition rates that are significantly lower than in the past.

Corporate With the closing of the TOTAL farm out, we have repaid our credit facility and are now debt free. Congratulations to all involved in managing the debt situation of the company.