UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


___________________





FORM
10-KSB







x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007





OR





o
            TRANSACTION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




FOR
THE TRANSITION PERIOD FROM __________ TO __________.





Commission
File Number 0-24269


___________________








SURGE
GLOBAL ENERGY, INC.


(Name of
small business issuer in its charter)





DELAWARE
              (State
      or other jurisdiction of incorporation or organization)
            34-1454529
              (I.R.S.
      Employer Identification No.)990
      Highland Drive, Suite 110V, Solana Beach, California
              (Address
      of principal executive offices)
            92075
              (Zip
      Code)





Issuer’s
telephone number:  (858) 720-9900





Securities
registered pursuant to Section 12(b) of the Act:  NONE





Securities
registered pursuant to Section 12(g) of the Act:





Title
      of each class
              Common
      Stock
            Name
      of each exchange on which registered
              None





___________________





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.  o
  Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to filing requirements for the past 90 days.
 Yes xNoo


Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB  o




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




The
issuer had no revenues for its most recent fiscal year.





The
aggregate market value of the registrant’s common stock held by non-affiliates
computed by reference to the average bid and asked price of such common equity
on April 1, 2008 was $2,260,714.




The
number of shares outstanding of the registrant’s common stock at April 13, 2008
was 35,470,337.




DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s definitive proxy statement for its Annual Meeting of
Stockholders filed with the Commission on March 5, 2008 are incorporated by
reference into Part III.




Transitional
Small Business Disclosure Format (check one):   Yes o   No x





INDEX








PageCAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING INFORMATION
            1PART
      I
            
            1ITEM
      1.
            DESCRIPTION
      OF BUSINESS
            1ITEM
      2.
            DESCRIPTION
      OF PROPERTY
            15ITEM
      3.
            LEGAL
      PROCEEDINGS
            15ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            16PART
      II
            
            16ITEM
      5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            16ITEM
      6.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            17ITEM
      7.
            FINANCIAL
      STATEMENTS
            21ITEM
      8.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            21ITEM
      8A(T).
            CONTROLS
      AND PROCEDURES
            21ITEM
      8B.
            OTHER
      INFORMATION
            23PART
      III
            
            24ITEM
      9.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(a) OF THE EXCHANGE ACT
            24ITEM
      10.
            EXECUTIVE
      COMPENSATION
            24ITEM
      11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
            24ITEM
      12.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
            24ITEM
      13.
            EXHIBITS
            24ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            30








(i)


CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION




This
Annual Report on Form 10-KSB, including exhibits thereto, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are typically identified by the
words “anticipates,” “believes,” “expects,” “intends,” forecasts,” estimates,”
“plans,” “future,” “strategy,” or words of similar meaning. In particular, the
following types of statements are forward-looking:




·
            statements
      regarding our potential growth
opportunities;




·
            statements
      regarding our ability to generate revenues from our
      operations;




·
            statements
      regarding our anticipated exploration
work;




·
            statements
      regarding our ability to extract, refine, sell oil or sell oil
      properties;




·
            statements
      regarding our ability to comply or continue to comply with governmental
      regulations; and




·
            statements
      regarding our estimated future costs and
  expenses.




Various
factors could cause actual results to differ materially from those expressed in
the forward-looking statements, including those described in “Risk Factors” in
this Form 10-KSB. The company assumes no obligations to update these
forward-looking statements to reflect actual results, changes in assumptions, or
changes in other factors, except as required by law.




PART
I




As used
in this Annual Report on Form 10-KSB, “we,” “us,” “our,” “Surge “ and our
“company” refer to Surge Global Energy, Inc. (“Surge”), and our wholly owned
subsidiaries, including Peace Oil Corp., 1294697 Alberta Ltd.,  and
Cold Flow ULC, unless the context otherwise requires.




ITEM
      1.
            DESCRIPTION
      OF BUSINESS




General
Overview




Surge
Global Energy, Inc. is a Delaware corporation dually traded on the OTC Bulletin
Board and the Pink Sheets under the symbol SRGG. Our principal executive offices
are located at 990 Highland Drive, Suite 110V, Solana Beach, CA 92075. Our
telephone number is (858) 720-9900. Our fax number is (858) 720-9902. We
maintain a website at www.SurgeGlobalEnergy.com.




We are an
oil and gas exploration and development company. Our primary objective is to
identify, acquire and develop working interests in underdeveloped oil and gas
projects. We intend to develop oil and gas properties and explore for oil and
gas on a worldwide basis, focusing mainly in the United States and Canada. We
seek production and oil field drilling, production and development as the most
prudent ways to establish and increase shareholder values.




Our
strategic initiative is to pursue high-return projects with limited
risk.  Using our limited cash and other resources and assets, we will
attempt to acquire land sales for potential oil producing properties, purchase
producing oil and gas properties, drill new wells to generate proven oil and gas
reserves, and explore ways to maximize values from our investments in Andora
Energy Corporation and North Peace Energy Corp.


1


Corporate
History




We were
incorporated as The Havana Group, Inc. on November 25, 1997 under the laws of
the state of Delaware. Our initial business was the sale of pipes and tobacco
products and we completed our initial public offering in May 1998. On October
13, 2004, Surge’s name was changed from The Havana Group, Inc to Surge Global
Energy, Inc. and the symbol was changed to SRGG.OB.




As of
December 31, 2003, our pipe and tobacco inventory was liquidated and the
tangible and intangible assets related to that business were sold
off.  In December 2004, we completed the restructuring of our balance
sheet and the cancellation of  outstanding Preferred A and Preferred B
shares and indebtedness related to the discontinued tobacco and pipe
business.




From 2005
through 2007 we engaged in a series of acquisition, divestiture and capital
transactions in an effort to expand our business and provide the basis for
long-term shareholder returns from oil and gas exploration and
development.  Because our operations from 2005 forward have not
generated any revenue, we have used our equity and the value of interests in
other entities that we have controlled from time to time, to develop business
opportunities we believed would be advantageous.  Our management has
also undergone a number of changes during this period.




Because
we are a small company, the strategic transactions together with handling
management and board changes and issues and certain litigation have occupied
substantially all of our energy over the last three years.  For a
description of certain legal proceedings, see Item 3 Legal
Proceedings.




Sawn
Lake Project, Alberta Canada




Andora




In 2005
we formed a Canadian subsidiary that entered into an agreement to drill wells in
the Sawn Lake Property located in Northern Alberta, Canada with Deep Well Oil
& Gas, Inc. (“Deep Well”) and Northern Alberta Oil, Ltd.
(“NAOL”).  In November 2005 that subsidiary, renamed Signet Energy,
Inc. (“Signet”) was reorganized.  Surge issued 5,100,000 shares of its
common stock to Signet officers, directors and certain shareholders, and
transferred shares of Signet to Deep Well and NAOL.  As a result, we
became a minority shareholder in Signet, and obtained leases of oil and gas
properties from Deep Well and NAOL.  In July 2006, our interest in
Signet was further diluted by the issuance of additional equity by
Signet.  On September 17, 2007, Signet combined with Andora Energy
Corporation (“Andora”), resulting in further dilution of our interest in the
combined entity to 5.81% of the fully diluted shares of Andora.




We have
retained our equity interest in Andora.  Andora is an oil and gas
company owned 55.4% by Pan Orient Energy Corp., a Canadian energy company listed
on the TSX Venture Exchange.  For a more detailed description of this
series of transactions, see Note B to our Consolidated Financial Statements,
“Investment in Andora.”




Red
Earth Area, Alberta Canada




North
Peace




On March
2, 2007, Cold Flow Energy ULC (“Cold Flow”), a Canadian subsidiary of our
1294697 Alberta Ltd. subsidiary (also a Canadian company, formed in order to
facilitate the transaction at the advice of Canadian tax counsel), acquired all
of the outstanding shares of Peace Oil Corp (“Peace Oil”), another Canadian
company.  Cold Flow paid consideration valued at CDN$16,620,000 in
cash, promissory notes and exchangeable shares of Cold Flow preferred stock (the
“Exchangeable Shares”).  Each Exchangeable Share can be exchanged for
two shares of our common stock for five years from the closing subject to
certain redemption rights of Surge.  We also issued a warrant to
purchase 1,000,000 shares of our common stock to 1304146 Alberta Ltd. at an
exercise price of $1.00 per share subject to certain
contingencies.  Peace Oil is an oil and gas exploration and
development company, and among other things, at the time held an undivided 30%
working interest in 135 square miles (86,400 acres) of oil sands leases in the
Red Earth area of Alberta, Canada (the “Red Earth Leases”).


2


On June
28, 2007, the Company and Peace Oil sold certain assets of Peace Oil to North
Peace Energy Corp., a Canadian oil sands company listed on the TSX Venture
Exchange (“North Peace”), including the Red Earth Leases.  The
aggregate consideration was approximately CDN$20,000,000, consisting of
CDN$15,000,000 in cash and CDN$5,000,000 in common shares of North Peace at an
agreed price of CDN$2.20 per share (the “North Peace
Transaction”).  We are utilizing and intend to utilize the proceeds
from such sale to continue our current and future operations in the oil and gas
business.  None of Peace Oil, Cold Flow or 1294697 Alberta Ltd. has
any ongoing business operations at this time.




As a
result of these transactions, Peace Oil holds a 4.87% fully diluted interest in
North Peace.  For a more detailed description of this series of
transactions, see Note C to our Consolidated Financial Statements, “Investment
in Peace Oil.”




In
January 2008 we determined that we had incurred Canadian tax liability estimated
at $5.281 million as of December 31, 2007 related to these transactions, and as
a result restated our June 30, 2007 and September 30, 2007 financial
reports.  We are working on efforts to mitigate that tax
liability.  See “Risk Factors – We have an estimated $5,280,789
Canadian tax liability.”




Santa
Rosa Dome Project, Mendoza Province, Argentina




On March
18, 2008, we entered into a Purchase and Sale Agreement, with Oromin, Irie Isle
Limited; Cynthia Holdings Ltd. (“Cynthia”); and Chet Idziszek, pursuant to which
the Company sold its 17.52% interest in Cynthia.  Cynthia owns a
certain parcel of land in the eastern half of the Cuyana Bason in the
Province of Mendoza, Argentina.  We received Six Hundred Thousand U.S.
Dollars (US$600,000) in cash and the return of One Million (1,000,000) shares of
the Company’s stock previously issued for the Company’s purchase of its interest
in Cynthia.




Working
Capital Activities




On
November 28, 2006, we entered into a Securities Purchase Agreements (the
“Securities Purchase Agreements”) with each of Gemini Master Fund, Ltd.
(“Gemini”) and Mark C. Fritz, pursuant to which we sold 2,000,000 shares of our
common stock at a purchase price of $0.45 per share to Gemini and 1,000,000
shares of our common stock at a purchase price of $0.45 per share to Mr. Fritz.
Pursuant to the Securities Purchase Agreements, we also issued to Gemini a
warrant to purchase 2,000,000 shares, and to Mr. Fritz a warrant to purchase
1,000,000 shares, of our common stock at an exercise price of $0.60 per share
and with a term of five years, and a warrant to purchase 2,000,000 shares of our
common stock to Gemini, and a warrant to purchase 1,000,000 shares to Mr. Fritz,
at an exercise price of $0.50 per share with a term of six months which is 45
days after the effective registration statement. Concurrently, we also entered
into Registration Rights Agreements with each of Gemini and Mr. Fritz (the
“Registration Rights Agreements”) pursuant to which we agreed to file a
registration statement to cover the resale of the shares of common stock and the
shares underlying the warrants issued under the Securities Purchase Agreements
within 30 days of the Registration Rights Agreements and to cause such
registration statement to be declared effective by the SEC within 120 days of
the date of the Registration Rights Agreements.




Effective
as of April 19, 2007, we entered into an Exchange Agreement with Gemini under
which Gemini exchanged its rights and interests under the Securities Purchase
Agreement for a Convertible Note in the principal amount of $1,150,000 and other
consideration. We did not enter into a similar agreement with Mr. Fritz and the
securities purchased by Mr. Fritz in this private placement.  The
Convertible Note was retired by a payment of $1,380,000 on November 1, 2007, but
the warrants remain outstanding.




We have
been unable to file and obtain an effective registration statement with regard
to the shares issued to Mr. Fritz. Through the date of this filing, we have
filed a registration statement with regard to such shares, but it is not yet
effective.  As a result, we incurred liquidated damages, equal to 2%
of such net proceeds described above, assessed on a monthly basis and we are
accrued penalties until the shares could be registered.


3


We
received notification from the Division of Securities of the Ohio Department of
Commerce that the sale of shares to Mr. Fritz in this offering may not be exempt
from Ohio’s securities laws. See “Item 3 Legal Proceedings” below.  On
August 20, 2007, we received a letter from Mr. Fritz’s counsel requiring payment
of the liquidated damages described above or an offer to waive such damages
in connection with a redemption of Mr. Fritz’s shares.




In June
2006, Surge issued 160,000 shares in exchange for CDN$200,000 in convertible
debt related to the Signet subsidiary and charged the Signet investment for US$
178,618.




In March
2006, Surge received $1,800,000 of net proceeds from third party investors for
1,200,000 shares of common stock subscribed. In connection with this private
placement, Surge issued to the investors an aggregate of 1,200,000 warrants that
are subject to piggy-back registration rights. The common shares subscribed were
issued in April 2006.




In
November 2005, Surge completed a private placement which resulted in gross
proceeds of $800,000. In connection with this private placement, we sold 800,000
shares of common stock at a price of $1.00 per share and issued warrants to
purchase up to 1,600,000 shares of common stock. The warrants have a 3 to 5 year
term and an exercise price ranging from equal to $1.00 to $1.45.




In August
and October 2005, Surge issued an aggregate of 1,710,000 shares of common stock
in exchange for $1,710,000 of convertible notes.




In August
2005, Surge issued an aggregate of 200,000 shares of common stock to third party
investors and 100,000 shares of common stock to two directors in exchange for
net proceeds of $300,000. In connection with this private placement, the Company
issued to the investors an aggregate of 150,000 warrants with piggy-back
registration rights.




For more
detailed information on the foregoing transactions see Notes E, F and I to the
Consolidated Financial Statements.




Management
and Board Changes




Effective
on October 11, 2006, Stephen Sharpe resigned from our Board of Directors (the
“Board”) and on the same day Thomas A. Page, Richard Collato, and John Stiska
were appointed to our Board.  On March 26, 2007, Daniel Schreiber
resigned from our Board and on the same day Robert B. Fields was appointed to
our Board. On July 24, 2007, Dr. Kenneth Druck resigned from our
Board.




On
February 6, 2008, David Perez, our then Chief Executive Officer (“CEO”),
resigned from his position as CEO.  Mr. Perez continued to serve as a
member of our Board until February 11, 2008, on which date he resigned as a
member of the Board.  On February 11, 2008, the Board appointed John
Stiska as CEO of Surge.  On February 11, 2008, Richard Collato, Thomas Page
and Robert B. Fields resigned and on the same day, Barry Nussbaum, E. Jamie
Schloss, Jeffrey Bernstein and Charles Sage were appointed to our
Board.  Mark Fritz was appointed to our Board on February 12,
2008.




On
February 15, 2008, William Greene, our then Chief Financial Officer, resigned
from his position as Chief Financial Officer. While the Company searches for his
replacement, E. Jamie Schloss is serving as interim Chief Financial
Officer. In addition, Mr. Greene acts as a consultant to Surge until a
replacement has been retained.  On February 19, 2008, the Board
appointed Mr. Schloss as CEO to replace Mr. Stiska.




Kenneth
D. Polin was elected to our Board on March 18, 2008.




During
the last three years various of our directors and officers have been involved in
transactions with us and have had contractual relationships with
us.  These are described in detail in Note K to the Consolidated
Financial Statements “Related Party Transactions.”


4


Competition




The oil
and gas business is highly competitive. We will compete with private, public and
state-owned companies in all facets of the oil business, including suppliers of
energy and fuel to industrial, commercial and individual customers. Numerous
independent oil and gas companies, oil and gas syndicates and major oil and gas
companies actively seek out and bid for oil and gas prospects and properties as
well as for the services of third-party providers, such as drilling companies,
upon which we rely. Many of these companies not only explore for, produce and
market oil and natural gas, but also carry out refining operations and market
the resultant products on a worldwide basis. A substantial number of our
competitors have longer operating histories and substantially greater financial
and personnel resources than we do.




Competitive
conditions may be substantially affected by various forms of energy legislation
and/or regulation considered from time to time by the government of the United
States and other countries, as well as factors that we cannot control, including
international political conditions, overall levels of supply and demand for oil
and gas, and the markets for synthetic fuels and alternative energy
sources.




Government
And Environmental Regulation




Foreign
and domestic development, production and sale of oil are extensively regulated
in Canada at both the federal and state levels. Legislation affecting the oil
and gas industry is under constant review for amendment or expansion, frequently
increasing the regulatory burden. Also, numerous departments and agencies, in
Canada and at federal and state levels, have issued rules and regulations
binding on the oil and gas industry and its individual members, compliance with
which is often difficult and costly and some of which carry substantial
penalties for failure to comply. Canada and multiple state statutes and
regulations where we intend to conduct operations require permits for drilling
operations, drilling bonds and reports concerning wells. Such jurisdictions also
have statutes and regulations governing conservation matters, including the
unitization or pooling of oil and gas properties and establishment of maximum
rates of production from oil and gas wells.




Our
operations will be subject to extensive and developing federal, state and local
laws and regulations in the US and Canada relating to environmental, health and
safety matters; petroleum; chemical products and materials; and waste
management. Permits, registrations or other authorizations are required for the
operation of certain of our facilities and for our oil and gas exploration and
production activities. These permits, registrations or authorizations are
subject to revocation, modification and renewal. Governmental authorities have
the power to enforce compliance with these regulatory requirements, the
provisions of required permits, registrations or other
authorizations, lease conditions, and violators are subject to civil and
criminal penalties, including fines, injunctions or both. Failure to obtain or
maintain a required permit may also result in the imposition of civil and
criminal penalties. Third parties may have the right to sue to enforce
compliance.




Some risk
of costs and liabilities related to environmental, health and safety matters is
inherent in our operations, as it is with other companies engaged in similar
businesses, and there can be no assurance that material costs or liabilities
will not be incurred. In addition, it is possible that future developments, such
as stricter requirements of environmental or health and safety laws and
regulations affecting our business or more stringent interpretations of, or
enforcement policies with respect to, such laws and regulations, could adversely
affect us. To meet changing permitting and operational standards, we may be
required, over time, to make site or operational modifications at our
facilities, some of which might be significant and could involve substantial
expenditures. There can be no assurance that material costs or liabilities will
not arise from these or additional environmental matters that may be discovered
or otherwise may arise from future requirements of laws in the US and
Canada.




Number
of Total Employees and Number of Full-time Employees




From our
inception through the period ended December 31, 2007, we have relied on the
services of outside consultants for services and have three (3) full -time
employees. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive salaries to future employees. As of
March 31, 2008, we had one (1) full-time employee and we anticipate an
employment base of four (4) full-time employees during the next 12
months.


5


As we
continue to expand, we will incur additional cost for personnel. This projected
increase in personnel is dependent upon our generating revenues and obtaining
sources of financing. There is no guarantee that we will be successful in
raising the funds required or generating revenues sufficient to fund the
projected increase in the number of employees.




None of
our employees are covered by collective bargaining agreements, and we believe
our relations with our employees are favorable.




RISK
FACTORS




An
investment in our common stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in our reports filed with the SEC,
including the consolidated financial statements and notes thereto of our
company, before deciding to invest in our common stock. The risks described
below are not the only ones facing our company. Additional risks not presently
known to us or that we presently consider immaterial may also adversely affect
our company. If any of the following risks occur, our business, financial
condition and results of operations and the value of our common stock could be
materially and adversely affected




RISKS
RELATED TO OUR COMPANY




We
have a history of net operating losses.




We have a
history of net operating losses and we will need to generate substantial revenue
to achieve profitability. In the short term we must realize value from our
existing assets and resolve our Canadian tax issues or we will never generate
earnings.  We may not be able to generate revenue either in the short
term or the longer term.  Even if we do achieve profitability, we
cannot assure you that we will be able to sustain or increase profitability on a
quarterly or annual basis in the future. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether we will be able to continue expansion of our
operations and sell or finance existing assets. We may not achieve our business
objectives and the failure to achieve such goals would have an adverse impact on
us.




In the
short term we must realize value from our existing assets and resolve our
Canadian tax issues or we will never generate earnings.  Our future
performance is dependent upon our ability to identify, acquire and implement the
strategy to develop oil properties for production or resale to larger oil field
companies which may delay shareholder return on investment for
years.




We
will need additional financing to carry out our business plans.




Our
business model contemplates expansion of our business by identifying and
acquiring additional oil and gas properties.  We intend to rely on
internal and external sources of financing to meet the capital requirements
associated with the exploration and expansion of our oil and gas
operations.  We plan to obtain the future funding that we will need
through debt and equity markets, but we cannot assure that we will be able to
obtain additional funding when it is required or that it will be available to us
on commercially acceptable terms.




We also
intend to make offers to acquire oil properties in the ordinary course of our
business. If these offers are accepted, our capital needs will increase
substantially. If we fail to obtain the funding that we need when it is
required, we may have to forego or delay potentially valuable opportunities to
acquire new oil and gas properties or default on existing funding commitments to
third parties and forfeit or dilute our rights in existing oil property
interests.


6


We
have an estimated $5,280,789 Canadian tax liability.




In
January 2008 the Board determined that the reserve for Canadian income taxes
resulting from the Peace transaction was incorrect and should be
restated.  The amounts reported in our financial statements for its
quarters ended June 30, 2007 and September 30, 2007 failed to take into account
differences between the assigned values of the purchase price to the assets, the
corresponding tax attributes available to Peace Oil and did not properly reflect
tax consequences of the sale of certain assets by Peace Oil.  The
additional amount of tax payable increased by approximately CDN$4,130,467 above
the amount accrued in the previously reported financial statements and may be
subject to revision. We concluded the Canadian tax liability of Peace Oil has a
material impact on our financial position, results of operations and liquidity
and filed its restated  quarters ended June 30, 2007 and September 30,
2007.  On March 25, 2008 we filed our restated financial reports on
forms 10-QSB for the periods ended June 30, 2007 and September 30, 2007 to
reflect the revised tax liability during those periods . There is no assurance
that Peace Oil or Surge will be able to mitigate the tax liability. The total
estimated Canadian tax balance owed is $5,280,789 as of December 31,
2007.  The taxes are due on August 27, 2008 or penalties will be
incurred.  If we are able to mitigate the tax liability such action
must be taken no later than June 27, 2008.  For more detailed
information see Note G to the Consolidated Financial Statements “Income
Taxes”.




We
will need to raise additional funds to finance our operations in the
future.




We have a
history of net losses and expect that our operating expenses will continue to
deplete our cash reserves as we have no revenues. In addition, we may experience
a material decrease in liquidity due to unforeseen capital requirements or other
events and uncertainties. As a result, we may need to raise additional funds,
and such funds may not be available on favorable terms, if at all. If we cannot
raise funds on acceptable terms, we may not be able to execute on our business
plan, take advantage of future opportunities or respond to competitive pressures
or unanticipated requirements. This may seriously harm our business, financial
condition and results of operations.




We
have not acquired and may not be able to acquire profitable oil and gas
interests.




We can
provide no assurance that oil and gas will be discovered in commercial
quantities in any of the properties we currently hold interests in or properties
in which we may acquire interests in the future. Our success will depend upon
our ability to acquire working and revenue interests in properties upon which
oil reserves are ultimately discovered in commercial quantities for production
capability or to attract the interest of larger oil field companies. We do not
have an established history of locating and developing properties that have oil
and gas reserves.




We
are a development stage company implementing a new business plan.




In
January 2005, as a result of the disposal of our tobacco wholesale business in
December 2004, and the restructuring of our management and ownership, we began
implementing plans to establish an oil and gas development business. As a
result, we are a development stage enterprise, as defined by Statement of
Financial Accounting Standards No. 7 (“SFAS7”). We are a development stage
company with only a limited operating history upon which to base an evaluation
of our current business and future prospects, and we have just begun to
implement our business plan. Since our inception and the inception of our
development stage on January 1, 2005, we have suffered recurring losses from
operations and have been dependent on new investment to sustain our operations.
During the years ended December 31, 2007 and 2006, we reported net losses of
$11,343,620 and $15,926,093, respectively, and we cannot give any assurances
that we can achieve profits from operations. For the period from inception of
development stage through December 31, 2007, the Company has accumulated losses
of $36,000,922.


7


We
do not control any of our operations.




We do not
operate any of our properties or the entities in which we hold interests and we
therefore have no influence over the testing, drilling and production operations
of our properties. Our lack of control could result in the
following:




·
            the
      operator might initiate exploration or development on a faster or slower
      pace than we prefer;




·
            the
      operator might propose to drill more wells or build more facilities on a
      project than we have funds for or that we deem appropriate, which could
      mean that we are unable to participate in the project or share in the
      revenues generated by the project even though we paid our share of
      exploration costs;




·
            we
      could have our working interest ownership in the related lands and
      petroleum reserves reduced as a result of our failure to participate in
      development expenditures;




·
            the
      operator might not earn sufficient working interest based on required
      drilling activity which could impair the carrying value of the
      asset;




·
            the
      operator might obtain additional financing which may further dilute our
      interest in the property as well as trigger additional asset impairment;
      and




·
            if
      an operator refuses to initiate a project, we might be unable to pursue
      the project.




Any of
these events could materially reduce the value of our properties.




Information
in this report regarding our future exploitation and development projects
reflects our current intent and is subject to change.




We do not
currently have any exploitation and development plans. Whether we ultimately
undertake an exploitation or development project will depend on the following
factors:




·
            availability
      and cost of capital both by the company and our planned majority
      partners;




·
            receipt
      of additional seismic data or the reprocessing of existing
      data;




·
            current
      and projected oil or natural gas
prices;




·
            reserve
      results could be less than our anticipated recovery rate
      range;




·
            the
      costs and availability of drilling rigs and other equipment, supplies and
      personnel necessary to conduct these
operations;




·
            success
      or failure of activities in similar
areas;




·
            changes
      in the estimates of the costs to complete the
  projects;




·
            changes
      in the estimates of potential production
levels;




·
            our
      ability to attract other industry partners to acquire a portion of the
      working interest to reduce costs and exposure to
  risks;




·
            decisions
      of our joint working interest owners and partners;
  and




·
            market
      prices for our oil field assets could change and could vary when the
      development efforts and subsequent oil field values
  accrue.




8


We will
continue to gather data about our projects and it is possible that additional
information will cause us to alter our schedule or determine that a project
should not be pursued at all. You should understand that our plans regarding our
projects might change.




We
rely heavily upon reserve, geological and engineering data when determining
whether or not to invest in a particular oil and gas property.




The
reserve, geological and engineering data information that we use in evaluating
oil and gas prospects is based on estimates involving a great deal of
uncertainty. Different engineers may make different estimates of reserves and
cash flows based on the same available data. Reserve estimates depend in large
part upon the reliability of available geologic and engineering data, which is
inherently imprecise. Geologic and engineering data are used to determine the
probability that a reservoir of oil and gas exists at a particular location, and
whether oil and/or gas and natural gas are recoverable from a reservoir.
Recoverability is ultimately subject to the accuracy of data including, but not
limited to, geological characteristics of the reservoir, structure, reservoir
fluid properties, the size and boundaries of the drainage area, reservoir
pressure, and the anticipated rate of pressure depletion. The evaluation of
these and other factors is based upon available seismic data, computer modeling,
well tests and information obtained from production of oil and gas from adjacent
or similar properties, but the probability of the existence and recoverability
of reserves is less than 100% and actual recoveries of proved reserves can
differ from estimates.




Reserve
estimates also require numerous assumptions relating to operating conditions and
economic factors, including the price at which recovered oil and gas can be
sold, the costs of recovery, assumptions concerning future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
prevailing environmental conditions associated with drilling and production
sites, availability of enhanced recovery techniques, ability to transport oil
and gas to markets and governmental and other regulatory factors, such as taxes
and environmental laws. A negative change in any one or more of these factors
could result in quantities of oil and gas previously estimated as proved
reserves becoming uneconomic. For example, a decline in the market price of oil
or gas to an amount that is less than the cost of recovery of such oil or gas in
a particular location could make production commercially impracticable. The risk
that a decline in price could have that effect is magnified in the case of
reserves requiring sophisticated or expensive production enhancement technology
and equipment, such as some types of heavy oil. Each of these factors, by having
an impact on the cost of recovery and the rate of production, will also affect
the present value of future net cash flows from estimated reserves.




Our
ability to produce sufficient quantities of oil and gas from our properties may
be adversely affected by a number of factors outside of our
control.




The
business of exploring for and producing gas involves a substantial risk of
investment loss. Drilling wells involves the risk that the wells may be
unproductive or that, although productive, that the wells may not produce oil in
economic quantities. Other hazards, such as unusual or unexpected geological
formations, pressures, fires, blowouts, loss of circulation of drilling fluids
or other conditions may substantially delay or prevent completion of any well.
Adverse weather conditions can also hinder drilling operations. A productive
well may become uneconomic due to pressure depletion, water encroachment,
mechanical difficulties, etc, which impair or prevent the production of oil and
gas from the well.




There can
be no assurance that oil and gas will be produced from the properties in which
we have interests. In addition, the marketability of any oil and gas that we
acquire or discover may be influenced by numerous factors beyond our control.
These factors include the proximity and capacity of oil and gas pipelines and
processing equipment, market fluctuations of prices, taxes, royalties, land
tenure, allowable production and environmental protection. We cannot predict how
these factors may affect our business.




In
addition, the success of our business is dependent upon the efforts of various
third parties that we do not control. We rely upon various companies to assist
us in identifying desirable oil prospects to acquire and to provide us with
technical assistance and services. We also rely upon the services of geologists,
geophysicists, chemists, engineers and other scientists to explore and analyze
oil prospects to determine a method in which the oil prospects may be developed
in a cost-effective manner. In addition, we rely upon the owners and operators
of oil drilling equipment to drill and develop our prospects to production or to
attract the interest of larger oil field companies. Although we have developed
relationships with a number of third-party service providers, we cannot assure
that we will be able to continue to rely on such persons. If any of these
relationships with third-party service providers are terminated or are
unavailable on commercially acceptable terms, we may not be able to execute our
business plan.


9


Aboriginal
peoples may make claims regarding the lands on which our operations are
conducted.




Aboriginal
peoples have claimed aboriginal title and rights to a substantial portion of
western Canada. If any aboriginal peoples file a claim asserting aboriginal
title or rights to the lands on which any of our properties are located, and if
any such claim is successful, it could have a material adverse effect on our
operations.




The
Energy Utilities Board (EUB) that governs our operations in Alberta, Canada has
implemented a new directive (Directive 056) that the Alberta Government issued
in its First Nations Consultation Policy on Land Management and Resource
Development on May 16, 2005. The EUB expects that all industry applicants must
adhere to this policy and the consultation guidelines. These requirements and
expectations apply to the licensing of all new energy developments and all
modifications to existing energy developments, as covered in Directive 056. In
the policy, the Alberta Government has developed consultation guidelines to
address specific questions about how consultation for land management and
resource development should occur in relation to specific activities. Prior to
filing an application, the applicant must address all questions, objections, and
concerns regarding the proposed development and attempt to resolve them. This
includes concerns and objections raised by members of the public, industry,
government representatives, First Nations, Métis, and other interested parties.
If there are no outstanding concerns/objections, a confirmation of non-objection
has been obtained if required. This process can cause significant delays in
obtaining a drilling permit for exploration and/or a production well license for
both oil and gas.




If
we are unable to access our properties or conduct our operations due to surface
conditions, our business will be adversely affected.




Our
exploitation and development of oil and gas reserves depends upon access to the
areas where our operations are to be conducted. We conduct a portion of our
operations in regions where we are only able to do so on a seasonal basis.
Unless the surface is sufficiently frozen, we are unable to access our
properties, drill or otherwise conduct our operations as planned. In addition,
if the surface thaws earlier than expected, we must cease our operations for the
season earlier than planned. Our operations are affected by road bans imposed
from time to time during the break-up and thaw period in the spring. Road bans
are also imposed due to snow, mud and rock slides and periods of high water,
which can restrict access to our well sites and production facility sites. Our
inability to access our properties or to conduct our operations as planned will
result in a shutdown or slow down of our operations, which will adversely affect
our business.




Essential
equipment might not be available.




Oil and
gas exploitation and development activities depend upon the availability of
drilling and related equipment in the particular areas where those activities
will be conducted. Demand for that equipment or access restrictions may affect
the availability of that equipment to us and delay our exploitation and
development activities.




Pipeline
capacity may be inadequate.




There may
be periods of time when pipeline capacity is inadequate to meet our gas
transportation needs. It is often the case that as new development comes on
line, pipelines are close to or at capacity. During periods when pipeline
capacity is inadequate, we may be forced to reduce production or incur
additional expense as existing production is compressed to fit into existing
pipelines.




Our
reliance on third parties for gathering and distribution could curtail future
exploration and production activities.




The
marketability of our production will depend on the proximity of our reserves to
and the capacity of, third party facilities and services, including oil and
natural gas gathering systems, pipelines, trucking or terminal facilities, and
processing facilities. The unavailability or insufficient capacity of these
facilities and services could force us to shut-in producing wells, delay the
commencement of production, or discontinue development plans for some of our
properties, which would adversely affect our financial condition and
performance.


10


We
may not have good and marketable title to our properties.




It is
customary in the oil and gas industry that upon acquiring an interest in a
non-producing property, only a preliminary title investigation be done at that
time and that a drilling title opinion be done prior to the initiation of
drilling, neither of which can substitute for a complete title investigation. We
have followed this custom and intend to continue to follow this custom in the
future. Furthermore, title insurance is not available for mineral leases, and we
will not obtain title insurance or other guaranty or warranty of good title. If
the title to our prospects should prove to be defective, we could lose the costs
that we have incurred in their acquisition, or incur substantial costs for
curative title work.




Complying
with environmental and other government regulations could be costly and could
negatively impact our production.




Our
business is governed by numerous laws and regulations at various levels of
government. These laws and regulations govern the operation and maintenance of
our facilities, the discharge of materials into the environment and other
environmental protection issues. The laws and regulations may, among other
potential consequences, require that we acquire permits before commencing
drilling, restrict the substances that can be released into the environment with
drilling and production activities, limit or prohibit drilling activities on
protected areas such as wetlands or wilderness areas, require that reclamation
measures be taken to prevent pollution from former operations, require remedial
measures to mitigate pollution from former operations, such as plugging
abandoned wells and remediating contaminated soil and groundwater, and require
remedial measures to be taken with respect to property designated as a
contaminated site.




Under
these laws and regulations, we could be liable for personal injury, clean-up
costs and other environmental and property damages, as well as administrative,
civil and criminal penalties. We are currently evaluating insurance coverage for
sudden and accidental environmental damages as well as environmental damage that
occurs over time. However, we do not believe that insurance coverage for the
full potential liability of environmental damages is available at a reasonable
cost. Accordingly, we could be liable, or could be required to cease production
on properties, if environmental damage occurs.




The costs
of complying with environmental laws and regulations in the future may harm our
business. Furthermore, future changes in environmental laws and regulations
could occur that result in stricter standards and enforcement, larger fines and
liability, and increased capital expenditures and operating costs, any of which
could have a material adverse effect on our financial condition or results of
operations.




We could be deemed to be an investment company, which
would subject us to additional compliance requirements and restrict our
activities.





As a
result of the sale of Peace Oil’s working interest in the Red Earth Leases to
North Peace, we may be deemed to be an investment company under the Investment
Company Act of 1940. We are utilizing the proceeds from such sale to continue
our current and future operations. However, if we are deemed to be an investment
company, we may be required to institute burdensome compliance requirements and
our activities may be restricted, including restrictions on the nature of our
investment and restrictions on the issuance of securities, which may make it
difficult for us to effect a business combination. In addition, we may have
imposed upon us burdensome requirements, including, but not limited to, (i)
registration as an investment company, (ii) adoption of a specific form of
corporate structure, and (iii) reporting, record keeping, voting, proxy and
disclosure requirements and other rules and regulations. Compliance with such
additional regulatory burdens would require additional expense we have not
allotted for such purposes. Additionally, if we are deemed to be an investment
company, we would be prohibited from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. Further, if we are deemed to be an investment
company, we may be in breach of certain agreements we have previously
entered into with other third parties. Any such breach may adversely affect our
business.


11


Our
compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
controls are time consuming, difficult and costly for us.




It may be
time consuming, difficult and costly for us to develop and implement provisions
of the Sarbanes-Oxley Act applicable to us, including the internal controls and
reporting procedures required to be implemented for the each fiscal year ending
on or after December 15, 2007. We may need to hire additional financial
reporting, internal controls and other finance staff in order to develop and
implement appropriate internal controls and reporting procedures. If we are
unable to comply with the internal controls and other requirements of the
Sarbanes-Oxley Act, we may not be able to obtain the independent accountant
certifications that the Sarbanes-Oxley Act requires publicly-traded companies to
obtain.




The
loss of key employees would materially adversely affect our ability to operate
our business and implement our business plan.




Our
business operations are presently managed by one key employee, E. Jamie Schloss,
our Chief Executive Officer, and our interim Chief Financial Officer. The loss
of the services of such employees could seriously impair our business
operations. We do not have key man life insurance on any of our
executives.




We
are and may continue to be involved in litigation and other
disputes.




Our
business and operations may subject us to claims, litigation and other
proceedings brought by private parties and governmental authorities. We are
currently involved in a contract dispute with Dynamo Energy Corporation, a
Canadian corporation (“Dynamo”), in connection with an alleged breach of
contract.  See Item 3 “Legal Proceedings” for a discussion of the
Dynamo dispute.  Litigation can involve complex factual and legal
questions and its outcome is uncertain. Any claim that is successfully asserted
against us could result in significant damage claims and other losses. Even if
we were to prevail, any litigation could be costly and time-consuming and would
divert the attention of our management and key personnel from our business
operations, which adversely affect our financial condition, results of
operations or cash flows.




RISKS
RELATED TO OUR INDUSTRY




The
successful implementation of our business plan is subject to risks inherent in
the oil and gas business.




Our oil
and gas operations are subject to the economic risks typically associated with
exploration, development production activities and locating suitable purchasers
of our properties, including the necessity of significant expenditures to locate
and acquire properties and to drill exploratory wells. In addition, the cost and
timing of drilling, completing and operating wells is often uncertain In
conducting exploration and development activities, the presence of unanticipated
pressure or irregularities in formations, miscalculations or accidents may cause
our exploration, development and production activities to be unsuccessful. This
could result in a total loss of our investment in a particular property. If
exploration efforts are unsuccessful in establishing proved reserves and
exploration activities cease, the amounts accumulated as unproved costs will be
charged against earnings as impairments.




The
oil and gas industry is highly competitive.




The oil
and gas industry is highly competitive. We compete with oil and gas companies
and other individual producers and operators, many of which have longer
operating histories and substantially greater financial and other resources than
we do, as well as companies in other industries supplying energy, fuel and other
needs to consumers. Many of these companies not only explore for and produce
crude oil and gas, but also carry on refining operations and market petroleum
and other products on a worldwide basis. In addition, we compete with other oil
development firms in marketing their properties to other larger oil field
operators. Our larger competitors, by reason of their size and relative
financial strength, can more easily access capital markets than we can and may
enjoy a competitive advantage in the recruitment of qualified personnel. They
may be able to absorb the burden of any changes in laws and regulation in the
jurisdictions in which we do business and handle longer periods of reduced
prices of gas and oil more easily than we can. Our competitors may be able to
pay more for productive oil and gas properties and may be able to define,
evaluate, bid for and purchase a greater number of properties and prospects than
we can. Our ability to acquire additional properties in the future will depend
upon our ability to conduct efficient operations, evaluate and select suitable
properties, implement advanced technologies and consummate transactions in a
highly competitive environment.


12


Oil
and gas operations involve various risks.




The oil
and gas business involves operating hazards such as well blowouts, craterings,
explosions, uncontrollable flows of crude oil, natural gas or well fluids,
fires, formations with abnormal pressures, pipeline ruptures or spills,
pollution, releases of toxic gas and other environmental hazards and risks.
Personal injuries, damage to property and equipment, reservoir damage, or loss
of reserves may occur if such a catastrophe occurs, any one of which could cause
us to experience substantial losses. In addition, we may be liable for
environmental damage caused by previous owners of properties purchased or leased
by us.




Market
fluctuations in the prices of oil and gas could adversely affect our
business.




Prices
for oil and gas tend to fluctuate significantly in response to factors beyond
our control. These factors include, but are not limited to, the continued threat
of war in the Middle East and actions of the Organization of Petroleum Exporting
Countries and its maintenance of production constraints, the U.S. economic
environment, weather conditions, the availability of alternate fuel sources,
transportation interruption, the impact of drilling levels on crude oil and gas
supply, and the environmental and access issues that could limit future drilling
activities for the industry.




Changes
in commodity prices may significantly affect our capital resources, liquidity
and expected operating results. Price changes directly affect revenues and can
indirectly impact expected production by changing the amount of funds available
to reinvest in exploration and development activities. Reductions in oil and gas
prices not only reduce revenues and profits, but could also reduce the
quantities of reserves that are commercially recoverable. Significant declines
in prices could result in non-cash charges to earnings due to
impairment.




Changes
in commodity prices may also significantly affect our ability to estimate the
value of producing properties for acquisition and divestiture and often cause
disruption in the market for oil and gas producing properties, as buyers and
sellers have difficulty agreeing on the value of the properties. Price
volatility also makes it difficult to budget for and project the return on
acquisitions and development and exploitation of projects. We expect that
commodity prices will continue to fluctuate significantly in the
future.




RISKS
RELATED TO OUR STOCK




Insiders
have substantial control over us, and they could delay or prevent a change in
our corporate control even if our other stockholders wanted it to
occur.




Our
executive officers, directors, and principal stockholders who hold 5% or more of
the outstanding common stock and their affiliates beneficially owned as of March
3, 2008, in the aggregate including warrants, stock options and voting rights
exercisable with 60 days, approximately 44% of our outstanding common
stock.  These stockholders will be able to exercise significant
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. This could
delay or prevent an outside party from acquiring or merging with us even if our
other stockholders wanted it to occur.




Future
sales of our common stock may cause our stock price to decline.




Our stock
price may decline by future sales of our shares or the perception that such
sales may occur. If we issue additional shares of common stock in private
financings under an exemption from the registration laws, then those shares will
constitute “restricted shares” as defined in Rule 144 under the Securities Act.
The restricted shares may only be sold if they are registered under the
Securities Act, or sold under Rule 144, or another exemption from registration
under the Securities Act.




Some of
our outstanding restricted shares of common stock are either eligible for sale
pursuant to Rule 144 or are required to be registered under the Securities Act
for resale by the holders. We are unable to estimate the amount, timing, or
nature of future sales of outstanding common stock. Sales of substantial amounts
of our common stock in the public market may cause the stock’s market price to
decline.




13




Our
stock price can be extremely volatile.




Our
common stock is traded dually on the OTC Bulletin Board and the Pink Sheets.
There can be no assurance that an active public market will continue for the
common stock, or that the market price for the common stock will not decline
below its current price. Such price may be influenced by many factors,
including, but not limited to, investor perception of us and our industry and
general economic and market conditions. The trading price of the common stock
could be subject to wide fluctuations in response to announcements of our
business developments or our competitors, quarterly variations in operating
results, and other events or factors. In addition, stock markets have
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market prices of companies, at times for reasons
unrelated to their operating performance. Such broad market fluctuations may
adversely affect the price of our common stock.




We
do not expect to pay dividends.




We have
not paid dividends since inception on our common stock, and we do not
contemplate paying dividends in the foreseeable future on our common stock in
order to use all of our earnings, if any, to finance expansion of our business
plans.




If
we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board, we could be investigated by the SEC or we could
incur liability to our shareholders.




Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Failure to remain current in our reporting obligations might also subject us to
SEC investigation or private rights of action by our shareholders.




Our
common stock is subject to the “penny stock” rules off the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our stock.




The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:




·
            that
      a broker or dealer approve a person’s account for transactions in penny
      stocks; and




·
            the
      broker or dealer receive from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.




In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:




·
            obtain
      financial information and investment experience objectives of the person;
      and




·
            make
      a reasonable determination that the transactions in penny stocks are
      suitable for that person and the person has sufficient knowledge and
      experience in financial matters to be capable of evaluating the risks of
      transactions in penny stocks.




The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:




·
            sets
      forth the basis on which the broker or dealer made the suitability
      determination; and




·
            that
      the broker or dealer received a signed, written agreement from the
      investor prior to the transaction.




14


Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.




Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.




ITEM
      2.
            DESCRIPTION
      OF PROPERTY




Our
principal executive offices are located at 990 Highland Drive, Suite 110V,
Solana Beach, California 92075. In March, 2008 Surge executed a six month lease
at a monthly rental of $825 per month for this office space, which represents
approximately 366 square feet of rentable space.  Our Cold Flow and
Peace Oil subsidiaries entered into a lease on July 18, 2006 which terminates on
July 31, 2008 with a monthly base rent of approximately $364 per
month. Our facilities are in good condition for their intended use as offices
and are sufficient to meet our present needs.




We
commenced oil and gas exploration activities in February 2005. However, (1) we
did not engage in any production activities during the fiscal years ended
December 31, 2007 and 2006, nor did we have any proved reserves at the end of
such periods, and thus, were not required to provide any of the production data
required by Statement of Financial Accounting Standards No. 69 (“SFAS 69”), and
(2) we did not engage in any drilling activities during the fiscal years ended
December 31, 2007 and 2006 applicable to SFAS 69. We do not have any obligations
under existing contracts or agreements calling for the provision of fixed and
determinable quantities of oil and gas over the next three years, and have
therefore not filed any information or reports with any federal authority or
agency, containing estimates of total, proved developed or undeveloped net oil
or gas reserves.




Undeveloped
acreage is considered to be those lease acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil or natural gas, regardless of whether or not that acreage
contains proved reserves, but does not include undrilled acreage held by
production under the terms of a lease. As is customary in the oil and gas
industry, we can generally retain our interest in undeveloped acreage by
drilling activity that establishes commercial production sufficient to maintain
the leases or by paying delay rentals during the remaining primary term of such
a lease.




ITEM
      3.
            LEGAL
      PROCEEDINGS




Our
business and operations may subject us to claims, litigation and other
proceedings brought by private parties and governmental authorities. We are
currently involved in a contract dispute with Dynamo Energy Corporation, a
Canadian corporation (“Dynamo”), in connection with an alleged breach of
contract purportedly entered into on October 12, 2004. Our Board of Directors
previously determined that the proposed agreement with Dynamo had not been
authorized by the Board and made an offer of settlement, which was not accepted.
Dynamo notified us that it believes that agreement is valid, and in 2006 Dynamo
filed a civil complaint in the Superior Court of San Diego County against us,
Frederick Berndt, our former V.P. and Director, E. Jamie Schloss, our current
Chief Financial Officer, Chief Executive Officer and Director, and Signet
Energy, Inc. (“Signet”). On November 7, 2007, the Court dismissed the case on
the grounds that the Court in San Diego, California was not a convenient forum
in which to try the case .  On January 8, 2008, the Court entered
Dynamo’s dismissal request without prejudice. On February 1, 2008, Dynamo filed
a Statement of Claim in Canada in the Court of Queen’s Bench of Alberta, the
Judicial District of Calgary against us, David Perez, our former Chief Executive
Officer and Director, Signet, C.W. Leigh Cassidy, the former Chief Executive
Officer of Signet, and four Canadian entities. The Company and Mr. Perez were
purportedly served on March 22, 2008, and currently have until April 30, 2008 to
respond to the Statement of Claim.  Although it is impossible to
predict with certainty the outcome of this proceeding, or the outcome of any
litigation, we are confident in the merits of our defense and do not anticipate
an unfavorable outcome.




In
addition, the Division of Securities of the Ohio Department of Commerce
has notified us that the securities we issued to a purchaser in the State
of Ohio in one or more private placements may have been issued without an
applicable exemption from Ohio’s securities laws. As a result, the purchaser of
those securities may have rescission rights to unwind the corresponding sales,
which represents an approximate $2,000,000 contingent liability of the
Company.


15


Mr. E.
Jamie Schloss, our Chief Executive Officer, and Mr. Jeffrey L. Bernstein, each
members of the 13D/A Group and directors of the Company, were co-plaintiffs in
the case Jeffrey L. Bernstein and E. Jamie Schloss v. Surge Global Energy, Inc.,
C.A. No. 3411-VCS, in the Court of Chancery of the State of Delaware, in
which Mr. Schloss and Mr. Bernstein were parties adverse to the
Company.  This case has been settled.




From time
to time, we receive claims of and become subject to commercial litigation
related to the conduct of our business. Such litigation could be costly and time
consuming and could divert our management and key personnel from our business
operations. The uncertainty of litigation increases these risks. In connection
with such litigation, we may be subject to significant damages or equitable
remedies relating to the operation of our business. Any such litigation may
materially harm our business, results of operations and financial
condition.




ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




There was
no matter submitted during the fourth quarter of the fiscal year covered by this
report to a vote of security holders, through the solicitation of proxies or
otherwise.




PART
II




ITEM
      5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER
  MATTERS




Market
for Common Stock




Our
common stock is quoted dually on the OTC Bulletin Board and the Pink Sheets
under the trading symbol “SRGG.” The following table sets forth the high and low
bid prices for our common stock for the periods indicated. Such quotations are
taken from information provided by “Yahoo! Finance” and reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions.


Quarter
      Ended
              High
              LowDecember
      31, 2007
              $0.19
              $0.08September
      30, 2007
              $0.41
              $0.13June
      30, 2007
              $0.56
              $0.28March
      31, 2007
              $0.71
              $0.36December
      31, 2006
              $0.87
              $0.34September
      30, 2006
              $2.15
              $0.41June
      30, 2006
              $4.18
              $1.60March
      31, 2006
              $4.15
              $1.30







American
Stock Transfer (38 Maiden Lane, New York, NY 10038) is the registrar and
transfer agent for our common shares.




As of
April 13, 2008, we had 35,470,337 shares of common stock outstanding and
approximately 1,700 stockholders of record before the conversion of Convertible
Preferred shares.




Dividend
Policy




We have
never declared or paid dividends on our common stock, and we do not anticipate
that we will do so in the foreseeable future. We intend to retain future
earnings, if any, for use in our operations and the expansion of our
business.


16


ITEM
      6.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




The
following discussion of our financial condition, changes in financial condition
and results of operations for the fiscal years ended December 31, 2007 and
December 31, 2006, should be read in conjunction with the audited annual
financial statements and the notes thereto. In January 2005, as a result of the
Company disposing of its tobacco wholesale business in December 2004, and
restructuring its management and ownership, the Company began implementing plans
to establish an oil and gas development business. As a result, the Company has
not generated any revenues and has incurred significant operating
expenses.




Our
consolidated financial statements are stated in United States Dollars and are
prepared in accordance with United States Generally Accepted Accounting
Principles, although we have and have had interests in Canadian
companies.




Overview




For the
years ended December 31, 2007 and 2006, we suffered comprehensive losses of
$11.344 million and $15.926 million from operations.  In both 2007 and
2006, we engaged in a number of strategic and capital transactions in an attempt
to expand our business.  These are described in detail in Notes B, C,
E and F to the Consolidated Financial Statements and are briefly summarized
above in Item 1 Business.  Debt and equity placements helped provide
needed cash flow to us during both of these years, although there can be no
assurance that we will be able to raise additional working capital or complete
other financings in the future.




In early
2008, we engaged new management and new board members were
elected.  In 2008, our financial focus will be on reducing operating
expenses, attempting to mitigate our Canadian tax liability, and realizing value
from our remaining assets in order to position Surge to take advantage of
opportunities to expand its business and stabilize operations.




Results
of Operations




The
Company had no revenues in the twelve months ended December 31, 2007 or
2006.




Total
operating expenses as well as loss from operations for the twelve months ended
December 31, 2007 compared to 2006 decreased by $7.708 million to $6.744 million
from $14.452 million in the prior period. Included within the $7.708 million
decrease is $3.430 million of employee compensation costs, ($461,000) in
selling, general and administrative (SG&A) expenses, and $364,000 in
decreased depreciation and amortization expense and $4.375 million of impairment
in investment. The decrease in non-cash compensation cost of $3.430 million in
2007 was the result of forfeitures from resigned directors and lower volatility
assumptions for vested stock options during 2007. Included in the ($461,000)
SG&A increase was $834,000 in higher legal and audit related to financing
and registration activities offset by $373,000 in non-recurring Signet expenses
from 2006.  Depreciation and amortization decreased $364,000 due to
non-recurring Signet expense in 2007. The $4.375 million impairment decrease in
2007 represents the difference between the separate 2006 Signet impairment of
$6.296 million  due to lack of cold flow production potential and
unearned working interests compared to the 2007 impairment of $1.921 million
resulting from the North Peace investment share price decline.




In July
2006, Signet increased its outstanding shares following the completion of a
CDN$18,990,000 financing. As of July 6, 2006, Signet’s management and various
other investors owned 52.85% of Signet’s common stock, reducing our outstanding
voting security interest to less than 50%. Based upon this reduction in
ownership, we determined that we no longer had the legal power to control the
operating policies and procedures of Signet and deconsolidated Signet from our
consolidated financial statements during the fiscal quarter ending
September 30, 2006. Due to the change in influence on Signet’s operations,
we reflected our Signet operations as an equity investment using the 27.30%
equity interest effective July 6, 2006.  As a result, equity in losses
from affiliates increased to $1.057 million for the year ended December 31, 2007
from $1.043 million in the prior period.




Warrants
issued in connection with the Peace Oil acquisition resulted in a non-cash
expense of $368,000 in 2007 with no comparable transaction in
2006.


17


Net
financing expenses for the years ended December 31, 2007 and 2006 amounted to
($1.425) million and ($1.048) million, respectively. The increase
in financing expense was largely due to the 2007 beneficial conversion
feature related to the Gemini notes payable and warrant expense.




Gain on
sale of Peace Oil of $3.098 million and related income tax expense of $4.847
million represent non-recurring activity in 2007 with no corresponding
transactions or tax in 2006.




Loss
applicable to minority interest had no activity in 2007 compared to $1.119
million in 2006 related to Signet.




Loss
available to common stockholders decreased by $4.582 million from a loss of
$15.926 million in 2006 to $11.344 million in 2007 as a result of all the
factors described above.




Liquidity
and Capital Resources




As of
December 31, 2007, we had a deficit in working capital of $1.056 million. For
the year ended December 31, 2007, we had a net cash flow deficit from operating
activities of $3.292 million, consisting primarily of year to date losses of
$11.344 million from operations, adjusted by other non-cash charges of $1.749
million in net loss from the Peace Oil transaction, net of tax, $1.921 million
in impairment related to the North Peace investment, $1.057 million in share of
affiliate loss from Signet, $1.349 million in net employee compensation expense
arising from stock options issued to employees and directors, $368,000 in
warrant expense in connection with the Peace Oil transaction, $230,000 in
accrued interest related to the Gemini note payable, $1.077 million in
beneficial conversion feature related to the Gemini note payable and warrants,
$9,000 in depreciation and amortization, and $293,000 in net increases and
decreases in assets and liabilities primarily due to $465,000 increase in
accrued liabilities.




For the
year ended December 31, 2007, cash flow used in investing activities from
operations was $7.586 million due to $13,000 in fixed asset additions,
$14.071 million in the disposition on Peace Oil, ($5.091) million in investment
in North Peace and ($1.380) million from the Gemini transaction
repayment.




For the
year ended December 31, 2007, cash flow from financing activities was $342,000.
During the year ended December 31, 2007, the Company received $92,000 in
proceeds from option exercises and $250,000 in cash proceeds from Gemini related
to the April 18, 2007 exchange transaction.




By
adjusting its operations and development to the level of capitalization,
management believes it has sufficient capital resources to meet projected cash
flow deficits. However, if during that period or hereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations liquidity and
financial condition.




Product
Research and Development




We do not
anticipate performing research and development for any products during the next
twelve months.




Acquisition
or Disposition of Plant and Equipment




On March
18, 2008, we entered into a Purchase and Sale Agreement, with Oromin, Irie Isle
Limited; Cynthia Holdings Ltd. (“Cynthia”); and Chet Idziszek, pursuant to which
the Company sold its 17.52% interest in Cynthia.  Cynthia owns a
certain parcel of land in the eastern half of the Cuyana Bason in the Province
of Mendoza, Argentina.  We received $600,000 in cash and the return of
1,000,000 shares of the Company’s stock previously issued for the Company’s
purchase of its interest in Cynthia.


18


Number
of Employees




From our
inception through the period ended December 31, 2007, we have relied on the
services of outside consultants for services and have only one (1) full-time
employee. In order for us to attract and retain quality personnel, we anticipate
we will have to offer competitive salaries to future employees. As of March 31,
2008, we have one (1) full-time employee and we anticipate an employment base of
four (4) full-time employees during the next 12 months.




As we
continue to expand, we will incur additional cost for personnel This projected
increase in personnel is dependent upon our generating revenues and obtaining
sources of financing. There is no guarantee that we will be successful in
raising the funds required or generating revenues sufficient to fund the
projected increase in the number of employees.




None of
our employees are covered by collective bargaining agreements, and we believe
our relations with our employees are favorable.




Inflation




Management
believes that inflation has not had a material effect on our
operations.




Off
Balance Sheet Arrangements




We do not
maintain off-balance sheet arrangements nor do we participate in non-exchange
traded contracts requiring fair value accounting treatment.




Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operation are
based upon consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The following summarizes several of our critical accounting policies.
See a complete list of significant accounting policies in Note A to the
Consolidated Financial Statements.




Oil and Gas Properties




The
Company follows the full cost accounting method to account for the costs
incurred in the acquisition, exploration, exploitation, development and
production of oil and gas reserves. All costs, including internal costs,
directly related to acquisition, exploration, exploitation and development
activities, are capitalized as oil and gas property costs. The capitalized costs
of oil and gas properties, excluding unevaluated or unproven properties, are
amortized using a unit-of-production method based on estimated proved
recoverable oil and gas reserves. Amortization of unevaluated property costs
begins when the properties become proved or their values become impaired.
Impairment of unevaluated prospects is assessed based on management’s intention
with regard to future exploration and development of individually significant
properties and the ability of the Company to obtain funds to finance such
exploration and development. The Company anticipates its unevaluated property
costs to remain as unevaluated for no longer than two years.




Under
full cost accounting rules for each cost center, capitalized costs of evaluated
oil and gas properties, including asset retirement costs, less accumulated
amortization and related deferred income taxes, may not exceed an amount (the
“cost ceiling”) equal to the sum of (a) the present value of future net cash
flows from estimated production of proved oil and gas reserves, based on current
economic and operating conditions, discounted at 10%, plus (b) the cost of
properties not being amortized, plus (c) the lower of cost or estimated fair
value of any unproved properties included in the costs being amortized, less (d)
any income tax effects related to differences between the book and tax basis of
the properties involved. If capitalized costs exceed this limit, the excess is
charged to earnings.




Given the
volatility of oil and gas prices, it is reasonably possible that the estimate of
discounted future net cash flows from proved oil and gas reserves could change
in the near term. If oil and gas prices decline in the future, even if only for
a short period of time, it is possible that additional impairments of oil and
gas properties could occur. In addition, it is reasonably possible that
additional impairments could occur if costs are incurred in excess of any
increases in the present value of future net cash flows from proved oil and gas
reserves, or if properties are sold for proceeds less than the discounted
present value of the related proved oil and gas reserves.


19


Investment in unconsolidated
subsidiary




Investee
entities that the Company can exercise significant influence, but not control,
are accounted for under the equity method of accounting. Whether the Company
exercises significant influence with respect to an investee depends on an
evaluation of several factors, among others, representation of the company’s
board of directors and ownership level, generally 20% to 50% interest in the
voting securities of the company including voting rights associated with the
Company’s holdings in common, preferred and other convertible instruments in the
company. Under the equity method of accounting, the Company’s share of the
earnings or losses of these companies is included in the equity income (loss)
section of the consolidated statements of operations.




A loss in
value of an investment that is other than a temporary decline is recognized as a
charge to operations. Evidence of a loss in value might include, but would not
necessarily be limited to, absence of an ability to recover the carrying amount
of the investment or inability of the investee to sustain an earnings capacity
that would justify the carrying amount of the investment.




Impairment of Long-Lived
Assets




The
Company has adopted Statement of Financial Accounting Standards No. 144 (“SFAS
144”). The Statement requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undercounted cash flows. Should an impairment in value be indicated,
the carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to
sell




Stock Based Compensation




On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options based on estimated fair values. SFAS 123(R) supersedes the
Company’s previous accounting under Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
123(R). The Company has applied the provisions of SAB 107 in its adoption of
SFAS 123(R).




The
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006,
the first day of the Company’s fiscal year 2006. The Company’s Consolidated
Financial Statements as of and for the year ended December 31, 2007 reflect the
impact of SFAS 123(R). In accordance with the modified prospective transition
method, the Company’s Consolidated Financial Statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS
123(R).




New
Accounting Pronouncements




On
September 15, 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition and disclosure purposes under generally accepted
accounting principles. SFAS No. 157 will require the fair value of an
asset or liability to be based on a market based measure which will reflect the
credit risk of the company. SFAS No. 157 will also require expanded
disclosure requirements which will include the methods and assumptions used to
measure fair value and the effect of fair value measures on earnings.
SFAS No. 157 will be applied prospectively and will be effective for
fiscal years beginning after November 15, 2007 and to interim periods
within those fiscal years. The Company does not expect its adoption of this
new standard to have a material impact on its financial position, results of
operations or cash flows.


20


In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments, and certain other items, at fair value.
SFAS 159 applies to reporting periods beginning after November 15, 2007. The
adoption of SFAS 159 is not expected to have a material impact on the Company’s
financial condition or results of operations.




On
December 4, 2007, the FASB issued SFAS 141R, Business Combinations, which we
will adopt on January 1, 2009. This standard will significantly change the
accounting for business acquisitions both during the period of the acquisition
and in subsequent periods. Among the more significant changes in the accounting
for acquisitions are the following:




·
            Transaction
      costs will generally be expensed. Certain such costs are presently treated
      as costs of the acquisition.




·
            In-process
      research and development (IPR&D) will be accounted for as an asset,
      with the cost recognized as the research and development is realized or
      abandoned. IPR&D is presently expensed at the time of the
      acquisition.




·
            Contingencies,
      including contingent consideration, will generally be recorded at fair
      value with subsequent adjustments recognized in operations. Contingent
      consideration is presently accounted for as an adjustment of purchase
      price.




·
            Decreases
      in valuation allowances on acquired deferred tax assets will be recognized
      in operations. Such changes previously were considered to be subsequent
      changes in consideration and were recorded as decreases in
      goodwill.




Generally,
the effects of SFAS 141R will depend on future acquisitions.




On
December 4, 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51, which we will
adopt on January 1, 2009. This standard will significantly change the accounting
and reporting related to noncontrolling interests in a consolidated subsidiary.
After adoption, any noncontrolling interests will be classified as shareowner’s
equity, a change from its current classification between liabilities and
shareowner’s equity. Any earnings attributable to minority interests will be
included in net earnings. Purchases and sales of minority interests will be
reported in equity, deferring, perhaps permanently, recognition of the economic
gain or loss on partial dispositions.




ITEM
      7.
            FINANCIAL
      STATEMENTS




Our
consolidated financial statements are included beginning immediately following
the signature page to this report. See Item 13 for a list of the financial
statements and financial statement schedules included.




ITEM
      8.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




None.




ITEM
8A(T).          CONTROLS AND
PROCEDURES




As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective during the period ended
December 31, 2007.


21


Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Internal control over financial
reporting is a process designed by, or under the supervision of, our principal
executive and principal financial officers, or persons performing similar
functions, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the Company’s assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial
statements.




Our
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2007 based on the framework defined in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on
this evaluation, because of the Company’s limited resources and limited number
of employees, management concluded that, as of December 31, 2007, our
internal control over financial reporting is not effective in
providing reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. We also
discovered the following material weakness in our internal control over
financial reporting: we had no procedure to determine how gains would be treated
for tax purposes under Canadian law.  This material weakness led to
the following mistakes in our financial statements, which have since been
corrected.




On
January 31, 2008, the Board, in consultation with management of the Company,
determined that previously issued (i) consolidated financial statements for the
quarters ended (a) June 30, 2007 contained in the Company’s Quarterly Report on
Form 10-QSB filed August 20, 2007, and (b) September 30, 2007 contained in the
Company’s Quarterly Report on Form 10-QSB filed November 16, 2007, needed to be
restated to correct an error in accounting for Canadian income taxes in
connection with the disposition of certain assets by Peace Oil Corp. (“Peace
Oil”), the Company’s indirectly-owned Canadian subsidiary, Cold Flow Energy
ULC.  Upon advice from Canadian tax counsel and accounting advisors,
the Board determined that the purchase and sale of the Peace Oil assets required
different treatment under Canadian tax laws.  We have amended the
financial statements listed above to correctly account for the Canadian income
taxes in connection with the disposition of certain assets by Peace
Oil.




After
consultation with Canadian counsel and accountants, the Board determined that
the reserve for Canadian income taxes was incorrect and needed to be
restated.  The amounts reported in the Company’s financial statements
for its quarters ended June 30, 2007 and September 30, 2007 did not properly
reflect tax consequences of the sale of certain assets by Peace
Oil.  The financial statements have since been amended to properly
reflect the tax consequences of the sale of certain assets by Peace
Oil.




We have
since retained outside professionals to review Canadian tax liability related to
our Canadian operations and business transactions to prevent a reoccurrence of
this error and to improve our controls and procedures.  As a result of
these changes, the Company does not expect a reoccurrence of this error in
future filings.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.


22
 Limitations on Effectiveness
of Controls and Procedures
 
 Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. 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, within the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.
 
 Changes in internal
controls
 
 There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation required by paragraph (d) of Rule 13a-15 or
15d-15 under the Exchange Act that occurred during the quarter ended December
31, 2007 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




ITEM
8B.                      OTHER
INFORMATION




None




23


PART
III




ITEM
      9.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(a) OF THE EXCHANGE ACT




Information
required by this Item is incorporated by reference from our definitive proxy
statement including the election of directors, filed with the Commission on
March 5, 2008.




ITEM
      10.
            EXECUTIVE
      COMPENSATION




Information
required by this Item is incorporated by reference from our definitive proxy
statement including the election of directors, filed with the Commission on
March 5, 2008.




ITEM
      11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




Information
required by this Item is incorporated by reference from our definitive proxy
statement including the election of directors, filed with the Commission on
March 5, 2008.




ITEM
      12.
            CERTAIN
      RELATIONSHIPS AND RELATED
TRANSACTIONS




Information
required by this Item is incorporated by reference from our definitive proxy
statement including the election of directors, filed with the Commission on
March 5, 2008.




ITEM
      13.
            EXHIBITS




3.1           Certificate
of Incorporation filed with the State of Delaware on November 25, 1997, as
amended (including Certificate of Merger, filed November 25, 1997, Certificate
of Designation, filed February 2, 1998, Certificate of Amendment, filed May 12,
1998, Certificate of Renewal, filed August 20, 2003, Certificate of Amendment,
dated August 20, 2003 and Certificate of Amendment, filed September 30, 2004)
(incorporated herein by reference to Exhibit 3.1 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)




3.2           Certificate
of Amendment to Certificate of Incorporation filed with the State of Delaware on
February 22, 2007 (incorporated herein by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed February 22, 2007)




3.3           Amended
and Restated Certificate of Designations, Preferences, Rights and Limitations of
Special Voting Preferred Stock filed with the State of Delaware on March 7, 2007
(incorporated herein by reference to Exhibit 3(i).1 to the Company’s Current
Report on Form 8-K, filed March 8, 2007)




3.4           Amended
and Restated Bylaws of the Company (incorporated herein by reference to Exhibit
3(ii).1 to the Company’s Current Report on Form 8-K, filed October 25,
2006)




9.1           Voting
Trust Agreement by and among the Company, Northern Alberta Oil Ltd. and Deep
Well Oil and Gas (Alberta) Ltd. dated November 15, 2005 (incorporated herein by
reference to Exhibit 10.20 to the Company’s Registration Statement on Form SB-2,
filed December 30, 2005)




10.1           Employment
Agreement by and between the Company and David Perez dated November 30, 2004
(incorporated herein by reference to Exhibit 10.2 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)




10.2           Sublease
by and between the Company and Granite Financial Group dated November 22, 2004
(incorporated herein by reference to Exhibit 10.4 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)


24


10.3           Farmout
Agreement by and among the Company, Signet Energy, Inc. (f/k/a Surge Global
Energy (Canada) Ltd.), Northern Alberta Oil Ltd. and Deep Well Oil & Gas,
Inc. dated February 25, 2005 (incorporated herein by reference to Exhibit 10.5
to the Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.4           Farmout
Amending Agreement by and among the Company, Signet Energy, Inc. (f/k/a Surge
Global Energy (Canada) Ltd.), Northern Alberta Oil Ltd. and Deep Well Oil &
Gas, Inc. dated November 15, 2005 (1) (incorporated herein by reference to
Exhibit 10.6 to the Company’s Registration Statement on Form SB-2, filed
December 30, 2005)




10.5           Form
of Note and Warrant Purchase Agreement by and between the Company and each of
Mark C. Fritz, Victor G. Mellul and Irving L. Plaksen dated March 17, 2005
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on
Form 8-K, filed March 24, 2005)




10.6           Form
of Convertible Note by and between the Company and each of Mark C. Fritz, Victor
G. Mellul and Irving L. Plaksen dated March 17, 2005 (incorporated by reference
to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed March 24,
2005)




10.7           Form
of Warrant by and between the Company and each of Mark C. Fritz, Victor G.
Mellul and Irving L. Plaksen dated March 17, 2005 (incorporated by reference to
Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed March 24,
2005)




10.8           Letter
Agreements by and between the Company and each of Mark C. Fritz, Victor G.
Mellul and Irving L. Plaksen dated July 17, 2005 (incorporated herein by
reference to Exhibit 10.10 to the Company’s Registration Statement on Form SB-2,
filed December 30, 2005)




10.9           Form
of Securities Purchase Agreement by and among the Company, Mark Fritz, Chet
Idziszek, Gary Vandergrift, Burton Gersh and Irving Plaksen effective as of
August 19, 2005, relating to the private placement offering of common stock and
warrants for an aggregate purchase price of $300,000 (incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
August 25, 2005)




10.10           Form
of Warrant by and among the Company, Mark Fritz, Chet Idziszek, Gary
Vandergrift, Burton Gersh and Irving Plaksen effective as of August 19, 2005
(incorporated herein by reference to Exhibit 10.12 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)




10.11           Form
of Registration Rights Agreement by and among the Company, Mark Fritz, Chet
Idziszek, Gary Vandergrift, Burton Gersh and Irving Plaksen effective as of
August 19, 2005 (incorporated herein by reference to Exhibit 10.13 to the
Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.12           Securities
Purchase Agreement by and between the Company and Pawnee Holding Corporation
dated October 24, 2005 (incorporated herein by reference to Exhibit 10.14 to the
Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.13           Warrant
by and between the Company and Pawnee Holding Corporation dated October 24, 2005
(incorporated herein by reference to Exhibit 10.15 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)




10.14           Registration
Rights Agreement by and between the Company and Pawnee Holding Corporation dated
October 24, 2005 (incorporated herein by reference to Exhibit 10.16 to the
Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.15           Form
of Subscription Agreement for 7% Convertible Debentures, by and between Signet
Energy, Inc. (f/k/a Surge Global Energy (Canada) Ltd) and certain purchasers
dated November 15, 2005 (incorporated herein by reference to Exhibit 10.17 to
the Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.16           Agency
Agreement by and among the Company, Signet Energy, Inc. (f/k/a Surge Global
Energy (Canada) Ltd.), and MGI Securities Inc. dated November 15, 2005
(incorporated herein by reference to Exhibit 10.18 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)


25


10.17           Shareholders
Agreement by and among the Company, Leigh Cassidy, Fred Kelly and Signet Energy,
Inc. (f/k/a Surge Global Energy (Canada) Ltd.) dated November 15, 2005
(incorporated herein by reference to Exhibit 10.19 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)




10.18           Trust
Indenture by and among the Company, Signet Energy, Inc. (f/k/a Surge Global
Energy (Canada) Ltd.) and Valiant Trust Company dated November 15, 2005
(incorporated herein by reference to Exhibit 10.21 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)




10.19           Registration
Rights Agreement by and among the Company and MGI Securities, Inc., as agent to
the purchasers of the debentures dated November 15, 2005 (incorporated herein by
reference to Exhibit 10.22 to the Company’s Registration Statement on Form SB-2,
filed December 30, 2005)




10.20           Release
and Indemnification Agreement by and between the Company and Signet Energy, Inc.
(f/k/a Surge Global Energy (Canada) Ltd.), dated November 15, 2005 (incorporated
herein by reference to Exhibit 10.26 to the Company’s Annual Report on Form
10-KSB, filed April 17, 2006)




10.21           Escrow
Agreement by and among the Company, Signet Energy, Inc. (f/k/a Surge Global
Energy (Canada) Ltd.) and Valiant Trust Company, dated November 15, 2005
(incorporated herein by reference to Exhibit 10.27 to the Company’s Annual
Report on Form 10-KSB, filed April 17, 2006)




10.22           Securities
Purchase Agreement by and between the Company and the Zemer Family Trust dated
November 16, 2005 (incorporated herein by reference to Exhibit 10.23 to the
Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.23           Warrant
by and between the Company and the Zemer Family Trust dated November 16, 2005
(incorporated herein by reference to Exhibit 10.24 to the Company’s Registration
Statement on Form SB-2, filed December 30, 2005)




10.24           Registration
Rights Agreement by and between the Company and the Zemer Family Trust dated
November 16, 2005 (incorporated herein by reference to Exhibit 10.25 to the
Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.25           Securities
Purchase Agreement by and between the Company and Benjamin Financial Limited
Partnership dated November 30, 2005 (incorporated herein by reference to Exhibit
10.26 to the Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.26           Warrant
by and between the Company and Benjamin Financial Limited Partnership dated
November 30, 2005 (incorporated herein by reference to Exhibit 10.27 to the
Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.27           Registration
Rights Agreement by and between the Company and Benjamin Financial Limited
Partnership dated November 30, 2005 (incorporated herein by reference to Exhibit
10.28 to the Company’s Registration Statement on Form SB-2, filed December 30,
2005)




10.28           Indenture
by and between Signet Energy, Inc. (f/k/a Surge Global Energy (Canada) Ltd.) and
Valiant Trust Company dated December 20, 2005 (incorporated herein by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed December 28,
2005)




10.29           Form
of 7% Secured Convertible Debentures Certificate dated December 20, 2005
(incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report
on Form 8-K, filed December 28, 2005)




10.30           Form
of Subscription Agreement for Flow-Through Shares by and between Signet Energy,
Inc. (f/k/a Surge Global Energy (Canada) Ltd.) and certain purchasers dated
December 20, 2005 (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed December 28, 2005)


26


10.31           Form
of Subscription Agreement for 7% Secured Convertible Debentures by and between
Signet Energy, Inc. (f/k/a Surge Global Energy (Canada) Ltd.) and certain
purchasers dated December 20, 2005 (incorporated herein by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K, filed December 28,
2005)




10.32           Agency
Agreement by and between Signet Energy, Inc. (f/k/a Surge Global Energy (Canada)
Ltd.) and MGI Securities, Inc. dated December 20, 2005 (incorporated herein by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed
December 28, 2005)




10.33           Form
of Securities Purchase Agreement effective as of March 14, 2006, relating to the
private placement offering of common stock and warrants for an aggregate
purchase price of $1,800,000 (incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K, filed March 23, 2006)




10.34           Form
of Warrant, effective as of March 14, 2006, relating to the private placement
offering of common stock and warrants for an aggregate purchase price of
$1,800,000 (incorporated herein by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K, filed March 23, 2006)




10.35           Form
of Registration Rights Agreement, effective as of March 14, 2006, relating to
the private placement offering of common stock and warrants for an aggregate
purchase price of $1,800,000 (incorporated herein by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K, filed March 23, 2006)




10.36           Form
of Non-Employee Director Agreement (incorporated herein by reference to Exhibit
10.37 to the Company’s Registration Statement on Form SB-2, filed December 20,
2006)




10.37           Form
of Nonstatutory Stock Option Agreement (incorporated herein by reference to
Exhibit 10.38 to the Company’s Registration Statement on Form SB-2, filed
December 20, 2006)




10.38           Consulting
Agreement by and between the Company and Richard Collato dated October 6, 2006
(incorporated herein by reference to Exhibit 10.39 to the Company’s Registration
Statement on Form SB-2, filed December 20, 2006)




10.39           Securities
Purchase Agreement by and between the Company and each of Gemini Master Fund
Limited and Mark C. Fritz dated November 28, 2006 (incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed
December 4, 2006)




10.40           Registration
Rights Agreement by and between the Company and each of Gemini Master Fund
Limited and Mark C. Fritz dated November 28, 2006 (incorporated herein by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed
December 4, 2006)




10.41           Common
Stock Purchase Warrants dated November 28, 2006 issued by the Company to each of
Gemini Master Fund Limited and Mark C. Fritz (incorporated herein by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed December 4,
2006)




10.42           “Greenshoe”
Common Stock Purchase Warrants dated November 28, 2006 issued by the Company to
each of Gemini Master Fund Limited and Mark C. Fritz (incorporated herein by
reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed
December 4, 2006)




10.43           Stock
Purchase Agreement among Cold Flow Energy ULC, the Company, Peace Oil Corp., and
Shareholders of Peace Oil Corp. dated November 30, 2006 (incorporated herein by
reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed
December 4, 2006)




10.44           Employment
Agreement between the Company and William Greene dated December 14, 2006
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K/A, filed with the Securities and Exchange Commission on
December 18, 2006)


27


10.45           First
Amendment to Stock Purchase Agreement by and among Cold Flow Energy ULC, the
Company, Peace Oil Corp., and the shareholders of Peace Oil dated March 2, 2007
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed March 8, 2007)




10.46           Voting
and Exchange Trust Agreement by and among the Company, Cold Flow Energy ULC, and
Olympia Trust Company dated March 2, 2007 (incorporated herein by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed March 8,
2007)




10.47           Support
Agreement by and among the Company, Cold Flow Energy ULC, and 1294697 Alberta
Ltd. dated March 2, 2007 (incorporated herein by reference to Exhibit 10.3 to
the Company’s Current Report on Form 8-K, filed March 8, 2007)




10.48           Promissory
Note dated March 2, 2007 issued by Cold Flow Energy ULC in the principal amount
of CDN$1,500,000 with a maturity date of June 30, 2007 (incorporated herein by
reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed
March 8, 2007)




10.49           Promissory
Note dated March 2, 2007 issued by Cold Flow Energy ULC in the principal amount
of CDN$1,000,000 with a maturity date of July 30, 2007 (incorporated herein by
reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed
March 8, 2007)




10.50           Promissory
Note dated March 2, 2007 issued by Cold Flow Energy ULC in the principal amount
of CDN$1,500,000 with a maturity date of August 30, 2007 (incorporated herein by
reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K, filed
March 8, 2007)




10.51           Promissory
Note dated March 2, 2007 issued by Cold Flow Energy ULC in the principal amount
of CDN$1,600,000 with a maturity date of December 31, 2007 (incorporated herein
by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K, filed
March 8, 2007)




10.52           Petroleum,
Natural Gas and General Rights Conveyance by and among 1304146 Alberta Ltd.,
Peace Oil Corp., Cold Flow Energy ULC, and the Company dated March 2, 2007
(incorporated herein by reference to Exhibit 10.8 to the Company’s Current
Report on Form 8-K, filed March 8, 2007)




10.53           Escrow
Agreement by and among Burstall Winger LLP, Peace Oil Corp., the Company, Cold
Flow Energy ULC, and 1304146 Alberta Ltd. dated March 2, 2007 (incorporated
herein by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K,
filed March 8, 2007)




10.54           Royalty
Agreement by and between 1304146 Alberta Ltd. and Peace Oil Corp. dated March 2,
2007 (incorporated herein by reference to Exhibit 10.10 to the Company’s Current
Report on Form 8-K, filed March 8, 2007)




10.55           Warrant
to purchase 1,000,000 shares of Surge common stock dated March 2, 2007
(incorporated herein by reference to Exhibit 10.11 to the Company’s Current
Report on Form 8-K, filed March 8, 2007)




10.56           Second
Amendment to Stock Purchase Agreement among Cold Flow Energy ULC, the Company,
Peace Oil Corp. and the Shareholders of Peace Oil Corp. dated April 16, 2007
(incorporated herein by reference to Exhibit 2.3 to the Company’s Current Report
on Form 8-K/A, filed May 16, 2007)




10.57           Exchange,
Purchase and Amendment Agreement dated as of April 19, 2007 by and between the
Company and Gemini Master Fund, Ltd. (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 25,
2007)




10.58           Convertible
Note Due May 1, 2008 Issued to Gemini Master Fund, Ltd. (incorporated herein by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed
April 25, 2007)


28


10.59           Agreement
to Vote dated May 22, 2007 between the Company, Signet Energy, Inc., Andora
Energy Corporation and David Perez (incorporated herein by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed May 29,
2007)




10.60           Letter
Agreement dated June 13, 2007 between the Company, Peace Oil Corp. and North
Peace Energy Corp. (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed June 15, 2007)




10.61           Agreement
of Purchase and Sale dated as of June 25, 2007 among Peace Oil Corp., North
Peace Energy Corp. and the Company (incorporated herein by reference to Exhibit
10.63 to the Company’s Registration Statement on Form SB-2, filed July 3,
2007)




10.62           Addendum
to Employment Agreement between William Greene and the Company, dated as of June
29, 2007 (incorporated herein by reference to Exhibit 10.64 to the Company’s
Registration Statement on Form SB-2, filed July 3, 2007)




10.63           Stock
Option Agreement dated July 17, 2007 between the Company and David
Perez  (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed July 23, 2007)




10.64           Stock
Option Agreement dated July 17, 2007 between the Company and William Greene
(incorporated herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K, filed July 23, 2007)




10.65           Escrow
Agreement dated August 8, 2007 between the Company and Gemini (incorporated
herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
filed August 10, 2007)




10.66           Redemption
Agreement dated August 8, 2007 between the Company and Gemini (incorporated
herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
dated August 10, 2007)




10.67           Agreement
to Vote dated August 17, 2007 between Signet Energy Inc., Andora Energy
Corporation, the Company and David Perez (incorporated herein by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB/A, filed March 25,
2008)




10.68           First
Supplemental Trust Indenture dated August 17, 2007 between the Company, Signet
Energy, Inc., and Valiant Trust Company (incorporated herein by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-QSB/A, filed March 25,
2008)




10.69           Addendum
to Employment Agreement dated December 31, 2007 by and between the Company and
William Greene (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed January 4, 2008)




10.70           Purchase
and Sale Agreement dated March 18, 2008, by and among Surge Global Energy, Inc.;
Oromin Enterprises, Ltd.; Irie Isle Limited; Cynthia Holdings Ltd.; and Chet
Idziszek (incorporated herein by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, filed March 24, 2008)




10.71           Stock
Option Agreement between the Company and Charles V. Sage dated February 27, 2008
and entered into on or about April 10, 2008




10.72           Stock
Option Agreement between the Company and Barry Nussbaum dated February 27, 2008
and entered into on or about April 10, 2008




10.73           Stock
Option Agreement between the Company and Jeffrey Lewis Bernstein dated February
27, 2008 and entered into on or about April 10, 2008




10.74           Stock
Option Agreement between the Company and E. Jamie Schloss dated February 27,
2008 and entered into on or about April 10, 2008


29


10.75           Stock
Option Agreement between the Company and Kenneth Polin dated March 18, 2008 and
entered into on or about April 10, 2008




31.1           Certification
by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the
Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.




31.2           Certification
by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the
Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.




32.1           Certification
by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States
Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.




32.2           Certification
by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States
Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.







ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




Information
required by this Item is incorporated by reference from our definitive proxy
statement including the election of directors, filed with the Commission on
March 5, 2008.


30


SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




Dated:  April
      14, 2008
            SURGE
      GLOBAL ENERGY, INC.
              
              
              By: 
       /s/ E. Jamie
      Schloss
              
              E.
      Jamie Schloss
              Chief
      Executive Officer
              (Principal
      Executive Officer)Dated:  April
      14, 2008
            By:  /s/ E. Jamie Schloss
              
              E.
      Jamie Schloss
              Chief
      Financial Officer
              (Principal
      Accounting Officer)





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




SIGNATURE
            TITLE
            DATE/s/
      Barry Nussbaum
              Barry Nussbaum
            Chairman
      of the Board and Director
            April
      14, 2008/s/
      E. Jamie Schloss
              
              E. Jamie Schloss
            Chief
      Executive Officer, Chief Financial Officer and Director
            April
      14, 2008/s/
      Jeffrey Bernstein
              
              Jeffrey Bernstein
            Director
            April
      14, 2008/s/
      Dale Fisher
              
              Dale Fisher
            Director
            April
      14, 2008/s/
      Mark Fritz
              
              Mark Fritz
            Director
            April
      14, 2008/s/
      Charles Sage
              
              Charles Sage
            Director
            April
      14, 2008/s/
      Kenneth D. Polin
              
              Kenneth D. Polin
            Director
            April
      14, 2008





31






SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549








CONSOLIDATED
FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








FORMING
A PART OF ANNUAL REPORT


PURSUANT
TO THE SECURITIES EXCHANGE ACT OF 1934








SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)











SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS







Page
      NoReport
      of Independent Registered Certified Public Accounting Firm
            
            F-2Consolidated
      Balance Sheets at December 31, 2007 and 2006
            
            F-3Consolidated
      Statements of Losses for the Years Ended December 31, 2007 and 2006, and
      for the period from
              January
      1, 2005 (date of inception of development stage) through December 31,
      2007
            
            F-4Consolidated
      Statements of Shareholders' (Deficiency) Equity for theperiod
      from January 1, 2005
              (date
      of inceptionof
      development stage) through December 31, 2007
            
            F-5
      ~ F-7Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007 and 2006,
      and for the period from
              January
      1, 2005 (date of inception of development stage) through December 31,
      2007
            
            F-8
      ~ F-9Notes
      to Consolidated Financial statements
            
            F-10
      ~ F-38






F-1




RBSM
LLP


Certified
Public Accountants








REPORT OF INDEPENDENT
REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM







To the
Board of Directors


Surge
Global Energy, Inc.


Solana
Beach, California








We have
audited the accompanying consolidated balance sheets of Surge Global Energy,
Inc. (the “Company”), as of December 31, 2007 and 2006 and the related
consolidated statements of losses, stockholders’ (deficiency) equity, and cash
flows for the two years then ended, and for the period January 1, 2005 (date of
inception of development stage) through December 31, 2007. These financial
statements are the responsibility of the company’s management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of December 31, 2007 and 2006, and the results of its operations and its cash
flows for the two years then ended, and for the period January 1, 2005 (date of
inception of development stage) through December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America.








/s/
      RBSM
      LLPRBSM
      LLPMcLean,
      Virginia
                April
      14, 2008
            Certified
      Public Accountants


F-2




SURGE
      GLOBAL ENERGY, INC.(A
      DEVELOPMENT STAGE COMPANY)CONSOLIDATED
      BALANCE SHEETS
              AS
      OF DECEMBER 31, 2007 AND 2006






ASSETS
            
            2007
            
            
            2006Current
      assets:Cash
      and cash equivalents
            
            $
            5,095,191
            
            
            $
            1,527,073Prepaid
      expense
            
            
            283,516
            
            
            
            26,043Total
      current assets
            
            
            5,378,707
            
            
            
            1,553,116Property
      and equipment, net
            
            
            20,810
            
            
            
            16,918Investment
      in Andora (Note B)
            
            
            3,540,639
            
            
            
            4,597,217Investment
      in North Peace Energy (Note C)
            
            
            3,170,833
            
            
            
            133,449Total
      Assets
            
            $
            12,110,989
            
            
            $
            6,300,700LIABILITIES
      AND STOCKHOLDERS' (DEFICIENCY) EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities (Note D)
            
            $
            1,153,536
            
            
            $
            603,541Income
      Tax Payable (Note G)
            
            
            5,280,789
            
            
            
            -Total
      current liabilities
            
            
            6,434,325
            
            
            
            603,541Total
      long-term liabilitiesWarrant
      Liability (Note E)
            
            
            -
            
            
            
            2,309,400Redeemable
      Preferred Shares (Note H)
            
            
            5,930,156
            
            
            
            -Commitment
      and contingencies (Note M)Stockholders'
      (deficiency) equity:Preferred
      stock, par value $.001 per share; 10,000,000 shares
      authorized:Series
      A - none issued and outstanding (Note I)Special
      Voting Preferred (Note I) 1 share outstandingSeries
      B - none issued and outstanding (Note I)Common
      stock, par value $.001 per share; 200,000,000 shares authorized;
      36,470,337 and 30,587,097 shares issued and outstanding,
      respectively (Note I)
            
            
            36,470
            
            
            
            30,587Additional
      paid-in capital
            
            
            48,963,611
            
            
            
            40,198,386Accumulated
      other comprehensive income (loss):Foreign
      currency translation adjustment
            
            
            (915,138
            )
            
            
            153,600Accumulated
      deficit
            
            
            (12,337,512
            )
            
            
            (12,337,512
            )Deficit
      from inception of development stage
            
            
            (36,000,923
            )
            
            
            (24,657,302
            )Total
      stockholders' (deficiency) equity
            
            
            (253,492
            )
            
            
            3,387,759Total
      liabilities and stockholders' (deficiency) equity
            
            $
            12,110,989
            
            
            $
            6,300,700






See
      accompanying footnotes to consolidated financial
  statements


F-3




SURGE
      GLOBAL ENERGY, INC.(A
      DEVELOPMENT STAGE COMPANY)CONSOLIDATED
      STATEMENTS OF LOSSES






For
      the periodfrom
      January 1,2005
      (date ofinception
      ofFor
      the Years Ending
            
            
            developmentDecember
      31
            
            
            stage)
      through2007
            
            
            
            2006
            
            
            December 31, 2007


Operating
      expenses:Selling,
      general and administrative expenses
            
            $
            3,465,152
            
            
            $
            3,003,780
            
            
            $
            8,513,248Amortization
      of deferred compensation
            
            
            -
            
            
            
            -
            
            
            
            3,039,038Non
      cash compensation to employees
            
            
            1,348,943
            
            
            
            4,779,130
            
            
            
            10,352,656Depreciation
      and amortization
            
            
            9,197
            
            
            
            372,762
            
            
            
            456,855Impairment
      of oil and gas investments
            
            
            1,921,015
            
            
            
            6,296,016
            
            
            
            8,242,031Total
      operating expense
            
            
            6,744,307
            
            
            
            14,451,688
            
            
            
            30,603,828Loss
      from operations
            
            
            (6,744,307
            )
            
            
            (14,451,688
            )
            
            
            (30,603,828
            )Equity
      in losses from affiliates
            
            
            (1,056,578
            )
            
            
            (1,043,085
            )
            
            
            (2,099,663
            )Warrants
      issued in connection with Peace Oil acquisition (Note J)
            
            
            (368,000
            )
            
            
            -
            
            
            
            (368,000
            )Net
      gain/(loss) on revaluation of warrant liability (Note E)
            
            
            
            
            
            
            (502,161
            )
            
            
            (431,261
            )Financing
      (expense), net
            
            
            (1,425,311
            )
            
            
            (1,048,186
            )
            
            
            (4,427,843
            )Gain
      on sale of Peace Oil (Note C)
            
            
            3,098,554
            
            
            
            -
            
            
            
            3,098,554Loss
      from continuing operations, before income taxes and minority
      interest
            
            
            (6,495,642
            )
            
            
            (17,045,120
            )
            
            
            (34,832,041
            )Provision
      for income taxes
            
            
            (4,847,978
            )
            
            
            -
            
            
            
            (4,847,978
            )Loss
      before minority interest
            
            
            (11,343,620
            )
            
            
            (17,045,120
            )
            
            
            (39,680,019
            )Loss
      applicable to minority interest
            
            
            -
            
            
            
            1,119,027
            
            
            
            3,679,096Loss
      available to common shareholders
            
            $
            (11,343,620
            )
            
            $
            (15,926,093
            )
            
            $
            (36,000,923
            )-Other
      comprehensive (loss): foreign currency translation (loss)
            
            
            (1,068,738
            )
            
            
            339,014
            
            
            
            (915,138
            )Comprehensive
      income (loss)
            
            $
            (12,412,358
            )
            
            $
            (15,587,079
            )
            
            $
            (36,916,060
            )(Loss)
      per common share (basic and diluted)
            
            $
            (0.37
            )
            
            $
            (0.58
            )
            
            $
            (1.34
            )Weighted
      average shares outstanding  (basic and diluted)
            
            
            30,659,776
            
            
            
            27,360,878
            
            
            
            26,777,392






See
accompanying footnotes to consolidated financial statements


F-4




SURGE
      GLOBAL ENERGY, INC.(A
      DEVELOPMENT STAGE COMPANY)CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITYFOR
      THE PERIOD FROM JANUARY 1, 2005 (DATE OF INCEPTION OF DEVELOPMENT STAGE)
      THROUGH DECEMBER 31, 2007




Preferred
      Stock Shares
            
            Preferred
      Stock Amount
            
            Common
      Stock Shares
            
            Common
      Stock Amount
            
            Additional
      Paid-in Capital
            
            Deferred
      Compensation
            
            Common
      Stock Subscription
            
            Foreign
      Currency Translation Adjustment
            
            Accumulated
      Deficit during Development Stage
            
            Accumulated
      Deficit
            
            TotalBalance
      at January 1, 2005
            -
            
            $
            -
            
            23,367,097
            
            $
            23,367
            
            $
            18,996,881
            
            $
            (7,020,985
            )
            $
            -
            
            $
            -
            
            $
            -
            
            $
            (12,337,511
            )
            $
            (338,248
            )Issuance
      of common stock in February 2005 in exchange for stock options exercised
      at $0.25 per share
            -
            
            
            -
            
            100,000
            
            
            100
            
            
            24,900
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            25,000Issuance
      of common stock in August 2005 in exchange for cash, net of costs and fees
      at $1.00 per share
            -
            
            
            -
            
            300,000
            
            
            300
            
            
            299,700
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            300,000Issuance
      of common stock in August 2005 in exchange for conversion of convertible
      notes payable at $1.00 per share
            -
            
            
            -
            
            1,675,000
            
            
            1,675
            
            
            1,673,325
            
            
            -
            
            
            35,000
            
            
            -
            
            
            -
            
            
            -
            
            
            1,710,000Issuance
      of common stock in October 2005 in exchange for convertible notes
      converted in August 2005
            -
            
            
            -
            
            35,000
            
            
            35
            
            
            34,965
            
            
            -
            
            
            (35,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
      of common stock in November 2005 in exchange for cash, net of costs and
      fees at $1.00 per share
            -
            
            
            -
            
            800,000
            
            
            800
            
            
            799,200
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            800,000Beneficial
      conversion feature in connection with issuance of convertible notes
      payable
            -
            
            
            -
            
            -
            
            
            -
            
            
            1,022,492
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,022,492Value
      of warrants attached to convertible notes payable
            -
            
            
            -
            
            -
            
            
            -
            
            
            629,192
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            629,192Foreign
      currency translation adjustment
            -
            
            
            -
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            (185,414
            )
            
            -
            
            
            -
            
            
            (185,414
            )Amortization
      of deferred compensation (Note J)
            -
            
            
            -
            
            -
            
            
            -
            
            
            -
            
            
            3,039,038
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,039,038Valuation
      of warrant liabilities in connection with private placement (Note
      E)
            -
            
            
            -
            
            -
            
            
            -
            
            
            (2,245,100
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,245,100
            )Other
      stock options awards granted pursuant to employment agreement (Note
      J)
            -
            
            
            -
            
            -
            
            
            -
            
            
            202,418
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            202,418Increase
      in value of investment in Signet Energy, Inc.(Note B)
            
            
            
            
            
            
            
            
            
            
            
            6,890,785
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,890,785Net
      loss
            -
            
            
            -
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (8,731,209
            )
            
            -
            
            
            (8,731,209
            )Balance
      at December 31, 2005
            -
            
            $
            -
            
            26,277,097
            
            $
            26,277
            
            $
            28,328,758
            
            $
            (3,981,947
            )
            $
            -
            
            $
            (185,414
            )
            $
            (8,731,209
            )
            $
            (12,337,511
            )
            $
            3,118,954




See
accompanying notes to consolidated financial information


F-5




SURGE
      GLOBAL ENERGY, INC.(A
      DEVELOPMENT STAGE COMPANY)CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
      (Continued)FOR
      THE PERIOD FROM JANUARY 1, 2005 (DATE OF INCEPTION OF DEVELOPMENT STAGE)
      THROUGH DECEMBER 31, 2007






Preferred
      Stock Shares
            
            Preferred
      Stock Amount
            
            Common
      Stock Shares
            
            Common
      Stock Amount
            
            Additional
      Paid-in Capital
            
            Deferred
      Compensation
            
            Common
      Stock Subscription
            
            Foreign
      Currency Translation Adjustment
            
            Accumulated
      Deficit during Development Stage
            
            Accumulated
      Deficit
            
            TotalBalance
      at December 31, 2005
            
            
            -
            
            $
            -
            
            
            26,277,097
            
            $
            26,277
            
            $
            28,328,758
            
            $
            (3,981,947
            )
            $
            -
            
            $
            (185,414
            )
            $
            (8,731,209
            )
            $
            (12,337,511
            )
            $
            3,118,954Reversal
      of unamortized deferred compensation upon adoption of SFAS 123R (Note
      J)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,981,947
            )
            
            3,981,947
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
      of common stock in April 2006 in exchange for cash, net of costs and fees
      at $1.50 per share
            
            
            -
            
            
            -
            
            
            1,200,000
            
            
            1,200
            
            
            1,798,800
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,800,000Shares
      returned and cancelled in June 2006 related to the acquisition of Phillips
      & King International Inc. during August 2000
            
            
            -
            
            
            -
            
            
            (450,000
            )
            
            (450
            )
            
            450
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
      of common stock in June 2006 in exchange for convertible notes in
      subsidiary
            
            
            -
            
            
            -
            
            
            160,000
            
            
            160
            
            
            178,456
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            178,616Issuance
      of common stock in July 2006 in exchange for stock options exercised at
      $0.25 per share
            
            
            -
            
            
            -
            
            
            400,000
            
            
            400
            
            
            99,600
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            100,000Issuance
      of common stock in November 2006 in exchange for cash, net of costs and
      fees at $0.45 per share
            
            
            -
            
            
            -
            
            
            3,000,000
            
            
            3,000
            
            
            1,347,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,350,000Conversion of warrant
      liability upon registration of warrants in May
      2006
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,787,861
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,787,861Valuation of warrant liabilities
      in connection with private placement (Note E)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,420,900
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,420,900
            )Gain
      on investment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,147,556
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,147,556Conversion
      to equity method
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,133,622
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,133,622Employee
      stock option expense (Note J)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,138,639
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,138,639Other
      stock options awards grantedpursuant
      to employment agreement (Note J)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            640,491
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            640,491Foreign
      currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -
            
            
            339,014
            
            
            -
            
            
            -
            
            
            339,014Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15,926,093
            )
            
            
            
            
            (15,926,093
            )






F-6




SURGE
      GLOBAL ENERGY, INC.(A
      DEVELOPMENT STAGE COMPANY)CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
      (Continued)FOR
      THE PERIOD FROM JANUARY 1, 2005 (DATE OF INCEPTION OF DEVELOPMENT STAGE)
      THROUGH DECEMBER 31, 2007


Preferred
      Stock Shares
            
            
            Preferred
      Stock Amount
            
            
            Common
      Stock Shares
            
            
            Common
      Stock Amount
            
            
            Additional
      Paid-in Capital
            
            
            Deferred
      Compensation
            
            
            Common
      Stock Subscription
            
            
            Foreign
      Currency Translation Adjustment
            
            
            Accumulated
      Deficit during Development Stage
            
            
            Accumulated
      Deficit
            
            
            TotalBalance
      at December 31, 2006
            
            
            -
            
            $
            -
            
            
            30,587,097
            
            $
            30,587
            
            $
            40,198,386
            
            $
            -
            
            $
            -
            
            $
            153,600
            
            $
            (24,657,302
            )
            $
            (12,337,511
            )
            $
            3,387,760Issuance
      of common stock in January 2007 in exchange for stock options exercised at
      $0.24 per share
            
            
            -
            
            
            -
            
            
            383,333
            
            
            383
            
            
            91,483
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            91,866Employee
      stock option expense (Note J)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,348,943
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,348,943Reclass
      warrant liability to APIC per EITF 00-19-2
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,309,400
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,309,400Gemini
      note conversion
            
            
            -
            
            
            -
            
            
            (2,000,000
            )
            
            (2,000
            )
            
            (898,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (900,000
            )Peace
      Oil acquisition warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            368,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            368,000Beneficial
      conversion feature in connection with issuance of convertible notes
      payable
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,076,575
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,076,575Exchange
      of Redeemable Preferred Shares into common stock
            
            
            
            
            
            
            
            
            7,499,907
            
            
            7,500
            
            
            4,468,824
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,476,324Foreign
      currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,068,738
            )
            
            -
            
            
            -
            
            
            (1,068,738
            )Net
      loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (11,343,620
            )
            
            -
            
            
            (11,343,620
            )Balance
      at December 31, 2007
            
            
            -
            
            $
            -
            
            
            36,470,337
            
            $
            36,470
            
            $
            48,963,611
            
            $
            -
            
            $
            -
            
            $
            (915,138
            )
            $
            (36,000,922
            )
            $
            (12,337,511
            )
            $
            (253,492
            )





See
accompanying notes to consolidated financial information


F-7


SURGE
      GLOBAL ENERGY, INC.(A
      DEVELOPMENT STAGE COMPANY)CONSOLIDATED
      STATEMENTS OF CASH FLOWS




For
      the periodfrom
      January 1,2005
      (date ofinception
      ofFor
      the Year Ended
            
            
            developmentDecember
      31
            
            
            stage)
      through2007
            
            
            2006
            
            
            December
      31,2007Cash
      flows from operating activities:Net
      Loss
            
            $
            (11,343,621
            )
            
            $
            (15,926,093
            )
            
            $
            (36,000,923
            )Gain
      on Peace Oil transaction
            
            
            (3,098,554
            )
            
            
            -
            
            
            
            (3,098,554
            )Minority
      interest
            
            
            -
            
            
            
            (1,119,027
            )
            
            
            (3,679,096
            )Adjustments
      to reconcile net loss to net cash (used in) operating
      activities:Share
      of affiliate loss
            
            
            1,056,578
            
            
            
            1,043,085
            
            
            
            2,099,663Depreciation
      and amortization
            
            
            9,057
            
            
            
            372,762
            
            
            
            456,715Impairment
      of investments in oil and gas
            
            
            1,921,015
            
            
            
            6,296,016
            
            
            
            8,242,031Amortization
      and write-off of debt discount - beneficial conversionFeature
      of convertible debenture
            
            
            -
            
            
            
            -
            
            
            
            1,022,492Amortization
      and write-off of discount attributable to warrants
            
            
            -
            
            
            
            -
            
            
            
            629,192Non
      cash compensation
            
            
            1,348,943
            
            
            
            4,779,130
            
            
            
            6,330,490Amortization
      of deferred compensation costs
            
            
            -
            
            
            
            -
            
            
            
            3,039,038Gain/loss
      on revaluation of warrant liability
            
            
            -
            
            
            
            502,161
            
            
            
            431,261Warrant
      expense
            
            
            368,000
            
            
            
            -
            
            
            
            368,000Interest
      on Gemini
            
            
            230,000
            
            
            
            -
            
            
            
            230,000Beneficial
      conversion feature in connection with issuance of convertible notes
      payable
            
            
            1,076,575
            
            
            
            -
            
            
            
            1,076,575Debt
      discount
            
            
            -
            
            
            
            817,944
            
            
            
            1,010,679Founders
      stock
            
            
            -
            
            
            
            -
            
            
            
            4,265,640Increase/decrease
      in:Other
      receivable
            
            
            (4,288
            )
            
            
            290,738
            
            
            
            (132,384
            )Prepaid
      expense
            
            
            (253,185
            )
            
            
            (34,173
            )
            
            
            (303,655
            )Other
      assets
            
            
            -
            
            
            
            80,958
            
            
            
            80,958Accounts
      payable and accrued liabilities
            
            
            549,995
            
            
            
            (126,568
            )
            
            
            1,010,598Income
      taxes payable
            
            
            4,847,978
            
            
            
            -
            
            
            
            4,847,978Net
      cash used in operating activities
            
            
            (3,291,507
            )
            
            
            (3,023,067
            )
            
            
            (8,073,302
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (12,949
            )
            
            
            (73,384
            )
            
            
            (110,636
            )Deposits
            
            
            -
            
            
            
            (9,913
            )
            
            
            (9,913
            )Capital
      expenditures in oil and gas properties
            
            
            -
            
            
            
            (1,444,708
            )
            
            
            (11,768,933
            )Asset
      retirement obligation
            
            
            -
            
            
            
            -
            
            
            
            51,273Oil
      leases
            
            
            -
            
            
            
            -
            
            
            
            6,314,820Disposition
      of Peace Oil
            
            
            14,071,294
            
            
            
            -
            
            
            
            14,071,294Investment
      in North Peace
            
            
            (5,091,848
            )
            
            
            -
            
            
            
            (5,091,848
            )Gemini
      repayment
            
            
            (1,380,000
            )
            
            
            -
            
            
            
            (1,380,000
            )Deduct
      June 2006 Signet cash balance
            
            
            -
            
            
            
            (5,626,405
            )
            
            
            (5,626,405
            )Net
      cash used in investing activities
            
            
            7,586,497
            
            
            
            (7,154,410
            )
            
            
            (3,550,348
            )Cash
      flows form financing activities:Proceeds
      from the sale of common stock and stock subscription, net of costs and
      fees
            
            
            -
            
            
            
            3,150,000
            
            
            
            4,250,000Proceeds
      from exercise of options
            
            
            91,867
            
            
            
            100,000
            
            
            
            91,867Proceeds
      from equity to debt conversion
            
            
            250,000
            
            
            
            -
            
            
            
            250,000Repayment
      of Peace notes payable
            
            
            -
            
            
            
            -
            
            
            
            -Net
      (payments for) proceeds from Joint Venture Partner cash call
      obligations
            
            
            -
            
            
            
            -
            
            
            
            125,000Proceeds
      from convertible debentures
            
            
            -
            
            
            
            -
            
            
            
            1,710,000Proceeds
      from note payable, gross
            
            
            -
            
            
            
            -
            
            
            
            10,421,933Proceeds
      from Signet stock, net of costs and fees
            
            
            -
            
            
            
            -
            
            
            
            1,769,602Share
      Issuance costs
            
            
            -
            
            
            
            -
            
            
            
            (124,987
            )Deferred
      financing costs
            
            
            -
            
            
            
            -
            
            
            
            (1,208,375
            )Net
      cash provided by financing activities
            
            
            341,867
            
            
            
            3,250,000
            
            
            
            17,285,040Effect
      of exchange rates on cash and cash equivalents
            
            
            (1,068,739
            )
            
            
            342,605
            
            
            
            (726,134
            )Net  increase
      (decrease) in cash and cash equivalents
            
            
            3,568,118
            
            
            
            (6,584,872
            )
            
            
            4,935,256Cash
      and cash equivalents at the beginning of the year
            
            
            1,527,073
            
            
            
            8,111,945
            
            
            
            159,935Cash
      and cash equivalents at the end of the year
            
            $
            5,095,191
            
            
            $
            1,527,073
            
            
            $
            5,095,191




See
accompanying footnotes to consolidated financial statements


F-8




SURGE
GLOBAL ENERGY, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


(A
DEVELOPMENT STAGE COMPANY)






For
      the periodfrom
      January 1,2005
      (date ofinception
      ofFor
      the Year Ended
            
            
            developmentDecember
      31
            
            
            stage)
      through2007
            
            
            2006
            
            
            December
      31,2007Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the period for interest
            
            
            -
            
            
            
            -
            
            
            
            -Cash
      paid during the period for taxes
            
            
            -
            
            
            
            -
            
            
            
            -Supplemental
      Disclosures of Non-Cash Transactions:Amortization
      of debt discount - beneficial conversion feature ofconvertible
      debenture
            
            
            1,076,575
            
            
            
            -
            
            
            
            2,099,067Amortization
      of discount attributable to warrants
            
            
            -
            
            
            
            -
            
            
            
            629,192Stock
      options pursuant to employment agreement
            
            
            1,348,943
            
            
            
            4,779,130
            
            
            
            6,330,490Amortization
      of deferred compensation costs
            
            
            -
            
            
            
            -
            
            
            
            3,039,038Loss
      on revaluation of warrant liability (Note J)
            
            
            -
            
            
            
            502,161
            
            
            
            431,261Common
      stock issued in exchange for convertible notes payable
            
            
            -
            
            
            
            -
            
            
            
            1,710,000Net
      unexchanged redeemable preferred stock issued in connection with the Peace
      Oil acquisition (Note H)
            
            
            5,930,156
            
            
            
            -
            
            
            
            5,930,156






See
accompanying footnotes to consolidated financial statements


F-9




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
A - SUMMARY OF ACCOUNTING POLICIES





A summary
of the significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows.





Business and Basis of
Presentation





The
consolidated financial statements include the accounts of Surge Global Energy,
Inc., Andora Energy Corporation ("Andora") (formerly Signet Energy, Inc., and
Surge Global Energy (Canada), Ltd.) (see Note B), and Cold Flow Energy ULC,
Peace Oil Corp. (see Note C) and 1294697 Alberta Ltd., (collectively the
“Company”).





As
previously reported and as of July 7, 2006, the Company deconsolidated Signet
Energy, Inc. (formerly Surge Surge Global Energy (Canada) Ltd.) from our
consolidated financial statements (See Note B - Investment in Andora for further
discussion).





The
Company’s Canadian subsidiaries are carried in Canadian dollars and are
presented in U.S. dollars upon consolidation.





In
January 2005, as a result of the Company disposing of its tobacco wholesale
business in December 2004, and restructuring its management and ownership, the
Company began implementing plans to establish an oil and gas development
business. As a result, the Company is a development stage enterprise, as defined
by Statement of Financial Accounting Standards No. 7 (“SFAS 7”) and is seeking
to explore the acquisition and development of oil and gas properties in the
United States, Canada and Argentina. From its inception of development stage
through the date of these financial statements, the Company has not generated
any revenues and has incurred significant operating expenses. Consequently, its
operations are subject to all risks inherent in the establishment of a new
business enterprise. For the period from inception of development stage through
December 31, 2007, the Company has accumulated losses of
$36,000,922.





Oil and Gas
Properties





The
Company follows the full cost accounting method to account for the costs
incurred in the acquisition, exploration, exploitation, development and
production of oil and gas reserves. All costs, including internal costs,
directly related to acquisition, exploration, exploitation and development
activities, are capitalized as oil and gas property costs. The capitalized costs
of oil and gas properties, excluding unevaluated or unproven properties, are
amortized using a unit-of-production method based on estimated proved
recoverable oil and gas reserves. Amortization of unevaluated property costs
begins when the properties become proved or their values become impaired.
Impairment of unevaluated prospects is assessed based on management’s intention
with regard to future exploration and development of individually significant
properties and the ability of the Company to obtain funds to finance such
exploration and development. The Company anticipates its unevaluated property
costs to remain as unevaluated for no longer than two years.





Under
full cost accounting rules for each cost center, capitalized costs of evaluated
oil and gas properties, including asset retirement costs, less accumulated
amortization and related deferred income taxes, may not exceed an amount (the
“cost ceiling”) equal to the sum of (a) the present value of future net cash
flows from estimated production of proved oil and gas reserves, based on current
economic and operating conditions, discounted at 10%, plus (b) the cost of
properties not being amortized, plus (c) the lower of cost or estimated fair
value of any unproved properties included in the costs being amortized, less (d)
any income tax effects related to differences between the book and tax basis of
the properties involved. If capitalized costs exceed this limit, the excess is
charged to earnings.





Given the
volatility of oil and gas prices, it is reasonably possible that the estimate of
discounted future net cash flows from proved oil and gas reserves could change
in the near term. If oil and gas prices decline in the future, even if only for
a short period of time, it is possible that additional impairments of oil and
gas properties could occur. In addition, it is reasonably possible that
additional impairments could occur if costs are incurred in excess of any
increases in the present value of future net cash flows from proved oil and gas
reserves, or if properties are sold for proceeds less than the discounted
present value of the related proved oil and gas reserves.




F-10




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
A - SUMMARY OF ACCOUNTING POLICIES (Continued)





Investment in unconsolidated
subsidiary





Investee
entities that the Company can exercise significant influence, but not control,
are accounted for under the equity method of accounting. Whether the Company
exercises significant influence with respect to an investee depends on an
evaluation of several factors, among others, representation of the Company’s
board of directors and ownership level, generally 20% to 50% interest in the
voting securities of the company including voting rights associated with the
Company’s holdings in common, preferred and other convertible instruments in the
company. Under the equity method of accounting, the Company’s share of the
earnings or losses of these companies is included in the equity income (loss)
section of the consolidated statements of operations.





A loss in
value of an investment that is other than a temporary decline is recognized as a
charge to operations. Evidence of a loss in value might include, but would not
necessarily be limited to, absence of an ability to recover the carrying amount
of the investment or inability of the investee to sustain an earnings capacity
that would justify the carrying amount of the investment.





Cash
Equivalents




For
purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.  The Company has $5,043,451 invested in a
short-term money market account maintained by a U.S. bank, of which $100,000 is
subject to FDIC insurance.





Property and
Equipment





Property
and equipment are stated at cost. When retired or otherwise disposed, the
related carrying value and accumulated depreciation are removed from the
respective accounts and the net difference less any amount realized from
disposition, is reflected in earnings. For financial statement purposes,
property and equipment are depreciated using the straight-line method over their
estimated useful lives of the assets. Depreciation expenses from continuing
operations amounted to $9,197 and $372,762 for the years ended December 31, 2007
and 2006, respectively.  As previously reported and as of July 7,
2006, the Company deconsolidated Signet Energy, Inc. (formerly Surge Global
Energy (Canada) Ltd.) from our consolidated financial statements (See Note B -
Investment in Andora for further discussion).  For the year ended
December 31, 2007 and net of the deconsolidation entries, assets and accumulated
depreciation values were reduced to correspond to the table listed
below.   Maintenance, repairs, and minor renewals are charged
against earnings when incurred. Additions and major renewals are
capitalized.





December
      31, 2007
            
            
            December
      31, 2006Furniture
            
            $
            36,456
            
            
            $
            23,506Accumulated
      depreciation
            
            
            (15,646
            )
            
            
            (6,588
            )Property
      and equipment, net
            
            $
            20,810
            
            
            $
            16,918




F-11




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006





NOTE
A - SUMMARY OF ACCOUNTING POLICIES (Continued)





Impairment of Long-Lived
Assets




The
Company has adopted Statement of Financial Accounting Standards No. 144 (“SFAS
144”). The Statement requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted cash flows, discounted at 10%. Should an impairment in value be
indicated, the carrying value of intangible assets will be adjusted, based on
estimates of future discounted cash flows resulting from the use and ultimate
disposition of the asset. SFAS No. 144 also requires assets to be disposed of be
reported at the lower of the carrying amount or the fair value less costs to
sell. For the year ended December 31, 2007, the Company recorded an impairment
charge of $1,921,015 (Note C).




Income
Taxes




Income
taxes are provided based on the liability method for financial reporting
purposes in accordance with the provisions of Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes.” Under this method deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be removed or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statements
of operations in the period that includes the enactment date.  The
Company recognized $4,847,978 and zero in income tax expense for the years ended
December 31, 2007 and 2006, respectively.




Earnings (Loss) Per
Share





The
Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," specifying the computation, presentation and disclosure
requirements of earnings per share information. Basic earnings (loss) per share
has been calculated based upon the weighted average number of common shares
outstanding. During the years ended December 31, 2007 and 2006, convertible debt
and security, stock options and warrants were excluded as common stock
equivalents in the diluted earnings per share because they are anti dilutive.
The weighted average number of common shares outstanding used in the
computations of (loss) per share were 30,659,776 and 27,360,878 for the years
ended December 31, 2007 and 2006, respectively.





Use of
Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.




Revenue
Recognition




For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which
superceded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS ("SAB101").





SAB 101
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3)
the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management’s judgments regarding the fixed nature of the selling prices of the
products delivered and the collectibility of those amounts. Provisions for
discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
The Company defers any revenue for which the product has not been delivered or
is subject to refund until such time that the Company and the customer jointly
determine that the product has been delivered or no refund will be
required.




SAB 104
incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"),
MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF 00-21 on
the Company's consolidated financial position and results of operations was not
significant.




F-12




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
A - SUMMARY OF ACCOUNTING POLICIES (Continued)





Research and
Development




The
Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board’s Statement of Financial Accounting
Standards No. 2 (“SFAS 2”), “Accounting for Research and Development Costs.
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and developments costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. The Company incurred no
research and product development costs for the years ended December 31, 2007 and
2006.





Foreign Currency
Translation





The
Company translates the foreign currency financial statements in accordance with
the requirements of Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." Assets and liabilities are translated at the rates of
exchange at the balance sheet date, and related revenue and expenses are
translated at average monthly exchange rates in effect during the period.
Resulting translation adjustments are recorded as a separate component in
stockholders' equity. Foreign currency transaction gains and losses are included
in the statements of losses.





Concentrations of Credit
Risk





Financial
instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company’s cash and temporary cash investments are above and remain above
FDIC insurance limits.




Fair Value of Financial
Instruments





Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosure of the fair value of certain
financial instruments. The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and short-term borrowings, as reflected in the
balance sheets, approximate fair value because of the short-term maturity of
these instruments.





Stock Based
Compensation





On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options based on estimated fair values. SFAS 123(R) supersedes the
Company’s previous accounting under Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
123(R). The Company has applied the provisions of SAB 107 in its adoption of
SFAS 123(R).




F-13




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
A - SUMMARY OF ACCOUNTING POLICIES (Continued)





Stock Based Compensation
(Continued)





The
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006,
the first day of the Company’s fiscal year 2006. The Company’s Consolidated
Financial Statements as of and for the year ended December 31, 2007 reflect the
impact of SFAS 123(R). In accordance with the modified prospective transition
method, the Company’s Consolidated Financial Statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS 123(R).
Stock-based compensation expense recognized under SFAS 123(R) for the year ended
December 31, 2007 was $1,348,943, net of the corporate income tax
effect.




SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s Consolidated
Statement of Losses. Prior to the adoption of SFAS 123(R), the Company accounted
for stock-based awards to employees and directors using the intrinsic value
method in accordance with APB 25 as allowed under Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation”
(“SFAS 123”). Under the intrinsic value method, no stock-based compensation
expense had been recognized in the Company’s Consolidated Statement of Losses
because the exercise price of the Company’s stock options granted to employees
and directors approximated or exceeded the fair market value of the underlying
stock at the date of grant.




Stock-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during
the period. Stock-based compensation expense recognized in the Company’s
Consolidated Statement of Losses for the year ended December 31, 2007 included
compensation expense for share-based payment awards granted prior to, but not
yet vested as of December 31, 2005 based on the grant date fair value estimated
in accordance with the pro forma provisions of SFAS 123 and compensation expense
for the share-based payment awards granted subsequent to December 31, 2005 based
on the grant date fair value estimated in accordance with the provisions of SFAS
123(R). SFAS 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company’s pro forma information required under SFAS
123 for the periods prior to year ended December 31, 2007, the Company accounted
for forfeitures as they occurred.




Upon
adoption of SFAS 123(R), the Company is using the Black-Scholes option-pricing
model as its method of valuation for share-based awards granted beginning in
fiscal 2006, which was also previously used for the Company’s pro forma
information required under SFAS 123. The Company’s determination of fair value
of share-based payment awards on the date of grant using an option-pricing model
is affected by the Company’s stock price as well as assumptions regarding a
number of highly complex and subjective variables. These variables include, but
are not limited to the Company’s expected stock price volatility over the term
of the awards, and certain other market variables such as the risk free interest
rate.




F-14




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
A - SUMMARY OF ACCOUNTING POLICIES (Continued)





Liquidity





As shown
in the accompanying consolidated financial statements, the Company incurred net
losses from operations of $6,744,307 and $14,451,688 for the years ended
December 31, 2007 and 2006, respectively. The Company's current liabilities, on
a consolidated basis, exceeded its current assets by $1,055,618, as of December
31, 2007.  By adjusting our expenses to the level of capitalization,
management believes it has sufficient capital resources to meet projected cash
flow needs through the next twelve months.





Comprehensive
Income





Statement
of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive
Income,” establishes standards for reporting and displaying of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.




Segment
Information




Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS 131”) establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision-making group, in making decisions
how to allocate resources and assess performance. The information disclosed
herein materially represents all of the financial information related to the
Company’s principal operating segment.




New Accounting
Pronouncements
  On September 15,
2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 addresses how companies
should measure fair value when they are required to use a fair value measure for
recognition and disclosure purposes under generally accepted accounting
principles. SFAS No. 157 will require the fair value of an asset or
liability to be based on a market based measure which will reflect the credit
risk of the company. SFAS No. 157 will also require expanded
disclosure requirements which will include the methods and assumptions used to
measure fair value and the effect of fair value measures on earnings.
SFAS No. 157 will be applied prospectively and will be effective for
fiscal years beginning after November 15, 2007 and to interim periods
within those fiscal years. The Company does not expect its adoption of this
new standard to have a material impact on its financial position, results of
operations or cash flows.


F-15
 
  SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  NOTE
A - SUMMARY OF ACCOUNTING POLICIES (Continued)
  New Accounting
Pronouncements (Continued)
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments, and certain other items, at fair value.
SFAS 159 applies to reporting periods beginning after November 15, 2007. The
adoption of SFAS 159 is not expected to have a material impact on the Company’s
financial condition or results of operations.




On
December 4, 2007, the FASB issued SFAS 141R, Business Combinations, which we
will adopt on January 1, 2009. This standard will significantly change the
accounting for business acquisitions both during the period of the acquisition
and in subsequent periods. Among the more significant changes in the accounting
for acquisitions are the following:




·
            Transaction
      costs will generally be expensed. Certain such costs are presently treated
      as costs of the acquisition.




·
            In-process
      research and development (IPR&D) will be accounted for as an asset,
      with the cost recognized as the research and development is realized or
      abandoned. IPR&D is presently expensed at the time of the
      acquisition.




·
            Contingencies,
      including contingent consideration, will generally be recorded at fair
      value with subsequent adjustments recognized in operations. Contingent
      consideration is presently accounted for as an adjustment of purchase
      price.




·
            Decreases
      in valuation allowances on acquired deferred tax assets will be recognized
      in operations. Such changes previously were considered to be subsequent
      changes in consideration and were recorded as decreases in
      goodwill.




Generally,
the effects of SFAS 141R will depend on future acquisitions.




On
December 4, 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51, which we will
adopt on January 1, 2009. This standard will significantly change the accounting
and reporting related to noncontrolling interests in a consolidated subsidiary.
After adoption, any noncontrolling interests will be classified as shareowner’s
equity, a change from its current classification between liabilities and
shareowner’s equity. Any earnings attributable to minority interests will be
included in net earnings. Purchases and sales of minority interests will be
reported in equity, deferring, perhaps permanently, recognition of the economic
gain or loss on partial dispositions.




F-16




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
B - INVESTMENT IN ANDORA





History





On
February 25, 2005, the Company formed a Canadian subsidiary initially named
Surge Global Energy (Canada) Ltd., which entered into a Farmout Agreement
(the”Farmout Agreement”) with Deep Well Oil & Gas, Inc. ( ”Deep Well”) and
Northern Alberta Oil, Ltd., ( “NAOL”). The Farmount Agreement provided that the
Company was initially obligated to drill two test wells on the Sawn Lake
Property located in Northern Alberta, Canada and to drill a total of ten wells
to perfect all rights. At the time, the Company was also obligated to issue one
third of its outstanding common stock on a fully diluted basis after the two
test wells were producing. Surge Global Energy (Canada) Ltd., was a wholly-owned
subsidiary of the Company until November 15, 2005.





On
November 15, 2005, the Company distributed 5,100,000 shares of common stock to
its Signet officers, directors and certain shareholders, and 7,550,000 shares of
Signet common stock to Deep Well and NAOL in exchange for leases of oil and gas
properties. Surge Global Energy (Canada) Ltd. was renamed Signet Energy, Inc.
(“Signet”) in November 2005. Signet became a minority owned subsidiary with the
Company retaining a 77.3% voting control of Signet at December 31, 2005 pursuant
to a Voting Trust Agreement with Northern Alberta Oil Ltd., or Northern, and
Deep Well Oil & Gas (Alberta), Ltd., or Deep Well,  In July
2006, Signet completed a private placement transaction, and as a result of the
financing and the Company’s election to not participate, the Company’s voting
interest in Signet was reduced to 47.15% (fully diluted voting interest of
35.14%, which assumes the exercise of all outstanding warrants and options and
the conversion of all convertible debt). Per the terms of the November 15, 2005
Voting Trust Agreement, voting control of the 7,550,000 Deep Well shares
terminated which reduced the Company’s voting control to 29.31% as of February
25, 2007 (fully diluted voting interest of 21.84%).




The
Company originally paid a total of $2,000,000 in 2005 to Deep Well and NAOL for
the Sawn Lake lease rights and in addition issued 7,550,000 shares of Signet
common stock in place of one third of the Company’s shares to perfect the rights
under the Farmout Agreement and to settle all claims with Deep Well and NAOL.
The Signet shares were valued at $6,314,820 for financial statement purposes
pursuant to SAB 51.





2006
Deconsolidation





In July
2006, Signet increased its outstanding shares following the completion of a
CDN$18,990,000 financing. As of July 6, 2006, Signet’s management and various
other investors owned 52.85% of Signet’s common stock to reduce the Company’s
outstanding voting security interest to less than 50%. Based upon this reduction
in ownership, The Company determined that it no longer has the legal power to
control the operating policies and procedures of Signet and deconsolidated
Signet from its consolidated financial statements during the fiscal quarter
ending September 30, 2006. Due to the change in influence on Signet’s
operations, the Company has reflected its Signet operations as an equity
investment using the 27.30% equity interest effective for the year ended
December 31, 2006 as well as for the nine months ended September 30,
2007.





Considering
the less than 50% interest in Signet as of July 6, 2006, effective July 6, 2006,
the Company has recorded the investment in Signet using the equity method of
accounting. Upon deconsolidation, the Company valued the Signet investment at
$11,936,000 which resulted in a gain of $4,148,000 which was recorded to the
investment account with a corresponding credit to additional paid-in
capital.





In
December 2006, beyond working interests earned to date, the right to earn
additional working interests in the Sawn Lake property acreage effectively
ended. These rights expired as the drilling results and lack of cold flow to
date on the property did not justify further horizontal development wells as
required by the Farmout Agreement. Accordingly, an amendment to the Farmout
Agreement to drill vertical delineation wells to earn additional working
interests in the property was sought but not granted by Deep Well. In addition,
in December 2006, Deep Well notified Signet that it was questioning Signet’s
earnings on 12 of the total 18 sections claiming Signet failed to properly
complete the well by not conducting the production testing as reasonably
required under the Farmout Agreement.




F-17


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  2006
Impairment
  Signet is
a pre-production stage development enterprise whose sole activity is the
delineation and development of an oil sand resource at its Sawn Lake property.
Signet has drilled, completed and production tested three horizontal wells on
the Sawn Lake property. The objective of these wells was to determine the
feasibility of conventional oil production from the property’s oil sands
resource, which feasibility was not established by the production test. As a
result of these factors, the Company recorded an impairment charge of $6,296,016
for the year ended December 31, 2006, which represented the carrying value of
the investment.


Andora
Agreement





On
September 19, 2007, Signet completed the proposed business combination of Signet
and Andora Energy Corporation ("Andora") (the “Combination”). As part of the
Combination, each of the issued and outstanding shares of Signet common stock
was exchanged for 0.296895028 shares of Andora common stock.  The
Company exchanged its 11,550,000 shares of Signet common stock for approximately
3,429,138 shares of common stock of Andora representing approximately 5.81% of
the fully diluted shares of Andora. Approximately
2,127,616 shares of Andora common stock received by the Company were placed in
an escrow account pursuant to an agreement with Valiant Trust Company, Andora
and Signet.  In connection with the Dynamo litigation claim (see Note
M), Andora is entitled to recover a claim from the Company pursuant to a
judgment of a court of competent jurisdiction and after exhausting all
appeals.  After satisfying any judgment award, any remaining escrowed
shares will be distributed to the Company upon a joint written notice from
Andora and the Company to Valiant.




Andora is
an oil and gas company owned 55.4% by Pan Orient Energy Corp., a Canadian energy
company listed on the TSX Venture Exchange.   According to Andora
disclosures, Andora’s assets include various percentage interests in 84 sections
of oil sands permits and a gross overriding royalty on various interests held by
Deep Well, all located in the Sawn Lake heavy oil project area of Alberta,
Canada, as well as a 2.4% net gross overriding royalty (3% of an 80% working
interest) on interests in the thickest net oil pay sections of the pool, which
is payable by Deep Well.





At the
time of the Combination, the Company’s former CEO was a member of  of
Signet’s Board of Directors of Signet and owned 850,000 shares of Signet common
stock, which he exchanged for approximately 252,361 shares of common stock of
Andora.




For the
years ended December 31, 2007 and 2006, the Company charged operations for
$1,056,578 and $1,043,085, respectively  representing the Company’s
27.30% share of Signet's loss. Both the 2006 impairment charge and share of
Signet’s loss were reflected as a reduction to the Signet investment.  For
the year ended December 31, 2007, The Company charged operations for $1,056,578
representing the Company’s 27.30% share of Signet's loss through September 2007,
which was reflected as a reduction to the Andora investment.  The net
investment in Andora at December 31, 2007 was $3,540,639 representing the
Company’s 5.81% of the fully diluted shares of Andora.





Should
Andora obtain financing in the future, the Company may sustain additional
dilution to its equity interest in Andora.





Equity
Method





As
described above, the Company uses the equity method to account for its
investment in Signet effective July 6, 2006. Under the equity method of
accounting, the Company's share of net income (loss) from Signet is reflected as
an increase (decrease) in its investment accounts and is also recorded as equity
loss from affiliates.





In
accordance with FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—an
amendment of APB Opinion No. 29,” the Company is required to measure the value
of assets exchanged in the non-monetary transaction by using the net book value
of the asset relinquished since the exchange was deemed to not have commercial
substance.   Accordingly, the Company will not recognize a gain
or loss on the conveyance of Signet shares into Andora shares.  Since
the Combination will not have a material impact on the Company’s financial
position, the presentation of an Unaudited Pro forma Condensed Consolidated
Balance Sheet has been excluded.




F-18


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006


NOTE
C - INVESTMENT IN PEACE OIL





On
November 30, 2006, the Company entered into a Stock Purchase Agreement (the
“Stock Purchase Agreement”) with Cold Flow Energy ULC, a corporation
incorporated under the laws of Alberta, Canada (“Cold Flow”), Peace Oil Corp., a
corporation incorporated under the laws of Alberta, Canada (“Peace Oil”), and
shareholders of Peace Oil (the “Target Shareholders”). Cold Flow is a wholly
owned subsidiary of the Company. Pursuant to the terms of the Stock Purchase
Agreement, Cold Flow purchased all of the issued and outstanding shares of the
capital stock of Peace Oil (the “Acquisition”) for a total purchase price of
CDN$16,350,000, which consisted of CDN$6,350,000 in cash and an aggregate of
8,965,390 exchangeable shares of Cold Flow preferred stock (the “Exchangeable
Shares”). On December 4, 2006, Cold Flow delivered an initial deposit of
CDN$150,000, which deposit and any interest earned thereon was deducted from the
cash portion of the purchase price.





Since
completion of the Acquisition was extended beyond January 18, 2007, Cold Flow
made an additional deposit of CDN$450,000 into escrow prior to January 18, 2007,
which additional deposit and any interest earned thereon was deducted from the
cash portion of the purchase price. On March 2, 2007, the Company completed the
Acquisition of Peace Oil. In connection with the closing of the Acquisition, the
parties amended the Stock Purchase Agreement on March 2, 2007 to modify the
total purchase price by CDN$270,000 to CDN$16,620,000 to retire CDN$250,000 in
shareholder loans and reimburse Peace Oil for CDN$20,000 in legal fees incurred
with the Acquisition. On March 2, 2007, the Company made an additional deposit
of CDN$420,000, which additional deposit and any interest earned thereon was
deducted from the cash portion of the purchase price to total CDN$1,020,000 in
deposits. CDN$5,600,000 of the cash portion of the purchase price is now payable
in promissory notes issued by Cold Flow in favor of 1304146 Alberta Ltd., which
is an entity formed by the shareholders of Peace Oil, with CDN$4,000,000 in
secured notes and CDN$1,600,000 as an unsecured note. As a result of the
acquisition, Peace Oil became a wholly owned subsidiary of Cold
Flow.





Pursuant
to the Stock Purchase Agreement, the Company, Cold Flow, and Olympia Trust
Company of Canada entered into a Voting and Exchange Trust Agreement on the
closing date and the Company and Cold Flow entered into a Support Agreement on
the closing date (collectively with the Stock Purchase Agreement, the
“Acquisition Agreements”). The Acquisition Agreements provide that each of the
8,965,380 Exchangeable Shares are exchangeable into two shares of the Company’s
common stock at any time from the closing until five years after the closing. In
addition, the Company may redeem all of the then outstanding Exchangeable Shares
at any time on or after the third anniversary of the closing date at a
redemption price equal to the sum of the market price of two shares of the
Company’s common stock plus all declared but unpaid dividends payable to the
Exchangeable Shares.





As part
of the Peace Oil transaction, on March 2, 2007 the Company also issued a warrant
to purchase 1,000,000 shares of our common stock to 1304146 Alberta Ltd. at an
exercise price per share of $1.00 per share contingent upon the Company
completing the final secured note payable of CDN$4,000,000 on June 28,
2007. The warrant is exercisable in cash or by net issue exercise and has a term
of three years from the date of issuance.




As provided by the Stock
Purchase Agreement, the Company filed an amended registration statement on Form
SB-2 with the SEC on July 27, 2007 registering the shares of the Company’s
common stock issuable upon exchange of the Exchangeable Shares for resale by the
Peace Oil shareholders. The registration statement was declared effective on
August 3, 2007. In addition, the Stock Purchase Agreement provides for
representations and warranties, and indemnification provisions typical of
transactions involving the acquisition of a privately held company.




F-19


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006


The
Acquisition of Peace Oil was accounted for using the purchase method in
accordance with SFAS 141, “Business Combinations.” The value of the Company's
common stock issued as a part of the Acquisition was determined based on the
most recent price of the Company's common stock on the day immediately preceding
the announcement date. The results of operations for Peace Oil have been
included in the Consolidated Statements of Operations since the date of
Acquisition.  The components of the purchase price were as
follows:





Redeemable
      Preferred shares
            
            $
            8,654,700Cash
            
            
            880,613Notes
      Payable
            
            
            4,848,798Direct
      acquisition costs
            
            
            44,673Total
      purchase price
            
            $
            14,428,784




In
accordance with Financial Accounting Standard (SFAS) No. 141, Business
Combinations, the total purchase price was allocated to the estimated fair value
of assets acquired and liabilities assumed. The fair value of the assets
acquired was based on management's best estimates. The purchase price was
allocated to the fair value of assets acquired and liabilities assumed as
follows:





Current
      assets
            
            $
            302,089Investment
      in Peace Oil
            
            
            14,443,011Liability
      assumed- cash advances from joint venture
            
            
            (316,316
            )Net
      assets acquired
            
            $
            14,428,784





Peace Oil
and 1304146 Alberta Ltd. entered into a Royalty Agreement dated March 2, 2007
("Royalty Agreement") that provides for the security interest for the payment of
CDN$4,000,000 of the purchase price in the Acquisition. In the Royalty
Agreement, Peace Oil granted to 1304146 Alberta Ltd. a non-convertible absolute
gross overriding royalty, which comprises an interest in the petroleum
substances in the lands of Peace Oil in the Red Earth area of Alberta. The gross
volume of petroleum substances comprising the overriding royalty is quantified
as follows: for crude oil, 50% of the gross monthly production of crude oil
produced from each oil well; for natural gas, 50% of the gross monthly
production of natural gas produced from each gas well; and for all other
petroleum substances, 50% of the gross monthly production thereof from each
well. All security interests and the Royalty Agreements will be extinguished
upon payment of CDN$4,000,000.





On June
28, 2007, the Company completed an Agreement of Purchase and Sale (the
“Agreement”) with Peace Oil and North Peace Energy Corp., a Canadian oil sands
company listed on the TSX Venture Exchange (“North Peace”) in connection with
the sale of certain assets of Peace Oil to North Peace (the “North Peace
Transaction”), including Peace Oil’s undivided 30% working interest in 135
square miles (86,400 acres) of oil sands leases in the Red Earth area of
Alberta, Canada (the “Red Earth Leases”).





The
aggregate consideration for the North Peace Transaction was approximately
CDN$20,000,000. The Transaction consideration consists of approximately
CDN$15,000,000 in cash, including a CDN$4,500,000 deposit and CDN$5,000,000 in
common shares of North Peace at a price of CDN$2.20 per share. The common shares
to be issued in the North Peace Transaction will be subject to a contractual
one-year hold period and will represent approximately 4.87% of the fully diluted
shares of North Peace.





As part
of the Agreement, Peace Oil and North Peace made certain representations and
warranties to each other and agreed to indemnify the other for certain losses
provided therein. In addition, the Company agreed to guarantee and be jointly
and severally liable for Peace Oil’s obligations and liabilities under the
Agreement.




F-20




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






As part
of the Agreement, the Company, Peace Oil and North Peace entered into a binding
Letter Agreement in connection with the Transaction.  Peace Oil is an
indirect wholly-owned subsidiary of the Company. Peace Oil and North Peace were
parties to a Joint Venture Agreement dated December 2005 (“Joint Venture
Agreement”) to develop and exploit the Red Earth Leases. The Joint Venture
Agreement provided that Peace Oil and North Peace were to hold 30% and 70%
working interests in the Red Earth Leases, respectively. Upon closing of the
Transaction, North Peace obtained all of Peace Oil’s interest in the Red Earth
Leases.





After
consultation with Canadian tax and legal advisors in January 2008, the Company
determined that the reserve for Canadian income taxes resulting from the Peace
transaction was incorrect and should be restated.  The amounts
reported in the Company’s unaudited consolidated financial statements for its
quarters ended June 30, 2007 and September 30, 2007 failed to take into account
differences between the assigned values of the purchase price to the assets, the
corresponding tax attributes available to Peace Oil and did not properly reflect
tax consequences of the sale of certain assets by Peace Oil.  The
additional amount of tax payable increased by approximately CDN$4,130,467, above
the amount accrued in the previously reported financial statements and may be
subject to revision. The Company concluded the Canadian tax liability has a
material impact on the Company’s consolidated financial position, results of
operations and liquidity and restated its June 30, 2007 and September 30, 2007
to reflect the revised tax liability during those periods.





Investment
in North Peace Energy





As a
result of the Peace Oil sale to North Peace, the Company owns 2,270,430 common
shares of North Peace which represents 4.87% of the fully diluted shares of
North Peace as of December 31, 2007.





During
the year ended December 31, 2007, the Company has recorded a gain of $3,098,554
related to the sale of Peace Oil as well as income tax expense of $4,847,978
(see Note G)




Pro
Forma Information




The
following pro forma unaudited financial information has been prepared by
management of the Company in order to present consolidated financial
results of operations of the Company as to give effect to the loss of control
and significant influence of Signet (including the Andora Agreement
“Non-Monetary Share Exchange”)  and the sale of Peace Oil. The pro
forma condensed consolidated statement of losses for the year ended December 31,
2007 and the year ended December 31, 2006 present pro forma results had the
transactions taken place at January 1, 2005.





The pro
forma information is based on historical financial statements giving effect to
the loss of control and significant influence of Signet using the cost
method  of accounting and the sale of Peace Oil.  The
unaudited pro forma financial information is not necessarily indicative of the
actual results of operations or the financial position which would have been
attained had the acquisitions been consummated at either of the foregoing dates
or which may be attained in the future.




For
      the year ended December 31, 2007
            
            
            For
      the year ended December 31, 2006
            
            
            For
      the period from January 1, 2005 (date of inception) through December 31,
      2007Net
      Loss - (as reported)
            
            $
            (11,343,620
            )
            
            $
            (15,926,093
            )
            
            $
            (36,000,922
            )Adjustments:Gain
      on sales of Peace Oil
            
            
            (3,098,554
            )
            
            
            -
            
            
            
            (3,098,554
            )Income
      tax provision on sale of Peace Oil
            
            
            4,847,978
            
            
            
            -
            
            
            
            4,847,978Loss
      in Signet prior to deconsolidation
            
            
            -
            
            
            
            2,026,122
            
            
            
            7,014,937Loss
      applicable to minority interest
            
            
            -
            
            
            
            (1,119,027
            )
            
            
            (3,679,096
            )Equity
      losses from affiliate
            
            
            1,056,578
            
            
            
            1,043,085
            
            
            
            2,099,663Net
      Loss - pro forma
            
            $
            (8,537,618
            )
            
            $
            (13,975,913
            )
            
            $
            (28,815,994
            )Loss
      per common share - Pro forma(basic
      and diluted)
            
            $
            (0.28
            )
            
            $
            (0.51
            )
            
            $
            (1.08
            )




F-21


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006


NOTE
D - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities at December 31, 2007 and 2006 are as
follows:





2007
            
            
            2006Accounts
      payable
            
            $
            498,478
            
            
            $
            269,712Accrued
      payroll, payroll expenses and taxes
            
            
            35,005
            
            
            
            43,105Accrued
      expenses
            
            
            620,053
            
            
            
            290,724Total
            
            $
            1,153,536
            
            
            $
            603,541





NOTE
E - WARRANT LIABILITY





November 2005 Private
Placement





In
November 2005, the Company completed a private placement which resulted in gross
proceeds of $800,000. In connection with this private placement, the Company
sold 800,000 shares of common stock at a price of $1.00 per share and issued
warrants to purchase up to 1,600,000 shares of common stock. The warrants have a
3 to 5 year term and exercise prices ranging from equal to $1.00 to
$1.45.





Since the
warrants are subject to certain registration rights, the Company valued the
warrants using the Black-Scholes option pricing model, applying a life of 3 to
year 5 years, a risk free interest rate of 4.42% to 4.54%, an expected dividend
yield of 0%, a volatility of 205% and a deemed fair value of common stock of
$1.22 to $1.55 which was the closing price of the Company’s common stock on
November 14 and November 30, 2005, respectively, and recorded a warrant
liability at grant date, totaling $2,245,100, in accordance with EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”. The warrant liability has subsequently been
recalculated using the closing price of the Company’s common stock as of
December 31, 2005 of $1.45. Assumptions regarding the life, the expected
dividend yield and volatility were left unchanged but the Company did apply a
risk free interest rate of 4.35%, a volatility of 200% and a deemed fair value
of common stock of $1.45, which was the closing price of the Company’s common
stock on December 31, 2005. The difference of $70,900 between the fair value of
the warrants as of December 31, 2005 and the previous valuation as of November
2005 has been recorded as a gain on revaluation of warrant liability, and
included in the accompanying consolidated financial statements for the year
ended December 31, 2005. The warrant liability at December 31, 2005 was
$2,174,200.





The
registration rights provide for the Company to file with the Securities and
Exchange Commission a Registration Statement covering the resale of all of the
securities issued in connection with the private placement. The registration
statement was filed with the Securities and Exchange Commission on December 30,
2005. The Company was required to have received an effective registration no
later than May 15, 2006 closing date or six months following each investor’s
private placement date. Per the terms of the registration rights agreement and
since the registration was not effective until May 30, 2006, the Company was
obligated to reprice 1 million of the $1.00 warrant exercise price by $0.005 for
each day the registration was not effective from May 15, 2006. As a result, the
1 million $1.00 warrants were repriced to $0.93. Upon the registration becoming
effective on May 30, 2006, the fair value of the warrant liability on that date,
totaling $3,787,861, was reclassified to permanent equity. The difference of
$1,613,661 between the fair value of the warrants as of December 31, 2005 and
May 30, 2006 has been recorded as a loss on revaluation of warrant liability,
and included in the accompanying consolidated financial statements for the year
ended December 31, 2006.




F-22


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006


November 2006 Private
Placement





In
November 2006, the Company completed a private placement which resulted in gross
proceeds of $1,350,000. In connection with this private placement, the Company
also issued warrants to purchase an aggregate of 3,000,000 shares of the
Company’s common stock at an exercise price of $0.60 per share and a 5 year term
as well as warrants to purchase an aggregate of 3,000,000 shares of the
Company’s common stock at an exercise price of $0.50 per share with a six-month
term. The warrant exercise price is subject to a weighted average anti-dilution
adjustment if the Company issues any shares of common stock for a consideration
per share below the exercise price then in effect.




Concurrently,
the Company entered into a Registration Rights Agreement with each of the
purchasers. Pursuant to its terms, the Company agreed to file a registration
statement to cover the resale of the shares of common stock and the shares
underlying the warrants within 30 days of the agreement and to cause such
registration statement to be declared effective by the SEC within 120 days of
the agreement. The Company filed the registration statement on December 20,
2006. The Company withdrew the registration statement on June 28, 2007. The
Company failed to cause the registration statement to be declared effective by
the SEC within the effective deadline pursuant to the agreement, and, as a
result, the Company is obligated to pay to each holder an amount in cash, as
partial liquidated damages and not as a penalty, equal to 2.0% of the aggregate
purchase price paid by such holder pursuant to the Securities Purchase Agreement
for any registrable securities then held by such holder.





The
Company recorded an initial warrant liability at grant date in accordance with
EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock”. The warrant liability has
subsequently been recalculated using the closing price of the Company’s common
stock as of December 31, 2006 of $0.57. The Company valued the warrants using
the Black-Scholes option pricing model, applying a life of six months to 5
years, a risk-free interest rate of 4.34% to 4.42%, an expected dividend yield
of 0%, a volatility of 155% and a deemed fair value of common stock of $0.77,
which was the closing price of the Company’s common stock on November 30, 2006.
Initial warrant liability was valued at $3,420,900 on November 30,
2006.




At
December 31, 2006, the Company revalued the warrants using the Black-Scholes
option pricing model. Assumptions regarding the life, the expected dividend
yield was left unchanged but the Company did apply a risk free interest rate
range of 4.35% to 4.38%, a volatility of 155% and a deemed fair value of common
stock of $0.57, which was the weighted average closing price based on trading
volume of the Company’s common stock during the month of December 31, 2006. The
decrease of $1,111,500 in the fair value of the warrants at December 31, 2006
from the previous valuation at November 30, 2006 has been recorded as a gain on
revaluation of warrant liability for the year ended December 31, 2006. Warrant
liability at December 31, 2006 amounted to $2,309,400.




In
December 2006, the FASB approved FSP EITF 00-19-2 “Accounting for Registration
Payment Arrangements, which establishes the standard that contingent obligations
to make future payments under a registration rights arrangement shall be
recognized and measured separately in accordance with Statement 5 and FASB
Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss”. The
Company has evaluated the effect of how FSP EITF 00-19-2 and FSP EITF Topic D-98
affected these accompanying financial statements. In adopting FSP EITF 00-19-2
accounting pronouncement on January 1, 2007, the Company reclassified $2,309,400
of the warrant liability to permanent equity.





NOTE
F - NOTE PAYABLE





On
December 4, 2006, the Company previously entered into a Securities Purchase
Agreement (“Securities Purchase Agreement”) with Gemini Master Fund, Ltd.
(“Gemini”) pursuant to which the Company sold 2,000,000 shares of its common
stock at a purchase price of $0.45 per share. Pursuant to the Securities
Purchase Agreement, the Company also issued to Gemini a warrant to purchase
2,000,000 shares of our common stock at an exercise price of $0.60 per share and
with a term of five years and a warrant to purchase 2,000,000 shares of our
common stock at an exercise price of $0.50 per share with a term of six months
which is 45 days after the effective registration statement. Concurrently, the
Company also entered into a Registration Rights Agreement with Gemini pursuant
to which the Company agreed to file a registration statement to cover the resale
of the shares of common stock and the shares underlying the warrants within 30
days of the agreement and to cause such registration statement to be declared
effective by the SEC within 120 days of the agreement.




F-23


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006


On April
19, 2007, the Company entered into an Exchange, Purchase and Amendment Agreement
with Gemini (the “Exchange Agreement”). The Exchange Agreement amends the filing
date of the registration statement under the Registration Rights Agreement to be
the 30th
calendar day after the date of the Exchange Agreement and the effectiveness date
to be the 120th
calendar day following the date of the Exchange Agreement. The Exchange
Agreement also provides a waiver by Gemini of any liquidated damages due under
the Registration Rights Agreement prior to the execution of the Exchange
Agreement while all registration rights related to the Exchange Agreement remain
in place. The Exchange Agreement provides for the sale and issuance by us of a
Convertible Note at 0% interest (the “Convertible Note”) in the principal amount
of $1,150,000 to Gemini in consideration for the waiver of the liquidated
damages and the surrender to us of all the shares issued to Gemini pursuant to
the Securities Purchase Agreement. The principal amount of the Convertible Note
issued to Gemini also covers an additional $250,000 of cash consideration from
Gemini Master Fund. The Company’s obligations under the Registration Rights
Agreement now cover the shares underlying the Convertible Note and the shares
underlying the warrants, but no longer include the surrendered shares. As a
result of the Exchange Agreement, Gemini retains all previously issued
warrants.





The
Convertible Note has a maturity date of May 1, 2008. The holder has the right to
convert all or any part of the outstanding and unpaid principal amount of the
note into shares of our common stock at a conversion price of $0.37 per share,
subject to antidilution adjustment if the Company issues securities for a
consideration per share less than the conversion price on the date of such
issuance or sale. In the event of a default or a change in control, the holder
has the right to have all or any portion of the unpaid principal amount, plus
any accrued and unpaid interest, redeemed by us at a redemption price equal to
120% of the unpaid principal amount of the note being redeemed plus all accrued
and unpaid interest (the “Redemption Price”). Upon satisfaction of certain
equity conditions, the Company has the right to redeem all but not less than all
of the unpaid principal amount of the note at the Redemption
Price.  On August 6, 2007, the Company received a notice of default
and election of Mandatory Redemption pursuant to Section 5 of the Note from
Gemini (the “Mandatory Redemption Notice”). Gemini stated that the default
resulted from the Company’s failure to (i) register for resale of the shares of
common stock issuable upon conversion of the Note and exercise of the warrants
(collectively, the “Securities”), and (ii) pay liquidated damages to Gemini for
such failure to register the Securities under the Registration Rights Agreement.
Pursuant to Section 5(a) of the Note, Gemini has the right, upon written notice
to the Company, to have all or any portion of the unpaid principal amount of the
Note, plus all accrued and unpaid interest, redeemed by the Company (a
“Mandatory Redemption”) at a price equal to one hundred and twenty percent
(120%) of (x) the unpaid principal amount of the Note, plus (y) all accrued and
unpaid interest (including default interest) under the Note.  Upon
receiving notice of default and election of the Mandatory Redemption Notice, the
Company requested that the date of the Mandatory Redemption be postponed until
November 1, 2007. After consideration, Gemini decided to accommodate the
Company’s request and on August 8, 2007, the Company and Gemini entered into a
Redemption Agreement (“Redemption Agreement”) and an Escrow Agreement (“Escrow
Agreement”) with Torrey Pines Bank (the “Bank”) to effect the postponement of
the Mandatory Redemption.  As of September 30, 2007, restricted cash
totaling $1,380,000 was held with Torrey Pines Bank.





Under the
Redemption Agreement, the Company and Gemini agreed that the appropriate payment
for the Mandatory Redemption is $1,380,000 (the “Mandatory Redemption Price”)
and to postpone the redemption of the Note and the required payment of the
Mandatory Redemption Price until November 1, 2007 (the “Revised Mandatory
Redemption Date”). Pursuant to the Redemption Agreement, the Company agreed that
(a) Gemini may revoke the Mandatory Redemption Notice (in which case the Company
shall not redeem the Note), (b) the Mandatory Redemption Notice shall remain
valid and in full force and effect unless revoked by Gemini, and (c) a default
has occurred and is continuing under the Note and, unless the Mandatory
Redemption Notice is revoked by Gemini, the Company shall redeem the Note for
the Mandatory Redemption Price regardless of whether there is a cure or
discontinuance of the default under the Note. Gemini has the right to extend the
Revised Mandatory Redemption Date until December 31, 2007. On November 1, 2007,
the Company repaid Gemini $1,380,000 from the escrow established on August 8,
2007.





In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
recognized and measured an aggregate of $553,828 of the proceeds, which is equal
to the intrinsic value of the imbedded beneficial conversion feature, to
additional paid in capital and a discount against the Convertible
Note during the year ended December 31, 2007. The debt discount attributed
to the beneficial conversion feature was amortized over the 196-day escrow
period of April 19, 2007 through November 1, 2007 as interest
expense.





The
Company valued the attached warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: contractual terms of
5 years, an average risk free interest rate of 4.42% to 4.91%, a dividend yield
of 0%, and volatility of 157.24%. The $522,747 of debt discount attributed to
the value of the warrants issued was amortized over the 196-day escrow period of
April 19, 2007 through November 1, 2007 as interest expense.





The
Company amortized the debt discount to the Convertible Note for the
beneficial conversion feature and value of the attached warrants, and recorded
non-cash interest expense in the amount of $1,076,575 for the year ended
December 31, 2007.




F-24


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006


NOTE
G - INCOME TAXES




For
income tax reporting purposes, the Company's aggregate unused net operating
losses approximate $4,130,000, which expire through 2027 subject to limitations
of Section 382 of the Internal Revenue Code, as amended.. The deferred tax asset
related to the carry forward is approximately $1,445,000. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earning history of
the Company, it is more likely that the benefits will not be
realized.




Total
income taxes for the years ended December 31, 2007 and 2006 are as
follow:




For
      the year ended
              December
      31, 2007
            
            
            For
      the year ended
              December
      31, 2006Current:U.S.
      Federal
            
            $
            -
            
            
            $
            -State
            
            
            -
            
            
            
            -Canadian
            
            
            5,280,789
            
            
            
            -Total
      current tax provision
            
            
            5,280,789
            
            
            
            -Deferred:U.S.
      Federal
            
            
            -
            
            
            
            -State
            
            
            -
            
            
            
            -Canadian
            
            
            -
            
            
            
            -Total
      deferred tax provision
            
            
            -
            
            
            
            -TotaIncome
      taxes
            
            $
            5,280,789
            
            
            $
            -




Current
provision for income taxes of $5,280,789 is the result of applying the Alberta
Canada provincial tax rate of 30.8% to the gain on sale of the Peace Oil assets
to North Peace net of operating loss offsets and exchange rates (See Note
C).





As part
of the January 2008 review by Canadian tax and legal advisors, the Company
established new tax years for Peace Oil to extend tax payment due dates related
to the gain on the North Peace Transaction.  The new Peace Oil tax
year commences June 28, 2007, the date of the gain, through June 27,
2008.  The Company seeks a Canadian oil sands acquisition candidate
with asset tax pool losses sufficient to offset some or all of the North Peace
Transaction gain by June 27, 2008.  Peace Oil’s  tax
liability is due by August 27, 2008.




F-25


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006


NOTE
H - REDEEMABLE PREFERRED SHARES





In
connection with the Peace Oil Acquisition, on March 2, 2007, Cold Flow issued
8,965,380 exchangeable shares (“Exchangeable Shares”) to the Peace Oil
shareholders, each of which is exchangeable into two shares of the Company’s
common stock or a total of 17,930,780 the Company’s common shares. The
Exchangeable Shares are entitled to a dividend corresponding to any dividend,
whether cash, stock or otherwise, declared on any shares of the Company’s common
stock. The Company’s Board of Directors did not authorize a dividend rate for
the periods presented in these financial statements. Cold Flow is restricted
from taking certain actions, including, without limitation, declaring or paying
dividends on Cold Flow shares, redeeming Cold Flow shares, or issuing any shares
of capital stock of Cold Flow senior to the Exchangeable Shares, without the
approval of the holders of the Exchangeable Shares. Upon a liquidation,
dissolution, bankruptcy or winding up of Cold Flow, Exchangeable Shares receive
an amount equal to two times the then current market value of a share of the
Company’s common stock (plus any declared, but unpaid, dividends declared on the
Company’s shares) per share before any distribution to common
shareholders.




Except
for limited voting rights with respect to approvals of amendments to the
Acquisition Agreements and other related agreements, the Exchangeable Shares are
not entitled to any voting rights. Holders of Exchangeable Shares may cause Cold
Flow to redeem Exchangeable Shares for a purchase price equal to two times the
current market price of the Company’s common stock (determined by the average of
the closing bid and asked prices of the Company’s common stock during a period
of 20 consecutive trading days ending not more than three trading days before
the date requested for retraction by a holder) plus any declared, but unpaid,
dividends on the Company’s shares. Such purchase price may be satisfied by
delivering two shares of the Company’s common stock and payment for any such
dividends. The Exchangeable Shares are also subject to redemption by Cold Flow,
following the third anniversary of the closing of the acquisition of Peace
Oil.




Included
within the Company’s 36,470,337 issued and outstanding shares at December 31,
2007, Cold Flow had 5,215,436.50 Exchangeable Shares issued and outstanding at
December 31, 2007 and none at December 31, 2006. Since a holder of Exchangeable
Shares may cause a redemption of shares at any time, the Company has classified
the redemption amount outside permanent equity.  As of December 31,
2007, the Company Redeemable Preferred Shares had a carrying value of
CDN$5,817,300 or US $5,930,156.  On November 6, 2007, Cold Flow
shareholders exchanged 3,749,953.5 preferred shares into 7,499,907 common shares
of the Company.




NOTE
I - CAPITAL STOCK





Preferred
Stock





The
Company is authorized to issue up to 10,000,000 shares of Preferred Stock in one
or more series and to fix the rights, preferences, privileges, and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidating preferences, and the number of shares constituting any
series or the designation of such series.





The
Company has issued 1,100,000 shares of its Series B Convertible Preferred Stock
(Series B) $.001 par value to Duncan Hill, Inc in 1997. The Series B stock has
the same voting privileges as the Common Stock. Each share of Series B stock is
convertible into one share of the Company's Common stock at the option of either
the holder or the Company upon the Company's net pre-tax profit reaching
$500,000 in any given calendar year. The Series B stock is not subject to
redemption. In the event of a voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Company, each share of Series B stock has a
liquidation preference of $.001 plus dividends in arrears, which is subordinated
to the liquidation preference of the Series A stock. The holder of each share of
Series B Preferred Stock will be entitled to receive, when, as, and if declared
by the Board of Directors of the Company, out of funds legally available
therefore, cumulative quarterly cash dividends at the rate of $.025 per share,
quarterly on March 31, June 30, September 30, and December 31 commencing with
March 31, 1998 before any dividend shall be declared, set apart for, or paid
upon the Common Stock for such year, and the remainder of the surplus or net
earnings applicable to the payment of dividends shall be distributed as
dividends among the holders of Common Stock as and when the Board of Directors
determines. There were no dividends declared or paid during the time the Series
B Preferred Stock was outstanding.




F-26




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
I - CAPITAL STOCK (Continued)





In
connection with the Asset Purchase Agreement in December 2004 (Note A), Duncan
Hill, Inc., an entity controlled by the Company’s former Chief Executive Officer
agreed to convey to the Company for cancellation of 5,000,000 shares of Series A
Preferred Stock and 1,100,000 shares of Series B Preferred Stock, and to release
the Company from all obligations for accumulated dividends thereon, in exchange
for 6,100 shares of the Company's Common Stock.




On March
2, 2007, the Company issued one share of our Special Voting Preferred Stock to
Olympia Trust Company as trustee pursuant to the Voting and Exchange Trust
Agreement. The preferred stock was issued in connection with our acquisition of
Peace Oil. The issuance of the preferred stock is exempt from registration
pursuant to Regulation S promulgated under the Securities Act of 1933, as
amended. The Special Voting Preferred Stock is not convertible into shares of
any other series or class of our capital stock.





Common
Stock





On
February 22, 2007, the Company approved an increase to the
Company's authorized shares of capital stock to an aggregate of 210,000,000
shares, consisting of 200,000,000 shares of common stock with a par value of
$0.001 per share (“Common Stock”) and 10,000,000 shares of preferred stock,
pursuant to an amendment to our Certificate of Incorporation. As of December 31,
2007, the Company had 36,470,337 shares of Common Stock issued and
outstanding.





The
Company is not currently subject to any contractual arrangements, which restrict
its ability to pay cash dividends. The Company's Certificate of Incorporation
prohibits the payment of cash dividends on the Company's Common Stock in excess
of $.05 per share per year so long as any l preferred stock remains outstanding
unless all accrued and unpaid dividends on l preferred stock has been set apart
and there are no arrearages with respect to the redemption of
any  preferred stock.





In
February 2005, the Company issued 100,000 shares of common stock to one of the
Company’s former Directors in connection with stock options exercised at $0.25
per share for net proceeds of $25,000.





In August
2005, the Company issued an aggregate of 200,000 shares of common stock to third
party investors and 100,000 shares of common stock to two Directors of the
Company in exchange for net proceeds of $300,000. In connection with this
private placement, the Company issued to the investors an aggregate of 150,000
warrants with Piggy-back registration rights.




In August
and October 2005, the Company issued an aggregate of 1,710,000 shares of common
stock in exchange for $1,710,000 of convertible notes. The Company entered into
a Note and Warrant Purchase Agreement with investors on March 17, 2005 for the
issuance of an aggregate of $1,710,000 of convertible notes, and attached to the
Convertible Notes were warrants to purchase 855,000 shares of the Company’s
common stock. The Noteholders had the option to convert any unpaid note
principal to the Company’s common stock at $2.25 per share anytime during the
term of the note. In August 2005, the Company entered an agreement with the
noteholders to reduce the conversion rate to $1.00 per share, and the
noteholders advised the company of their intent to convert the Notes into common
stock. In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company recognized an imbedded
beneficial conversion feature present in the convertible note in the amount of
$1,022,492 (after adjustment for note amendment in August 2005) to additional
paid-in capital and a discount against the convertible note.  In accordance
with Emerging Issues Task Force Issue 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments (“EITF - 0027”), the Company recognized the
value attributable to the warrants in the amount of $629,192 (after adjustment
for the note amendment in August 2005) to additional paid-in capital and a
discount against the Convertible Note. The Company valued the warrants in
accordance with EITF 00-27 using the Black-Scholes pricing model and the
following assumptions: contractual terms of 5 years, an average risk free
interest rate of 4.00%, a dividend yield of 0%, and volatility of 174%. The debt
discount attributed to the beneficial conversion feature and value of the
warrants issued is amortized over the convertible note’s maturity period (one
year) as interest expense. Upon the conversion of the $1,710,000 promissory
notes to the Company’s common stock, all unamortized debt discount was charged
to operations. The Company recorded non-cash interest expense in the amount of
$1,651,684 during the year ended December 31, 2005 in connection with the
$1,710,000 convertible notes.





F-27




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
I - CAPITAL STOCK (Continued)




Common Stock
(Continued)


In
November 2005, the Company issued an aggregate of 800,000 shares of common stock
to third party investors in exchange for net proceeds of $800,000. In connection
with this private placement, the Company issued to the investors an aggregate of
1,600,000 warrants that are subject to registration rights and penalties if the
registration is not effective by May 15, 2006. The Company has accounted for the
warrants issued in accordance with EITF 00-19 “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock” (Note E).
 
 In March 2006, the Company received
$1,800,000 of net proceeds from third party investors for 1,200,000 shares of
common stock subscribed. In connection with this private placement, the Company
issued to the investors an aggregate of 1,200,000 warrants that are subject to
piggy-back registration rights. The common shares subscribed were issued in
April 2006.
 
 In June
2006, the Company issued 160,000 shares in exchange for C$200,000 in convertible
debt related to the Signet subsidiary and charged the Signet investment for US$
178,618.
 
 In June
2006, 450,000 shares were returned for services not completed related to the
acquisition of Phillips & King International Inc. during August
2000.
 
 In July
2006, the Company issued 400,000 shares of common stock to a former Company
officer and director in connection with stock options exercised at $0.25 per
share for net proceeds of $100,000.


While the
Company no longer presents consolidated results for its equity interest in
Signet, CDN$8,550,000 of Signet debenture holders have an option to convert
their debentures into the Company’s Common Stock. In November 2005, Signet
issued convertible promissory notes in exchange for aggregate gross proceeds
of CDN$8,550,000. During the quarter ended June 30, 2006, CDN$200,000 of
promissory notes were converted to stock reducing total notes payable to
CDN$8,350,000. Per the terms of a Debenture Subscription Agreement, and at
the option of the holder, the debentures are exchangeable into either Signet or
the Company’s common shares or are subject to automatic conversion should Signet
complete a going public transaction on the Toronto Stock Exchange. Converting to
the Company’s shares also increased the Company’s ownership percentage in
Signet.  Prior to the Andora Agreement and other than the CDN$200,000
conversion that occurred during the quarter ended June 30, 2006, there have been
no other conversions.




In
November 2006, the Company issued an aggregate of 3 million shares of common
stock to third party investors in exchange for net proceeds of $1,350,000. In
connection with this private placement, the Company issued to the investors an
aggregate of six million warrants that are subject to registration rights and
penalties amounting to 2% of the proceeds on a monthly basis if the registration
is not effective by March 28, 2007. To address pending SEC comments, the Company
is obligated to provide and disclose Peace Oil financials as well as a pro
forma of the combined companies. The Company has accounted for the warrants
issued in accordance with EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (Note
E).





The
Company was unable to obtain an effective registration statement as of March 28,
2007. Subsequently, on April 19, 2007, Gemini agreed to extend the time for
filing of the registration statement, pursuant to a Exchange Purchase and
Amendment Agreement (“Exchange Agreement”), the until 30 days from the date of
the Exchange Agreement and the time for the effectiveness of the registration
statement from March 28, 2007 to 120 days from the date of Exchange Agreement.
The Company has not filed a registration statement and, as a
result, the Company has incurred monthly liquidated damages, equal to
2% of such net proceeds described above, which have been assessed on a
monthly basis and have accrued interest. The Company charged $28,110 to
operations related to the late registration penalty during the year
ended December 31, 2007.




In
January 2007, the Company issued 383,333 shares of Common Stock to two of the
Company’s directors in connection with stock options exercised at an average of
$0.24 per share for net proceeds of $91,867.




In April
2007, the Company exchanged 2,000,000 shares of Common Stock for a note payable
with Gemini (see Note F - Note Payable).





In
November 2007, Cold Flow shareholders exchanged 3,749,953.5 preferred shares
into 7,499,907 common shares of the Company.




F-28





SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006




NOTE
J - WARRANTS AND STOCK OPTIONS
 
 Class A
Warrants
 
 The
Company granted an aggregate of 855,000 warrants in March 2005 in connection
with issuance of convertible notes payable.  Additionally, the Company
issued an aggregate of 150,000 warrants in connection with the equity financing
in August 2005 and 1,600,000 warrants related to the November 2005 financing.
During 2006, the Company granted an aggregate of 1,200,000 warrants in
connection with an equity financing in March 2006 and 6,000,000 warrants in
connection with an equity financing in November 2006. The Company issued
1,000,000 warrants in the year ended December 31, 2007 in connection with
completing the North Peace Transaction. The following table summarizes the
changes at December 31, 2007.





Warrants Outstanding
            
            
            Warrants ExercisableExercise
      Prices
            
            
            Number
              Outstanding
            
            
            Weighted
      Average
              Remaining
              Contractual
      Life
              (Years)
            
            
            Weighed
      Average
              Exercise
      Price
            
            
            Number
              Exercisable
            
            
            Weighted
      Average
              Exercise
      Price$
            0.50
            
            
            
            3,000,000
            
            
            $
            0.
      25
            
            
            $
            0.50
            
            
            
            3,000,000
            
            
            $
            0.500.60
            
            
            
            3,000,000
            
            
            
            4.11
            
            
            
            0.60
            
            
            
            3,000,000
            
            
            
            0.600.93
            
            
            
            1,000,000
            
            
            
            0.88
            
            
            
            0.93
            
            
            
            1,000,000
            
            
            
            0.931.00
            
            
            
            1,000,000
            
            
            
            2.49
            
            
            
            1.00
            
            
            
            1,000,000
            
            
            
            1.001.45
            
            
            
            600,000
            
            
            
            1.55
            
            
            
            1.45
            
            
            
            600,000
            
            
            
            1.451.60
            
            
            
            1,005,000
            
            
            
            1.98
            
            
            
            1.60
            
            
            
            1,005,000
            
            
            
            1.602.00
            
            
            
            1,200,000
            
            
            
            3.20
            
            
            
            2.00
            
            
            
            1,200,000
            
            
            
            2.0010,805,000
            
            
            $
            2.23
            
            
            $
            0.94
            
            
            
            10,805,000
            
            
            $
            0.94




Transactions
involving the Company's warrant issuance are summarized as follows:





Number
      of
              Shares
            
            Weighted
      Average
              Price
      Per ShareOutstanding
      at January 1, 2005
            -
            
            $
            -Granted
            2,605,000
            
            
            1.32Exercised
            -
            
            
            -Canceled
      or expired
            -
            
            
            -Outstanding
      at December 31, 2005
            2,605,000
            
            $
            1.32Granted
            7,200,000
            
            
            0.79Exercised
            -
            
            
            -Canceled
      or expired
            -
            
            
            -Outstanding
      at December 31, 2006
            9,805,000
            
            $
            0.93Granted
            1,000,000
            
            
            1.00Exercised
            -
            
            
            -Canceled
      or expired
            -
            
            
            -Outstanding
      at December 31, 2007
            10,805,000
            
            $
            0.94




In
connection with the placement of the convertible notes in March 2005, the
Company issued detachable warrants granting the holders the right to acquire
855,000 shares of the Company’s common stock at $4.00 per share. In August 2005,
the exercise price of the warrants was reduced to $1.60 per share. The Company
recognized the value attributable to the warrants in accordance with Emerging
Issues Task Force Issue 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments (“EITF - 0027”) using the Black-Scholes pricing
model.




F-29




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
J - WARRANTS AND STOCK OPTIONS (Continued)





Class A Warrants
(Continued)





In
connection with a private placement in August 2005, the Company issued to the
investors an aggregate of 150,000 warrants with piggy-back registration rights.
The exercise price of these warrants was above the fair value of the Company’s
common stock at grant date, and accordingly no intrinsic value was
measured.




In
connection with a private placement in November 2005, the Company issued to the
investors an aggregate of 1,600,000 warrants. These warrants are subject to
registration rights and the Company accounted for the warrants issued in
accordance with EITF 00-19 “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock” (Note
E).





In
connection with a private placement in March 2006, the Company issued to the
investors an aggregate of 1,200,000 warrants with piggy-back registration
rights.




In
connection with a private placement in November 2006, the Company issued to the
investors an aggregate of 6,000,000 warrants. These warrants are subject to
registration rights and the Company accounted for the warrants issued in
accordance with EITF 00-19 “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock” (Note
E).





Stock
Options





The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company's common stock issued to shareholders at
December 31, 2007.





Options
      Outstanding
            
            Options
      Exercisable


Exercise
      Prices
            
            
            Number
      Outstanding
            
            Weighted
      Average
              Remaining
      Contractual
              Life
      (Years)
            
            Weighed
      Average
              Exercise
      Price
            
            Number
      Exercisable
            
            Weighted
      Average
              Exercise
      Price$
            0.001
            
            
            
            100,000
            
            8.79
            
            $
            0.001
            
            100,000
            
            $
            0.0010.34
            
            
            
            1,400,000
            
            9.55
            
            
            0.34
            
            800,000
            
            
            0.340.37
            
            
            
            400,000
            
            9.23
            
            
            0.37
            
            800,000
            
            
            0.370.45
            
            
            
            143,000
            
            8.92
            
            
            0.45
            
            143,000
            
            
            0.450.50
            
            
            
            1,016,667
            
            8.79
            
            
            0.50
            
            1,016,667
            
            
            0.500.65
            
            
            
            4,000,000
            
            6.89
            
            
            0.65
            
            4,000,000
            
            
            0.651.00
            
            
            
            387,530
            
            7.72
            
            
            1.00
            
            387,530
            
            
            1.001.11
            
            
            
            400,000
            
            8.50
            
            
            1.11
            
            211,111
            
            
            1.111.35
            
            
            
            19,279
            
            6.93
            
            
            1.35
            
            19,279
            
            
            1.351.50
            
            
            
            178,727
            
            8.16
            
            
            1.50
            
            178,727
            
            
            1.503.50
            
            
            
            80,000
            
            0.94
            
            
            3.50
            
            80,000
            
            
            3.508,125,203
            
            7.85
            
            $
            0.64
            
            7,269,648
            
            $
            0.66





F-30




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
J - WARRANTS AND STOCK OPTIONS (Continued)





Stock Options
(Continued)





Transactions
involving the Company's options issuance are summarized as follows:





Number
      of
              Shares
            
            
            Weighted
              Average
      Price
              Per
      ShareOutstanding
      at January 1, 2005
            
            
            6,866,406
            
            
            $
            0.61Granted
            
            
            387,530
            
            
            
            1.00Exercised
            
            
            (100,000
            )
            
            
            0.25Canceled
      or expired
            
            
            (337,778
            )
            
            
            0.61Outstanding
      at December 31, 2005
            
            
            6,816,158
            
            
            $
            0.64Granted
            
            
            4,500,600
            
            
            
            0.94Exercised
            
            
            (400,000
            )
            
            
            0.25Canceled
      or expired
            
            
            (1,305,555
            )
            
            
            1.12Outstanding
      at December 31, 2006
            
            
            9,611,203
            
            
            $
            0.73Granted
            
            
            1,800,000
            
            
            
            0.35Exercised
            
            
            (383,333
            )
            
            
            0.24Canceled
      or expired
            
            
            (2,902,667
            )
            
            
            0.82Outstanding
      at December 31, 2007
            
            
            8,125,203
            
            
            $
            0.64




During
the year ended December 31, 2004, the Company granted an aggregate of 5,500,000
stock options to employees. The exercise prices of the stock options granted
were below the fair value of the Company’s common stock at the grant date. The
Company has originally accounted the intrinsic value of the stock options as
deferred compensation costs in the amount of $9,189,705 and as a reduction of
stockholders’ equity in the year ended December 31, 2004. The deferred
compensation costs are amortized over the vesting period of the options.
Compensation expense of $3,039,038 was charged to operations during the year
ended December 31, 2005.





If the
Company recognized compensation cost for the stock options and warrants for the
non-qualified employee stock option plan in accordance with SFAS No 123, the
Company's pro forma net loss attributable to common shareholders and net loss
per share would have been $(8,731,209) and $(0.36) for the year ended December
31, 2005.





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS 123R, using the modified-prospective transition method. Unamortized
deferred compensation of $3,981,947 resulted from the intrinsic value of the
stock options at grant date was reversed and the employee stock options granted
prior to, but not vested as of January 1, 2006, were valued based on the grant
date fair value estimated in accordance with the original provisions of SFAS
123. During the year ended December 31, 2007, total stock-based compensation
expense charged to operations in connection with new grant and vested employee
stock options was $1,348,943, net of tax effect.





In
addition, the Company issued an aggregate of zero and 600,600 stock options to
its former Chief Executive Officer as compensation for certain equity the
Company issued during the years ended December 31, 2007 and 2006, respectively.
The estimated value of the options granted during the years ended December 31,
2007 and 2006 was determined using the Black-Scholes option pricing model and
the Company has charged to operations compensation expense of $0 and $640,491,
respectively.




F-31




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
J - WARRANTS AND STOCK OPTIONS (Continued)





Stock
Options (Continued)




During
the year ended December 31, 2007, the Company granted an additional 1,800,000
stock options to employees and directors. Terminations resulted in the
cancellation of 2,902,667 and 1,305,555 employee stock options during the years
ended December 31, 2007 and 2006, respectively





The
weighted-average fair value of stock options granted to employees and directors
during the years ended December 31, 2007 and 2006 and the weighted-average
significant assumptions used to determine those fair values, using a
Black-Scholes option pricing model are as follows:





2007
            
            
            2006Significant
      assumptions (weighted-average):Risk-free
      interest rate at grant date
            
            
            4.93
      %
            
            
            
            4.42
      - 5.13 %Expected
      stock price volatility
            
            
            157
      %
            
            
            
            143
      - 155 %Expected
      dividend payout
            
            
            -
            
            
            
            -Expected
      option life (in years)
            
            
            10.0
            
            
            5.0
      to 10.0





Total
compensation expense of $1,348,943 and $4,779,130 was charged to operations
during the years ended December 31, 2007 and 2006, respectively.





NOTE
K - RELATED PARTY TRANSACTIONS





In
June 2004, the Company entered into an “Assignment of Oil and Gas Leases”
(“Assignment”) with Castle Rock Resources, Inc. (“Assignor”), an entity
controlled by E. Jamie Schloss, a previous Director and Chief Financial Officer.
Pursuant to the Assignment, the Assignor sold, conveyed and delivered to us all
right, title, and interest in a 50% working interest ownership, and 37.5% net
revenue interest in the oil and gas leases, in exchange for cash consideration
paid by us in the amount of $25,000. The rights the Company had pursuant to
these leases expired in the third quarter of 2005. During the year ended
December 31, 2005, no drilling on a new well had commenced by the Company and no
revenues or expenses have been generated from the lease. The Company wrote off
its capitalized costs in the Mirasol Oil and Gas Leases during the year ended
December 31, 2005 (Note B). In November, 2004, Mr. Schloss gave the Company a
free option until July, 2006 to acquire two producing oil & gas properties
owned or controlled by him for a price equal to 36 months net production for the
past twelve months prior to exercising the option. The option expired in July
2006. On June 28, 2006, Mr. Schloss was terminated as CFO and replaced as a
director by shareholder vote at the annual meeting on July 27,
2006.  As a result of the Company’s February 11, 2008 and February 12,
2008 Board actions, Mr. Schloss was reappointed as a director and as CEO and
CFO.





F-32





SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
K - RELATED PARTY TRANSACTIONS (Continued)




Our business and operations may subject
us to claims, litigation and other proceedings brought by private parties and
governmental authorities. We are currently involved in a contract dispute with
Dynamo Energy Corporation, a Canadian corporation (“Dynamo”), in connection with
an alleged breach of contract purportedly entered into on October 12, 2004. Our
Board of Directors previously determined that the proposed agreement with Dynamo
had not been authorized by the Board and made an offer of settlement, which was
not accepted. Dynamo notified us that it believes that agreement is valid, and
in 2006 Dynamo filed a civil complaint in the Superior Court of San Diego County
against us, Frederick Berndt, our former V.P. and Director, E. Jamie Schloss,
our current Chief Financial Officer, Chief Executive Officer and Director, and
Signet Energy, Inc. (“Signet”). On November 7, 2007, the Court dismissed the
case on the grounds that the Court in San Diego, California was not a convenient
forum in which to try the case .  On January 8, 2008, the Court entered
Dynamo’s dismissal request without prejudice. On February 1, 2008, Dynamo filed
a Statement of Claim in Canada in the Court of Queen’s Bench of Alberta, the
Judicial District of Calgary against us, David Perez, our former Chief Executive
Officer and Director, Signet, C.W. Leigh Cassidy, the former Chief Executive
Officer of Signet, and four Canadian entities. The Company and Mr. Perez were
purportedly served on March 22, 2008, and currently have until April 30, 2008 to
respond to the Statement of Claim.  Although it is impossible to predict
with certainty the outcome of this proceeding, or the outcome of any litigation,
we are confident in the merits of our defense and do not anticipate an
unfavorable outcome times.




Commencing in November
2004 and terminating in February 2008, we subleased office space in San Diego,
California from Granite, a company owned by a Dan Schreiber, a previous director
of the Company at a rent of $1,800 per month. In January 2006, we entered into a
one year sublease agreement at this location. The monthly rent under this
sublease was $4,094 and this lease was cancelled as of February 28,
2008.




As part of the Peace
Oil  transaction in March 2007, and disclosed in our December 4, 2006
8-K, March 8, 2007 8-K, March 31, 2007 10QSB, April 30, 2007 proxy and the May
16 8-K audit of Peace Oil, Peace Oil had independently retained Granite
Financial Group (“Granite”) for a 10% finder's fee for gross amounts up to $10
million. From the gross  North Peace Transaction proceeds of
CDN$20,000,000 on June 28, 2007, Peace Oil paid Granite CDN$ 1,600,000 upon the
closing.   In addition, as part of the Gemini transaction in
April 2007, the Company paid Granite Financial Group (“Granite”) a $25,000
commission in connection with the additional $250,000 invested by Gemini (see
Note F - Note Payable).The Company paid $135,000 and $171,000 in commissions to
Granite,owned by Daniel Schreiber , for the years ended December
31,  2006 and 2005, respectively.  Mr. Schreiber, was one of
the Company’s Directors for the period of March 2006 through March
2007.





On
August 19, 2005, the Company completed a private placement offering which
resulted in proceeds to the Company in the amount of $50,000 from Chet Idziszek
and $50,000 from Gary Vandergrift, both members of the Company’s Board of
Directors at the time of the transaction.




As a
result of the Signet November 2005 financing, Mr. Kelly entered into a new
compensation agreement with Signet which replaced the previous agreement with
the Company. In January 2006, he resigned as Chief Executive Officer of the
Company to become Signet’s Chief Operating Officer. Mr. Kelly’s new Agreement
provided a salary of C$220,000 per annum to be paid by Signet Energy, Inc. In
November 2005, Mr. Kelly and Mr. Perez received 1,700,000 shares and
855,000 shares respectively in Signet.





On October 6, 2006, the Company entered
into an agreement with Richard Collato, who is a member of our Board of
Directors, as a consultant to provide business implementation strategies as well
as locate and introduce three prospective appointees for our Board of Directors
in exchange for a $6,000 monthly retainer. The agreement terminated in October
2007. In addition to the monthly retainer, the consultant earned $150,000 in
other compensation during the years ended December 31, 2006 and December 31,
2007 upon placing three Board of Director appointees and as a result of the
appointees serving for a maximum of twelve months. In addition, the consultant
was granted 300,000 options with an exercise price of $0.001, with 150,000
options vesting immediately and 12,500 options vesting monthly over the next
twelve months.





On June
29, 2007, the Company entered into an Addendum to Employment Agreement dated
June 29, 2007 (the “Addendum”) with William Greene, the Company’s former Chief
Financial Officer. The Addendum extends the term of the Employment Agreement
dated December 14, 2006 between the Company and Mr. Greene, from June 30, 2007
to December 31, 2007. In addition, on June 29, 2007, the Company’s Compensation
Committee (the “Compensation Committee”) awarded Mr. Greene a bonus of $36,000
and awarded Mr. David Perez, the Company’s Chief Executive Officer, a bonus of
$50,000. Each of the bonuses were equal to 20% of Mr. Greene’s and Mr. Perez’s
respective base salaries.  On December 31, 2007, the Company entered
into an Addendum to Employment Agreement (the “Addendum”) with Mr.
Greene.  The Addendum extends the term of the Employment Agreement
dated December 14, 2006 (the “Employment Agreement”) between the Company and Mr.
Greene, as amended, from December 31, 2007 to June 30, 2008.  In
addition, the Addendum provides that if Mr. Greene’s employment with the Company
is terminated prior to June 30, 2008 due to a voluntary or involuntary change in
control, Mr. Greene is entitled a ninety day (90) severance payment based on his
current compensation.  Mr. Greene resigned on February 15,
2008.




F-33


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
   NOTE
K - RELATED PARTY TRANSACTIONS (Continued)


On July
17, 2007, pursuant to David Perez's employment agreement with the Company, the
Company approved reimbursement for legal fees incurred related to litigation
filed by an existing shareholder of the Company against Mr.
Perez.  For the year ended December 31, 2007, reimbursements totaled
$324,782.





On July
17, 2007, the Company granted options to Mr. Perez, the former CEO and Mr.
Greene, the former CFO.  Mr. Perez was granted 1,200,000 options with
600,000 vesting immediately witth the remaining 600,000 vesting on January 17,
2008.  Mr. Greene was granted 200,000 options that vested
immediately.  All the options have an exercise price of $0.34 per
share.





Dale
Fisher was elected as a director to our Board of Directors on September 6,
2007.  Prior to his election, Mr. Fisher was an officer and
shareholder of Peace Oil Corp. which the Company acquired on March 2, 2006 (see
Note C). Mr. Fisher was issued 1,905,145.50 redeemable preferred shares in Cold
Flow ULC as a result of the Company’s acquisition of Peace Oil
Corp.  Each redeemable preferred share is exchangeable into two shares
of the Company’s common stock.  On November 6, 2007, Mr. Fisher
exchanged 500,000 redeemable preferred shares of Cold Flow into 1,000,000 shares
of the Company’s common stock.  Upon completing the North
Peace Transaction in June 28, 2007 and repaying CDN$4,000,000 in secured
note payable repayments to Peace Oil shareholders, the Company was obligated to
issue a warrant to purchase 1,000,000 shares to 1304146 Alberta Ltd. at an
exercise price per share of $1.00. The warrant is exercisable in cash or by net
issue exercise and has a term of three years from the date of
issuance.  Mr. Fisher’s pro rata portion of the warrant represents
212,500 shares when exercised.





On
February 6, 2008, Mr. David Perez, the Chief Executive Officer (“CEO”) of the
Company resigned from his position as CEO.  Mr. Perez continued to
serve as a member of the Company’s Board of Directors (the “Board”) until
February 11, 2008, on which date he resigned as a member of the
Board.  On February 11, 2008, the Board appointed Mr. John Stiska as
CEO of the Company and agreed to pay him $18,000 per month for such
services.  On February 15, 2008, William Greene, the Chief Financial
Officer of the Company, resigned from his position as Chief Financial
Officer.  While the Company searches for his
replacement,  Mr. E. Jamie Schloss will serve as interim Chief
Financial Officer. In addition, Mr.Greene will act as a consultant to the
Company until a replacement has been retained.  On February 19, 2008,
the Board  appointed Mr. E. Jamie Schloss, age 64, as Chief Executive
Officer (“CEO”) of the Company and agreed to pay him $9,000 per month for such
services.  Mr. Schloss succeeds Mr. Stiska, who served as CEO until
February 19, 2008.





In 2007,
Mr. Perez received $324,782 for reimbursement of legal fees for lawsuits in
which he and former director Daniel Schreiber were defendants before Mr. Perez’s
resignation in February of 2008. Mr. Perez has claimed additional amounts from
the Company as indemnification in connection with lawsuits involving a member of
the 13D/A Group.  Mr. Schreiber has also claimed indemnification is
owed to him in connection with the same lawsuits.  The payment of Mr.
Perez’s legal fees was reviewed by a prior Board of Directors based on
information supplied by Mr. Perez. The current Board of Directors will review
those expenditures and determine if they were proper. Upon Mr. Perez's
resignation from the Company as Chief Executive Officer on February 6, 2008, he
claimed that his resignation was for “Good Reason” as defined in his employment
agreement and therefore he is owed the severance provided for in his employment
agreement.  The Company disputes that Mr. Perez resigned for “Good
Reason” and denies that he is owed such severance.





On
February 27, 2008, the Company granted stock options to certain of its new
directors.  Barry Nussbaum received  2,500,000 shares
subject to stock options, and E. Jamie Schloss received 1,700,000 shares subject
to stock options.  Their stock options have an exercise price of $0.08
per share and will vest in monthly installments over 12 months with the first
such installment vesting on February 27, 2008 and the last installment vesting
on February 28, 2009.  Thirty percent of the options will vest in the
first monthly installment, and the remaining balance of the options will vest in
equal monthly installments over the remaining 11 months, with the final month
adjusting for any rounding differences.  However, should Nussbaum or
Schloss decide to discontinue their services early, such vested options that
exceed the amount of vested options Nussbaum or Schloss would have received if
the options vested ratably over 12 months on a pro rata basis are subject to
forfeiture.  Charles V. Sage and Jeffrey Lewis Bernstein both received
500,000 shares subject to stock options. Their stock options have an exercise
price of $0.08 per share and will vest in equal monthly installments over 12
months with the first such installment vesting on March 27, 2008 and the last
installment vesting on February 27, 2009.  The stated expiration date
for all stock options granted on February 27, 2008 is February 26,
2013.  As a result of his election to the Board, on March 18, 2008,
Kenneth D. Polin was granted 500,000 shares subjects to stock options with an
exercise price of $0.10 per share that vest in equal monthly installments over
12 months with the first such installment vesting on April 18, 2008 and the last
installment vesting on March 18, 2009.  The stated expiration date for
Polin’s stock options is March 17, 2013.





On March
18, 2008, the Company entered into a Purchase and Sale Agreement, with Oromin
Enterprises, Ltd.;  Irie Isle Limited; Cynthia Holdings Ltd.
(“Cynthia”); and Chet Idziszek, a former director of the Company, pursuant to
which the Company sold its 17.52% interest in Cynthia, which is the owner of a
certain parcel of land in the eastern half of the Cuyana Bason in the
Province of Mendoza, Argentina.  In consideration for its sale of
interest in Cynthia, the Company received Six Hundred Thousand U.S. Dollars
(US$600,000) in cash and the return of One Million (1,000,000) shares of the
Company’s stock previously issued for the Company’s purchase of its interest in
Cynthia.





F-34




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006






NOTE
L - (LOSS) PER SHARE





The
following table presents the computation of basic and diluted losses per
share:





2007
            
            
            2006Net
      loss available for common shareholders
            
            $
            (11,343,620
            )
            
            $
            (15,926,093
            )Basic
      and fully diluted loss per share
            
            $
            (0.
      37
            )
            
            $
            (0.58
            )Weighted
      average common shares outstanding (basic and assuming
      dilution)
            
            
            30,659,776
            
            
            
            27,360,878




For the
years ended December 31, 2007 and 2006, zero and 7,390,245 potential shares,
respectively, were excluded from the shares used to calculate diluted losses per
share as their inclusion would reduce net losses per share.




NOTE
M- COMMITMENTS AND CONTINGENCIES





Operating
Leases




Commencing
in November 2004 and in terminating in February 2008, the Company subleased
office space in San Diego, California from a company owned by a director of the
Company at a monthly rental of $4,094.00 per month. In March 2008, the Company
relocated to its current facility for a term of six months and monthly rent of
$825.  In April 2006, the Company established Cold Flow Energy ULC as
a new wholly owned subsidiary based in Alberta, Canada to exploit oil and gas
opportunities with monthly base rent of $364 per month. Total rent and related
expenses of $62,167 and $46,024 were charged to operating expenses for the years
ended December 31, 2007 and 2006, respectively.




Employment
Agreement





The
Company has employment agreements with its Executives. In addition to salary and
benefit provisions, the agreements include defined commitments should the
Executives terminate employment with or without cause.





Chief Executive
Officer: Mr. Perez was appointed as Chief Operating Officer and entered
into an employment agreement with the Company in November 2004 with a five year
employment term.  Mr. Perez assumed the position of Chief Executive
Officer on January 31, 2006 with an annual base salary of $250,000 with
increases subject to the Board or the Compensation Committee’s discretion. Mr.
Perez resigned from the position of Chief Executive Officer on February 6,
2008.  Pursuant to his employment agreement, Mr. Perez was eligible to
receive a performance bonus equal to 5% of the Company’s net income before
income taxes, as adjusted, in excess of $500,000 for each fiscal year. Pursuant
to this employment agreement, Mr. Perez also received an automobile allowance,
term life insurance on his behalf, reimbursement of incurred legal expenses and
other benefits. If the Company issues additional equity securities, Mr.
Perez was entitled to receive additional stock options for a number of shares
equal to 14.3% of the additional equity securities, subject to exceptions for
stock dividends, stock splits, shares issued to employees, directors and
consultants pursuant to Board-approved compensation plans, shares issued in a
public offering, shares issued for business combinations and up to 200,000
shares issued to certain vendors. The additional stock option’s exercise price
would be equal to the price of the issued securities sold or deemed sold, would
immediately vest and would have a ten year life. All stock options were subject
to Mr. Perez’s continuing service to the Company.


F-35
  SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
   NOTE
M- COMMITMENTS AND CONTINGENCIES (Continued)   Employment Agreement
(continued)


The
employment agreement provided that in the event the Company terminates Mr.
Perez’s employment without cause, or Mr. Perez terminates his employment for
certain defined reasons including: (a) the assignment to Mr. Perez of any duties
inconsistent with his employment agreement or in any respect with his position,
authority, duties or responsibilities, or any other action by us which results
in a diminution in such position, authority, duties or responsibilities; (b) if
the Company materially breach any of our obligations under his employment
agreement and do not cure such material breach within thirty (30) days after
receiving notice; (c) If the Company required him to be based at any office or
location other than our executive offices in San Diego, California; (d) any
purported termination by us of his employment otherwise than as expressly
permitted by his employment agreement or by law, Mr. Perez will be entitled to
receive a pro-rated bonus, plus, if such termination is within the first year of
the term, a severance payment equal to $500,000 minus base compensation paid to
the date of termination, or if such termination is after the first year of the
term, a severance payment equal to four times his base compensation. Mr. Perez
will also in such cases be entitled to an acceleration of vesting on all stock
options he holds, and such options will remain exercisable for their full term.
Should the compensation or benefits Mr. Perez receives under this agreement or
his stock options be deemed to constitute a "parachute payment" under Section
280G of the Internal Revenue Code, the Company has agreed to pay Mr. Perez an
additional payment to cover the excise taxes imposed by federal and state law on
such parachute payment, and additional "gross-up" payments to cover further
income taxes on such additional payments.  If Mr. Perez offers to
continue his employment at the end of the term and the Company does not accept
such offer, it will be treated as a termination without cause. Mr. Perez will
not be entitled to the foregoing severance benefits if he resigns due to
non-payment of accrued base compensation before such time as the Company has
raised at least $2 million in financing following the date of the
agreement.





Stock
awards represent the fair market value of 252,361 shares of Andora Energy
Corporation (formerly Signet, Inc.) granted to Mr. Perez in connection with
Signet’s 2005 financing transaction and the subsequent combination with Andora
on September 19, 2007.




Chief Financial
Officer: In July 2003, the Company entered into an agreement with E.
Jamie Schloss as its acting Chief Financial Officer and his affiliated company
Castle Rock Resources to provide consulting and related services to assist the
Company in locating oil and gas properties on a non-exclusive contract basis.
The agreement provided the Company with a 30 day right of first refusal on each
prospect property. The affiliated company received options to purchase 400,000
shares at $25 per share. Mr. Schloss exercised these options in August 2006. For
wells proposed by the affiliated company and drilled by the Company, the
affiliated company received a management fee of $5,000 per month. In addition,
the affiliated company will oversee operations and finances for such wells. For
all cash raised by the affiliated company on behalf of the Company, the
affiliated company was to receive a 10% finder's fee and reimbursement of
certain expenses. The finder's fee is payable in cash or stock at the affiliated
company's option. The affiliated company had a right in certain circumstances to
require registration under the Securities Act for the resale of the
shares could have been purchased upon exercise of its stock option. The
agreement expired on July 21, 2006. On December 9, 2004 the Company granted Mr.
Schloss a 10-year option to purchase 400,000 shares at $0.65 per share and
vesting in 36 equal monthly installments (Note J). In December 2005, the Company
agreed to compensate Mr. Schloss at the salary of $80,000 per annum. On June 28,
2006, Mr. Schloss was terminated with William Greene appointed as
CFO.  On February 15, 2008, Mr. Greene resigned and E. Jamie Schloss
was appointed as CFO.





Mr.
Greene was appointed as Chief Financial Officer and in June 2006 and entered
into an employment agreement with the Company in December 2006, which was
extended through June 30, 2008 by means of an addendum. Mr. Greene resigned from
his position as Chief Financial Officer on February 15, 2008.  Pursuant to
this employment agreement, Mr. Greene was entitled to an annual salary of
$180,000, plus medical benefits. He was entitled to stock options to purchase
200,000 shares of our common stock with a ten year term that vested on July 17,
2007 at an exercise price of $0.34 per share as well as stock options to
purchase 400,000 shares of our common stock with a ten year term at an exercise
price of $1.11 per share, vesting monthly on a pro rata basis over a three-year
period, and otherwise subject to our employee stock option plan. Under the
agreement, if Mr. Greene was terminated without cause or as a result of a change
in control, than all outstanding stock options became vested
immediately.  Upon termination without cause, the Company was required
to pay Mr. Greene the balance of his contract and pro rate his stock options
based on the date of departure.  Stock option awards included the
stock option to purchase 400,000 shares of our common stock received in July
2006 and the stock option to purchase 200,000 shares of our common stock
received in July 2007 and fully valued at $676,000 and $2,180, respectively, per
FAS 123R. For the period ended December 31, 2007, no stock options have been
exercised.





On
February 19, 2008, the Board  of the Company, appointed Mr. E. Jamie
Schloss as Chief Executive Officer of the Company and agreed to pay him $9,000
per month for such services.





F-36




SURGE
GLOBAL ENERGY, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006





NOTE
M - COMMITMENTS AND CONTINGENCIES (Continued)




Pension
Plans





The
Company currently sponsors a voluntary qualified 401(k) savings plan and a
pension plan, available to full-time employees. The pension plan is a
non-contributory defined contribution plan. The 401(k) plan provides for
discretionary employee contribution of up to 100% of annual pre-tax earnings,
subject to the maximum amount established annually under Section 401(k) of the
Internal Revenue Code or $15,000 for the year ended December 31, 2007. In the
year ended December 31, 2007, discretionary Company contributions totaling
$73,000 were made to the 401(k) saving plan and pension plan and resulted in an
equal and corresponding reduction to base salaries to leave total gross
compensation unchanged.




Total
expense relative to these plans for the years ended December 31, 2007 and 2006
was $2,365 and $1,585, respectively.




Consulting
Agreements





The
Company has consulting agreements with outside contractors, certain of whom are
also Company shareholders and directors. The Agreements are generally for a term
of 12 months from inception and renewable automatically from year to year unless
either the Company or Consultant terminates such engagement by written
notice.





Litigation





Our business and
operations may subject us to claims, litigation and other proceedings brought by
private parties and governmental authorities. The Company is currently involved
in a contract dispute with Dynamo Energy Corporation, a Canadian corporation
(“Dynamo”), in connection with an alleged breach of contract. Our Board of
Directors previously determined that the proposed agreement with Dynamo had not
been authorized by the Board and made an offer of settlement, which was not
accepted. Dynamo notified us that it believes that agreement is valid, and on
November 15, 2006, Dynamo filed a First Amended Complaint in the Superior Court
of San Diego County against us, Frederick Berndt, our former V.P. and Director
and E. Jamie Schloss, our former Chief Financial Officer and Director.
In early June 2007, Dynamo asked us to stipulate to the filing of a Second
Amended Complaint to add fraud claims against David Perez, our Chief
Executive Officer and Chairman of the Board of
Directors. Dynamo  filed a motion seeking leave to file a Second
Amended Complaint.  On November 7, 2007, the Court dismissed the case
on the grounds that the Court is not a convenient forum in which to try the case
and also (i) granted Dynamo's motion to file a Second Amended Complaint and
(ii) determined that the Court does not have personal jurisdiction over
Signet and Frederick Berndt and dismissed them from the lawsuit.  The
Court entered Dynamo’s dismissal request without prejudice on January 8, 2008.
Dynamo has since re-filed the case in the Court of Queen’s Bench of Alberta, the
Judicial District of Calgary.





In
addition, the Division of Securities of the Ohio Department of Commerce notified
the Company that the securities the Company issued to a purchaser in the State
of Ohio in one or more private placements may have been issued without an
applicable exemption from Ohio’s securities laws. As a result, the purchaser of
those securities may have rescission rights to unwind the corresponding sales,
which represents an approximate $2,000,000 contingent liability of the
Company.





Mr. E.
Jamie Schloss, our Chief Executive Officer, and Mr. Jeffrey L. Bernstein, each
members of the 13D/A Group and directors of the Company, were co-plaintiffs in
the case Jeffrey L. Bernstein and E. Jamie Schloss v. Surge Global Energy, Inc.,
C.A. No. 3411-VCS,in the Court of Chancery
of the State of Delaware, in which Mr. Schloss and Mr. Bernstein were parties
adverse to the Company.  This case has been settled.




In 2007,
Mr. Perez received $324,782 for reimbursement of legal fees for lawsuits in
which he and former director Daniel Schreiber were defendants before Mr. Perez’s
resignation in February of 2008. Mr. Perez has claimed additional amounts from
the Company as indemnification in connection with lawsuits involving a member of
the 13D/A Group.  Mr. Schreiber has also claimed indemnification is
owed to him in connection with the same lawsuits.  The payment of Mr.
Perez’s legal fees was reviewed by a prior Board of Directors based on
information supplied by Mr. Perez. The current Board of Directors will review
those expenditures and determine if they were proper. Upon  Mr. Perez
resignation from the Company as Chief Executive Officer on February 6, 2008, he
claimed that his resignation was for “Good Reason” as defined in his employment
agreement and therefore he is owed the severance provided for in his employment
agreement.  The Company disputes that Mr. Perez resigned for “Good
Reason” and denies that he is owed such severance.





F-37


SURGE
GLOBAL ENERGY, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006




NOTE
M - COMMITMENTS AND CONTINGENCIES (Continued)
  Litigation
can involve complex factual and legal questions and its outcome is uncertain.
Although it is not possible at this early stage to predict the likely outcome of
this action, an adverse result could have a material adverse effect on us. Any
claim that is successfully asserted against us could result in significant
damage claims and other losses. Even if the Company were to prevail, any
litigation could be costly and time-consuming and would divert the attention of
our management and key personnel from our business operations, which adversely
affect our financial condition, results of operations or cash
flows.
 
 On
November 6, 2007 the Company retained Rundle Energy Partners Ltd. to act as
exclusive Canadian marketer and advisor to allow the Company to consider other
strategic alternatives in the Canadian energy sector.  Rundle will
receive an initial fee of $100,000 and earn up to $400,000 upon a successful
closing.


NOTE
N - OTHER SUBSEQUENT EVENTS





In
January 2008, and after consultation with Canadian tax and legal advisors, the
Company determined that the reserve for Canadian income taxes resulting from the
North Peace Transaction was incorrect and should be restated.  The
amounts reported in the Company’s unaudited consolidated financial statements
for its quarters ended June 30, 2007 and September 30, 2007 failed to take into
account differences between the assigned values of the purchase price to the
assets, the corresponding tax attributes available to Peace Oil and did not
properly reflect tax consequences of the sale of certain assets by Peace
Oil.  The additional amount of tax payable increased by approximately
CDN$4,130,467 above the amount accrued in the previously reported financial
statements and may be subject to revision. The Company concluded the Canadian
tax liability has a material impact on the Company’s consolidated financial
position, results of operations and liquidity and filed its restated quarters
ended June 30, 2007 and September 30, 2007 on March 25, 2008 to reflect the
revised tax liability during those periods. There is no assurance that the
Company will be able to mitigate the tax liability (see Note G).





On
February 6, 2008, Mr. David Perez, the Chief Executive Officer (“CEO”) of the
Company resigned from his position as CEO.  Mr. Perez continued to
serve as a member of the Company’s Board of Directors (the “Board”) until
February 11, 2008, on which date he resigned as a member of the
Board.  On February 11, 2008, the Board appointed Mr. John Stiska as
CEO of the Company and agreed to pay him $18,000 per month for such
services.    As a result of the change in control, on
February 15, 2008, William Greene, the Chief Financial Officer of the Company
resigned from his position as Chief Financial Officer and received a severance
payment of three month’s salary totaling approximately $45,000 per the terms of
his employment contract. While the Company searches for his
replacement,  Mr. E. Jamie Schloss will serve as interim Chief
Financial Officer. In addition, Mr.Greene has acted as a consultant to the
Company until a replacement has been retained.  On February 19, 2008,
the Board  appointed Mr. E. Jamie Schloss, age 64, as Chief Executive
Officer (“CEO”) of the Company and agreed to pay him $9,000 per month for such
services.  Mr. Schloss succeeds Mr. Stiska, who served as CEO until
February 19, 2008.





Following
the appointment of the new Board members on February 11, 2008, on February 27,
2008, the Company granted stock options to the new members.  Barry
Nussbaum received  2,500,000 shares subject to stock options, and E.
Jamie Schloss received 1,700,000 shares subject to stock
options.  Their stock options have an exercise price of $0.08 per
share and will vest in monthly installments over 12 months with the first such
installment vesting on February 27, 2008 and the last installment vesting on
February 28, 2009.  Thirty percent of the options will vest in the
first monthly installment, and the remaining balance of the options will vest in
equal monthly installments over the remaining 11 months, with the final month
adjusting for any rounding differences.  However, should Nussbaum or
Schloss decide to discontinue their services early, such vested options that
exceed the amount of vested options Nussbaum or Schloss would have received if
the options vested ratably over 12 months on a pro rata basis are subject to
forfeiture.  Charles V. Sage and Jeffrey Lewis Bernstein both received
500,000 shares subject to stock options. Their stock options have an exercise
price of $0.08 per share and will vest in equal monthly installments over 12
months with the first such installment vesting on March 27, 2008 and the last
installment vesting on February 27, 2009.  The stated expiration date
for all stock options granted on February 27, 2008 is February 26,
2013.  As a result of his election to the Board, on March 18, 2008,
Kenneth D. Polin was granted 500,000 shares subjects to stock options with an
exercise price of $0.10 per share that vest in equal monthly installments over
12 months with the first such installment vesting on April 18, 2008 and the last
installment vesting on March 18, 2009.  The stated expiration date for
Polin’s stock options is March 17, 2013.





On March
5, 2008, the Company filed its annual proxy and subsequently held its annual
meeting on March 18, 2008 to elect the seven directors identified above and
reappointed RBSM LLP as its independent auditor.





On March
18, 2008, the Company entered into a Purchase and Sale Agreement, with Oromin
Enterprises, Ltd.;  Irie Isle Limited; Cynthia Holdings Ltd.
(“Cynthia”); and Chet Idziszek, pursuant to which the Company sold its 17.52%
interest in Cynthia, which is the owner of a certain parcel of land in the
eastern half of the Cuyana Bason in the Province of Mendoza,
Argentina.  In consideration for its sale of interest in Cynthia, the
Company received $600,000 in cash and the return of 1,000,000 shares of the
Company’s common stock previously issued for the Company’s purchase of its
interest in Cynthia.






F-38