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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–Q

(Mark One)

[X]  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

[    ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

(604) 913-1462

(Registrant's telephone number, including area code)

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. Yes [X]  No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]  No [X]

As of November 19, 2003, the registrant had 174,784,064 shares of common stock outstanding.

EUROGAS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

Condensed Consolidated Balance Sheets (Unaudited) as of September 30,

  2003 and December 31, 2002

 3

Condensed Consolidated Statements of Operations (Unaudited) for the

  Three and Nine Months Ended September 30, 2003 and 2002

 4

Condensed Consolidated Statements of Cash Flows (Unaudited) for the

 Nine Months Ended September 30, 2003 and 2002

 5

Notes to Condensed Consolidated Financial Statements (Unaudited)

 6

Item 2.  Managements Discussion and Analysis of Financial Condition

Results of Operations

 14

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

19

Item 4.

Controls and Procedures

19

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

 20

Item 5.

Other Information

20

Item 6.  Exhibits and Reports on Form 8-K

 20

Signatures

 26

2

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

EUROGAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

3

EUROGAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(UNAUDITED)

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

4

EUROGAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

5

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Condensed Interim Financial Statements — The accompanying unaudited condensed consolidated financial statements include the accounts of EuroGas, Inc. and its subsidiaries ("EuroGas" or the "Company").  These financial statements are condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with EuroGas' most recent annual financial statements included in the Company's report on Form 10-K for the year ended December 31, 2002.  In particular, EuroGas' significant accounting principles were presented as Note 1 to the Consolidated Financial Statements in that Report.  In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying condensed consolidated financial statem ents and consist of only normal recurring adjustments.  The results of operations presented in the accompanying condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003.

Business Condition — EuroGas has accumulated a deficit of $155,507,784 through September 30, 2003. EuroGas has had no revenue, losses from operations and negative cash flows from operating activities during the years ended December 31, 2002 and 2001 and during the nine months ended September 30, 2003. At September 30, 2003, the Company had a working capital deficiency of $20,321,881 and a capital deficiency of $10,030,270. The Company has impaired most of its oil and gas properties. These conditions raise substantial doubt regarding the Company's ability to continue as a going concern. Realization of the investment in properties and equipment is dependent upon management obtaining financing for exploration, development and production of its properties. In addition, if exploration or evaluation of property and equipment is unsuccessful, all or a portion of the remaining recorded amount of thos e properties will be recognized as impairment losses. Payment of current liabilities will require substantial additional financing. Management of the Company plans to finance operations, explore and develop its properties and pay its liabilities through borrowing, through sale of interests in its properties, through advances received against future talc sales and through the issuance of additional equity securities. Realization of any of these planned transactions is not assured.

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of EuroGas, Inc., its majority-owned subsidiaries and EuroGas' share of properties held through joint ventures. All significant intercompany accounts and transactions have been eliminated in consolidation.

Stock-Based Compensation — At September 30, 2003, the Company had options outstanding that had been previously granted to employees and consultants. The Company accounts for stock options granted to employees under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and accounts for options granted to non-employees at their fair value under SFAS No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation expense is reflected in net loss during the periods presented in the accompanying financial statements as all options had an exercise price equal to the market value of the underlying common stock on the date of grant or the related compensation was recognized in earlier periods. There would not have been any effect to net loss or to basic and diluted loss per common share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation as the related compensation was recognized in earlier periods.

Loss Per Share — Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share during periods of income reflect potential dilution which could occur if all potentially issuable common shares from stock purchase warrants and options, convertible notes payable and preferred shares resulted in the issuance of common shares. The weighted-average common shares outstanding was not increased from 39,342,858 potentially issuable common shares at September 30, 2003 and 42,142,858 potential shares at September 30, 2002, because to do so would have decreased the loss per share.

6

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Reclassifications — Certain reclassifications have been made to the accompanying December 31, 2002 and September 30, 2002 financial statements to conform to the current period presentation.

Cumulative Effect of Accounting Change – The Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations, effectively on January 1, 2003. In accordance with the transition provisions of SFAS No. 143, the Company recorded asset retirement costs of $140,187, liabilities of $326,177, and recognized the cumulative effect on prior years of $185,990 as an expense during the nine months ended September 30, 2003, which had no effect on basic and diluted loss per common share.

Recent Accounting Pronouncements — The Company adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of January 1, 2003. Among other provisions, this statement modifies the criteria for classification of gains or losses on debt extinguishment such that they are not required to be classified as extraordinary items if they do not meet the criteria for classification as extraordinary items in APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The adoption of this standard did not have any effect on the Company’s financial position or results of operations.

The Company also adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities as of January 1, 2003. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The provisions of this statement did not have any effect on the Company’s financial position or results of operations.

NOTE 2 — INVESTMENT IN SECURITIES

The Company’s primary investment in securities consists of 209,550 shares of Enterra Energy Ltd. The Enterra shares are held as collateral by Oxbridge Limited under a claim, as discussed in Note 3. At June 30, 2003, the Company changed its expectation of realizing proceeds from sale of the Enterra shares to more than one year and reclassified the investment in the Enterra shares as a long-term asset. The Company’s investments in equity securities, including the Enterra shares, are accounted for as available for sale, as defined by SFAS No. 115, as they have readily determinable fair values and are not restricted other than in connection with being pledged as collateral. Accordingly, the investments in securities available for sale are carried at market value with unrealized gains and losses included in accumulated other comprehensive income (loss). The cost of securities sold is determined by the aver age-cost method. The investments in securities consisted of the following:

7

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the nine months ended September 30, 2003, the Company made no sales or purchases of investment securities.

NOTE 3 — ACCRUED SETTLEMENT OBLIGATIONS

Oxbridge Settlement — During 1997, Oxbridge Limited presented 2,391,968 shares of Series 1995 Preferred Stock to EuroGas for conversion into EuroGas common shares but was effectively prevented in doing so by an agreed order with the Trustee in the McKenzie bankruptcy case described below. As a result, Oxbridge was unable to receive proceeds from the sale of the conversion shares when the average market prices and trading volume would have resulted in substantial proceeds and has made a claim against EuroGas for its losses. Oxbridge is holding investment securities as collateral pending resolution or settlement of the claim. During 2002, EuroGas estimated the cost to settle the Oxbridge claim to be approximately $6,800,000. That amount is included in the accrued settlement obligation as of September 30, 2003.

McKenzie Bankruptcy Claim — This litigation is being brought by Steve Smith, Chapter 7 Trustee (the “Trustee”) for the bankruptcy estates of Harven Michael McKenzie, Debtor; Timothy Stewart McKenzie, Debtor; Steven Darryl McKenzie, Debtor (case no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7, respectively), pending in the United States Bankruptcy Court for the Southern District of Texas, Houston Division.

In March 1997, the Trustee commenced the following cause of action:  W. Steve Smith, Trustee, v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas, Inc. GlobeGas, B.V. and Pol-Tex Methane, (Adv. No. 97-4114 in the United States Bankruptcy Court for the Southern District of Texas, Houston Division) (hereafter “97-4114”).  The Trustee’s initial claim appears to allege that the Company may have paid inadequate consideration for its acquisition of GlobeGas from persons or entities acting as nominees for the McKenzies, and therefore McKenzies’ creditors are the true owners of the proceeds received from the development of the Pol-Tex Concession in Poland.  The Company has contested the jurisdiction of the Court, and the Trustee’s claim against a Polish corporation (Pol-Tex), and the ownership of Polish mining rights. The Company further contends that it paid su bstantial consideration for GlobeGas (Pol-Tex’s parent), and that there is no evidence that the creditors of the McKenzies invested any money in the Pol-Tex Concession.

In March of 1997, the Trustee brought a related suit W. Steve Smith, Trustee v. Bertil Nordling, Rolf Schlegal, MCK Development B.V. Claron N.V., Jeffrey Ltd., Okibi N.V., McKenzie Methane Poland Co., Harven Michael McKenzie, Timothy Stewart McKenzie, Steven Darryl McKenzie and EuroGas, Inc.,  (Adv. No. 97-4155) in each of the three McKenzie individual bankruptcy cases.  In general, the action asserts that the defendants, other than the Company, who acquired an interest in the Polish Project, received a fraudulent transfer of assets belonging to the individual McKenzie bankruptcy estates, or are alter egos or the strawmen for the McKenzies.  As a result, the Trustee asserts that any EuroGas stock or cash received by these defendants should be accounted for and turned over to the Trustee.  As to the Company, the Trustee asserts that as transfer agent, the Company should turn over the preferred stock pre sently outstanding to the defendants or reserve such shares in the name of the Trustee and that any special considerations afforded these defendants should be canceled. It appears the Company was named to this litigation only because of its relationship as transfer agent to the stock in question.  This suit has been administratively consolidated with 97-4114, and is currently pending before the Houston bankruptcy court.  

In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement Pleadings and Join Additional Parties in the consolidated adversary proceedings, seeking to add new parties, including Wolfgang and Reinhard Rauball and assert additional causes of action against EuroGas and the other defendants in this action.  These new causes of action include claims for damages based on fraud, conversion, breach of fiduciary duties, concealment and perjury.  These causes of action claim that the

8

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In June 1999, the Trustee filed another suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O., et al (Adv. No. 99-3287).  That suit sought sanctions against the defendants for actions allegedly taken by the defendants during the bankruptcy cases which the Trustee considered improper.  The defendants filed a motion to dismiss the lawsuit, which was granted in August 1999.  In July 1999, the Trustee also filed a suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O. (Adv. No. 99-3444).  This suit seeks damages in excess of $170,000 for the defendants’ alleged violation of an agreement with the Trustee executed in March 1997.  EuroGas disputes the allegations and has filed a motion to dismiss or alternatively, to abate this suit, which motion is currently pending before the court.

On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauballs (other named defendants).  On September 10, 2002, the Court entered an Order which required the Trustee to specify the causes of action asserted against each Defendant.  A few days prior to this Order, the Trustee filed his Second Motion for Leave to Amend and Supplement Pleadings and to Drop Certain Defendants (the “Second Motion”).  On October 21, 2002, EuroGas and other Defendants filed their Response to the Second Motion.  On November 11, 2002, the Trustee filed his Motion and Reply to this Response under which, in part, Trustee sought court approval to file a Third Amended Complaint. On March 13, 2003 the Court entered and Order Granting Trustee’s Motion for Leave to Amend.  

On March 13, 2003 the Trustee filed his Third Amended Complaint, which is now styled Steve Smith, Trustee v. Harven Michael McKenzie, McKenzie Methane Poland, Inc., EuroGas, Inc., Wolfgang Rauball, Reinhard Rauball, MCK Development, B.V., Claron, N.V., Jeffrey, Ltd. and Okibi N.V. (Adv. No. 97-4114 and 97-4115). As to EuroGas, the Third Amended Complaint asserts claims for breach of contract, fraud in the inducement, conspiracy, aiding and abetting civil conspiracy, fraudulent transfer and punitive damages. As to Wolfgang and Reinhard Rauball, the Complaint asserts claims for turnover under Section 542 and 543 (Reinhard Rauball only) of the Bankruptcy Code, conversion, post-petition avoidable transfers, civil conspiracy, aiding and abetting civil conspiracy and punitive damages. The Company has filed a Motion to Dismiss the Third Amended Complaint. A trial date set for November 2003 was postponed pending a settlement agreement described below.

Management’s estimate of the amounts due under the claims made by the Trustee and his attorneys have been adequately accrued in the accompanying financial statements.

Kukui, Inc. Claim — In November 1996, the Company entered into a settlement agreement with Kukui, Inc. ("Kukui"), a principal creditor in the McKenzie bankruptcy case, whereby the Company issued 100,000 common shares and an option to purchase 2,000,000 additional common shares, which option expired on December 31, 1998. The Company granted registration rights with respect to the 100,000 common shares issued. On August 21, 1997, Kukui asserted a claim against EuroGas, which was based upon an alleged breach of the 1996 settlement agreement as a result of the Company's failure to file and obtain the effectiveness of a registration statement for the resale by Kukui of the 100,000 shares delivered to Kukui in connection with the 1996 settlement. In addition, the Estate of Bernice Pauahi Bishop (the “Bishop Estate”), Kukui's parent company, entered a claim for failure to registe r the resale of common shares subject to its option to purchase up to 2,000,000 common shares of EuroGas. EuroGas denied any liability and filed a counterclaim against Kukui and the Bishop Estate for breach of contract concerning their activities with the McKenzie Bankruptcy Trustee.

9

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In December 1999, EuroGas signed a settlement agreement with the bankruptcy Trustee, and other parties, including Kukui, Inc., and the Trustees of the Bishop Estate, which had pursued separate claims against EuroGas (the “Settlement Agreement”).  The Settlement Agreement, in part, required EuroGas to pay $900,000 over 12 months and issue 100,000 shares of registered common stock to the Bishop Estate by June 30, 2000.  The bankruptcy court approved the Settlement Agreement on May 23, 2000.  The claims of Kukui, Inc. and the Trustees of the Bishop Estate have been dismissed pursuant to the terms of the Settlement Agreement.  Under the terms of the Settlement Agreement, EuroGas recorded an accrued settlement obligation and litigation settlement expense of $1,000,000 during 1999, paid Kukui $782,232 of the settlement obligation in 2000 and accrued an additional settlement obligation li ability and expense of $251,741 during 2000. During 2000, EuroGas issued the Bishop Estate 100,000 registered common shares, which were valued at $100,000, or $1.00 per share. The resulting accrued settlement obligation of $369,509 for the estimated cost of settling the claim included an estimated default penalty and interest. The Company contends that it has fully performed under the Settlement Agreement and that the Settlement Agreement additionally entitles the Company to a complete release and dismissal of all suits filed by the Bankruptcy Trustee.  The Bankruptcy Trustee contends that EuroGas defaulted under the Settlement Agreement and is not entitled to a release or dismissal.  

Holbrook Claim — On February 9, 2001, James R. Holbrook, a documents escrow agent appointed under the Settlement Agreement, filed his Complaint of Escrow Agent for Interpleader and for Declaratory Relief against EuroGas, the Trustee and the other parties to the settlement in an action styled James R. Holbrook v. W. Steve Smith, Trustee, Kukui, Inc., EuroGas, Inc. and Kruse Landa & Maycock, L.L.C., (Adv. No. 01-3064) in the McKenzie bankruptcy cases.  Under this complaint, Holbrook sought a determination of the defendants’ rights in certain EuroGas files that he had received from Kruse Landa and Maycock, former attorneys for EuroGas.  Through this litigation, the Trustee sought turnover of all these files pursuit to the Settlement Agreement.  EuroGas has opposed turnover of privileged materials and filed a cross-claim in the suit asking for a declar atory judgment that the Settlement Agreement is enforceable and that the Trustee be ordered to specifically perform his obligations under the Settlement Agreement.  The Trustee filed a counterclaim requesting specific performance by EuroGas and other relief.  At the direction of the court, both parties filed motions for summary judgment.  On December 17, 2001, the court entered an order granting Trustee’s Motion for Summary Judgment and denying a related Motion to Strike Affidavit, which EuroGas had filed.  EuroGas has appealed this order to the United States District Court for the Southern District of Texas. On September 25, 2002 the District Court entered its Opinion and Order affirming the Bankruptcy Court’s orders. On October 25, 2002 EuroGas filed a notice of appeal of the District Court’s order to the Fifth Circuit Court of Appeals. The appeal is currently pending before this Court. EuroGas cannot predict the outcome of these appeals, but intends to vigorously pursue the appeals to completion.

Settlement of McKenzie Claims — On November 4, 2003, EuroGas signed a settlement agreement with the Bankruptcy Trustee, Kukui, and other parties.  Under the terms of the settlement agreement, EuroGas agreed to make payments totaling $2,800,000, to be paid in installments, with an initial payment of $250,000 paid November 5, 2003, $250,000 to be paid by December 6, 2003 and the terms for payment of the remaining balance will be negotiated between EuroGas, Kukui and the Bankruptcy Trustee in December 2003.  Upon completion of the payments all the cases relating to the McKenzie bankruptcy claim, including the Kukui, claim and the Holbrook claim will be dismissed. Under this settlement EuroGas, its subsidiaries, Wolfgang Rauball and Reinhard Rauball will be released from any further claim by Kukui and the Bankruptcy Trustee.

10

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 4 — NOTES PAYABLE TO RELATED PARTIES

Notes payable to related parties consist of the following:

NOTE 5 — RELATED PARTY TRANSACTIONS

Receivable from a Related Party – The Chief Executive Officer and principal shareholder of EuroGas, together with various other companies under his control, have paid miscellaneous business expenses on behalf of EuroGas, and EuroGas has paid certain expenses on their behalf. The resulting receivables and payables are combined and presented in the accompanying financial statements as receivable from related parties of $119,850 and $101,084 as of September 30, 2003 and December 31, 2002, respectively.

Related party loans are described in Note 4, Notes Payable to Related Parties.

NOTE 6 – ASSET RETIREMENT OBLIGATION

Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred, which, for the Company, was when the talc mine was opened and as it is mined and when an oil or gas well is drilled or purchased. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset.  The Company’s asset retirement obligations relate primarily to the obligation to reclaim property in connection with the talc mine and the obligation to plug and abandon oil and gas wells and support wells at the conclusion of their useful lives.

SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. When the liability is initially recorded, the related cost is normally capitalized by increasing the carrying amount of the related property. However, for assets that have previously been impaired, the related cost is charged to expense.  Over time, the liability is accreted upward for the change in its present value each period until the obligation is settled. The initial capitalized cost, if any, is amortized by the unit-of-production method. At January 1, 2003, the implementation of SFAS No. 143 resulted in a net increase in property and equipment of $140,187. Liabilities increased by $326,177, which represents the establishment of an asset retirement obligation liability. The cumulative effect on prior years of the change in accounting principle of $185,990, or $0.00 per share, was recorded in 2003 as an expense. The effect of adopting this accounting principle was an increase to the loss during the nine months ended September 30, 2003 of $21,255.

11

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following present pro forma net loss and basic and diluted loss per common share information as if SFAS No. 143 had been applied retroactively for all periods presented:

The pro forma amount of the liability for the asset retirement obligation was $296,525 at December 31, 2001, $310,645 at June 30, 2002 and $318,221 at September 30, 2002. The asset retirement obligation is adjusted each quarter for any liabilities incurred or settled during the period, accretion expense and any revisions made to the estimated cash flows. The reconciliation of the asset retirement obligation for the nine months ended September 30, 2003 is as follows:

NOTE 7 — PREFERRED AND COMMON STOCK

On June 25, 2003 the Company issued 3,000,000 shares of common stock for to a third party investor $300,000 in cash, or $0.10 per share.

There are 2,391,968 shares of 1995 Series Preferred Stock (the “1995 Series preferred stock”) issued and outstanding. The 1995 Series preferred stock is non-voting, non-participating and has a liquidation preference of $0.10 per share plus unpaid dividends. The 1995 Series preferred shareholders are entitled to annual dividends of $0.05 per share. Each share of the 1995 Series preferred stock is convertible into two common shares upon lawful presentation of the share certificates. Dividends are payable until converted. EuroGas has the right to redeem the 1995 Series preferred stock on not less than 30 days written notice, at a price of $36.84 per share, plus any accrued but unpaid dividends. Annual dividend requirements of the 1995 Series preferred stock are $119,598.

There are 260 shares of the 1997 Series A Convertible Preferred Stock (the “1997 Series preferred stock”). The 1997 Series preferred stock is non-voting and accrues dividends at $60.00 per share, or six percent annually. The 1997 Series preferred stock has a liquidation preference of $1,000 per share, plus unpaid dividends before liquidation payments applicable to common shares but after liquidation payments to the 1995 Series preferred stock outstanding. The 1997 Series preferred stock, along with unpaid dividends thereon, are convertible into common shares at the rate of $1,000 divided by the lesser of 125% of the average closing bid price for five trading days prior to issuance or 82% of the average closing bid price for five trading days prior to conversion. The 1997 Series preferred stock has a liquidation preference of $260,000. Annual dividend requirements of the 1997 Series preferred stock are $15,600. The following is a summary of the preferred stock outstanding at September 30, 2003:

12

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Aggregate accrued dividends on preferred stock were $684,160 and $650,824 at September 30, 2003 and December 31, 2002, respectively.

NOTE 8 — ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss consisted of the following:

NOTE 9 — SUPPLEMENTAL CASH FLOW INFORMATION

NOTE 10 — CONTINGENCIES AND COMMITMENTS

Purchase of Rozmin – EuroGas acquired a direct 43% interest in Rozmin s.r.o. through a series of transactions from 1998 through April 2002. Rozmin s.r.o. holds a talc deposit in Eastern Slovakia. On April 17, 2001, EuroGas entered into an agreement to purchase an additional 57% interest in Rozmin s.r.o. from Belmont Resources, Inc. ("Belmont"), in exchange for EuroGas issuing 12,000,000 common shares, paying Belmont $100,000 in advance royalties, and modifying the exercise price of existing stock options. EuroGas further agreed to issue an additional 1,000,000 common shares for each $0.05 decrease in the ten-day average OTC Bulletin Board quoted trading price of the Company's common shares below $0.30 per share through April 17, 2002. During 2002 EuroGas issued 3,830,000 common shares to Belmont under the stock price guarantee. In connection with the purchase by EuroGas, Rozmin s.r. o. granted an overriding royalty to Belmont of two percent of gross revenues from any talc sold.

Additionally, EuroGas agreed to issue additional common shares to Belmont if Belmont did not realize approximately $1,218,000 from the resale of the original 12,000,000 common shares by April 17, 2002, and provide notice of such deficiency to EuroGas, to compensate Belmont for the shortfall based on the ten-day average trading price on the date of the notice of shortfall from Belmont. Because Belmont has not provided notice of the sale of the shares and the resulting deficiency, EuroGas is not able to calculate the shares that may be issuable, but estimates it may be obligated to issue approximately 12,000,000 additional common shares, based on recent market prices for the Company’s common stock, to Belmont under this provision of the agreement.

13

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

EuroGas also agreed to arrange the necessary financing to place the talc deposit into commercial production by April 17, 2002 and agreed that if the talc deposit was not in commercial production by then, EuroGas agreed to pay Belmont additional advanced royalties of $10,000 per month for each month of delay in achieving commercial production. As of September 30, 2003 EuroGas has accrued $175,000 in advance royalty due to Belmont because the talc deposit is not in commercial production.

Litigation – The principal portion of the Company’s active litigation involves matters relating to the Company’s acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession in Poland) and is described in Note 3.

Netherlands Tax Liability – EuroGas’ subsidiary, GlobeGas BV, lost its appeal for a reduction of a 1992 income tax liability in the Netherlands with a carrying amount of $929,680 at September 30, 2003. The tax arose from the sale of equipment at a profit by the former owner of GlobeGas to its Polish subsidiary. The liability is reflected in EuroGas’ financial statements; however, GlobeGas does not have the ability to pay the assessed obligation and as a result may face forced liquidation and dissolution by the Netherlands tax authority.

Employment commitments and contingencies – During April 1999, EuroGas entered into a three-year employment contract with a former chief executive officer. The contract provided for an annual salary of $400,000 plus living and other allowances of $28,200. In addition, options to purchase 1,000,000 common shares at $0.95 per share were granted in connection with the employment contract. The officer resigned in January 2001. The options vested on January 1, 2000, and were considered to have expired during 2002 due to the termination of the officer’s employment. EuroGas has accrued salary obligations to the officer in the amount of $230,000, plus certain expenses, which are included in accrued liabilities. EuroGas believes there may be offsets to this amount but has not reduced the accrued amount.

Former officers have made claims for compensation and for reimbursement of expenses against EuroGas, which amounts have been included as accrued liabilities.  

On February 5, 2002 EuroGas entered into an employment agreement with its new President. The three-year agreement provides for annual compensation of $400,000 to be paid in monthly installments. The agreement provides for all terms of the agreement to continue for the unexpired term of the agreement should the Company be involved in a winding-up or merger transaction. The agreement may be terminated if either party fails to meet its obligations under the terms of the agreement. In June 2002, the Company agreed to compensate its Chief Executive Officer and principal shareholder $25,000 per month.

Lease commitments – The Company leases office facilities from various lessors in Poland, Vienna, and Vancouver. Except for Vancouver, the office leases are on month-to-month agreements. EuroGas entered into a lease agreement for its Vancouver office space that required monthly payments of $6,851 through January 2003. Thereafter, the lease is on a month-to-month basis.

NOTE 11 – SUBSEQUENT EVENTS

On November 5, 2003, EuroGas issued 3,571,429 common shares and 3,571,429 warrants to a third party investor for its direct payment of $250,000 as the first payment of a settlement agreement discussed in Note 3. The payment mode in behalf of the Company was allocated to the shares and warrants issued based upon their relative fair values, with $131,719 allocated to the shares and $118,281 allocated to the warrants. The warrants are exercisable anytime before October 31, 2006 at $0.07 per share had have an estimated fair value of $272,601, or $0.08 per share. The fair value of warrants was determined at the issue date using the Black-Scholes option-pricing model with the following assumptions:  risk-free interest rate of 2.46 percent, dividend yield of 0 percent, estimated future volatility of 181 percent, and an expected life of 3 years.

14

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

General – The Company is primarily engaged in the acquisition of rights to explore for and exploit natural gas, coal bed methane gas, crude oil, talc and other minerals. The Company has acquired interests in several large exploration concessions and is in various stages of identifying industry partners, farming out exploration rights, undertaking exploration drilling, and seeking to develop production. The Company is also involved in a planning-stage co-generation and mineral reclamation project. Unless otherwise indicated, all dollar amounts in this Form 10-Q are reflected in United States dollars.

When used herein, the terms the "Company," and "EuroGas," include EuroGas, Inc. and its wholly owned subsidiaries.

Results of Operations – The following table sets forth consolidated income statement data and other selected operating data for the three-month and nine-month periods ended September 30, 2003 and 2002, respectively

.

15

Three months ended September 30, 2003, compared with three months ended September 30, 2002

Revenues.   The Company had no oil and gas sales for the three months ended September 30, 2003 and $2,462 for the three months ended September 30, 2002.

Operating Expenses.  Operating expenses primarily include general and administrative expenses, depreciation, impairment of mineral interests and equipment and litigation settlement expense. General and administrative expenses were $384,619 for the three months ended September 30, 2003, compared to $509,330 for the three months ended September 30, 2002. The decrease in administrative expenses is the result of reduced expenditures relating to administrative items. Depreciation expense was $206 for the three months ended September 30, 2003, compared to $5,890 for the three months ended September 30, 2002.  

Other Income and Expense.  Interest expense was $24,993 for the three months ended September 30, 2003, compared to $2,168 during the three months ended September 30, 2002.  

Income Taxes.  Historically, the Company has not been required to pay income taxes due to the Company's absence of net profits. For future years, the Company anticipates that it will be able to utilize operating loss carry forwards in the United States of America of approximately $17,800,000 as of September 30, 2003, to offset profits, if and when achieved, resulting in a reduction in income taxes payable. However, to the extent accumulated deficits have not been incurred in countries where income is earned, such offsets will not be available.

Net Loss.  The Company incurred a net loss of $242,559 for the three months ended September 30, 2003, compared to a net loss of $940,385 for the three months ended September 30, 2002. The losses were due in large part to the absence of revenues, combined with continued administrative, interest, foreign exchange loss and other recurring continuing expenses.

Due to the fluctuating economies of the Eastern European countries in which the Company operates, the Company is subject to fluctuations in currency exchange rates that can result in the recognition of significant gains or losses during any period. The Company recognized a gain of $27,504 in the three months ended September 30, 2003, compared to a loss of $20,150 in the three months ended September 30, 2002, as a result of exchange rate changes and currency transactions during these periods. The Company does not currently employ any hedging techniques to protect against the risk of currency fluctuations.

Nine months ended September 30, 2003, compared with Nine months ended September 30, 2002

Revenues.  The Company had no oil and gas sales for the nine months ended September 30, 2003 and $5,074 for the nine months ended September 30, 2002.

Operating Expenses.  Operating expenses primarily include general and administrative expenses, depreciation, impairment of mineral interests and equipment and litigation settlement expense. General and administrative expenses were $1,820,691 for the nine months ended September 30, 2003, compared to $2,319,415 for the nine months ended September 30, 2002.  The decrease in administrative expenses is the result of reduced expenditures. Depreciation expense was $3,475 for the nine months ended September 30, 2003, compared to $28,245 for the nine months ended September 30, 2002. This decrease is primarily attributable to the lower carrying amount of properties in service. The Company incurred no impairment charges and $140,000 of litigation settlement expenses during the nine months ended September 30, 2003 but incurred $3,937,500 of impairment of mineral interests and equipment an d $2,221,617 of litigation settlement expense during the nine months ended September 30, 2002.

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Other Income and Expense. Interest expense was $57,345 for the nine months ended September 30, 2003, compared to $90,447 during the nine months ended September 30, 2002. Foreign exchange net loss was $75,161 during the nine months ended September 30, 2003 compared to a net gain of $195,034 during the nine months ended September 30, 2002. The Company realized equipment rental income of $34,798 during the nine months ended September 30, 2003 with no comparable amount during the nine months ended September 30, 2002.

Income Taxes.  Historically, the Company has not been required to pay income taxes due to the Company's absence of net profits. For future years, the Company anticipates that it will be able to utilize operating loss carry forwards in the United States of America of approximately $17,800,000 as of September 30, 2003, to offset profits, if and when achieved, resulting in a reduction in income taxes payable. However, to the extent accumulated deficits have not been incurred in countries where income is earned, such offsets will not be available.

Cumulative Effect of Accounting Change.  Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which required the Company to recognize the fair value of legal and contractual asset retirement obligations when incurred. The Company recognized the cumulative effect of this accounting change on prior years of $185,990 upon adoption January 1, 2003, which charge is reflected in the nine months ended September 30, 2003.

Net Loss.  The Company incurred a net loss of $2,060,018 for the nine months ended September 30, 2003, compared to a net loss of $8,165,892 for the nine months ended September 30, 2002. The losses were due in large part to the absence of revenues, combined with continued administrative, depreciation, and other recurring continuing expenses and the one time cumulative effect of the change in the method of accounting for asset retirement obligations.

Due to the fluctuating economies of the Eastern European countries in which the Company operates, the Company is subject to fluctuations in currency exchange rates that can result in the recognition of significant gains or losses during any period. The Company recognized a loss of $75,161 in the nine months ended September 30, 2003, and a gain of $195,034 in the nine months ended September 30, 2002, as a result of currency transactions during these periods. The Company does not currently employ any hedging techniques to protect against the risk of currency fluctuations.

Capital and Liquidity

The Company had an accumulated deficit of $155,507,784 at September 30, 2003, substantially all of which has been funded out of proceeds received from the issuance of stock and the incurrence of liabilities. At September 30, 2003, the Company had total current assets of $203,612 and total current liabilities of $20,525,493 resulting in a working capital deficiency of $20,321,881. As of September 30, 2003, the Company's balance sheet reflected $825,426 in mineral interests in properties not subject to amortization, net of valuation allowance. These properties are held under licenses or concessions that contain specific drilling or other exploration commitments and that expire within one to three years, unless the concession or license authority grants an extension or a new concession license, of which there can be no assurance. If the Company is unable to establish production or resources on th ese properties, is unable to obtain any necessary future licenses or extensions, or is unable to meet its financial commitments with respect to these properties, it could be forced to write off the carrying value of the applicable property.

Throughout its existence, the Company has relied on cash from financing activities to provide the funds required for acquisitions and operating activities. During the nine months ended September 30, 2003, the Company received $300,000 from the sale of common stock and $186,675 from the sale of assets and expended $30,000 in the purchase of property and equipment and development of mineral interests, $548,746 was used in operating activities. As a result, the Company used net cash of $141,780 during the nine months ended September 30, 2003.

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While the Company had cash of $46,142 at September 30, 2003, it has substantial short-term and long-term financial commitments. Many of the Company's projects are long-term and will require the expenditure of substantial amounts over a number of years before the establishment, if ever, of production and ongoing revenues. As noted above, the Company has relied principally on cash provided from equity and debt transactions to meet its cash requirements. The Company does not have sufficient cash to meet its short-term or long-term needs, and it will require additional cash, either from financing transactions or operating activities, to meet its immediate and long-term obligations. There can be no assurance that the Company will be able to obtain additional financing, either in the form of debt or equity, or that, if such financing is obtained, it will be available to the Company on reasonable ter ms. If the Company is able to obtain additional financing or structure strategic relationships in order to fund existing or future projects, existing shareholders will likely continue to experience further dilution of their percentage ownership of the Company.

If the Company is unable to establish production or reserves sufficient to justify the carrying value of its assets, to obtain the necessary funding to meet its short and long-term obligations, or to fund its exploration and development program, all or a portion of the mineral interests in unproven properties will be charged to operations, leading to significant additional losses.  

Inflation

The amounts presented in the Company's consolidated financial statements do not provide for the effect of inflation on the Company's operations or its financial position. Amounts shown for property, plant, and equipment and for costs and expenses reflect historical costs and do not necessarily represent replacement costs or charges to operations based on replacement costs. The Company's operations, together with other sources, are intended to provide funds to replace property, plant and equipment as necessary. Net income would be lower than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments. Due to inflationary problems in Eastern Europe that are seen in currency exchange losses, the Company has seen losses on its asset values in those countries.

Warning Regarding Forward-looking Statements and Factors that may affect Future Results

This Quarterly Report on Form 10-Q contains forward-looking statements and information relating to the Company and its business, which are based on the beliefs of management of the Company and assumptions made based on information currently available to management. These statements can be identified by the use of the words “will,” "anticipate," "estimate," "project," "likely," "believe," "intend," "expect" or similar words. Forward-looking statements reflect the current views of management of the Company and are not intended to be accurate descriptions of the future. When considering these statements, the reader should bear in mind the cautionary information set forth in this section and other cautionary statements throughout this Report and the Company's Annual Report on Form 10-K for the year ended December 31, 2 002, and in the Company's other filings with the Securities and Exchange Commission. All forward-looking statements are based on management's existing beliefs about present and future events outside of management's control and on assumptions that may prove to be incorrect. The discussion of the future business prospects of the Company is subject to a number of risks and assumptions, including those identified below. Should one or more of these or other risks materialize or if the underlying assumptions of management prove incorrect, actual results of the Company may vary materially from those anticipated, estimated, projected or intended. Among the factors that may affect the Company's results are its ability to establish beneficial relationships with industry partners to provide funding and expertise to the Company's projects; its efforts to locate commercial deposits of hydrocarbons on the Company's concessions and licenses; the negotiation of additional licenses and permits for the

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exploitation of any reserves located; the success of exploratory activities; the completion of wells drilled by the Company, its joint venture partners and other parties allied with the Company's efforts; the economic recoverability of in-place reservoirs of hydrocarbons; technical problems in completing wells and producing gas; the success of marketing efforts; the ability to obtain the necessary financing to successfully pursue the Company’s business strategy; operating hazards and uninsured risks; the intense competition and price volatility associated with the oil and gas industry; and international and domestic economic conditions.

The Company's activities are subject to risks in addition to the risks normally associated with the exploration and development of hydrocarbons. Each of the eastern European countries in which the Company has obtained or seeking to obtain concessions is in the process of developing capitalistic economies. As a result, many of their laws, regulations, and practices with respect to the exploration and development of hydrocarbons have not been time tested or, in some cases, yet adopted. The Company's operations are subject to significant risks that any change in the government itself or in government personnel, or the development of new policies and practices may adversely effect the Company's operations and financial results at some future date. Furthermore, the Company's concessions and licenses are often subject, either explicitly or implicitly, to ongoing review by governmental ministries. In the event that any of these countries elects to change its regulatory system, it is possible that the government might seek to annul or amend the governing agreements in a manner unfavorable to the Company or impose additional taxes or other duties on the activities of the Company. As a result of the potential for political risks in these countries, it remains possible that the governments might seek to nationalize or otherwise cause the interest of the Company in the various concessions and licenses to be forfeited. Many of the areas in which the Company's prospects are located lack the necessary infrastructure for transporting, delivering, and marketing the products which the Company seeks to identify and exploit. Consequently, even if the Company is able to locate hydrocarbons in commercial quantities, it may be required to invest significant amounts in developing the infrastructure necessary to carry out its business plan. The Company does not presently have a source of funding available to meet these c osts.

  Future terrorist activity or government action against perceived terrorist threats in the United States or in areas of the world in which the Company does business or owns property may, however, adversely affect the Company’s business operations and financial condition.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company conducts business in many foreign currencies. As a result of the effects that foreign exchange rate movements of those currencies have on the Company's costs and on the cash flows, which it receives from its foreign operations, the Company is subject to foreign exchange rate risks. The Company believes that it currently has no other material market risk exposure. To date, the Company has addressed its foreign currency exchange rate risks principally by maintaining its liquid assets in U.S. dollars, in interest-bearing accounts, until payments in foreign currency are required, but the Company does not reduce this risk by utilizing hedging activities.

Item 4.    Controls and Procedures

Based on their evaluation, as of a date within 90 days of the filing date of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are effective.  There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings.

The principal portion of the Company’s active litigation involves matters relating to the Company’s acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession in Poland) and include the McKenzie Bankruptcy claim, the Kukui, Inc. claim, and the Holbrook Claim.

On November 4, 2003, EuroGas signed a settlement agreement with the Bankruptcy Trustee, Kukui, and other parties.  Under the terms of the settlement agreement, EuroGas agreed to make payments totaling $2,800,000, to be paid in installments, with an initial payment of $250,000 paid November 5, 2003, $250,000 to be paid by December 6, 2003 and the terms for payment of the remaining balance will be negotiated between EuroGas, Kukui and the Bankruptcy Trustee in December 2003.  Upon completion of the payments all the cases relating to the McKenzie bankruptcy claim, including the Kukui, claim and the Holbrook claim will be dismissed. Under this settlement EuroGas, its subsidiaries, Wolfgang Rauball and Reinhard Rauball will be released from any further claim by Kukui and the Bankruptcy Trustee.

Item 5. Other information

On October 10, 2003 Mr. Vojtech Agyagos tendered his resignation to the Company as a Director and Secretary of the Corporation.  He stated that health reasons had caused him to resign his positions.

Item 6.  Exhibits and Reports on Form 8-K

(a)

The following exhibits are filed with this report.

*

Incorporated by reference

(b)

No current reports on Form 8-K were filed during the reporting quarter.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EUROGAS, INC.

(Registrant)

By     /s/  Wolfgang Rauball

     Wolfgang Rauball

      Chief Executive Officer

By     /s/  Hank Blankenstein

      Hank Blankenstein

      Principal Accounting and Financial

      Officer

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