UNITED STATES SECURITIES AND        EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

**FORM        10-Q**

 

QUARTERLY        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES AND EXCHANGE ACT OF 1934

 

| For the quarterly period ended June 30, 2008 | Commission File No. 001-31852 |
|----------------------------------------------|-------------------------------|

 

**Tri-Valley Corporation**

(Exact        name of registrant as specified in its charter)

 

|   | **Delaware** | **84-0617433** |
|--------|--------------|----------------|

| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
|---------------------------------|--------------------------------------|

                                                                         incorporation or organization)

 

**4550        California Avenue, Suite 600, Bakersfield, California 93309**

(Address        of principal executive offices)

 

**(661)        864-0500**

(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.

YesxNoo

 

Indicate        by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or        a non-accelerated filer. (as defined in Rule 12b-2 of the Exchange Act). (Check        one):

 

| Large accelerated filer | o | Accelerated filer         | x |
|-------------------------|---|---------------------------|---|
| Non-accelerated filer   | o | Smaller reporting company | o |

 

 

Indicate        by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the        Exchange Act).

YesoNox

 

The number        of shares of Registrant's common stock outstanding at July 11, 2008, was        27,012,589.

 

1

 

 

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**TRI-VALLEY CORPORATION**

 

 

**INDEX**

 

|      |                                                                              | Page   |
|-----------|-----------------------------------------------------------------------------------|--------|
|      |                                                                              |   |
| PART I -  | FINANCIAL INFORMATION                                                             | 3      |
|      |                                                                              |   |
| Item 1.   | Consolidated Financial Statements                                                 | 3      |
|      |                                                                              |   |
| Item 2.   | Management's Discussion and Analysis of Financial                                 |   |
|      | Condition and Results of Operations                                               | 13     |
|      |                                                                              |   |
| Item 3.   | Quantitative and Qualitative Disclosures about Market                        Risk | 20     |
|      |                                                                              |   |
| Item 4.   | Controls and Procedures                                                           | 20     |
|      |                                                                              |   |
| PART II - | OTHER INFORMATION                                                                 | 20     |
|      |                                                                              |   |
| Item 1A.  | Risk Factors                                                                      | 20     |
|      |                                                                              |   |
| Item 2.   | Unregistered Sales of Equity Securities                                           | 20     |
|      |                                                                              |   |
| Item 6.   | Exhibits                                                                          | 20     |
|      |                                                                              |   |
|      | SIGNATURES                                                                        | 21     |
|      |                                                                              |   |

 

2

 

 

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**PART        I**

         

**FINANCIAL INFORMATION**

 

Item 1.        Unaudited Consolidated Financial Statements

 

**TRI-VALLEY CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

|                                          | June 30,     |   | December 31, |
|-----------------------------------------------|--------------|--------|--------------|
|                                          | 2008         |   | 2007         |
|                                          | (Unaudited)  |   | (Audited)    |
|                                          |         |   |         |
| Current assets                                |         |   |         |
| Cash                                          | $ 2,590,505  |   | $ 3,955,610  |
| Cash restricted to OPUS I use                 | 5,235,550    |   | 3,712,083    |
| Accounts receivable, trade                    | 4,096,669    |   | 313,521      |
| Advances from joint venture participants, net | 1,139,390    |   | -            |
| Prepaid expenses                              | 12,029       |   | 12,029       |
|                                          |         |   |         |
| Total current assets                          | 13,074,143   |   | 7,993,243    |
|                                          |         |   |         |
| Property and equipment, net                   |         |   |         |
| Proved properties                             | 2,127,298    |   | 2,143,907    |
| Unproved properties                           | 4,443,369    |   | 2,414,843    |
| Rigs                                          | 5,368,185    |   | 6,731,758    |
| Other property and equipment                  | 5,252,880    |   | 4,942,145    |
|                                          |         |   |         |
| Total property and equipment, net             | 17,191,732   |   | 16,232,653   |
|                                          |         |   |         |
| Other assets                                  |         |   |         |
| Deposits                                      | 159,833      |   | 338,772      |
| Invest in marketable securities (Note 4)      | 302,500      |   | 440,000      |
| Investments in partnerships                   | 17,400       |   | 17,400       |
| Goodwill                                      | 212,414      |   | 212,414      |
| Other                                         | 20,413       |   | 20,413       |
|                                          |         |   |         |
| Total other assets                            | 712,560      |   | 1,028,999    |
|                                          |         |   |         |
| **Total assets**                              | $ 30,978,435 |   | $ 25,254,895 |

 

 

 

 

 

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

 

3

 

 

----

**LIABILITIES AND STOCKHOLDERS' EQUITY**

|                                                                                     | June 30,                                           |   | December 31,               |
|------------------------------------------------------------------------------------------|----------------------------------------------------|--------|----------------------------|
|                                                                                     | 2008                                               |   | 2007                       |
|                                                                                     | (Unaudited)                                        |   | (Audited)                  |
| Current liabilities                                                                      |                                               |   |                       |
| Notes payable                                                                            | $      419,302  |   | $ 402,003             |
| Accounts payable and accrued expenses                                                    | 10,989,719                                    |   | 5,699,153             |
| Deferred revenue                                                                         | 828,524                                       |   | 242,163               |
| Amounts payable to joint venture participants                                            | 3,001,152                                     |   | 281,419               |
| Advances from joint venture participants, net                                            | -                                                  |   | 3,671,927             |
|                                                                                     |                                               |   |                       |
| Total current liabilities                                                                | 15,238,697                                    |   | 10,296,665            |
|                                                                                     |                                               |   |                       |
| Non-Current Liabilities                                                                  |                                               |   |                       |
| Asset retirement obligation                                                              | 268,395                                       |   | 240,394               |
| Long-term portion of notes payable                                                       | 2,228,203                                     |   | 2,355,707             |
|                                                                                     |                                               |   |                       |
| Total non-current liabilities                                                            | 2,496,598                                     |   | 2,596,101             |
|                                                                                     |                                               |   |                       |
| Total liabilities                                                                        | 17,735,295                                    |   | 12,892,766            |
|                                                                                     |                                               |   |                       |
| Minority interest                                                                        | -                                                  |   | 249,945               |
|                                                                                     |                                               |   |                       |
| Stockholders’ equity                                                               |                                               |   |                       |
| Common stock, $.001 par value; 100,000,000 shares                                        |                                               |   |                       |
| authorized; 26,941,764 and 25,077,184 issued and                                         |                                               |   |                       |
| outstanding at June 30, 2008, and December 31,                                           |                                               |   |                       |
| 2007, respectively                                                                       | 26,942                                        |   | 25,077                |
| Less: common stock in treasury, at cost,                                                 |                                               |   |                       |
| 100,025 shares                                                                           | (13,370)                                           |   | (13,370)                   |
| Capital in excess of par value                                                           | 43,504,264                                    |   | 37,090,714            |
| Additional paid in capital – warrants                                              | 782,729                                       |   | 782,729               |
| Additional paid in capital - stock options                                               | 2,194,709                                     |   | 1,800,642             |
| Accumulated deficit                                                                      | (33,207,578)                                       |   | (27,586,553)               |
| Accumulated other comprehensive income                                                   | (44,556)                                           |   | 12,945                |
|                                                                                     |                                               |   |                       |
| Total stockholders' equity                                                               | 13,243,140                                    |   | 12,112,184            |
|                                                                                     |                                               |   |                       |
| **Total liabilities, minority interest and stockholder's                        equity** |  

$ 30,978,435                          |   |  

$ 25,254,895  |

 

 

 

 

 

 

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

 

4

 

 

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**TRI-VALLEY CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

|                                            | For the Three Months

Ended June 30,                                     |   | For the Six Months

Ended June 30,                                       |
|-------------------------------------------------|--------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|
|                                            | 2008                                                                     |   | 2007                                                                     |   | 2008 |   | 2007 |
| Revenues                                        |                                                                     |   |                                                                     |   |   |   |   |
| Sale of oil and gas                             | $ 1,245,950                                                         |   | $ 168,015                                                           |   | $  1,628,374  |   | $ 332,201  |
| Gain on sale of asset (Note 8)                  | 79,972                                                              |   | -                                                                   |   | 661,222  |   | -  |
| Rig income                                      | 567,078                                                             |   | 560,366                                                             |   | 1,122,384  |   | 1,810,869  |
| Other income                                    | 347,461                                                             |   | 571,329                                                             |   | 500,277  |   | 672,940  |
| Interest income                                 | 21,728                                                              |   | 106,240                                                             |   | 28,778  |   | 200,307  |
| Total Revenues                                  | 2,262,189                                                           |   | 1,405,950                                                           |   | 3,941,035  |   | 3,016,317  |
|                                            |                                                                     |   |                                                                     |   |   |   |   |
| Costs and expenses                              |                                                                     |   |                                                                     |   |   |   |   |
| Oil and gas lease expense                       | 319,469                                                             |   | 116,098                                                             |   | 377,032  |   | 204,493  |
| Mining exploration expenses                     | 126,471                                                             |   | 45,662                                                              |   | 130,371  |   | 113,152  |
| Drilling and development                        | -                                                                   |   | 625,593                                                             |   | -  |   | 858,089  |
| Rig operations                                  | 464,259                                                             |   | 335,450                                                             |   | 879,581  |   | 780,008  |
| Depletion, depreciation and amortization        | 357,186                                                             |   | 233,194                                                             |   | 714,370  |   | 486,317  |
| Interest                                        | 86,426                                                              |   | 71,770                                                              |   | 154,202  |   | 148,666  |
| Impairment loss (Note 9)                        | 870,948                                                             |   | -                                                                        |   | 870,948  |   | 246,862  |
| General and administrative                      | 3,378,098                                                           |   | 2,767,609                                                           |   | 6,266,853  |   | 5,228,219  |
|                                            |                                                                     |   |                                                                     |   |   |   |   |
| Total costs and expenses                        | 5,602,857                                                           |   | 4,195,376                                                           |   | 9,393,357  |   | 8,065,806  |
|                                            |                                                                     |   |                                                                     |   |   |   |   |
| Loss before minority interest                   | (3,340,668)                                                              |   | (2,789,426)                                                              |   | (5,452,322) |   | (5,049,489) |
|                                            |                                                                     |   |                                                                     |   |   |   |   |
| Minority interest                               | -                                                                        |   | -                                                                        |   | (3,769) |   | -  |
|                                            |                                                                     |   |                                                                     |   |   |   |   |
| Net Loss                                        | (3,340,668)                                                              |   | (2,789,426)                                                              |   | (5,448,553) |   | (5,049,489) |
| Basic net loss per share:

Loss from operations | $           (.12) |   | $           (.11) |   | $           (.21) |   | $           (.20) |
| Basic loss per common share                     | $           (.12) |   | $           (.11) |   | $           (.21) |   | $           (.20) |
|                                            |                                                                     |   |                                                                     |   |   |   |   |
| Weighted average number of shares outstanding   | 26,731,656                                                          |   | 24,627,121                                                          |   | 26,521,549  |   | 24,278,448  |
|                                            |                                                                     |   |                                                                     |   |   |   |   |
| Potentially dilutive shares outstanding         | 29,459,573                                                          |   | 28,032,887                                                          |   | 29,510,391  |   | 27,555,100  |

 

No        dilution is reported since net income is a loss per SFAS 128

 

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

 

5

 

 

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**TRI-VALLEY CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

|                                                                                                                      | For the Six Months      |
|---------------------------------------------------------------------------------------------------------------------------|-------------------------|
|                                                                                                                      | Ended June 30,          |
|                                                                                                                      | 2008                    |   | 2007 |
| Cash Flows from Operating Activities                                                                                      |                    |   |   |
| Net loss                                                                                                                  | $ (5,448,553)           |   | $ (5,049,489) |
|                                                                                                                      |                    |   |   |
| Adjustments to reconcile net income to net cash used from                        operating activities:                    |                    |   |   |
| Depreciation, depletion and amortization                                                                                  | 714,370            |   | 486,317  |
| Impairment, dry hole and other disposals of                        property                                               | -                  |   | 258,862  |
| Loss on Impairment of Fixed Assets                                                                                        | 870,948            |   | -  |
| Minority interest                                                                                                         | (3,769)                 |   | - |
| Stock options                                                                                                             | 394,067            |   | 653,210  |
| Gain on sale of property                                                                                                  | (661,222)               |   | -  |
| Warrants                                                                                                                  | -                  |   | 316,852  |
| Changes in operating capital:                                                                                             |                    |   |   |
| Increase in prepaids                                                                                                      | -                  |   | (368,881) |
| Decrease in deposits and other assets                                                                                     | 178,939            |   | 150,000 |
| Increase in accounts receivable                                                                                           | (3,783,148)             |   | (69,261) |
| Increase (decrease) in accounts payable, deferred revenue                        and accrued expenses                     |  

5,834,272  |   |  

(939,490) |
| Increase (decrease) accounts payable to joint                        venture                                              |                    |   |   |
| participants and related parties                                                                                          | 2,719,733               |   | (142,206) |
| Increase (decrease) in advances from joint venture                        participants                                    | (4,811,317)             |   | 3,161,076  |
|                                                                                                                      |                    |   |   |
| Net Cash Used by Operating Activities                                                                                     | (3,995,680)             |   | (1,543,010) |
|                                                                                                                      |                    |   |   |
| Cash Flows from Investing Activities:                                                                                     |                    |   |   |
|                                                                                                                      |                    |   |   |
| Proceeds from sale of property                                                                                            | 2,587,500          |   | -  |
| Proceeds from the sale of marketable securities                                                                           | 79,999             |   | -  |
| Investment in marketable securities                                                                                       | -                  |   | (380,000) |
| Buy back of minority interest in GVPS                                                                                     | (418,648)               |   | (1,494,000) |
| Capital expenditures                                                                                                      | (4,442,674)             |   | (2,515,667) |
|                                                                                                                      |                    |   |   |
| Net Cash Used by Investing Activities                                                                                     | (2,193,823)             |   | (4,389,667) |
|                                                                                                                      |                    |   |   |
| Cash Flows from Financing Activities                                                                                      |                    |   |   |
| Principal payments on long-term debt                                                                                      | (67,550)                |   | (3,847) |
| Net proceeds from additional paid in capital – stock                        options                                 | 293,514            |   | 496,547  |
| Net proceeds from additional paid in capital –                        warrants                                      | -                  |   | 658,400  |
| Net proceeds from minority interest holders – Great                        Valley

Drilling/Great Valley Production |  

-          |   |  

(400,551) |
| Stock issuance costs                                                                                                      | (939,885)               |   | (787,900) |
| Net proceeds from issuance of common stock                                                                                | 7,061,786               |   | 5,934,956  |
| Net Cash Used by Financing Activities                                                                                     | $ 6,347,865        |   | $ 5,897,605  |
|                                                                                                                      |                    |   |   |

 

 

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

 

6

 

 

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**TRI-VALLEY CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 

|   | For the Six Months |
|--------|--------------------|
|   | Ended June 30,     |
|   | 2008               |   | 2007 |

 

|                                             |               |   |                                               |
|--------------------------------------------------|--------------------|--------|----------------------------------------------------|
| Net Increase in Cash and Cash Equivalents        | 158,362            |   | (35,072)                                           |
| Cash and Cash Equivalents at Beginning of Period | 7,667,693          |   | 15,598,215                                    |
|                                             |               |   |                                               |
| Cash and Cash Equivalents at End of Period       | $ 7,826,055        |   | $ 15,563,143                                  |
|                                             |               |   |                                               |
|                                             |               |   |                                               |
|                                             |               |   |                                               |
|                                             | For the Six Months |
|                                             | Ended June 30,     |
|                                             | 2008               |   | 2007                                               |
| Supplemental Information:                        |               |   |                                               |
| Cash paid for interest                           | $ 154,202          |   | $      148,667  |
|                                             |               |   |                                               |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7

 

 

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**TRI-VALLEY CORPORATION**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR        THE SIX MONTHS ENDED**

**June        30, 2008 and 2007**

(Unaudited)

 

**NOTE 1 -        DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION**

 

**Description of Business**

 

Tri-Valley Corporation (“TVC” or the Company), a Delaware        corporation formed in 1971, is in the business of exploring, acquiring and developing        petroleum and metal and mineral properties and interests therein.

 

The        Company identifies reportable segments by product. The Company includes revenues from both        external customers and revenues from transactions with other operating segments in its        measure of segment profit or loss. The Company also includes interest revenue, DD&A,        and other operating expenses in its measure of segment profit or loss. The results of these        four segments are presented in Note 7 to the Consolidated Financial Statements.

 

| The Company’s four industry segments are: |
|-------------------------------------------------|
|                                            |   |
| -                                               | *Oil and gas operations*include                        our share of revenues from oil and gas wells on which Tri-Valley Oil and                        Gas Company serves as operator, royalty income and production revenue from                        other partnerships in which we have operating or non-operating interests.                        It also includes revenues for consulting services for oil and gas related                        activities. |
|                                            |   |
| -                                               | *Rig operations*began in 2006,                        when the Company acquired drilling rigs and began operating them through                        subsidiaries Great Valley Production Services, LLC, and Great Valley                        Drilling Company, LLC. Rig operations include income from rental of oil                        field equipment and income received from refurbishing and selling oilfield                        equipment. |
|                                            |   |
| -                                               | *Minerals*include the                        Company’s mining and mineral prospects and operations, and expenses                        associated with those operations. |
|                                            |   |
| -                                               | *Drilling and development*includes revenues received from oil and gas drilling and                        development operations performed for joint venture partners, including the                        Opus-I drilling partnership. |
|                                            |   |

The        Company has five subsidiaries:

 

|   | **•** | Tri-Valley Oil & Gas Company (“TVOG”)                        operates the oil & gas activities. TVOG derives the majority of its                        revenue from oil and gas drilling and turnkey development. TVOG primarily                        generates its own exploration prospects from its internal database, and                        also screens prospects from other geologists and companies. TVOG generates                        these geological “plays” within a certain geographic area of                        mutual interest. The prospect is then presented to potential co-ventures.                        The company deals with both accredited individual investors and energy                        industry companies. TVOG serves as the operator of these co-ventures. TVOG                        operates both the oil and gas production segment and the drilling and                        development segment of our business lines. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | Select Resources Corporation (“Select”) was                        created in late 2004 to manage, grow and operate the minerals segment of                        our business lines. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | Great Valley Production Services, LLC, (“GVPS”)                        was formed in 2006 to operate oil production services, well work over and                        drilling rigs, primarily for TVOG. Tri-Valley currently owns 100% of GVPS.                        In July of 2008, the drilling rigs were sold so that going forward the                        primary operations of GVPS will be to refurbish oilfield equipment for use                        in the Company’s operations and for sale to outside third                        parties. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

8

 

 

----

 

|   | **•** | Great Valley Drilling Company, LLC (“GVDC”) was                        formed in 2006 to operate oil drilling rigs, primarily in Nevada where                        Tri-Valley has 17,000 acres of prospective oil leases. However, because rig                        availability is scarce in Nevada, GVDC has an opportunity to do contract                        drilling for third parties in both petroleum and geothermal projects. For                        the time being GVDC, whose operation began in the first quarter of 2007,                        expects its primary activity will be contract drilling for third parties.                        GVDC is 100% owned by TVC. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Tri-Valley Power Corporation is inactive at the present                        time. |
|--------|------------|--------------------------------------------------------------------------------------|

 

Basis of        Presentation

 

The        financial information included herein is unaudited; however, such information reflects all        adjustments (consisting solely of normal recurring adjustments), which are, in the opinion        of management, necessary for a fair statement of results for the interim periods. The        results of operations for the six-month period ended June 30, 2008, are not necessarily        indicative of the results to be expected for the full year.

 

The        accompanying consolidated financial statements do not include footnotes and certain        financial presentations normally required under generally accepted accounting principles in        the United States of America; and, therefore, should be read in conjunction with our Annual        Report on Form 10-K, filed with the Securities and Exchange Commission on March 14, 2008,        for the year ended December 31, 2007.

 

Principles of Consolidation

 

The        consolidated financial statements include the accounts of the Company, its wholly owned        subsidiaries, TVOG, Select, GVDC, GVPS, Tri-Valley Power Corporation, since their        inception. Other partnerships in which the Company has an operating or nonoperating        interest in which the Company is not the primary beneficiary and owns less than 51%, are        proportionately combined. This includes Opus I, Martins-Severin, Martins-Severin Deep, and        Tri-Valley Exploration 1971-1 partnerships. All material intra and intercompany accounts        and transactions have been eliminated in combination and consolidation.

 

**NOTE 2 -        PER SHARE COMPUTATIONS**

 

Per        share computations are based upon the weighted-average number of common shares outstanding        during each year. Common stock equivalents are not included in the computations since their        effect would be anti-dilutive.

 

**NOTE 3        – SUMMARY OF RECENTLY ISSUED ACCOUNTING PRONOUCEMENTS**

 

Accounting for Uncertainty in Income Taxes

In July        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation        No. 48,*“Accounting for Uncertainty in Income        Taxes*– An interpretation of FASB Statement No. 109”        (“FIN 48”). This Interpretation provides a comprehensive model for the        financial statement recognition, measurement, presentation and disclosure of uncertain tax        positions taken or expected to be taken in income tax returns. We adopted this        Interpretation in 2007 with no effect to the Company and the adoption has not had a        material impact on our financial position or results of operations.

 

Fair        Value Measurements

 

In        September 2006, the FASB issued SFAS No. 157,*“Fair Value        Measurements.”*This Statement replaces multiple existing        definitions of fair value with a single definition, establishes a consistent framework for        measuring fair value and expands financial statement disclosures regarding fair value        measurements. This Statement applies only to fair

**NOTE        3 - Recently Issued Accounting Pronouncements (Continued)**

 

9

 

 

----

value        measurements that already are required or permitted by other accounting standards and does        not require any new fair value measurements. SFAS No. 157 is effective for fiscal years        beginning subsequent to November 15, 2007. We adopted this Statement in the first quarter        of 2008, and we do not expect the adoption to have a material impact on our financial        position or results of operations.

 

The        Fair Value Option for Financial Assets and Financial Liabilities

 

In        February 2007, the FASB issued SFAS No. 159, “*The Fair Value        Option for Financial Assets and Financial Liabilities*,”        which permits an entity to measure certain financial assets and financial liabilities at        fair value. The objective of SFAS No. 159 is to improve financial reporting by allowing        entities to mitigate volatility in reported earnings caused by the measurement of related        assets and liabilities using different attributes, without having to apply complex hedge        accounting provisions. Under SFAS No. 159, entities that elect the fair value option (by        instrument) will report unrealized gains and losses in earnings at each subsequent        reporting date. The fair value option election is irrevocable, unless a new election date        occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial        statement users understand the effect of the entity’s election on its earnings, but        does not eliminate disclosure requirements of other accounting standards. Assets and        liabilities that are measured at fair value must be displayed on the face of the balance        sheet. The Company adopted this statement effective beginning January 1, 2008, and we do        not expect the adoption to have a material impact on our financial position or results of        operations.

 

Noncontrolling Interest in Consolidated Financial        Statements

 

In        December 2007, the FASB issued SFAS No. 160,        “*Noncontrolling Interests in Consolidated Financial        Statements — An Amendment of ARB No.* *51”*. SFAS No. 160 establishes new        accounting and reporting standards for a noncontrolling interest in a subsidiary and for        the deconsolidation of a subsidiary. Specifically, this statement requires the recognition        of a noncontrolling interest (minority interest) as equity in the consolidated financial        statements. The amount of net income attributable to a noncontrolling interest will be        included in consolidated net income on the face of the income statement. SFAS No. 160        requires that changes in a parent’s ownership interest in a subsidiary that do not        result in deconsolidation are equity transactions if the parent retains its controlling        financial interest. In addition, this statement requires that a parent recognize a gain or        loss when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair        value of the noncontrolling equity investment on the deconsolidation date. SFAS        No. 160 also includes expanded disclosures regarding the interests of the parent and        its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on        or after December 15, 2008 and earlier adoption is prohibited. We do not expect the        adoption of SFAS No. 160 to have a material impact on our financial position or        results of operations.

The        Hierarchy of Generally Accepted Accounting Principles

In        May 2008, the FASB issued SFAS No. 162, “*The        Hierarchy of Generally Accepted Accounting Principles”.*SFAS No. 162 identifies the sources of accounting principles and the        framework for selecting the principles used in the preparation of financial statements of        nongovernmental entities that are presented in conformity with generally accepted        accounting principles in the United States. The new standard becomes effective 60 days        following the SEC’s approval of the Public Company Accounting Oversight Board        amendments to AU Section 411. SFAS No. 162 is not expected to have a material        impact on our consolidated financial position or results of operations.

 

**NOTE        4 – INVESTMENT**

 

In the        second quarter of 2007, the Company received 150,000 stock options for Duluth Metals common        stock for providing executive and geological services for Duluth Metals. The stock options        are exercisable at $0.30 Canadian. During the fourth quarter of 2007, the options were        exercised and converted into stock at a cost of $47,055. During the second quarter, 30,000        shares of stock were sold at an average price of $2.82 Canadian. The market value of the        stock on June 30, 2008, was $2.53 Canadian. The Company follows the provisions of Statement        of Financial Accounting Standards No. 115 (SFAS 115),        “*Accounting for Certain Investments in Debt and Equity        Securities*.” SFAS 115 requires companies to classify their        investments as trading, available-for-sale or held-to-maturity. The

 

10

 

 

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Company’s securities consist of stock which has been classified as        available-for-sale. These are recorded in the financial statements at fair market value and        any unrealized gains (losses) will be reported as a component of shareholder equity. At        June 30, 2008, the cost basis net of write-downs, unrealized gains, unrealized losses and        fair market value of the Company's holdings are as follows:

 

 

|                 | June 30, 2008   |
|----------------------|-----------------|
|                 |            |
| Net cost of equities | $ 341,644  |
| Unrealized Losses    | (39,144)        |
| Fair Market Value    | $ 302,500  |
|                 |            |

 

SFAS 115        requires that for each individual security classified as available-for-sale, a company        shall determine whether a decline in fair value below the cost basis is other than        temporary. If the decline in fair value is judged as such, the cost basis of the individual        security shall be written down to fair value as a new cost basis and the amount of the        write-down shall be reflected in other comprehensive income of the equity section. At June        30, 2008, the company's marketable securities had a fair market value of $302,500. The        unrealized loss of $28,500 for the second quarter of 2008 is reported as other        comprehensive income bringing the net unrealized loss inception to date to        $39,144.

 

This        investment was translated into U.S. Dollars in accordance with SFAS        No. 52,*“Foreign Currency        Translation*.” The investment was translated at the rate of        exchange on the balance sheet date.

 

**NOTE 5 -        CHANGES IN SECURITIES**

 

Common Stock

 

During        the second quarter of 2008, the Company issued 950,575 shares of common stock. An employee        exercised employee stock options issued in previous years to purchase 10,500 shares of        common stock totaling $5,250. A former officer exercised his stock options in a cashless        exercise and was issued 412,920 shares of common stock. The remaining 527,155 shares were        issued in private placements at prices of $5.00 to $8.00 per share, for a total        consideration of $ 2,981,002. Total stock issuance cost for the second quarter was        $544,485.

 

**NOTE 6        – STOCK BASED COMPENSATION EXPENSE**

 

Stock        Based Compensation

 

Compensation expense charged against income for stock based awards in the        second quarter of 2008 and 2007 was $186,104 and $401,411, pre-tax, respectively, and is        included in general and administrative expense in the Consolidated Statement of        Operations.

 

For        further information regarding stock based compensation, please refer to Note 5 of the Notes        to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year        ended December 31, 2007.

 

**NOTE        7 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS**

         

The        Company reports operating segments according to SFAS No. 131,*“Disclosure about Segments of an Enterprise and Related        Information.”*

 

11

 

 

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The        Company identifies four principal industry segments by products and services, which are        described in*Note 1 – Description of Business and Basis of        Presentation – Description of Business*. The Company        includes revenues from both external customers and revenues from transactions with other        operating segments in its measure of segment profit or loss.

 

The        following table sets forth our revenues by segment for the six months ended June 30, 2008        and the six months ended June 30, 2007, in thousands:

         

|                                  | Three Months Ended June 30 | Six Months Ended June 30 |
|---------------------------------------|----------------------------|--------------------------|
|                                  | 2008                       | 2007                     | 2008 | 2007 |
| **Sales and Other Revenues**          |                       |                     |   |   |
| Oil & Gas                         | $ 1,508                    | $ 302                    | $ 2,531 | $ 594 |
| Rigs & refurbishing operations    | 611                        | 631                      | 1,267 | 1,944 |
| Minerals                              | 143                        | 473                      | 143 | 478 |
|                                  |                       |                     |   |   |
| Consolidated Sales and Other Revenues | $ 2,262                    | $ 1,406                  | $ 3,941 | $ 3,016 |

 

 

12

 

 

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**NOTE        7- FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS (continued)**

 

The        following table sets forth our operating income (loss)by segment, in        thousands:

 

|                               | Three Months Ended June 30 | Six Months Ended June 30 |
|------------------------------------|----------------------------|--------------------------|
|                               | 2008                       | 2007                     | 2008 | 2007 |
| **Operating income (loss)**        |                       |                     |   |   |
| Oil & Gas                      | $ (1,508)                  | $ (2,343)                | $ (3,064) | $ (3,825) |
| Rigs & refurbishing operations | (1,528)                    | (512)                    | (1,680) | (323) |
| Minerals                           | (31)                       | 179                 | (168) | (151) |
| Non-segmented                      | (273)                      | (113)                    | (540) | (750) |
| Total income                       | (3,340)                    | (2,789)                  | (5,452) | (5,049) |
|                               |                       |                     |   |   |

 

 

The        following table summarizes our total assets, in thousands:

 

|                               |   | June 30, 2008 |   | December 31, 2007 |
|------------------------------------|--------|---------------|--------|-------------------|
| **Total Assets**                   |   |          |   |              |
| Oil & Gas                      |   | $ 25,692      |   | $ 18,191          |
| Rigs & refurbishing operations |   | 3,181         |   | 4,703             |
| Minerals                           |   | 2,105         |   | 2,361             |
|                               |   |          |   |              |
| Consolidated Total Assets          |   | $ 30,978      |   | $ 25,255          |
|                               |   |          |   |              |

 

 

**NOTE        8 – RELATED PARTY TRANSACTIONS**

 

During        the second quarter TVOG rebuilt a steam generator and sold a 75% interest to the Opus I        partnership at a fair market value of $562,500. TVOG also sold a 75% interest in a rebuilt        heater treater to the OPUS I partnership at a fair market value of $337,500. These assets        are being operated by Tri-Valley Corporation on Opus I/TVOG properties. The gain recognized        on these sales was $79,972.

 

**NOTE        9 – SALE OF RIG ASSETS & IMPAIRMENT**

 

In June        2008, GVPS entered into a purchase and sale agreement to sell rigs and rig related        equipment to Excalibur Well Services Corporation. The agreement stated that GVPS would sell        the rigs and related equipment to Excalibur for $4,800,000, if the transaction closed on or        before July 18, 2008. Excalibur gave $500,000 as a non-refundable deposit to GVPS and that        the agreed price would increase to $5,300,000 if the transaction did not close on or before        July 18, 2008. Since GVPS was committed to the sale the equipment at a price of $4,800,000        an impairment loss of $870,948 was recognized in the second quarter to write down the        subject assets to the agreed selling price.

 

The        impairment represents the difference between the net carrying costs and the estimated        selling price less cost to dispose for the rig and related equipment. Based on estimates,        management believes that additional impairments in the future are not likely. Management        believes that the agreement to sell these assets will be finalized during the third quarter        of 2008.

 

 

 

13

 

 

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**NOTE        9 – SALE OF RIG ASSETS & IMPAIRMENT (Continued)**

 

Property        held for sale consists of the following:

|                   |   | **Original**           |   |           |   | **Adjusted**          |
|------------------------|--------|------------------------|--------|----------------|--------|-----------------------|
|                   |   | **Carrying****Amount** |   | **Impairment** |   | **Carrying****Value** |
| Drilling Rigs          |   | $4,977,201             |   | $(764,402)     |   | $4,212,799            |
| Drilling Rig Equipment |   | 520,592                |   | (79,953)       |   | 440,639               |
| Vehicles               |   | 173,155                |   | (26,593)       |   | 146,562               |
| Total                  |   | $5,670,948             |   | $(870,948)     |   | $4,800,000            |

 

 

| Outstanding liabilities related to these assets totaled                        $364,124. |
|------------------------------------------------------------------------------------------|

 

 

**NOTE        10 – SUBSEQUENT EVENTS**

 

On July        18, 2008 the sale of our rig and related assets was completed at a sales price of        $4,800,000. The assets were written down to the sales price in the second quarter,        recognizing an impairment loss.

 

 

14

 

 

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

 

**Notice        Regarding Forward-Looking Statements**

 

This        report contains forward-looking statements. The words, "anticipate," "believe," "expect,"        "plan," "intend," "estimate," "project," "could," "may," "foresee," and similar expressions        are intended to identify forward-looking statements. These statements include information        regarding expected development of Tri-Valley's business, lending activities, relationship        with customers, and development in the oil and gas industry. Should one or more of these        risks or uncertainties occur, or should underlying assumptions prove incorrect, actual        results may vary materially and adversely from those anticipated, believed, estimated or        otherwise indicated.

 

**Results of Operations**

 

*Three        months ended June 30, 2008 Compared to three months ended June 30, 2007*

 

For the        quarter ended June 30, 2008, revenue was $2.3 million, compared to $1.4 million in the        second quarter of 2007, an increase of $0.9 million. We had an operating loss of about $3.3        million in the second quarter of 2008, compared to a loss of $2.8 million in the second        quarter of 2007.

 

Revenues

 

The        Company identifies reportable segments by products and services. The Company includes        revenues from both external customers and revenues from transactions with other operating        segments in its measure of segment profit or loss. The Company also allocates interest        revenue and expense, DD&A, and other operating expenses in its measure of segment        profit or loss. The following table sets forth our revenues by segment for the second        quarter of 2008 and 2007, in thousands.

 

|                              | Three MonthsEnded June 30 | Increase/              | Percentage               |
|-----------------------------------|---------------------------|------------------------|--------------------------|
|                              | 2008                      | 2007                   | (decrease)               | Change |
|                              |                      |                   |                     | % |
| Oil and gas                       | $1,508                    | $   302 | $   1,206 | 399 |
| Rig & refurbishing operations | 611                       | 631                    | (20)                     | (3) |
| Minerals                          | 143                       | 473                    | (330)                    | (70) |
|                              |                      |                   |                     |   |
| Total revenues                    | $2,262                    | $1,406                 | $ 856                    | 61 |

 

 

Oil and gas revenues in the second quarter of 2008        included approximately $1.25 million from the sale of oil and gas, compared to $168,000 in        the second quarter of 2007.**This also represents a        quarter-over-quarter increase of 642%.**The increase resulted from        both significantly increased oil and gas production and increased commodity        pricing.

 

The primary oil and gas activities during the second        quarter of 2008 represented an ongoing rapid build-up of operations per our        “Operation Catapult” initiative which is focused on rapidly accelerating        production of oil and gas and resultant operating cash flow, and investment returns to our        Partners and Shareholders. In summary, key activity included the completion of Phase I        drilling for the TVOG Opus I Drilling Program LP, progressive cyclic steaming of heavy oil        wells, ongoing conversion of temporary to permanent facilities, installation of a fuel gas        line and test headers, a variety of remedial work on existing wellbores, additional new        perforated zones on existing wells, additional field-level staffing to handle our uplift,        and continued, prudent progression of the existing asset exploitation programs. The Company        expects that the oil and gas production will continue to grow increasing revenues and that        the operating income of this segment will be improved by year-end 2008.

 

 

 

15

 

 

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Operating Income (Loss)

 

The        following table sets forth our operating income (loss) by segment in the second quarter of        2008 and 2007, in thousands.

 

|                              | Three Months Ended June 30, 2008 | Three Months Ended June 30, 2007 | Increase (Decrease) | Percentage Change (%) |
|-----------------------------------|----------------------------------|----------------------------------|---------------------|-----------------------|
|                              |                             |                             |                |                  |
| **Total operating income**        |                             |                             |                |                  |
| Oil & Gas                     | $ (1,508)                        | $ (2,343)                        | 835                 | 36                    |
| Rig & refurbishing operations | (1,528)                          | (512)                            | (1,016)             | (198)                 |
| Minerals                          | (31)                             | 179                              | (210)               | (117)                 |
| Non-segmented                     | (273)                            | (113)                            | (160)               | (141)                 |
| Total income                      | $ (3,340)                        | $ (2,789)                        | $ (551)             | (20)                  |

 

Income        for the quarter ended June 30, 2008 was a loss of $3.3 million, compared to $2.8 million        loss in the second quarter of 2007, an increase in the loss of $0.5 million.

 

Second quarter operations results continue to exceed        targeted volumes, schedules and economic projections.

 

*Six        months ended June 30, 2008 Compared to six months ended June 30, 2007*

 

For the        six months ended June 30, 2008, revenue was $3.9 million, compared to $3.0 million in the        first six months of 2007, an increase of $0.9 million. We had an operating loss of about        $5.4 million in the first six months of 2008, compared to a loss of $5.0 million in the        first six months of 2007.

 

General        and administrative expenses were $6.3 million for the first six months ended June 30, 2008,        compared to $5.2 million for the first six months of 2007, an increase of $1.1 million.        $0.4 million of this increase was due to non-recurring expenses associated with the buy        back of the minority interest of GVPS. The remaining $0.7 million increase was due to the        increase in oil and gas and rig operations and refurbishing segments activity level and        increased staff over the same period last year.

 

Revenues

 

The        Company identifies reportable segments by products and services. The Company includes        revenues from both external customers and revenues from transactions with other operating        segments in its measure of segment profit or loss. The Company also allocates interest        revenue and expense, DD&A, and other operating expenses in its measure of segment        profit or loss. The following table sets forth our revenues by segment for the first six        months of 2008 and 2007, in thousands.

 

|                              | Six MonthsEnded June 30 | Increase/              | Percentage               |
|-----------------------------------|-------------------------|------------------------|--------------------------|
|                              | 2008                    | 2007                   | (decrease)               | Change |
|                              |                    |                   |                     | % |
| Oil and gas                       | $2,531                  | $   594 | $   1,937 | 326 |
| Rig & refurbishing operations | 1,267                   | 1,944                  | (677)                    | (35) |
| Minerals                          | 143                     | 478                    | (335)                    | (70) |
|                              |                    |                   |                     |   |
| Total revenues                    | $3,941                  | $3,016                 | $ 925                    | 31 |

 

 

 

16

 

 

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Operating Income (Loss)

 

The        following table sets forth our operating income (loss) by segment for the first six months        of 2008 and 2007, in thousands.

 

|                              | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 | Increase (Decrease) | Percentage Change |
|-----------------------------------|--------------------------------|--------------------------------|---------------------|-------------------|
|                              |                           |                           |                |              |
| **Total operating income**        |                           |                           |                |              |
| Oil & Gas                     | $ (3,064)                      | $ (3,825)                      | 761                 | 20                |
| Rig & refurbishing operations | (1,680)                        | (323)                          | (1,357)             | (420)             |
| Minerals                          | (168)                          | (151)                          | (17)                | (11)              |
| Non-segmented                     | (540)                          | (750)                          | 210                 | 28                |
| Total operating income            | $ (5,452)                      | $ (5,049)                      | $ (403)             | (8)               |

 

Income        for the six months ended June 30, 2008 was a loss of $5.4 million, compared to $5.1 million        loss in the first six months of 2007, an increase in the loss of $0.3 million.

 

*Oil and        Gas*

 

**Pleasant Valley Field, Ventura County,        CA**: The initial, Phase I horizontal drilling campaign on the        “Hunsucker Lease” was completed in mid-April with the drilling and completion        of the PV-8 well, representing the seventh horizontal well drilled and completed to date.        Cyclic steaming operations continued effectively with two of our 12.5 mmbtu/hr refurbished        steam generators with all horizontal wells experiencing at least one steam cycle, and        others experiencing up to three complete steam cycles with significantly increasing oil        rates observed per successive cycle and improving cumulative Steam-Oil Ratios. PV-1, the        initial horizontal drill well and most mature steamed well has experienced an outstanding        cumulative Steam-Oil ratio near unity through three steam cycles. Another quarterly high        point was the successful Ventura County APCD source testing of both aforementioned steam        generators which beat strict County emission standards.

 

Consistent with our ongoing efforts to convert from        temporary to permanent facilities and further optimize lifting costs and cost structure, a        fuel gas line to support steam generation was commissioned and fully operating this        quarter. Although trucking of our oil has proven to be problem-free, an oil sales line is        also currently being accelerated to simplify our operations, reduce risk, and mitigate        potential sales interruptions.

 

Based on initial field performance over six months, a        revised, detailed field operations philosophy was established and has resulted in, among        other key decisions, alternating steaming and production of geographical regions of the        field to accelerate heating of the thick, continuous Vaca Tar Sand. In addition, to also        accelerate reservoir heating and production, limited pumping cycles have been employed        early on in deference to re-steaming after post-steaming flow periods cease. The field        development plan and performance to date was reviewed and validated by Dr. S. M. Farouq        Ali, a globally renowned industry thermal development expert. This review resulted in        confirmation of existing operating and provided insight into future expectations in the        field.

 

PV2, the single deep vertical well, continues to        produce with favorable results on rod pump after adding additional uphole intervals in this        well. As part of our ongoing lease expansion plans, TVOG executed lease development        agreements with the DOGGR and the Lessor to develop and re-exploit an offset Lenox Ranch        lease which also contains twenty existing idle wellbores that were previously on short term        cyclic steam injection. It is noteworthy that our reservoir mapping on this lease indicates        a better reservoir structure than the existing Hunsucker lease development. These wells        will be re-entered and returned to production with steam injection as appropriate and a        drilling location will be constructed to accommodate horizontal drill wells commensurate        with the Hunsucker Lease development. We are progressing on acquiring additional offset        lease acquisitions.

 

17

 

 

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As of the date of this quarterly report, all of the        above horizontal wells remain on confidential status with the California Division of Oil,        Gas and Geothermal Resources as to public disclosure of production rates and        volumes.

 

**Moffat Ranch, Madera County, CA:**Our first newly drilled well, 48X-7, remains on high, sustained, low        watercut gas production from a single gas zone which represents only one of fourteen        identified potentially commercial zones in the well. To mitigate any production        interruptions, a gas compressor was mobilized to the field in anticipation of gas        compression needs due to higher, and fluctuating line pressures in the area, but has not        yet been required to be placed in full time service. Remedial well work to restore existing        idle wells to production continued, and one gas well was converted to plunger lift. An        additional offset, idle wellbore and associated facilities was acquired during the quarter        and will be returned to production in the near term from a previously produced interval.        This well also contains the producing zone of 48X-7 and will be completed after evaluating        the existing interval for productive capacity.

 

As of the date of this quarterly report, the        production rates and volumes of the 48X-7, as reported to the California Division of Oil,        Gas and Geothermal Resources, remain confidential.

 

**Belridge Field, Kern County,        CA**: The waterflood pilot project continued in the quarter, has        proven to be effective, and is responding as expected. A new water injector is being        permitted and will be drilled in the near term to expand the waterflood pilot. Cyclic        steaming operations on the D-352 well with our third refurbished steam generator continued        with favorable results. Uphole Etchegoin perforations added in D-188 well in the first        quarter continue to produce at a high oil rate with low watercut, however, offset        perforations in D-540 were unsuccessful in matching the D-188 results. Similar perforations        will be added in D-24 in the near term to assess its productive potential. All well test        headers have been installed and commissioned which has resulted in improved understanding        of field production and the development of a detailed field operations philosophy to        increase off take and improve well reliability and uptime time forward. Individual well        test results, available for the first time since we acquired the field, indicates a large        potential production uplift in the field.

 

**Edison Field, Shields & Arms Lease, Kern        County, CA**: Well work performed on existing producers and the        single injection well in the first quarter has continued to yield a robust increase in        daily production from this lease. Plans to enhance production from our other Edison Field        leases will occur in 2008.

 

**Rio Vista, Solano County, CA:**The Hanson well #2, which was converted to plunger lift in the first        quarter, continues to produce at high gas rates thus indicating a successful long term        application of the technology. Other Rio Vista area long term, proved-developed-producing        gas reserves continued at customary levels. This long term, sustained production from our        Rio Vista gas fields continues to add sustained, low lifting cost production, and        increasing cash flow in response to recent higher gas prices.

 

*Rig        & refurbishing operations*

 

Revenues        from rig operations totaled $0.6 million in the second quarter of 2008, which was all from        drilling contracts and completion operations, which was the same as the revenue from rig        operations in the second quarter of 2007. GVPS did not realize operating revenue in the        second quarter of 2008 due to taking our rigs out of service to conduct comprehensive        inspections and API certifications to enable universal industry utilization of our fleet        for third party revenue generation. The operating loss in the second quarter of 2008 was        $1.5 million, compared to an operating loss of $0.5 million in the second quarter of 2007,        or an increase in the loss of $1.0 million. $0.9 million of this loss was due to the write        down of the rig and rig related equipment that was sold.

 

GVPS was        established in 2006 in response to a then acute shortage of contractor supplied production        rig services in California. GVPS enabled TVOG to significantly accelerate production via        well work and newly drilled wells than afforded by existing rig contractor rig        availability. However, since 2006 the California rig supply has caught up to market demand.        GVPS began to consider alliances with various production service firms to increase rig        availability for an increasing number of TVOG active and idle wells. In June 2008, GVPS        agreed to sell all of its production and drilling rigs and down hole tools to Excalibur        Well Services, Inc. in exchange for cash and a highly attractive, preferred client status        for well servicing. The sale was completed in July 2008 for a price of $4.8 million.        GVPS

 

18

 

 

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recognized an impairment loss of $0.9 million in the second quarter to write        down the value of the assets being sold to the sales price. GVPS retained its fleet of 17        steam generators.

 

GVDC        drilled one petroleum well in Nevada for another operator during the second quarter. The        rig is presently idle and is looking for its next jobs. More than 120 petroleum and        geothermal wells have been staked or permitted for future drilling in Nevada. We believe        that GVDC’s experience in Nevada provides a profitable opportunity for the business        line in 2008 and beyond, and the Company has stepped up its marketing activity in Nevada,        Idaho and eastern Washington. With engine modifications to accommodate stricter air quality        rules, the rig can also operate in California.

 

*Minerals Activities*

 

Revenues        from minerals activities in the second quarter of 2008 were $0.14 million compared to $0.47        million in 2007, due to a decrease in consulting revenue. With the primary emphasis of the        Company to boost oil and gas production, the properties of Select Resources have been in a        care and maintenance status. However, Jim Bush, formerly Vice President of exploration for        Tri-Valley Oil and Gas Co., has been named President of Select Resources. His charge is to        activate and monetize the properties through finding joint venture partners, spin-off or        outright sale.

 

For the        second quarter, mineral programs consisted largely of assessing and compiling geologic        information collected in previous work programs associated with the Calder, Richardson, and        Shorty Creek properties in Alaska. Select also continued to pursue candidates for        management and officer levels in the company and consultants to assist in property        development. Select has retained a nationally recognized consultant to assist in 1) the        development of the Admiral Calder mine in general, and 2) a business assessment for its        products.  Select continues to pursue returning the Admiral Calder mine to a        profitable undertaking, continues to explore adding uranium as a new commodity of interest,        and has reduced efforts directed towards acquiring new base metals and industrial minerals        properties. More specific information is provided in the following sections.

 

Industrial Minerals

 

During        the second quarter, Select continued low-cost monitoring and security at the Admiral Calder        calcium carbonate mine in Alaska.  Select also worked (and is still working) with        consultants to provide independent confirmation of the extent of and distribution of        high-quality material in the deposit for upcoming financial and/or operational decisions.        In addition to the ground calcium carbonate (GCC) market, Select is further evaluating the        site’s potential to produce new product types that can competitively participate in        new (i.e. first-time for Calder) market categories. These include gray limestone, dimension        stone, and ways to minimize and exploit mine waste (such as using it for acid mine control        at other mines).  Select continues to pursue end users and calcium carbonate mining        and processing companies as potential partners to fund larger scale development and        operations on the Admiral Calder mine, or acquire the property altogether.  Putting        the mine into a revenue-generating status remains a Select priority.  In parallel with        the above, Select is reviewing candidates for a long-term position to head up the        development of this property.

 

Select        continues to maintain a number of industrial mineral projects in six western states in a        hold status, pending further review.  Commodities in these projects include barite,        sand & gravel, aggregate, limestone, dolomite, calcium carbonate, cinder, and other        industrial mineral commodities.

 

Precious        Metals

 

Select        continues to solicit mining interests for the larger scale exploration on both the        Richardson and Shorty Creek properties, as well as identifying a field site manager for        both properties.   Select has contacted, and continues to solicit, candidates for        these positions.

 

Shorty        Creek has been described by the State Geologist of Alaska as perhaps the best un-drilled        gold exploration project in Alaska.

 

19

 

 

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The        Richardson District is arguably the most prospective gold exploration district in Alaska        and it remains under-explored. Tri-Valley has found native gold at 60 locations along a 20        mile swath suggesting the possibility of a huge system.

 

Uranium

 

Select        Resources has begun soliciting and reviewing uranium opportunities in a very targeted and        selective manner.  Select is adhering rigorously to strict high-end criteria for these        properties.

 

Base        Metals

 

Base        Metals operations continue to be on hold.

 

*Non-segmented items*

 

The        non-segmented items consist of stock option expense and interest expense. Non-segmented        items decreased from $0.7 million in the first six months of 2007, to $0.5 million in the        first six months of 2008. Stock option expense for the first six months of 2008 was $0.4        million, compared to $0.6 million for the first six months of 2007, a decrease of $0.2        million. Interest expense for the first six months of 2008 was $0.1 million, unchanged from        the first six months of 2007.

 

Capital        Resources and Liquidity

 

In 2002        through the second quarter of 2008, our drilling activities have been largely funded by        selling interests in our OPUS I drilling partnership. We do not borrow in order to fund        drilling activities. Our continued drilling activity relies on our ability to raise money        for projects through drilling partnerships or other joint ventures.

 

Current        assets were about $13.1 million at June 30, 2008, up from $8.0 million at year end 2007, an        increase of $5.1 million. Cash on hand was increased from $7.7 million at year end 2007        compared to $7.8 million at June 30, 2008. Current liabilities increased to about $15.2        million at June 30, 2008, compared to $10.3 million at year end 2007, due primarily to an        increase of $5.3 million in accounts payable and accrued expenses which was caused by our        recent increase in drilling activity and a decrease of about $3.7 million in advances from        joint venture participants and an increase of $0.5 million in deferred revenue caused        mainly by the deposit on the sale of rigs and rig related equipment which closed in the        third quarter of 2008.

 

Operating Activities

 

We had a        negative cash flow of $4.0 million for the six months ended June 30, 2008 compared to a        negative cash flow of $1.5 million for the same period in 2007, the cash flow in the        current period is due mainly to our loss from operations being offset by our increase in        accounts payable, deferred revenue and a increase in advances from joint venture        participants and an increase in our accounts receivable. Our loss from operations was        approximately $5.4 million for the six months ended June 30, 2008 compared to a $5.0        million loss for the same period in 2007.

 

The        largest component of cash flow in the first six months of 2008 was an increase in accounts        payable, deferred revenue and accrued expenses of $5.8 million caused by the increase in        our activity level,. Accounts receivable increased by $3.8 million. Advances from joint        venture participants increased by $4.8 million and accounts payable to joint venture        participants decreased by $2.7 million. The increase from advances from joint venture        participants was due to oil and gas sales payable from May and June which had been accrued        but not received by the company until July. The loss on impairment of fixed assets was $0.9        million. Gain on the sale of fixed assets was $0.7 million and depreciation, depletion and        amortization was $0.7 million and stock option expense was $0.4 million.

 

 

 

20

 

 

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Investing Activities

 

Cash        used in investing activities was $2.2 million for the first six months of 2008 compared to        $4.4 million for the first six months of 2007. $4.4 million was used towards capital        expenditures, primarily the drilling of new wells. We also received $2.6 million for the        sale of three steam generators and a heater treater. We used $0.4 million to buy back        membership units in GVPS.

 

Financing Activities

 

Net cash        provided by financing activities was $6.3 million for the first six months of 2008 compared        to $5.9 million for the same period of 2007. We received $7.1 million from sales of        restricted shares of common stock in privately negotiated transactions including the        exercise of stock options by employees. We used $68,000 to pay down principal on long-term        debt. We have not planned any private placement of equity securities for the remainder of        2007, but we may continue to receive funds from privately negotiated transactions. We do        not have a targeted or budgeted amount of equity financing activities.

 

Liquidity

 

The        recoverability of our oil and gas reserves depends on future events, including obtaining        adequate financing for our exploration and development program, successfully completing our        planned drilling program, and achieving a level of operating revenues that is sufficient to        support our cost structure. At various times in our history, it has been necessary for us        to raise additional capital through private placements of equity financing. When such a        need has arisen, we have met it successfully. It is management’s belief that we will        continue to be able to meet our needs for additional capital as such needs arise in the        future. We may need additional capital to pay for our share of costs relating to the        drilling prospects and development of those that are successful, and to acquire additional        oil and gas leases, drilling equipment and other assets. The total amount of our capital        needs will be determined in part by the number of prospects generated within our        exploration program and by the working interest that we retain in those        prospects.

 

During        the remainder of 2008, we expect to expend approximately $11 million on drilling        activities. Funds for the majority of these activities will be provided by sales of        partnership interests in the Opus-I drilling partnership, which will still be raising funds        for development purposes. Tri-Valley’s portion is expected to be approximately $2        million. We are evaluating and finalizing results of recently drilled Pleasant Valley and        Moffat Ranch in order to design the optimum development plan for the property. We expect to        drill additional wells there in 2008. Our ability to complete our planned drilling        activities in 2008 depends on some factors beyond our control, such as availability of        equipment and personnel. Our actual capital commitments for fiscal year 2008 are less than        $3 million, but to expend $11 million we will require additional capital from the OPUS        partnership or other outside parties.

 

During        the remainder of 2008, we expect expenditures of approximately $ 0.2 million on mining        activities, including mining lease and exploration expenses.

 

Should        we choose to make an acquisition of producing oil and gas properties, such an acquisition        would likely require that some portion of the purchase price be paid in cash, and thus        would create the need for additional capital. Additional capital could be obtained from a        combination of funding sources. The potential funding sources include:

 

|   | **•** | Cash flow from operating activities, |
|--------|------------|--------------------------------------|

|   | **•** | Borrowings from financial institutions (which we typically                        avoid), |
|--------|------------|-------------------------------------------------------------------------------------------|

|   | **•** | Debt offerings, which could increase our leverage and add to                        our need for cash to service such debt (which we typically                        avoid), |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Additional offerings of our equity securities, which would                        cause dilution of our common stock, |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------|

|   | **•** | Sales of portions of our working interest in the prospects                        within our exploration program, which would reduce future revenues from its                        exploration program, |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Sale to an industry partner of a participation in our                        exploration program, |
|--------|------------|---------------------------------------------------------------------------------------------------|

|   | **•** | Sale of all or a portion of our producing oil and gas                        properties, which would reduce future revenues. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------|

 

21

 

 

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Our        ability to raise additional capital will depend on the results of our operations and the        status of various capital and industry markets at the time such additional capital is        sought. Accordingly, there can be no assurances that capital will be available to us from        any source or that, if available, it will be on terms acceptable to us. The Company has no        off balance sheet arrangements.

 

New        Accounting Pronouncements

 

See Note        3 to our unaudited consolidated financial statements.

 

| **Item 3.** | **Quantitative and Qualitative Disclosures about Market                        Risk** |
|-------------|---------------------------------------------------------------------------------------|

 

Tri-Valley Corporation does not engage in hedging activities and does not        use commodity futures or forward contracts in its cash management functions.

 

| **Item 4.** | **Controls and Procedures** |
|-------------|-----------------------------|

 

As of        June 30, 2008, an evaluation was performed under the supervision and with the participation        of our management, including our Chief Executive Officer and Chief Financial Officer, of        the effectiveness of the design and operation of our disclosure controls and procedures.        These controls and procedures are based on the definition of disclosure controls and        procedures in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange        Act of 1934.

 

Based on        that evaluation as of June 30, 2008, our management, including the CEO and CFO concluded        that our disclosure controls and procedures were effective to ensure that the information        required to be disclosed by us in the reports that we file or submit under the Securities        Exchange Act of 1934 is recorded, processed, summarized and reported within the time        periods specified in SEC rules and forms.

 

Management, including our CEO and CFO, do not expect that our disclosure        controls and procedures or internal control over financial reporting will prevent all        errors and fraud. In designing and evaluating our control system, management recognized        that any control system, no matter how well designed and operated, can provide only        reasonable, not absolute, assurance of achieving the desired control objectives. Further,        the design of a control system must reflect the fact that there are resource constraints,        and management necessarily was required to apply its judgment in evaluating the        cost-benefit relationship of possible controls and procedures. Because of the inherent        limitations in all control systems, no evaluation of controls can provide absolute        assurance that all control issues and instances of fraud, if any that may affect our        operations have been detected. These inherent limitations include the realities that        judgments in decision-making can be faulty, and that breakdowns can occur because of simple        error or mistake.

 

During        the second quarter of 2008, there were no changes in the Company's internal control over        financial reporting that have materially affected, or are reasonably likely to materially        affect, the Company’s internal control over financial reporting.

 

**PART II        - OTHER INFORMATION**

 

**Item        1A.****Risk Factors**

 

There have        been no material changes from the risk factors previously disclosed in our Annual Report on        Form 10-K for the fiscal year ended December 31, 2007.

 

 

22

 

 

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| **Item 2.** | **Unregistered Sales of Equity Securities** |
|-------------|---------------------------------------------|

 

During        the second quarter of 2008, the Company issued 527,155 shares of restricted common stock to        private investors at prices of $5.00 to $8.00 per share for a total consideration of        $2,981,002.

 

All of        these transactions were conducted in reliance on the exemption from registration        requirements of the Securities Act of 1933 contained in Section 4(2) of that        Act.

 

 

| **Item 6.** | **Exhibits** |
|-------------|--------------|

 

| Item | Description |
|------|-------------|

 

| 31.1 | Rule 13a-14(a)/15d-14(a) Certification |
|------|----------------------------------------|

| 31.2 | Rule 13a-14(a)/15d-14(a) Certification |
|------|----------------------------------------|

| 32.1 | 18 U.S.C. Section 1350 Certification |
|------|--------------------------------------|

| 32.2 | 18 U.S.C. Section 1350 Certification |
|------|--------------------------------------|

 

 

23

 

 

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**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.

 

**TRI-VALLEY CORPORATION**

 

| August 8, 2008 | */s/F. Lynn Blystone* |
|----------------|-----------------------|

F. Lynn Blystone

Chairman, President and CEO

 

| August 8, 2008 | */s/ Arthur M. Evans* |
|----------------|-----------------------|

Arthur M. Evans

Chief Financial Officer

 

 

 

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