NOTE 4 – OIL AND GAS PROPERTIES

During the nine months ended September 30, 2012, the Company invested $24,030,938 (of which $3,590,000 was accrued as of September 30, 2012) for the development of oil and gas properties, consisting of (1) drilling and drilling preparation costs on 3 wells in Colombia of $23,688,911, (2) seismic cost in Colombia of $139,400, (3) evaluation cost in Colombia of $107,430 and (4) leasehold costs on U.S. properties of $95,197.

Our estimated drilling budget during the fourth quarter of 2012 is approximately $10.0 million, principally relating to the drilling of the Zorro Gris #1 well on the CPO 4 prospect, a future seismic acquisition program on CPO 4, as well as general and administrative, taxes, and social and environmental costs associated with CPO 4.

Impairments

In April 2012, the Company, together with the operator, determined to cease efforts to test and complete the Tamandua #1 sidetrack well on the CPO 4 prospect in Colombia. As a result of the determination to cease efforts to complete the Tamandua #1 well, the Company included the costs related to the Tamandua #1 well in the full cost pool for inclusion in the ceiling test. The Company recorded impairment charges of $0 and $26,527,300 during the three and nine months ended September 30, 2012, respectively, to write off costs not being amortized that were attributable to the drilling of the Tamandua #1 well on the Company's CPO 4 block as well as to write off seismic exploration and evaluation cost, general and administrative cost and environmental and governmental cost that were attributable to the Tamandua #1 well through September 30, 2012.

In July 2012, the Company determined to plug and abandon the Cachirre #1 well on the CPO 4 prospect in Colombia. As a result of such determination, the Company included the costs related to the Cachirre #1 well in the full cost pool for inclusion in the ceiling test at September 30, 2012. The Company recorded impairment charges of $1,174,169 and $11,275,788 during the three and nine months ended September 30, 2012 to write off costs not being amortized that were attributable to the drilling of the Cachirre #1 well as well as to write off seismic exploration and evaluation cost, general and administrative cost and environmental and governmental cost that were attributable to the Cachirre #1 well through September 30, 2012.

Sale of Oil and Gas Properties

During the first quarter of 2012, the Company sold all of its interest in Hupecol Cuerva, LLC ("HC, LLC"), which holds interests in the La Cuerva block and, pending approval of the Colombian authorities, the LLA 62 block, together covering approximately 90,000 acres in the Llanos Basin in Colombia.

HC, LLC sold for $75 million, adjusted for working capital. 13.3% of the sales price of HC, LLC will be held in escrow to fund potential claims arising from the sale. Pursuant to its 1.6% ownership interest in HC, LLC, the Company received 1.6% in the net sale proceeds after deduction of commissions, overriding royalty interest, and transaction expenses; subject to the escrow holdback and a further contingency holdback by Hupecol of 1.3% of the sales price. Following completion of the sale of HC, LLC, the Company had no continuing interest in the La Cuerva and LLA 62 blocks.

At December 31, 2011, the Company's estimated proved reserves associated with the La Cuerva and LLA 62 blocks totaled 94,619 barrels of oil, which represented 82% of the Company's estimated proved oil and natural gas reserves. Sales of oil and gas properties under the full cost method of accounting are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and reserves. Since the sale of these oil and gas properties would significantly alter the relationship, the Company recognized a gain on the sale of $315,119 during the nine months ended September 30, 2012, computed as follows:

Sales price	$	1,224,393
Add: Transfer of asset retirement and other obligations		34,471
Less: Transaction costs		(30,330	)
Less: Prepaid deposits		(54,857	)
Less: Carrying value of oil and gas properties, net		(858,558	)
Net gain on sale	$	315,119

The following table presents pro forma data that reflects revenue, income from continuing operations, net loss and loss per common share for the three and nine months ended September 30, 2012 as if the HC, LLC sale had occurred at the beginning of each period and excludes the gain on sale.

Pro-Forma Information:	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012

Oil and gas revenue	$	30,752		$	124,424
Loss from operations	$	(5,910,054	)	$	(45,612,086	)
Net loss	$	(5,935,713	)	$	(49,030,769	)

Basic and diluted loss per common share	$	(0.16	)	$	(1.42	)

The following table presents pro forma data that reflects revenue, income from continuing operations, net loss and loss per common share for the three and nine months ended September 30, 2011 as if the HC, LLC sale had occurred at the beginning of each period and excludes the gain on sale.

Pro-Forma Information:	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011

Oil and gas revenue		$	31,574			$	116,101
Loss from operations		$	(1,055,613	)		$	(3,946,748	)
Net loss		$	(1,082,282	)		$	(4,047,525	)

Basic and diluted loss per common share		$	(0.03	)		$	(0.13	)

The Company currently has operations in two geographical areas, the United States and Colombia. Revenues for the three and nine months ended September 30, 2012 and 2011 and Long Lived Assets (net of depletion, amortization, and impairments) as of September 30, 2012 and December 31, 2011 attributable to each geographical area are presented below:

	Three Months Ended September 30, 2012 Revenues		Nine Months Ended September 30, 2012 Revenues		As of September 30, 2012 Long Lived Net Assets
United States	$	30,752	$	124,424	$	1,033,893
Colombia		-		263,185		8,069,771
Total	$	30,752	$	387,609	$	9,103,664

	Three Months Ended September 30, 2011 Revenues		Nine Months Ended September 30, 2011 Revenues		As of December 31, 2011 Long Lived Net Assets
United States		31,574	$	116,100	$	603,135
Colombia		287,687		680,968		23,192,745
Total		319,261	$	797,068	$	23,795,880