FX Energy (FXEN)

Note 6: Commitments and Contingencies

In November and December 2007, three actions were filed in the United States District Court for the District of Utah against the Company and its officers or directors David N. Pierce, Clay Newton, Thomas B. Lovejoy, Andrew W. Pierce, and Richard Hardman, by three separate plaintiffs, each seeking class certification to proceed on behalf of all others similarly situated and alleging violations by the defendants of the antifraud provisions of the federal securities laws set forth in Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder relating to the Company’s public statements about its oil and gas activities and prospects in Poland between March 2004 and January 2006. The complaints seek damages to be determined at trial, interest, and costs, together with such other relief as the court may deem appropriate. The three actions have now been consolidated into a single matter, In re FX Energy, Inc., Securities Litigation, United States District Court for the District of Utah, case no. 2:07-cv-00874, and the lead plaintiffs and counsel have been specified. The consolidated actions have not been certified to proceed as a class action.

A consolidated complaint has been filed by the lead plaintiff that alleges that the defendants violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by making material misrepresentations and omissions regarding the Company’s Sroda-5 and Lugi-1 projects between January 20, 2005, and January 5, 2006. The consolidated complaint seeks damages to be determined at trial, interest, costs and such other relief as the court may deem appropriate. On June 20, 2008, the Company filed a motion to dismiss, with a supporting memorandum, for failure to state a claim upon which relief can be granted. Plaintiffs filed an opposition to the defendants’ motion on August 19, 2008, to which defendants filed a reply on October 3, 2008. Following a hearing on February 23, 2009, on defendants’ motion to dismiss, the matter is under advisement by the court. The Company intends to defend vigorously this consolidated action on behalf of all defendants.

Another pending action filed in the United States District Court for the District of Utah entitled Leilani York, derivatively on behalf of nominal defendant FX Energy, Inc., plaintiff, v. David N. Pierce, Dennis B. Goldstein, Arnold S. Grundvig, Jr., Richard Hardman, Tom Lovejoy, Jerzy Maciolek, Clay Newton, Andrew W. Pierce, and David Worrell, defendants, and FX Energy, Inc., nominal defendant, case no. 2:08-cv-00143, which asserts derivative claims on the Company’s behalf against certain of its current and former directors and certain of its current and former executive officers, arising from the same set of facts, has been stayed pending final resolution of the In re FX Energy, Inc., Securities Litigation.

Note 6: Commitments and Contingencies

In November and December 2007, three actions were filed in the United States District Court for the District of Utah against the Company and its officers or directors David N. Pierce, Clay Newton, Thomas B. Lovejoy, Andrew W. Pierce, and Richard Hardman, by three separate plaintiffs, each seeking class certification to proceed on behalf of all others similarly situated and alleging violations by the
defendants of the antifraud provisions of the federal securities laws set forth in Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder relating to the Company’s public statements about its oil and gas activities and prospects in Poland between March 2004 and January 2006. The complaints seek damages to be determined at trial, interest, and costs, together with such other relief as the court may deem appropriate. The three actions have now
been consolidated into a single matter, In re FX Energy, Inc., Securities Litigation, United States District Court for the District of Utah, case no. 2:07-cv-00874, and the lead plaintiffs and counsel have been specified. The consolidated actions have not been certified to proceed as a class action.

A consolidated complaint has been filed by the lead plaintiff that alleges that the defendants violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by making material misrepresentations and omissions regarding the Company’s Sroda-5 and Lugi-1 projects between January 20, 2005, and January 5, 2006. The consolidated complaint seeks
damages to be determined at trial, interest, costs and such other relief as the court may deem appropriate. On June 20, 2008, the Company filed a motion to dismiss, with a supporting memorandum, for failure to state a claim upon which relief can be granted. Plaintiffs filed an opposition to the defendants’ motion on August 19, 2008, to which defendants filed a reply on October 3, 2008. Following a hearing on February 23, 2009, on defendants’ motion to dismiss, the matter
is under advisement by the court. The Company intends to defend vigorously this consolidated action on behalf of all defendants.

Another pending action filed in the United States District Court for the District of Utah entitled Leilani York, derivatively on behalf of nominal defendant FX Energy, Inc., plaintiff, v. David N. Pierce, Dennis B. Goldstein, Arnold S. Grundvig, Jr., Richard Hardman, Tom Lovejoy, Jerzy Maciolek, Clay Newton, Andrew W. Pierce, and David Worrell, defendants, and FX Energy, Inc.,
nominal defendant, case no. 2:08-cv-00143, which asserts derivative claims on the Company’s behalf against certain of its current and former directors and certain of its current and former executive officers, arising from the same set of facts, has been stayed pending final resolution of the In re FX Energy, Inc., Securities Litigation.

Note 6: Commitments and Contingencies

In November and December 2007, three actions were filed in the United States District Court for the District of Utah against the Company and its officers or directors David N. Pierce, Clay Newton, Thomas B. Lovejoy, Andrew W. Pierce, and Richard Hardman, by three separate plaintiffs, each seeking class certification to proceed on behalf of all others similarly situated and alleging violations by the
defendants of the antifraud provisions of the federal securities laws set forth in Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder relating to the Company’s public statements about its oil and gas activities and prospects in Poland between March 2004 and January 2006. The complaints seek damages to be determined at trial, interest, and costs, together with such other relief as the court may deem appropriate. The three actions have now
been consolidated into a single matter, In re FX Energy, Inc., Securities Litigation, United States District Court for the District of Utah, case no. 2:07-cv-00874, and the lead plaintiffs and counsel have been specified. The consolidated actions have not been certified to proceed as a class action.

A consolidated complaint has been filed by the lead plaintiff that alleges that the defendants violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by making material misrepresentations and omissions regarding the Company’s Sroda-5 and Lugi-1 projects between January 20, 2005, and January 5, 2006. The consolidated complaint seeks
damages to be determined at trial, interest, costs and such other relief as the court may deem appropriate. On June 20, 2008, the Company filed a motion to dismiss, with a supporting memorandum, for failure to state a claim upon which relief can be granted. Plaintiffs filed an opposition to the defendants’ motion on August 19, 2008, to which defendants filed a reply on October 3, 2008. Following a hearing on February 23, 2009, on defendants’ motion to dismiss, the matter
is under advisement by the court. The Company intends to defend vigorously this consolidated action on behalf of all defendants.

Another pending action filed in the United States District Court for the District of Utah entitled Leilani York, derivatively on behalf of nominal defendant FX Energy, Inc., plaintiff, v. David N. Pierce, Dennis B. Goldstein, Arnold S. Grundvig, Jr., Richard Hardman, Tom Lovejoy, Jerzy Maciolek, Clay Newton, Andrew W. Pierce, and David Worrell, defendants, and FX Energy, Inc.,
nominal defendant, case no. 2:08-cv-00143, which asserts derivative claims on the Company’s behalf against certain of its current and former directors and certain of its current and former executive officers, arising from the same set of facts, has been stayed pending final resolution of the In re FX Energy, Inc., Securities Litigation.

Note 6: Commitments and Contingencies

In November and December 2007, three actions were filed in the United States District Court for the District of Utah against the Company and officers or directors David N. Pierce, Clay Newton, Thomas B. Lovejoy, Andrew W. Pierce, and Richard Hardman, by three separate plaintiffs, each seeking class certification to proceed on behalf of all others similarly situated and alleging violations by the defendants of the antifraud provisions of the federal securities laws set forth in Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder relating to our public statements about the Company’s oil and gas activities and prospects in Poland between March 2004 and January 2006.  The complaints seek damages to be determined at trial, interest, and costs, together with such other relief as the court may deem appropriate.  The three actions have now been consolidated into a single matter, and the lead plaintiffs and counsel have been specified.  The consolidated actions have not been certified to proceed as a class action.  No responsive pleading from the defendants will be due until an amended complaint is filed.  The Company proposes to defend vigorously this action on behalf of all defendants. 

F-17

FX ENERGY, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

- Continued -

Note 6: Commitments and Contingencies

Fences I Project Area

On April 11, 2000, the Company agreed to spend $16.0 million of exploration costs on the Fences I project area to earn a 49% interest. When expenditures exceeded $16.0 million, POGC would be obligated to pay its 51% share of further costs.

F-16

FX ENERGY, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

- Continued -

In early 2003, the Company entered into a settlement agreement with POGC to address the methods by which the Company would satisfy its then existing unpaid liability incurred in connection with meeting its spending commitment. Among other things, the Company agreed to assign to POGC all of its rights to prior production from the Kleka 11 well, and the liability was to be further offset by the value of the remaining gas reserves associated with the well. As of December 31, 2004, the Company’s share of the Kleka 11 well had estimated reserves with a value of approximately $1.3 million, equal to the accrued liability recorded in favor of POGC. Upon completion of the assignment of the Kleka 11 well, the Company’s previously unpaid liability was to have been settled in full.

Through the end of 2004, exclusive of the Kleka 11 well assignment, the Company incurred qualifying costs in excess of the commitment amount, which meant the Company had earned its 49% interest, and POGC was obligated to pay its 51% share of all qualifying project costs. Due to the fact that the Company exceeded its $16.0 million commitment through actual cash expenditures in 2004, the Company and POGC subsequently agreed that the Kleka 11 well would not be assigned to POGC, nor would POGC take credit for prior years’ gas sales. In addition, during the first half of 2005, POGC applied approximately $1.3 million in unused cash-call proceeds against the Company’s outstanding accrued liability. Accordingly, as of December 31, 2005, by virtue of the various transactions related to the Company’s Fences I exploration commitment, POGC now owed the Company an amount equal to the Company’s prior overpayment and its share of gas sales from the Kleka 11 well from inception through the end of 2005 ($1.4 million) and the Company owed POGC an amount attributable to prior costs and interest that were to have been settled against prior year gas sales from the Kleka 11 well ($0.4 million). At December 31, 2005, the receivable from POGC was included in Joint Interest and Other Receivables in the Consolidated Balance Sheets. In connection with settling its accounts, the Company recorded a net charge of approximately $55,000 which was included in Interest and Other Income in the Consolidated Statements of Operations in 2005.

During 2006, the Company collected this net receivable, a portion of which was paid to the Polish government in the form of value-added tax.