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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2008

or

For the transition period from to

Commission file number:  001-32628

STORM CAT ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

(registrant’s telephone number, including area code): (303) 991-5070

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes    o  No

Indicate by check mark whether the registrant is a large accelerated filer, or an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes     x  No

As of November 14, 2008, there were 81,304,799 common shares outstanding.

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PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

STORM CAT ENERGY CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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STORM CAT ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(stated in thousands of U.S. dollars, except share amounts)

The accompanying notes are an integral part of these financial statements.

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STORM CAT ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(stated in thousands of U.S. dollars, except share and per share amounts)

The accompanying notes are an integral part of these financial statements.

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STORM CAT ENERGY CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

(stated in thousands of U.S. dollars, except share amounts)

The accompanying notes are an integral part of these financial statements.

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STORM CAT ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(stated in thousands of U.S. dollars)

The accompanying notes are an integral part of these financial statements.

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STORM CAT ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Storm Cat Energy Corporation, together with its consolidated subsidiaries (“Storm Cat” or the “Company”), is an independent oil and gas company focused primarily on the pursuit, exploration and development of large unconventional gas reserves from fractured shales, coal beds and tight sand formations and, secondarily, from conventional formations.  We have producing properties in Wyoming’s Powder River Basin (“PRB”) and in Arkansas’ Arkoma Basin (“Fayetteville Shale”).  Our primary exploration and development acreage is located in the United States and Canada. Unless the context otherwise requires, the terms “Storm Cat,” we”, “us,” “our” and the “Company”, when used herein refer to Storm Cat Energy Corporation, together with its operating subsidiaries. When the context requires, we refer to these entities separately.

NOTE 1. BASIS OF PRESENTATION

General

The accompanying Consolidated Financial Statements of Storm Cat, with the exception of the Consolidated Balance Sheet at December 31, 2007, have not been audited by independent public accountants and have been prepared in accordance with generally accepted accounting principals (“GAAP”) in the U.S.  In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present fairly our financial position at September 30, 2008, our loss for the three and nine months ended September 30, 2008 and 2007 and cash flows for the nine months ended September 30, 2008 and 2007. All such adjustments are of a normal recurring nature. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimates. Certain amounts presented in prior period financial statements have been reclassified for consistency with current period presentation. The results for interim periods are not necessarily indicative of annual results.

Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they should be read along with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Bankruptcy Filing

On November 10, 2008, all of the direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”) of Storm Cat Energy Corporation (the “Parent”) filed a voluntary petition for reorganization (the “Reorganization Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Code”) in the United States Bankruptcy Court for the District of Colorado (the “Bankruptcy Court”). The Reorganization Cases do not include the Parent.  The Debtors expect the cases to be jointly administered. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Code and orders of the Bankruptcy Court.

The accompanying Consolidated Financial Statements of Storm Cat, are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  However, the Reorganization Cases raise substantial doubt about the Company’s ability to remain a going concern. The Company’s continuation as a going concern is contingent upon, among other things, its ability (i) to obtain a Debtor-in-Possession Credit Agreement (ii) to reduce administrative, operating and interest costs and liabilities through the bankruptcy process; (iii) to generate sufficient cash flow from operations; (iv) to achieve profitability; (v) to obtain confirmation of a plan of reorganization under the Bankruptcy Code and (vi) to obtain financing to facilitate an exit from bankruptcy. In the event the Company’s restructuring activities are not successful and it is required to liquidate, additional significant adjustments will be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used.

American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”), which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared.  However, it does require that the financial statements for periods subsequent to the filing of the Reorganization Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the period ending December 31, 2008.  The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities.  Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may settled for lesser amounts.  In addition, cash provided by reorganization items must be disclosed separately in the statement of cash flows.  Storm Cat adopted SOP90-7 effective on November 10, 2008 and will segregate those items as outlined above for all reporting periods subsequent to such date.

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NOTE 2.  LIQUIDITY

At September 30, 2008, the Company was not in compliance with certain of the financial and minimum average daily production and other covenants set forth in the Credit Agreement, dated as of December 27, 2007, as amended by that certain First Amendment to Credit Agreement, dated as of April 17, 2008 (the “Credit Agreement”) by and among Storm Cat Energy (USA) Corporation (“Storm Cat (USA)”), a wholly owned subsidiary of Storm Cat, Wells Fargo Foothill, LLC, as agent (the “Agent”) and the lenders from time to time party thereto (the “Lenders”).  As reported in our Form 10-Q filed with the Securities and Exchange Commission on August 11, 2008, we were not in compliance with financial and minimum average daily production covenants set forth in the Credit Agreement for the quarter ended June 30, 2008 and did not expect to be in compliance for the next twelve months.  Accordingly, the $64.5 million outstanding pursuant to the Credit Agreement at September 30, 2008 has been classified as a current liability in the accompanying Consolidated Balance Sheet.

On August 13, 2008, we received a notice (the “Default Notice”) of default under the Credit Agreement from the Agent and Lenders.  As a result of the Event of Default, the Agent increased the rate of interest to the default rate of interest on the borrowings outstanding under the Credit Agreement, which default rate of interest is two percent (2.0%) higher than would otherwise be in effect on such loans.  The Lenders were no longer obligated to make any advances or extend credit pursuant to the Credit Agreement, but the Lenders have continued to make advances or other in their sole discretion.  In addition, upon receipt of the Default Notice, the Agent issued instructions to each of Storm Cat’s and its subsidiaries’ depository banks directing such banks to forward by daily sweep all amounts held in Storm Cat’s depository accounts into the Agent’s account.  Furthermore, the Default Notice provided that the Agent and the Lenders reserved any and all rights, powers, privileges and remedies under the Credit Agreement and the other loan documents and by applicable law, which includes, without limitation, acceleration of all amounts due pursuant to the Credit Agreement, or foreclosure of the Agent’s mortgage and security interest in Storm Cat’s real and personal property.

As noted above, on November 10, 2008, the Debtors filed a voluntary petition for reorganization under Chapter 11 of Code in the Bankruptcy Court.  Storm Cat Energy Corporation was not included in the U.S. bankruptcy filing, nor did it file an application for creditor protection under the Companies’ Creditors Arrangement Act in Canada. The Debtors expect the cases to be jointly administered.  Since May 2008, we have been exploring numerous alternatives to improve liquidity, including raising capital, refinancing outstanding debt or the potential sale of assets.  Unfortunately, as a result of falling commodity prices and the global financial crisis, we have been unsuccessful to date.  Nonetheless, in connection with on-going discussions with the Lenders regarding potential restructuring initiatives, the Company has engaged Houston-based Parkman Whaling LLC for the purpose of assisting the Company in exploring strategic business alternatives as well as engaged Alvarez & Marsal, a turnaround and restructuring firm, for the purpose of assisting the Company with its restructuring efforts.

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We are actively engaged in discussions with our existing lenders to enter into a Debtor-in-Possession Credit Agreement (“DIP Agreement”) to repay the outstanding indebtedness under the Credit Agreement and provide a revolving credit facility to finance our ongoing operations.  There can be no assurance that we will be able to obtain a DIP Agreement or that such DIP Agreement would be on terms acceptable to us.  Under Chapter 11, and assuming the DIP financing negotiations are successful, we expect to continue, without undue interruption, our operations in the ordinary course of business, and intend to file a reorganization plan with the Bankruptcy Court as soon as practicable.

In connection with the above mentioned defaults under the Credit Agreement, Wells Fargo Bank, National Association, the counterparty to the swap agreements and an affiliate of one of the Lenders, exercised its right to declare a cross-default on our natural gas commodity swap agreements.  The agreements were terminated on October 23, 2008, and Wells Fargo Bank, National Association, paid all amounts owing to us upon termination of the swap agreements, which was $9.4 million, to the Lenders to be set-off against and reduce the amounts outstanding under the revolving credit facility.  The termination of the swap agreements fully exposes our cash flow to changes in commodity prices.  As a result, we discontinued hedged accounting on September 30, 2008 and have recorded unrealized gains and losses in the Consolidated Statement of Operations.

The Lenders notified the holders of the 9 1/4% Series A Subordinated Convertible Notes due March 31, 2012 (“Series A Notes”) and the 9 1/4% Series B Subordinated Convertible Notes due March 31, 2012 (“Series B Notes” and together with the Series A Notes, the “Convertible Notes”) that pursuant to the terms of the Note Purchase Agreements and the Subordination and Intercreditor Agreement previously entered into by the noteholders, the Lenders were enforcing their rights (1) to prohibit us from making any payments to the noteholders pursuant to the terms of the Convertible Notes and the Note Purchase Agreements, and (2) to require that the noteholders standstill and not accelerate any amounts due under the Convertible Notes upon an “event of default” or seek other enforcement or redemption actions otherwise permitted under the Note Purchase Agreements.

We failed to make our required quarterly interest payment when due on September 30, 2008, and as of October 31, 2008 such failure has continued for a period of 30 days, with respect to (1) $18,535,000 in outstanding principal of its Series A Notes and (2) $31,660,000 in outstanding principal of its Series B Notes.  Our failure to make the required quarterly interest payment prior to the expiration of such 30 day grace period constitutes an “event of default” under the Note Purchase Agreements. As a result of this “event of default”, the rate of interest on the outstanding principal amount of the Convertible Notes as well as any overdue interest will increase from 9 1/4% to 12.0% per annum.

We have a working capital deficit of $139.5 million at September 30, 2008.  This compares to a deficit in working capital of $2.0 million at December 31, 2007.  Reclassification of $64.5 million outstanding under our Credit Agreement to current liabilities, the reclassification of $50.2 million of Convertible Notes to current liabilities, and the increase in trade payables to $24.6 million compared to $5.8 million at December 31, 2008 are the primary reasons for the large increase in our working capital deficit.

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These matters raise substantial doubt about our ability to continue as a going concern.  Our continued operations are contingent upon, among other things, our ability (i) to obtain a Debtor-in-Possession Credit Agreement (ii) to reduce administrative, operating and interest costs and liabilities through the bankruptcy process; (iii) to generate sufficient cash flow from operations; (iv) to achieve profitability; (v) to obtain confirmation of a plan of reorganization under the Bankruptcy Code and (vi) to obtain financing to facilitate an exit from bankruptcy.

NOTE 3. SIGNIFICANT ACCOUNTING POLICIES

Please see our Annual Report on Form 10-K for the year ended December 31, 2007 for a comprehensive listing of our accounting policies.

Foreign Currency

We are exposed to fluctuations in foreign currencies, primarily through our operations in Canada. We monitor this exposure but have not entered into any hedging arrangements to protect from currency fluctuations.  As of September 30, 2008, $1.1 million U.S. dollar equivalent, or 100% of our cash, was held in U.S. dollars.

For the nine months ended September 30, 2008, balances in the Consolidated Statements of Operations were converted from Canadian to U.S. dollars at a weighted average exchange rate of $0.98280 CDN to $1.00 U.S., and Consolidated Balance Sheet balances were converted at a rate of $0.96360 CDN to $1.00 U.S. based on the exchange rate on September 30, 2008.

For the nine months ended September 30, 2007, balances in the Consolidated Statements of Operations were converted from Canadian to U.S. dollars at a weighted average exchange rate of $0.90685 CDN to $1.00 U.S.

Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. On February 12, 2008, the FASB issued Staff Position No. FAS 157-2  (“FSP 157-2”) which proposed a one year deferral for the implementation of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis (less frequent than annually).

On January 1, 2008 we elected to implement SFAS 157 with the one-year deferral. Given the nature of our current financial instruments, the adoption of SFAS 157 did not have a material impact on our financial position, results of operations or cash flows.

The estimated fair values of derivatives included in the Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 are summarized below. The decrease in the net derivative liability from December 31, 2007 to a net derivative asset September 30, 2008 is primarily attributable to the effect of lower natural gas prices.

Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels—defined by SFAS 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities—are as follows:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

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Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

Natural Gas Commodity Hedges

During 2007 and through September 30, 2008, realized gains or losses from the settlement of natural gas derivative contracts that qualified as cash flow hedges for accounting purposes under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” were reported as natural gas revenues in the Consolidated Statements of Operations.  Changes in the fair value of derivative instruments designated as cash flow hedges, to the extent they are effective in offsetting cash flows attributable to the hedged risk, were recorded in accumulated other comprehensive loss in the Consolidated Balance Sheets.

As of September 30, 2008, we had hedge contracts in place through December 2010 for a total of approximately 4,902,400 MMBtu of anticipated production from our PRB properties. On October 23, 2008, in connection with the above mentioned defaults under the Credit Agreement, the Lenders terminated our remaining natural gas commodity swap agreements (see Note 2. Liquidity, Item 2. Subsequent Events, and Item 3.  “Quantitative and Qualitative Disclosures About Market Risk”  for a detailed listing of our commodity swaps).

In response to the termination of our future natural gas derivative contracts, we discontinued hedged accounting on September 30, 2008 and we booked unrealized gains from the natural gas derivative contracts to the Consolidated Statements of Operations.  Realized gains from the termination of our future natural gas derivative contracts that the lenders applied to reduce the amounts outstanding under the revolving credit facility were recorded to realized gains on the Consolidated Statements of Operations.  Prior to the quarter-end, realized gains and losses were recorded as a component of “Natural Gas Revenue” on the Consolidated Statements of Operations.

On August 5, 2008, we liquidated a portion of our natural gas hedges to bring the percentage of our production hedged into compliance with our internal hedging policy and with the covenants in the Credit Agreement.  The unwinding of the hedges netted us approximately $1.7 million of cash. The gains on the sale of these natural gas contracts were recorded to the Consolidated Statements of Operations.

We recognized a $3.3 million gain on the fair value of our derivative contracts in the first nine months of 2008, and $0.5 million gain for the same period in 2007.  The table below summarizes derivative instrument gain (loss) activity:

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NOTE 5. OIL AND GAS PROPERTIES

Accounting for Oil and Gas Properties

We follow the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized on a country-by-country (cost center) basis. Capitalized costs, less estimated salvage value, are depleted using the units-of-production method whereby historical costs and future development costs are amortized over the total estimated proved reserves. Costs of acquiring and evaluating unproved properties and major development projects are initially excluded from the depletion and depreciation calculation until it is determined whether or not proved reserves can be assigned to such properties. These costs are assessed periodically to ascertain whether impairment has occurred (i.e., “impairment tests”). Please refer to Regulation S-X Rule 4-10(c)(4) for full discussion regarding impairment tests.

The Company calculates the ceiling value of its proven reserves based upon the current market price for natural gas at the Colorado Interstate Gas (“CIG”) Mainline price for PRB reserves and 92% of the NYMEX Henry Hub price for Arkansas reserves.  At September 30, 2008 the CIG market price for PRB reserves was $3.49 per MMBtu and the adjusted NYMEX Henry Hub market price for Arkansas reserves was $6.59 per MMBtu.  At that date, the Company’s full cost pool exceeded this calculated value by $47.3 million.

In the first nine months of 2008, we invested $1.8 million in lease rentals, geophysical and geological activities and capitalized interest. During this period, we also invested $36.7 million in various capital projects as follows:

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Asset Retirement Obligation

The estimated fair value of the future costs associated with dismantlement, abandonment and restoration of natural gas properties is recorded when the assets are placed into service, generally through acquisition or completion of a well.  The net estimated costs are discounted to present values using a risk-adjusted rate over the estimated economic life of the properties.  Such costs are capitalized as part of the basis of the related asset and are depleted as part of the applicable full cost pool.  The associated liability is recorded initially as a long-term liability.  Subsequent adjustments to the initial asset and liability are recorded to reflect revisions to estimated future cash flow requirements.  In addition, the liability is adjusted to reflect accretion expense as well as settlements during the period.  Reconciliation of the changes in the asset retirement obligation for the nine months ended September 30, 2008 and 2007, respectively, is as follows:

NOTE 6. BANK CREDIT FACILITY

On December 27, 2007, Storm Cat USA entered into the Credit Agreement which was amended on April 17, 2008, which provided for certain credit facilities (the “Credit Facility”) consisting of a $40.0 million term loan facility and a $25.0 million revolving facility.  Storm Cat and each of Storm Cat USA’s subsidiaries agreed to guarantee the obligations of Storm Cat (USA) under the Credit Facility.  As of September 30, 2008, we had a total of $64.5 million outstanding pursuant to the Credit Agreement, which consisted of $40.0 million on the term loan facility and $24.5 million on the revolving facility.

Storm Cat and the subsidiary guarantors have also executed and delivered certain other related agreements and documents pursuant to the Credit Facility, including a guaranty agreement, security and pledge agreement and mortgages.  The obligations of Storm Cat, Storm Cat (USA), and their subsidiaries under the Credit Facility are secured by a first priority security interest in favor of Wells Fargo for the benefit of the lenders, in Storm Cat and its subsidiaries’ material tangible and intangible assets, and proved reserves, among other things.

On August 13, 2008, we received the Default Notice from the Agent and Lenders.  As a result of the Event of Default, the Agent increased the rate of interest to the default rate of interest on the borrowings outstanding under the Credit Agreement, which default rate of interest is two percent (2.0%) higher than would otherwise be in effect on such loans.  The Lenders were no longer obligated to make any advances or extend credit pursuant to the Credit Agreement, but the Lenders have continued to make advances or other in their sole discretion.  In addition, upon receipt of the Default Notice, the Agent issued instructions to each of Storm Cat’s and its subsidiaries’ depository banks directing such banks to forward by daily sweep all amounts held in Storm Cat’s depository accounts into the Agent’s account.  Furthermore, the Default Notice provided that the Agent and the Lenders reserved any and all rights, powers, privileges and remedies under the Credit Agreement and the other loan documents and by applicable law, which includes, without limitation, acceleration of all amounts due pursuant to the Credit Agreement, or foreclosure of the Agent’s mortgage and security interest in Storm Cat’s real and personal property.

As noted above, on November 10, 2008, the Debtors filed the Reorganization Cases with the Bankruptcy Court.  Since May 2008, we have been exploring numerous alternatives to improve liquidity, including raising capital, refinancing outstanding debt or the potential sale of assets.  Unfortunately, as a result of falling commodity prices and the global financial crisis, we have been unsuccessful to date.  Nonetheless, in connection with on-going discussions with the Lenders regarding potential restructuring initiatives, the Company has engaged Houston-based Parkman Whaling LLC for the purpose of assisting the Company in exploring strategic business alternatives as well as engaged Alvarez & Marsal, a turnaround and restructuring firm, for the purpose of assisting the Company with its restructuring efforts.

We are actively engaged in discussions with our existing lenders to enter into a DIP Agreement to repay the outstanding indebtedness under the Credit Agreement and provide a revolving credit facility to finance our ongoing operations.  There can be no assurance that we will be able to obtain a DIP Agreement or that such DIP Agreement would be on terms acceptable to us.

The $64.5 million outstanding under the Credit Facility is recorded as a Current Liability under the line item “Bank Debt” on the Consolidated Balance Sheets.  Loan origination fees incurred during acquisition of this debt were capitalized and were being amortized over the term of the loan.  As a result of the Event of Default under the Credit Agreement, the indebtedness outstanding under the Credit Facility was required to be treated as a demand note and be fully recognized.  Unamortized loan fees of $1.5 million relating to the Credit Facility were expensed in the quarter ended September 30, 2008.

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NOTE 7. CONVERTIBLE NOTES

On January 19, 2007, we entered into a Series A Note Purchase Agreement for the private placement of Series A Notes in a total aggregate principal amount of $18.5 million and a Series B Note Purchase Agreement for the private placement the Series B Notes in a total aggregate principal amount of $31.7 million.  The Convertible Notes were bifurcated into two series because a shareholder vote was required for issuance of any Convertible Notes above the amount issued under the Series A Notes.  The Series A Notes and the Series B Notes are convertible into our common shares at a price of $1.17 per share, as may be adjusted in accordance with the terms of the Series A Notes or the Series B Notes (as applicable), and we may require the conversion of the Series A Notes or the Series B Notes (as applicable) at any time 18 months after the closing date of the applicable issuance that our common shares trade above $2.05, as may be adjusted, for 20 days within a period of 30 consecutive trading days.  On the day of the Series A Note Purchase Agreement and the Series B Note Purchase Agreement, the $1.17 conversion price was at premium to our closing stock price of $1.00.

On January 30, 2007, we closed the private placement of the Series A Notes.  The Series A Notes mature on March 31, 2012, unless earlier converted, redeemed or repurchased.  The Series A Notes bear interest at a rate of 9.25% per annum, commencing on January 30, 2007.  Interest on the Series A Notes is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, beginning on June 30, 2007.

On March 29, 2007 our shareholders authorized the issuance of the underlying shares of the Series B Notes and on March 30, 2007, we closed the private placement of $31.7 million of Series B Notes.  The Series B Notes mature on March 31, 2012, unless earlier converted, redeemed or repurchased.  The Series B Notes bear interest at a rate of 9.25% per annum, commencing on March 30, 2007.  Interest on the Series B Notes is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, beginning on June 30, 2007.

As part of the private placements, we entered into a registration rights agreement (the “Registration Rights Agreement”) with the investors requiring us to file with the Securities and Exchange Commission (the “SEC”) registration statements covering the common shares issuable upon conversion of the Series A Notes and the Series B Notes.  We have fulfilled our obligations under the Registration Rights Agreement to have an effective registration covering the shares that are issuable upon conversion of the Convertible Notes with respect to all of the shares underlying the Convertible Notes, with the exception of 123,932 common shares issuable upon conversion of Series B Notes held by certain of our officers and directors.  The registration statements and the related prospectuses can be accessed via the SEC website at www.sec.gov.

The Lenders notified the holders of the Convertible Notes that pursuant to the terms of the Note Purchase Agreements and the Subordination and Intercreditor Agreement previously entered into by the noteholders, the Lenders were enforcing their rights (1) to prohibit the Company from making any payments to the noteholders pursuant to the terms of the Convertible Notes and the Note Purchase Agreements, and (2) to require that the noteholders standstill and not accelerate any amounts due under the Convertible Notes upon an “event of default” or seek other enforcement or redemption actions otherwise permitted under the Note Purchase Agreements.

We failed to make our required quarterly interest payment when due on September 30, 2008, and as of October 31, 2008 such failure has continued for a period of 30 days, with respect to (1) $18,535,000 in outstanding principal of its Series A Notes and (2) $31,660,000 in outstanding principal of its Series B Notes.  The failure of the Company to make the required quarterly interest payment prior to the expiration of such 30 day grace period constitutes an “event of default” under the Note Purchase Agreements. As a result of the “event of default”, the rate of interest on the outstanding principal amount of the Convertible Notes as well as any overdue interest will increase from 9 1/4% to 12.0% per annum.

We have reclassified the $50.2 million of Convertible Notes to Current Liabilities on the Consolidated Balance Sheets.  Loan origination fees incurred during the acquisition of this debt were capitalized and were being amortized over the term of the loan.  As a result of the “event of default” under the Convertible Notes we are required to classify the convertible notes as short term indebtedness.  Unamortized loan fees relating to the Convertible Notes of $2.4 million were expensed in the quarter ended September 30, 2008.

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NOTE 8. SHAREHOLDERS’ EQUITY

Outstanding Share Data

We have an unlimited number of authorized common shares, without par value, and an unlimited number of preferred shares which may be issued in series and with preferences as determined by our Board of Directors.  As of the filing of this report no preferred shares had been issued.

At September 30, 2008, 81,304,799 common shares were issued and outstanding, 5,995,333 common share options outstanding and reserved for issuance under our Amended and Restated Share Option Plan (the “Amended Option Plan”) and 121,251 unvested restricted stock units (“RSUs”) outstanding under our Restricted Share Unit Plan.  There were also 15,841,880 common shares reserved for issuance upon conversion of the Series A Notes and 27,059,829 common shares reserved for issuance upon conversion of the Series B Notes.

Basic and Diluted Loss per Share

Basic loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding during the period.  The shares represented by vested RSUs issued to date are included in the calculation of the weighted average basic common shares outstanding.  Diluted loss per share is calculated giving effect to the potential dilution that would occur if vested stock options, RSUs and stock purchase warrants were exercised and the Convertible Notes were converted to common shares.  The dilutive effect of options, RSUs, warrants and the Convertible Notes is computed by application of the treasury stock method which assumes that proceeds from the exercise of in-the-money options and warrants would be used to repurchase common shares at average market prices during the period.  Diluted amounts are not presented when the effects of the computations are anti-dilutive due to net losses incurred.  Accordingly, there is no difference in the amounts presented for basic and diluted loss per share for the quarters ended September 30, 2008 and 2007.  Listed below is a table showing the potentially dilutive shares outstanding as of September 30, 2008 and 2007 which have been excluded from the diluted earnings per share calculation.

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Options and RSUs Issued and Outstanding

The Amended Option Plan and the Restricted Share Unit Plan (together, the “Plans”), both approved by our shareholders on June 21, 2007, authorizes the granting of incentive and nonqualified options to purchase up to 10,000,000 common shares in the aggregate. The Plans are administered by the Board of Directors which determines the terms pursuant to which any option is granted. The Plans provide that upon a change in control, options then outstanding will immediately vest and we will take such actions as are necessary to make all shares subject to options immediately salable and transferable.

Of the 10,000,000 shares authorized for issuance in the aggregate under the Plans, 9,352,000 shares have been granted and 1,987,807 shares have been forfeited, leaving a total of 1,937,187 shares available for issuance as of September 30, 2008.  Below is a reconciliation of our remaining shares available to grant at the end of the third quarter 2008:

(1)Exercise price is in Canadian dollars.

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Share Based Payments Expensed for the nine months ended September 2008 and 2007

SFAS No. 123(R), paragraph B129, “Equity Instruments with Exercise Prices Denominated in a Foreign Currency” requires that all equity instruments with exercise prices denominated in a currency other than the currency of the market in which the underlying equity instrument primarily trades be accounted for as liabilities.  Because we have granted options that are priced in Canadian dollars, and our stock is primarily traded on the American Stock Exchange (“AMEX”), the liability method is required relative to all U.S. employees.  We employ the following methods in recording share-based payments.

The fair value of share-based payments are expensed, with a corresponding increase to additional paid-in capital for the equity method, or the share-based payment liability for the liability method.  Upon exercise of stock options, the consideration paid upon exercise is recorded as additional value of common shares and the amount previously recognized in additional paid-in capital is reclassified to common shares.

Both of the aforementioned methods of calculating share-based payments require us to make several estimates including when stock options might be exercised, the stock price volatility, forfeiture rates, and the model used to calculate value.  The timing for exercise of options is outside our control and depends upon a variety of factors including the market value our common shares and the financial objectives of the holders of the options, among other factors.  We calculate volatility using historical data; however, future volatility is inherently uncertain.

The following table summarizes our share-based payments expense under each method:

Stock Activity During the Quarter

No restricted stock units or stock options were issued to directors, employees and consultants.  Grants to directors were in accordance with the Company’s Director Compensation Policy.  Employee and consultant grants were for services rendered during the current year.

NOTE 9. INCOME TAXES

The income tax benefit realized in the first nine months of 2007 was $1.3 million.  This is a tax benefit that is passed on to our flow-through shareholders.  In order to have this tax benefit, the flow-through shareholders pay a premium above market for their shares.  This premium is reduced in equity and recorded as a liability.  As the capital obligation is satisfied, the liability is reduced and an income tax benefit is recorded to the income statement.  The liability no longer exists and no tax benefit was recognized in the first nine months of 2008.

NOTE 10. OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive earnings (loss) is a term used to refer to net earnings plus other comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under generally accepted accounting principles are reported as separate components of shareholders’ equity instead of net earnings. Items included in other comprehensive loss for the three and nine months ended September 30, 2008 are foreign currency gains (losses) related to the translation of the assets and liabilities of our Canadian operations. Items included in other comprehensive loss for the three and nine months ended September 30, 2007  are foreign currency gains (losses) related to the translation of the assets and liabilities of our Canadian operations and unrealized gains (losses) related to the changes in the fair value of derivative instruments designated as cash flow hedges.

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Comprehensive loss for the three months and nine months ended September 30, 2008 and 2007, respectively, is reflected in the table below:

NOTE 11. SALES, TRANSPORTATION AND GATHERING COMMITMENTS

Sales Commitments

We had no forward sales contracts at September 30, 2008.

Firm Transportation Service Agreements

We have a firm transportation agreement in place through April 11, 2013 to transport gas from Cheyenne Plains to ANR PEPL (Oklahoma). The agreement obligates us to pay $0.34 per Dth on 2,000 Dth/D or approximately $20,000 per month. The firm commitment payment is offset by any charges for volumes shipped on the Cheyenne Plains pipeline to the ANR PEPL (Oklahoma) delivery hub. We released our 2,000 Dth/D capacity commitment for a period of twelve months (from November 1, 2008 through October 31, 2009) at the full volume commitment for $0.43 per Dth.

We also have a firm transportation agreement with an unaffiliated third party that expires November 30, 2013. The agreement requires us to pay $0.15 per Dth on 100% load basis of 4,000 Dth/D. Gas is received at Glenrock, Wyoming and delivered to the Dullknife hub in Wyoming. We are currently meeting the volume commitment relative to this agreement.

Gathering Commitments

We have a fee-based gas gathering and compression services agreement with an unrelated third party for the provision of field gathering, treating, compression and high pressure transport of natural gas to be produced from our Fayetteville Shale project. We are obligated to deliver sufficient volumes to generate fees totaling $19.0 million over a four-year period which began in April 2008.

NOTE 12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES

These financial statements have been prepared in accordance with U.S. GAAP which differs in certain respects with those principles and practices that we would have followed had our financial statements been prepared in accordance with Canadian GAAP.

Differences between U.S. GAAP and Canadian GAAP impact us as follows:

Oil and Gas Properties

Canadian GAAP requires recognition and measurement processes to assess impairment of oil and gas properties using estimates of future oil and gas prices and costs plus the cost of unproved properties that have been excluded from the depletion calculation. In the measurement of the impairment, the future net cash flows of a cost center’s proved and probable reserves are discounted using a risk-free interest rate.  For U.S. GAAP purposes, future net cash flows from proved reserves using period-end, non-escalated prices and costs, are discounted to present value at 10% per annum and compared to the carrying value of oil and gas properties.

Comprehensive Loss

U.S. GAAP requires disclosure of comprehensive loss which includes net loss under U.S. GAAP plus the change in cumulative translation adjustment and the unrealized gain or loss on future volumes we have hedged as risk management contracts for natural gas price fluctuations.  Prior to September 2008 we had volumes hedged through December 2010 creating a current difference between U.S. and Canadian GAAP because the hedge gain or loss amounts are recognized on a current basis in the statement of operations under Canadian GAAP.  The concept of comprehensive loss did not come into effect until fiscal years beginning on or after October 1, 2006 for Canadian GAAP. At September 30, 2008 all hedge contracts were reclassified as investments and reported in current period income (loss).

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Flow-Through Shares

U.S. GAAP requires the stated capital on flow-through share issuances to be equal to the estimated fair market value of the shares on the date of issue.  The difference between the gross proceeds received on the issuance of the shares and the estimated fair market value of the shares is recorded as a liability (the “Premium”) until the renunciation of expenditures has occurred. The full renunciation has occurred prior to September 30, 2008 and there is no flow-through share liability.

Under Canadian GAAP, the gross proceeds received on flow-through share issuances are initially recorded as share capital. When the expenditures are incurred and the tax deductions are renounced to subscribers, Canadian GAAP requires that the stated capital be reduced and that income tax benefits be recorded for the estimated future income taxes that were renounced.  Under U.S. GAAP, the initial liability is adjusted to a deferred income tax liability and as a result of the recalculation of our deferred taxes, this amount is ultimately recorded as an income tax benefit.

Share-Based Payments

U.S. GAAP, under SFAS No. 123(R), paragraph B129, “Equity Instruments with Exercise Prices Denominated in a Foreign Currency,”  requires that all equity instruments with exercise prices denominated in a currency other than the currency of the market in which the underlying equity instrument primarily trades be accounted for as liabilities.  This is not applicable under Canadian GAAP.

The impact of the above differences on the financial statements is as follows:

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NOTE 13. RELATED PARTY TRANSACTIONS

We paid $84,378 in the first nine months of 2008 for legal fees to a law firm of which one of our directors is a partner.  At September 30, 2008 $60,655  was outstanding and payable to this law firm.

All past and future and ongoing transactions with affiliates are and will be on terms which management believes are no less favorable than could be obtained from non-affiliated parties.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, the terms “Storm Cat,” we”, “us,” “our” and the “Company”, when used herein refer to Storm Cat Energy Corporation, together with its operating subsidiaries. When the context requires, we refer to these entities separately. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company should be read in conjunction with the Consolidated Financial Statements and notes related thereto included in this Quarterly Report on Form 10-Q.

Important Investor Information

On November 10, 2008, all of the direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”) of Storm Cat Energy Corporation (the “Parent”) filed a voluntary petition for reorganization (the “Reorganization Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Code”) in the United States Bankruptcy Court for the District of Colorado (the “Bankruptcy Court”). The Reorganization Cases do not include the Parent.  The Debtors expect the cases to be jointly administered. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Code and orders of the Bankruptcy Court.  For the duration of the Reorganization Cases, our operations, including our ability to execute our business plan, are subject to the risks and uncertainties associated with the Reorganization Cases as described below under “Risk Factors” in Item 1A of Part II hereof.

Results of Operations

Comparative Results of Operations for the three and nine months ended September 30, 2008 and 2007, respectively.

The following table sets forth selected operating data for the three months ended September 30, 2008 (the “Q3 2008 Period”), and the three months ended September 30, 2007 (the “Q3 2007 Period”):