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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 COMMISSION FILE NUMBER 1-31679
 TETON ENERGY CORPORATION
  DELAWARE
    
    84-1482290(State or other jurisdiction of incorporation
    
    (IRS Employeror organization)
    
    Identification No.)410 17th Street  Suite 1850Denver, Colorado
    
    80202(Address of principal executive offices)
    
    (Zip Code)
 (303) 565-4600
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $0.001
    
    American Stock Exchange
 None
 o þ
 o þ
 þ o
 o
  o o þ
 o þ




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##### 



FORM 10-K
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 INDEX
 PART I
    
    
    1Item 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    8Item 2. Description of Properties
    
    
    18Item 3. Legal Proceedings
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23PART II
    
    
    24Item 5. Market for Common Equity and Related Stockholders Matters
    
    
    24Item 6. Selected Financial Data
    
    
    27Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 7A. Quantitative and Qualitative Disclosures about Market Risks
    
    
    41Item 8. Financial Statements and Supplementary Data
    
    
    43Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    72ITEM 9A. Controls and Procedures
    
    
    72Item 9B. Other Information
    
    
    72PART III
    
    
    73Item 10. Directors and Executive Officers of the Registrant
    
    
    73Item 11. Executive Compensation
    
    
    75Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    75Item 13. Certain Relationships and Related Transactions
    
    
    77ITEM 14. Principal Accountant Fees and Services
    
    
    77PART IV
    
    
    78ITEM 15. Exhibits and Financial Statement Schedules
    
    
    78SIGNATURES
    
    
    81Employment Agreement - Richard BosherInternational Swap Dealers Association, Inc. Master AgreementEmployment Agreement - William P. Brand, Jr.Employment Agreement - Dominic J. Bazile IIConsent of Independent Registered Public Accounting FirmConsent of Independent Petroleum Engineers and GeologistsCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  i




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##### Table of Contents



Forward-Looking Statements
   
    
    general economic conditions;
    
    the market price of, and demand for, oil and natural gas;
    
    our ability to service future indebtedness;
    
    our success in completing development and exploration activities;
    
    expansion and other development trends of the oil and gas industry;
    
    our present company structure;
    
    our accumulated deficit;
    
    acquisitions and other business opportunities that may be presented to and pursued by us;
    
    reliance on outside operating companies for drilling and development of our oil and
gas properties;
    
    our ability to integrate our acquisitions into our company structure;
    
    changes in laws and regulations; and
    
    other Risk Factors described in Item 1A of this Annual Report.
   ii




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Glossary of Commonly Used Terms, Abbreviations, and Measurements
  COMMONLY USED TERMS AND ABBREVIATIONS
 AMI
 Barrels of oil equivalent (BOE)
 Basin
 Basis
 Btu
 Cash flow hedge
 Collar
 Denver-Julesburg (DJ) Basin
 Development well
 Exploratory well
 Farm tap
 Field
 Futures contract
 Gas
 Gross
 Hedging
 iii




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Net
 Piceance Basin
 Productive
 Proved reserves
 Proved developed reserves
 Proved undeveloped reserves
 Reserves
 Reservoir
 Transportation
 Throughput
 Williston Basin
 Working interest
 MEASUREMENTS
 Barrel
 Bbl  Bcf  Bcfe  Mcf  Mcfe  MMBtu  MMcf  MMcfe
 iv




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PART I
 
 ITEM 1. BUSINESS.
 Background
   Piceance Basin
  DJ Basin
  1




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Williston Basin
    2




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Recent Events
    Business Strategy
  Pursue Attractive Reserve and Leasehold Acquisitions.
 Pursuit of Selective Complementary Acquisitions.
 Drive Growth through Drilling.
 Maximize Operational Control.
 Operate Efficiently, Effectively, and Maximize Economies of Scale Where Practical.
 3




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Governmental Regulation
    Regulation of Oil and Natural Gas Exploration and Production
   4




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Split Estate Regulation and Access Difficulties
  Natural Gas Marketing, Gathering, and Transportation
    Environmental Regulations
  5




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6




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Operating Hazards and Insurance
   Employees
   7




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ITEM 1A. RISK FACTORS.
 Risks Related to our Business
 We have incurred significant losses. We expect future losses and we may never become profitable.
  Substantially all of our producing properties are located in the Rocky Mountains, making us
vulnerable to risks associated with operating in one geographic area.
  If we are unable to obtain additional funding our business operations will be harmed.
  Drilling for and producing oil and natural gas are high risk activities with many uncertainties
that could adversely affect our business, financial condition, or results of operations.
  
    
    delays imposed by or resulting from compliance with regulatory requirements;
    
    pressure or irregularities in geological formations;
 8




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
    
    shortages of or delays in obtaining equipment, including drilling rigs, and
qualified personnel;
    
    equipment failures or accidents;
    
    adverse weather conditions;
    
    reductions in oil and natural gas prices;
    
    title problems; and
    
    limitations in the market for oil and natural gas.
 Our business involves numerous operating hazards for which our insurance and other contractual
rights may not adequately cover our potential losses.
    Acquisitions are a part of our business strategy and are subject to the risks and uncertainties of
evaluating recoverable reserves and potential liabilities.
   9




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Our ability to complete acquisitions could be affected by competition with other companies and our
ability to obtain financing or regulatory approvals.
  Our acquisitions may pose integration risks and other difficulties.
    Substantial acquisitions or other transactions could require significant external capital and
could change our risk and property profile.
  Competitive industry conditions may negatively affect our ability to conduct operations.
  10




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There is currently a shortage of available drilling rigs and equipment which could cause us to
experience higher costs and delays that could adversely affect our operations.
  We have limited operating control over our properties.
  We have no long-term contracts to sell oil and gas.
  Oil and gas prices fluctuate widely, and low prices for an extended period of time are likely to
have a material adverse impact on our business, results of operations and financial condition.
  11




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
    
    domestic and foreign supply, and perceptions of supply, of oil and natural gas;
    
    level of consumer demand;
    
    political conditions in oil and gas producing regions;
    
    weather conditions;
    
    world-wide economic conditions;
    
    domestic and foreign governmental regulations; and
    
    price and availability of alternative fuels
  Our use of oil and natural gas price hedging contracts involves credit risk and may limit future
revenues from price increases and result in significant fluctuations in our net income and
shareholders equity.
   The marketability of our production depends mostly upon the availability, proximity and capacity of
gas gathering systems, pipelines and processing facilities, which are owned by third parties.
  12




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Our credit facility has substantial restrictions and financial covenants and we may have difficulty
obtaining additional credit, which could adversely affect our operations.
    Our debt level and the covenants in the agreements governing our debt could negatively impact our
financial condition, results of operations and business prospects.
  
    
    increasing our vulnerability to general adverse economic and industry conditions and
detracting from our ability to withstand successfully a downturn in our business or the
economy generally;
    
    requiring us to dedicate a substantial portion of our cash flow from operations to
required payments on debt, thereby reducing the availability of cash flow for working
capital, capital expenditures and other general business activities;
    
    limiting our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions and general corporate and other activities;
    
    limiting our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate;
    
    placing us at a competitive disadvantage relative to other less leveraged
competitors; and
    
    making us vulnerable to increases in interest rates, because borrowings under our
credit facility may be at rates prevailing at the time of each borrowing.
 13




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The instruments governing our indebtedness contain various covenants limiting the discretion
of our management in operating our business.
  
    
    pay dividends on, redeem or repurchase our capital stock or redeem or repurchase our
subordinated debt, if any;
    
    make loans to others;
    
    make investments;
    
    incur additional indebtedness or issue preferred stock;
    
    create certain liens;
    
    sell assets;
    
    enter into agreements that restrict dividends or other payments from our subsidiaries to us;
    
    consolidate, merge or transfer all or substantially all of the assets of us and our
subsidiaries taken as a whole;
    
    engage in transactions with affiliates;
    
    enter into hedging contracts;
    
    create unrestricted subsidiaries; and
    
    enter into sale and leaseback transactions.
  Our development and exploration operations require substantial capital and we may be unable to
obtain needed capital or financing on satisfactory terms, which could lead to a loss of properties
and a decline in our natural gas and oil reserves.
  
    
    our proved reserves;
    
    the level of oil and natural gas we are able to produce from existing wells;
    
    the prices at which oil and natural gas are sold; and
    
    our ability to acquire, locate and produce new reserves.
 14




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Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material
inaccuracies in these reserve estimates or underlying assumptions will materially affect the
quantities and present value of our reserves.
     Seasonal weather conditions and lease stipulations can adversely affect the conduct of drilling
activities on our properties.
  15




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Unless we replace our oil and natural gas reserves, our level of reserves and production will
decline, which would adversely affect our cash flows and income.
  The loss of key personnel could adversely affect our business.
  Rising inflation and price increases could have a negative effect on our value and increase our
costs.
  Our inability to meet operating and financial obligations could adversely affect our business.
  16




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Risks Relating To Our Common Stock
 Our stock price and trading volume may be volatile, which could result in losses for our
stockholders.
  
    
    actual or anticipated quarterly variations in our operating results;
    
    changes in expectations as to our future financial performance or changes in
financial estimates, if any, of public market analysts;
    
    announcements relating to our business or the business of our competitors;
    
    conditions generally affecting the oil and natural gas industry;
    
    the success of our operating strategy; and
    
    the operating and stock price performance of other comparable companies.
  Our insiders beneficially own a significant portion of our stock.
  
    
    elect or defeat the election of our directors;
    
    amend or prevent amendment of our articles of incorporation or bylaws;
    
    effect or prevent a merger, sale of assets or other corporate transaction; and
    
    affect the outcome of any other matter submitted to the stockholders for vote.
  We do not expect to pay dividends in the foreseeable future. As a result, holders of our common
stock must rely on stock appreciation for any return on their investment.
  17




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The anti-takeover effects of provisions of our charter, by-laws, and shareholder rights plan, and
of certain provisions of Delaware corporate law, could deter, delay, or prevent an acquisition or
other change in control of us and could adversely affect the price of our common stock.
  
    
    We are authorized to issue blank check preferred stock, which is preferred stock
that can be created and issued by the board of directors without prior shareholder
approval, with rights senior to those of our common shareholders;
    
    We have a shareholder rights plan that could make it more difficult for a third
party to acquire us without the support of our board of directors and principal
shareholders.
    
    We are subject to Section 203 of the Delaware General Corporation Law, or the DGCL.
In general, Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period of
three years after the date of the transaction in which the person became an interested
stockholder. A business combination includes a merger, sale of 10% or more of our
assets and certain other transactions resulting in a financial benefit to the
stockholder. For purposes of Section 203, an interested stockholder includes any
person that is:
 
    
    the owner of 15% or more of the outstanding voting stock of the corporation;
    
    an affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation, at any time within three years
immediately prior to the relevant date; and
    
    an affiliate or associate of the persons defined as an interested shareholder.
  
 ITEM 2. DESCRIPTION OF PROPERTIES.
  Piceance Basin
  18




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Eastern DJ Basin
    19




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Williston Basin
     Production Data
  20




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2006
    
    2005
    
    2004Total gross oil production, barrels
    
    
    
    
    
    
    
    
    
    
    1,393,616Total gross gas production, MCF
    
    
    3,744,379
    
    
    
    457,331
    
    
    
    Net oil production, barrel(1)
    
    
    
    
    
    
    
    
    
    
    348,404Net gas production, MCF(1)
    
    
    737,175
    
    
    
    90,037
    
    
    
    Average oil sales price, $/Bbl(2)
    
    
    
    
    
    
    
    
    
    $
    18.98Average gas sales price, $/MCF(3)
    
    $
    4.78
    
    
    $
    7.86
    
    
    
    Average production cost per barrel(4)
    
    
    
    
    
    
    
    
    
    $
    16.12Average production cost per MCF including
production taxes
    
    $
    0.78
    
    
    $
    1.10
    
    
    
    Gross productive wellsOil
    
    
    
    
    
    
    
    
    
    
    24.0Gas
    
    
    20.0
    
    
    
    3.0
    
    
    
    Total
    
    
    20.0
    
    
    
    3.0
    
    
    
    24.0Net productive wellsOil
    
    
    
    
    
    
    
    
    
    
    12.0Gas
    
    
    5.00
    
    
    
    0.75
    
    
    
    Total
    
    
    5.00
    
    
    
    0.75
    
    
    
    12.00
 (1)
    
    Net production and net well count is based on Tetons effective net interest as of the end
of each year.(2)
    
    Average oil sales price is a combination of domestic (Russian) and export price.(3)
    
    Average gas sales price excludes fuel, gathering, transportation and marketing fees.(4)
    
    Excludes production payment to Limited Liability Company Energosoyuz-A. 21




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Net Wells Drilled
  Year Ended December 31,2006
    
    2005
    
    2004Gross
    
    Net (1)
    
    Gross
    
    Net (1)
    
    Gross
    
    Net (1)Number of Wells
DrilledExploratoryProductive
    
    
    
    
    
    
    
    
    
    
    3.00
    
    
    
    0.75
    
    
    
    
    
    
    
    In progress (2)
    
    
    18.00
    
    
    
    4.27
    
    
    
    7.00
    
    
    
    1.75
    
    
    
    
    
    
    
    Dry (3)
    
    
    4.00
    
    
    
    1.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    22.00
    
    
    
    5.27
    
    
    
    10.00
    
    
    
    2.50
    
    
    
    
    
    
    
    Development (4)Productive
    
    
    20.00
    
    
    
    5.00
    
    
    
    
    
    
    
    
    
    
    
    3.00
    
    
    
    1.50In progress
    
    
    8.00
    
    
    
    2.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dry
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    28.00
    
    
    
    7.00
    
    
    
    
    
    
    
    
    
    
    
    3.00
    
    
    
    1.50TotalProductive
    
    
    20.00
    
    
    
    5.00
    
    
    
    3.00
    
    
    
    0.75
    
    
    
    3.00
    
    
    
    1.50In progress
    
    
    26.00
    
    
    
    6.27
    
    
    
    7.00
    
    
    
    1.75
    
    
    
    
    
    
    
    Dry
    
    
    4.00
    
    
    
    1.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    50.00
    
    
    
    12.27
    
    
    
    10.00
    
    
    
    2.50
    
    
    
    3.00
    
    
    
    1.50
 (1)
    
    Net well count is based on Tetons effective net interest as of the end of each year.(2)
    
    The 18 exploratory gross wells in progress as of December 31, 2006 are 16 gross wells in the
DJ Basin and 2 gross wells in the Williston Basin (1 gross well at 25% working interest and 1
gross well at 1.56% working interest).(3)
    
    The 4 gross dry holes are in the DJ Basin as of December 31, 2006.(4)
    
    The 28 development gross productive wells and in progress wells as of December 31, 2006 are
in the Piceance Basin. 22




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Developed and Undeveloped Acreage
  Developed Acres
    
    Undeveloped AcresGross
    
    Net
    
    Gross
    
    NetPiceance Basin, Colorado
    
    
    200
    
    
    
    50
    
    
    
    6,114
    
    
    
    1,529Eastern DJ Basin, Nebraska
    
    
    
    
    
    
    
    
    
    
    256,749
    
    
    
    58,627Eastern DJ Basin, Colorado
    
    
    
    
    
    
    
    
    
    
    9,823
    
    
    
    7,757Williston Basin, North Dakota
    
    
    
    
    
    
    
    
    
    
    87,192
    
    
    
    16,024Total
    
    
    200
    
    
    
    50
    
    
    
    359,878
    
    
    
    83,937
  
 ITEM 3. LEGAL PROCEEDINGS.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  23




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PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
   High
    
    Low2006 periodFirst quarter
    
    $
    8.75
    
    
    $
    6.01Second quarter
    
    $
    7.49
    
    
    $
    5.06Third quarter
    
    $
    5.84
    
    
    $
    4.34Fourth quarter
    
    $
    5.30
    
    
    $
    4.202005 periodFirst quarter
    
    $
    3.81
    
    
    $
    1.32Second quarter
    
    $
    4.53
    
    
    $
    2.06Third quarter
    
    $
    8.00
    
    
    $
    4.45Fourth quarter
    
    $
    7.20
    
    
    $
    4.90
  Dividends
 24




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Performance Graph
 The
following Performance Graph and related information shall not be
deemed soliciting material or to be filed
with the Securities and Exchange Commission, nor shall such
information be deemed to be incorporated by reference into any future
filing under the Securities Act of 1933 or Securities Exchange Act of
1934, each as amended, except to the extent that Teton specifically
incorporates it by reference into such filing.
 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 *
    
    $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ending December 31. Recent Issuances of Unregistered Securities
   25




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Equity Compensation Plan Information
  Number of Securities
    
    Weighted Avg.to be Issued upon
    
    Exercise PriceExercise
    
    of Outstanding
    
    Number of Securitiesof Outstanding Options,
    
    Options,
    
    Remaining AvailablePlan Category
    
    Warrants and Rights
    
    Warrants and Rights
    
    for Future IssuanceEquity compensation plans approved by
security holders:2003 Employee Stock Compensation
Plan(1)
    
    
    2,088,545
    
    
    $
    3.56
    
    
    
    2005
Long-term Incentive
Plan:Performance
Share Units(2)
    
    
    1,911,000
    
    
    
    (3)
    
    
    
    (4)Restricted Common
Stock Grants(5)
    
    
    193,999
    
    
    $
    5.98
    
    
    
    
 (1)
    
    The 2003 Employee Stock Compensation Plan was terminated upon
the adoption of the LTIP. See Note 8 to the financial
statements.(2)
    
    The total 1,911,000 stretch performance share units consists
of 355,000 and 1,556,000
stretch performance share units for the 2005 and 2006 grant years, respectively,
and are available for future performance awards under the
Companys LTIP. See Note 8 to the
financial statements for description of the 2005 and 2006 grants
and the Companys LTIP.(3)
    
    Not applicable.(4)
    
    The Companys Long-Term Incentive Plan (the LTIP) provides for the issuance of a maximum
number of shares of common stock equal to 20% of the total number of shares of Common Stock
outstanding as of the effective date for the LTIPs first year and for each subsequent LTIP
year (i) that number of shares equal to 10% of the total number of shares of Common Stock
outstanding as of the first day of each respective LTIP year, plus (ii) that number of shares
of Common Stock reserved and available for issuance but unissued during any prior plan year
during the term of the LTIP; provided, however, that in no event shall the number of shares of
Common Stock available for issuance under the LTIP as of the beginning of any year plus the
number of shares of Common Stock reserved for outstanding awards under the LTIP exceed 35%
percent of the total number of shares of Common Stock outstanding at that time, based on a
three-year period of grants.(5)
    
    Represents restricted stock shares made pursuant to the
Companys LTIP which vest over a 3 year period from date
of grant. 26




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ITEM 6. SELECTED FINANCIAL DATA.
  As of and for the Year Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Summary of OperationsOil and gas sales
    
    $
    3,528,558
    
    
    $
    707,420
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss from continuing
operations
    
    
    (5,724,469
    )
    
    
    (3,777,449
    )
    
    
    (5,193,281
    )
    
    
    (4,036,164
    )
    
    
    (10,191,307
    )Discontinued operations, net
of tax
    
    
    
    
    
    
    (255,000
    )
    
    
    12,383,582
    
    
    
    (1,598,680
    )
    
    
    (782,616
    )Net income (loss)
    
    $
    (5,724,469
    )
    
    $
    (4,032,449
    )
    
    $
    7,190,301
    
    
    $
    (5,634,844
    )
    
    $
    (10,973,923
    )Income (loss) per share for:Continuing operations
    
    $
    (0.44
    )
    
    $
    (0.38
    )
    
    $
    (0.64
    )
    
    $
    (1.00
    )
    
    $
    (3.28
    )Discontinued operations
    
    
    
    
    
    $
    (0.02
    )
    
    $
    1.37
    
    
    $
    (0.23
    )
    
    $
    (0.25
    )Net income
    
    $
    (0.44
    )
    
    $
    (0.40
    )
    
    $
    0.73
    
    
    $
    (1.23
    )
    
    $
    (3.53
    )Balance SheetTotal assets
    
    $
    41,243,707
    
    
    $
    22,131,495
    
    
    $
    17,611,565
    
    
    $
    20,718,375
    
    
    $
    10,012,395Notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    507,001Cash dividends per common
share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  Overview
  27




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
    
    We sold 737,175 mcf of natural gas from our Piceance Basin properties at an average
wellhead price of $5.45 per mcf. Actual price realization after fuel, gathering,
marketing, and transportation averaged $4.78 per mcf, resulting in revenues net to us
of $3,528,558.
    
    Our net loss from continuing operations increased to $5,724,469 in 2006 ($0.44 per
share) from $3,777,449 in 2005 ($0.38 per share).
    
    On August 2, 2006, we closed on a public offering of 2,300,000 shares of our common
stock, which was priced on July 27, 2006, at $5.20 per share. Petrie Parkman & Co.,
served as the sole underwriter and book-running manager for the offering. Total shares
delivered at closing included the underwriters over-allotment option to purchase
300,000 additional common shares, which was exercised at closing. As a result of the
underwriters exercise of its over-allotment option, net proceeds of the offering were
$10.8 million.
  
    
    We participated in the drilling of 18 gross wells (4.5 net to us) in 2006 in the
Piceance Basin. As of December 31, 2006, we had 20 gross wells (5 net to us) on
production and drilled another 8 gross wells of which 6 gross wells have been drilled to the
total depth (1.50 net to us), of which all 8 gross wells are planned to be on
production in 2007.
    
    In May 2006, we acquired from American a 25% working interest in approximately
87,192 gross acres (16,024 net to us) in the Williston Basin for a total purchase price
of approximately $6.17 million. We are participating with American and Evertson (the
operator) in the drilling of one tri-lateral horizontal well, the Champion 1-25H.
Currently, the Champion 1-25H is being tested for production. The estimated cost for
the Champion 1-25H well is approximately $6.8 million to drill, complete and test.
    
    We participated in the drilling of 20 wells as part of the initial pilot program
with Noble Energy, Inc. on our acreage block in the DJ Basin, which includes
approximately 266,572 gross acres. We were carried for our 25 % working interest on
the first 20 wells with Noble. Ten of the 20 wells were drilled in the Chundy prospect
area located in Chase and Dundy Counties, Nebraska, and 7 of those wells have been
logged, cased and fracture stimulated and are currently awaiting sales connection. One
well has been logged and cased, and awaiting completion, and 2 wells were dry holes.
The other 10 wells were drilled in the Grant prospect area located in Grant County,
Nebraska of which 6 wells were logged, cased and are waiting on completion, 2 wells
were perforated and fracture stimulated, and 2 wells were plugged and abandoned. On March 14, 2007, the Company announced that 5 of the 20 pilot wells
in the Chundy area were put on production by Noble as part of a flow rate test to ascertain commercial
viability. Additional wells will be connected during the near term as part of this test.
  28




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##### Table of Contents



Results of Operations 2006 Compared to 2005
     
    
    An increase in compensation expense of $3,138,842, which increase was due primarily
to $2,623,830 of non-cash compensation expense of stock-based grants as a result of the
actual performance milestones associated with our long-term incentive plan and our
adoption of Statement of Financial Accounting Standard 123R Share-Based Payment,
effective as of January 1, 2006 and a non-cash expense of $486,518 associated with
restricted stock grants. In addition, compensation expense increased $787,707 as a
result of an increase in the number of full time employees (from 6 employees in 2005
to 11 employees in 2006) and a cash bonus expense increase of approximately $610,000
from 2005 to 2006. A full-time CFO was hired to replace an outside contractor CFO,
which increased salary and bonus costs, but reduced outside contractor fees as
described below.
    
    Consulting expenses associated with engineering, marketing, investor relations and
financial services rendered increased $201,666 in 2006 from 2005.
    
    Office expense increased $160,788 in 2006 from 2005 due to the increased
administrative and computer support as well as additional office space leased.
  
    
    Legal and accounting costs decreased by $1,059,484 from the prior year period in
2005. Of the $1,059,484 decrease, $795,375 was due to non-cash issuance of common
stock for accounting and legal services rendered in 2005. In 2006 we received back
50,000 shares of common stock as a refund of accounting services (that reduced our general and administrative expenses in 2006) valued at $157,500.
The remaining
 29




---



##### Table of Contents



decrease in 2006 of approximately $105,000 is primarily due to the replacement of a
part-time, contract CFO with a full-time, in-house CFO in 2006.
     Results of Operations 2005 Compared to 2004
 
    
    During 2005 we sold 90,037 mcf of natural gas from our Piceance Basin properties at
an average wellhead price of $8.90. Actual price realization after fuel, gathering,
marketing, and transportation averaged $7.86 per mcf, resulting in revenues net to us
of $707,420.
    
    Our net loss from continuing operations decreased to $3,777,449 in 2005 ($0.38 per
share) from $5,193,281 in 2004 ($0.64 per share).
   
    
    On February 15, 2005, we acquired a 25% interest in Piceance LLC, which owned 6,314
acres in the Piceance Basin, for a total purchase price, including the fair value of
stock and warrants issued, of approximately $6.4 million.
    
    During the second quarter of 2005, we acquired an interest in
an estimated 182,000 gross acres in
the Eastern DJ Basin for a total investment, including the fair value of stock and
warrants issued of approximately $4.2 million.
    
    Piceance LLC drilled and completed three wells in 2005 and drilled to total depth an
additional seven wells, which seven wells came on production in the first half of 2006.
    30




---



##### Table of Contents




    
    Advertising and public relations and related consulting expenses decreased $457,820
in 2005 primarily due to the fact that we eliminated several consulting contracts in
the second quarter of 2004 and expensed the costs to terminate such contracts during
such quarter.
    
    We expensed $415,494 in due diligence costs in 2004 compared to $28,886 in 2005
related to acquisitions that were not completed.
    
    Our public company compliance expense and related legal and accounting expenses
decreased $251,476 in 2005. Significant costs were incurred in 2004 related to the
sale of our Russian operations, legal and accounting expense incurred on acquisitions
that did not close and costs to prepare the proxy to solicit votes for the sale of our
Russian operations. Components of our compliance and legal costs incurred in 2005
include costs incurred in respect to the establishment of the shareholders rights plan,
the Long Term Incentive Plan, the preparation of three registration statements, and
legal costs associated with the departure of one of our former officers and directors.
    
    Franchise taxes, included in general and administrative expenses decreased $64,483
in 2005.
    
    Travel and entertainment expenses decreased $217,581 in 2005 relative to 2004 as we
no longer incur the significant costs of traveling to Russia.
    
    Compensation paid to employees decreased $572,911 in 2005 relative to 2004 because
we reduced our number of employees from 11 to 6, partially offset by an increase in
severance paid to employees of $222,000, primarily related to the severance costs
recorded for a former officer and director.
  Outlook for 2007
  
    
    Continue to develop the Piceance Basin acreage.
    
    Increase our liquidity through increases in our senior credit facility borrowing
base and consummation with other capital market transactions.
    
    Determine the commerciality of our DJ Basin play with Noble and continue to develop
the acreage as appropriate.
 31




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##### Table of Contents




    
    Determine the commerciality of our Williston Basin play with Evertson/American and
continue to develop the acreage as appropriate.
    
    Pursue additional oil and gas asset and project acquisitions including an operated
property.
    
    Continue to build up our operating staff and related capabilities.
 Liquidity and Capital Resources
       32




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##### Table of Contents



Sources and Uses of Funds
  Cash Flows and Capital Expenditures
     33




---



##### Table of Contents



Monthly Volume
    
    CIGCommodity
    
    Period
    
    (MMBtu)
    
    Floor/CeilingNatural Gas
    
    
    01/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    02/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    03/2007
    
    
    
    30,000
    
    
    $
    6.00/$725Natural Gas
    
    
    04/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    04/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    05/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    06/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    07/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    08/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    09/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    10/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    11/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    12/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25
  Commitments
   34




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##### Table of Contents



For the Year Ended December 31,2007
    
    2008
    
    2009
    
    Thereafter
    
    
    TotalOperating lease for
office space
    
    $
    123,000
    
    
    $
    129,000
    
    
    $
    44,000
    
    
    $
    
    
    
    $
    296,000
 Income Taxes, Net Operating Losses and Tax Credits
  35




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##### Table of Contents



Subsequent Events
  Critical Accounting Policies and Estimates
  Revenue Recognition
   36




---



##### Table of Contents



Oil and Gas Hedging
    Successful Efforts Method of Accounting
  37




---



##### Table of Contents



Reserve Estimates
  Depreciation, Depletion and Amortization
  38




---



##### Table of Contents



Impairment of Oil and Gas Properties
    Stock-Based Compensation
    39




---



##### Table of Contents



Income Taxes
  Asset Retirement Obligations
  Recently Adopted Accounting Pronouncements
  40




---



##### Table of Contents



Recently Issued Accounting Pronouncements
    
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
   41




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##### Table of Contents



Monthly Volume
    
    CIGCommodity
    
    Period
    
    (MMBtu)
    
    Floor/CeilingNatural Gas
    
    
    01/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    02/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    03/2007
    
    
    
    30,000
    
    
    $
    6.00/$725Natural Gas
    
    
    04/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    04/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    05/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    06/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    07/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    08/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    09/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    10/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    11/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25Natural Gas
    
    
    12/2007
    
    
    
    30,000
    
    
    $
    6.00/$7.25
  42




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 Consolidated Financial Statements
 and
 Independent Auditors Report
 December 31, 2006, 2005 and 2004
 43




---



##### Table of Contents



PageReport of Independent Registered Public Accounting Firm
    
    
    F  1Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    F  2Consolidated
Statements of Operations and Comprehensive (Loss) Income
    
    
    F  4Consolidated Statements of Changes in Stockholders (Deficit) Equity
    
    
    F  5Consolidated Statements of Cash Flows
    
    
    F  6Notes to Consolidated Financial Statements
    
    
    F  8




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ Ehrhardt Keefe Steiner & Hottman PCEhrhardt Keefe Steiner & Hottman PC 
 F-1




---



##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 December 31, 2006 and 2005
 December
31,2006
    
    
    2005AssetsCurrent assetsCash
    
    $
    4,324,784
    
    
    $
    7,064,295Trade accounts receivable
    
    
    860,070
    
    
    
    247,769Advances to
operators
    
    
    401,491
    
    
    
    224,429Tubular inventory
    
    
    148,628
    
    
    
    Fair value of derivatives
    
    
    402,867
    
    
    
    Prepaid expenses and other assets
    
    
    142,163
    
    
    
    137,729Total current assets
    
    
    6,280,003
    
    
    
    7,674,222Non-current assetsProperty and equipmentOil and gas properties (using successful efforts method of accounting)Proved
    
    
    11,635,699
    
    
    
    1,717,213Producing facilities
    
    
    690,244
    
    
    
    Unproved
    
    
    13,959,480
    
    
    
    10,636,279Wells in progress
    
    
    8,492,150
    
    
    
    2,105,884Facilities in progress
    
    
    1,363,644
    
    
    
    120,554Land
    
    
    300,000
    
    
    
    Fixed assets
    
    
    242,691
    
    
    
    71,045Total property and equipment
    
    
    36,683,908
    
    
    
    14,650,975Less
accumulated depletion and depreciation
    
    
    (1,911,889
    )
    
    
    (193,702
    )Net property and equipment
    
    
    34,772,019
    
    
    
    14,457,273Debt
issuance costs  net
    
    
    191,685
    
    
    
    Total non-current assets
    
    
    34,963,704
    
    
    
    14,457,273Total assets
    
    $
    41,243,707
    
    
    $
    22,131,495
  F-2




---



##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Consolidated Balance Sheets
 December 31, 2006 and 2005
 December
31,2006
    
    

2005Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    1,506,873
    
    
    $
    1,281,457Accrued liabilities
    
    
    4,195,674
    
    
    
    297,351Accrued payroll and severance
    
    
    890,877
    
    
    
    396,589Accrued royalties
    
    
    
    
    
    
    94,403Accrued franchise taxes payable
    
    
    30,518
    
    
    
    62,025Deposit on sale of assets
    
    
    
    
    
    
    300,000Accrued liability of discontinued operations
    
    
    
    
    
    
    255,000Accrued purchase consideration
    
    
    775,054
    
    
    
    Total current liabilities
    
    
    7,398,996
    
    
    
    2,686,825Non-current liabilitiesAsset retirement obligations
    
    
    78,115
    
    
    
    3,851Total non-current liabilities
    
    
    78,115
    
    
    
    3,851Total liabilities
    
    
    7,477,111
    
    
    
    2,690,676Commitments and contingenciesStockholders equityCommon stock, $.001 par value, 250,000,000
shares authorized, 15,180,649 shares issued
and outstanding at December 31, 2006 and
11,329,652 shares issued and outstanding at
December 31, 2005
    
    
    15,180
    
    
    
    11,329Additional paid-in capital
    
    
    60,836,839
    
    
    
    43,929,216Stock  based compensation
    
    
    3,138,772
    
    
    
    Accumulated deficit
    
    
    (30,224,195
    )
    
    
    (24,499,726
    )Total stockholders equity
    
    
    33,766,596
    
    
    
    19,440,819Total liabilities and stockholders equity
    
    $
    41,243,707
    
    
    $
    22,131,495
  F-3




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 
 Consolidated
Statements of Operations and Comprehensive (Loss) Income
 For the Years EndedDecember 31,2006
    
    
    2005
    
    
    2004Oil and gas sales
    
    $
    3,528,558
    
    
    $
    707,420
    
    
    $
    Cost of sales and expenses:Lease operating expense
    
    
    325,057
    
    
    
    50,932
    
    
    
    Production taxes
    
    
    250,528
    
    
    
    48,196
    
    
    
    General and administrative
    
    
    7,147,792
    
    
    
    4,006,747
    
    
    
    5,332,991Depletion, depreciation and amortization
    
    
    1,724,854
    
    
    
    181,276
    
    
    
    Accretion expense from asset retirement obligations
    
    
    24,329
    
    
    
    
    
    
    
    Exploration expense
    
    
    448,054
    
    
    
    445,108
    
    
    
    Total cost of sales and expenses
    
    
    9,920,614
    
    
    
    4,732,259
    
    
    
    5,332,991Loss from operations
    
    
    (6,392,056
    )
    
    
    (4,024,839
    )
    
    
    (5,332,991
    )Other income (expense):Unrealized derivative gain
    
    
    402,867
    
    
    
    
    
    
    
    Other income
    
    
    292,733
    
    
    
    247,390
    
    
    
    139,710Financing charges
    
    
    (28,013
    )
    
    
    
    
    
    
    Total other income (expense)
    
    
    667,587
    
    
    
    247,390
    
    
    
    139,710Loss from continuing operations
    
    
    (5,724,469
    )
    
    
    (3,777,449
    )
    
    
    (5,193,281
    )Discontinued operations, net of tax
    
    
    
    
    
    
    (255,000
    )
    
    
    12,383,582Net (loss) income
    
    
    (5,724,469
    )
    
    
    (4,032,449
    )
    
    
    7,190,301Imputed preferred stock dividends for inducements and beneficial
conversion charges
    
    
    
    
    
    
    
    
    
    
    (521,482
    )Preferred stock dividends
    
    
    
    
    
    
    (61,455
    )
    
    
    (105,949
    )Net (loss) income applicable to common shares
    
    
    (5,724,469
    )
    
    
    (4,093,904
    )
    
    
    6,562,870Other comprehensive loss, net of tax
effect of exchange rates
    
    
    
    
    
    
    
    
    
    
    (898,756
    )Comprehensive (loss) income
    
    $
    (5,724,469
    )
    
    $
    (4,093,904
    )
    
    $
    5,664,114Basic and diluted weighted average common shares outstanding
    
    
    13,092,741
    
    
    
    10,282,394
    
    
    
    9,028,967Basic and diluted loss per common share for continuing operations
    
    $
    (0.44
    )
    
    $
    (0.38
    )
    
    $
    (0.64
    )Basic and
diluted weighted average (loss) income per common
shares for discontinued operations
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    1.37Basic and
diluted (loss) income per common share
    
    $
    (0.44
    )
    
    $
    (0.40
    )
    
    $
    0.73
  F-4




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Changes in Stockholders Equity
 ForeignAdditional
    
    
    Stock
    
    
    Unamortized
    
    
    Currency
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Based
    
    
    Preferred Stock
    
    
    Translation
    
    
    Accumulated
    
    
    StockholdersShares
    
    

Amount
    
    

Shares
    
    

Amount
    
    

Capital
    
    

Compensation
    
    

Dividends
    
    

Adjustment
    
    

Deficit
    
    

EquityBalance-December 31, 2003
    
    
    618,231
    
    
    $
    618
    
    
    
    8,584,068
    
    
    $
    8,583
    
    
    $
    37,073,367
    
    
    $
    
    
    
    $
    (118,610
    )
    
    $
    898,756
    
    
    $
    (27,657,578
    )
    
    $
    10,205,136Common Stock issued for
settlement of accrued liabilities
    
    
    
    
    
    
    
    
    
    
    13,750
    
    
    
    14
    
    
    
    58,686
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,700Common Stock issued for services
    
    
    
    
    
    
    
    
    
    
    32,175
    
    
    
    33
    
    
    
    101,296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,329Warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149,061
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149,061Preferred stock issued for cash, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    of commissions of $50,000 (cash)
    
    
    126,436
    
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    499,872
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    499,998Preferred
stock converted to common stock
    
    
    (463,207
    )
    
    
    (463
    )
    
    
    500,264
    
    
    
    500
    
    
    
    (37
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of Preferred Stock
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (118,610
    )
    
    
    
    
    
    
    118,610
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,949
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,949
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (898,756
    )
    
    
    
    
    
    
    (898,756
    )Net income for year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,190,301
    
    
    
    7,190,301Balance-December 31, 2004
    
    
    281,460
    
    
    
    281
    
    
    
    9,130,257
    
    
    
    9,130
    
    
    
    37,657,686
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,467,277
    )
    
    
    17,199,820Common stock issued for
settlement of accrued liabilities
    
    
    
    
    
    
    
    
    
    
    12,828
    
    
    
    13
    
    
    
    10,487
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,500Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    298,276
    
    
    
    298
    
    
    
    944,726
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    945,024Common stock issued for asset
acquisitions
    
    
    
    
    
    
    
    
    
    
    862,963
    
    
    
    863
    
    
    
    1,467,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,468,006Warrants issued for asset
acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    413,872
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    413,872Warrants exercised net of AMEX
    
    
    
    
    
    
    
    
    
    
    743,868
    
    
    
    744
    
    
    
    3,496,757
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,497,501Preferred stock converted to
common stock
    
    
    (281,460
    )
    
    
    (281
    )
    
    
    281,460
    
    
    
    281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,455
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,455
    )Net loss for year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,032,449
    )
    
    
    (4,032,449
    )Balance-December 31, 2005
    
    
    
    
    
    
    
    
    
    
    11,329,652
    
    
    
    11,329
    
    
    
    43,929,216
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,499,726
    )
    
    
    19,440,819Warrants and options exercised
    
    
    
    
    
    
    
    
    
    
    1,530,996
    
    
    
    1,531
    
    
    
    6,233,888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,235,419Issuance of common stock, net
    
    
    
    
    
    
    
    
    
    
    2,300,000
    
    
    
    2,300
    
    
    
    10,831,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,833,485Return of common stock
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    (50
    )
    
    
    (157,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (157,500
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    70,001
    
    
    
    70
    
    
    
    
    
    
    
    3,138,772
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,138,842Net loss for year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,724,469
    )
    
    
    (5,724,469
    )Balance-December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    15,180,649
    
    
    $
    15,180
    
    
    $
    60,836,839
    
    
    $
    3,138,772
    
    
    $
    
    
    
    $
    
    
    
    $
    (30,224,195
    )
    
    $
    33,766,596
  F-5




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 For the Years EndedDecember 31,2006
    
    
    2005
    
    
    2004Net (loss) income
    
    $
    (5,724,469
    )
    
    $
    (4,032,449
    )
    
    $
    7,190,301Adjustments to reconcile net (loss) income to net cash used in
operating activitiesDepletion, depreciation, and amortization
    
    
    1,724,854
    
    
    
    181,276
    
    
    
    11,380Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (13,086,761
    )Accretion expense from asset retirement obligations
    
    
    24,329
    
    
    
    
    
    
    
    Stock, stock options and warrants issued for services and interest
    
    
    2,981,342
    
    
    
    834,774
    
    
    
    250,390Unrealized derivative gain
    
    
    (402,867
    )
    
    
    
    
    
    
    Changes in assets and liabilitiesFrom discontinued operations
    
    
    (255,000
    )
    
    
    255,000
    
    
    
    1,149,609Trade accounts receivable
    
    
    (612,301
    )
    
    
    (247,769
    )
    
    
    Advances to operators
    
    
    (177,062
    )
    
    
    (224,429
    )
    
    
    Tubular inventory
    
    
    (148,628
    )
    
    
    
    
    
    
    Prepaid expenses and other assets
    
    
    (4,434
    )
    
    
    (36,812
    )
    
    
    (5,224
    )Accounts payable and accrued liabilities
    
    
    446,543
    
    
    
    140,829
    
    
    
    69,530Accrued
payroll and severance, royalties, and franchise taxes payable
    
    
    368,378
    
    
    
    333,492
    
    
    
    3,945,154
    
    
    
    1,236,361
    
    
    
    (11,611,076
    )Net cash used in operating activities
    
    
    (1,779,316
    )
    
    
    (2,796,088
    )
    
    
    (4,420,775
    )Cash flows from investing activitiesSales deposit liability
    
    
    
    
    
    
    300,000
    
    
    
    Proceeds from sale of oil and gas properties
    
    
    2,700,000
    
    
    
    
    
    
    
    Proceeds from sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    7,963,450Repayments of loan from discontinued operating entity
    
    
    
    
    
    
    
    
    
    
    6,040,000Increase in deposits
    
    
    
    
    
    
    
    
    
    
    (25,000
    )Increase in oil and gas properties
    
    
    (20,355,252
    )
    
    
    (11,302,692
    )
    
    
    Increase in
fixed assets
    
    
    (182,163
    )
    
    
    (6,395
    )
    
    
    (45,420
    )Increase in non-current assets of discontinued operating entity
    
    
    
    
    
    
    
    
    
    
    (2,988,882
    )Net cash (used in) provided by investing activities
    
    
    (17,837,415
    )
    
    
    (11,009,087
    )
    
    
    10,944,148Cash flows from financing activitiesFrom discontinued operations
    
    
    
    
    
    
    
    
    
    
    3,258,378Proceeds from issuance of common stock, net of underwriting
fees and expenses of $1,126,515 and $50,000 commissions,
respectively
    
    
    10,833,485
    
    
    
    
    
    
    
    499,998Proceeds from exercise of warrants / options and issuance of
common stock , net of AMEX fees of $48,462 in 2005
    
    
    6,235,419
    
    
    
    3,497,501
    
    
    
    Debt issuance costs from bank debt
    
    
    (191,685
    )
    
    
    
    
    
    
    Payment of dividends
    
    
    
    
    
    
    (61,455
    )
    
    
    (81,463
    )Net cash provided by financing activities
    
    
    16,877,219
    
    
    
    3,436,046
    
    
    
    3,676,913Effect of exchange rates of cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (282,856
    )Net (decrease) increase in cash and cash equivalents
    
    
    (2,739,511
    )
    
    
    (10,369,129
    )
    
    
    9,917,430Cash and cash equivalents  beginning of year
    
    
    7,064,295
    
    
    
    17,433,424
    
    
    
    7,515,994Cash and cash equivalents  end of year
    
    $
    4,324,784
    
    
    $
    7,064,295
    
    
    $
    17,433,424
   F-6




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Consolidated Statements of Cash Flows (contd)
  During the year ended December 31, 2006, the Company had the following transactions:
        During the year ended December 31, 2005, the Company had the following transactions:
         During
the year ended December 31, 2004, the Company had the following transactions:
        F-7




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 Note 1  Nature of Organization
   Note 2  Summary of Significant Accounting Policies
 Principles of Consolidation
   Discontinued Operations
  Use of Estimates
  Cash and Cash Equivalents
  Revenue Recognition
  F-8




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
 Oil and Gas Derivatives
     Comprehensive Income
  Tubular Inventory
  Debt Issuance Costs
  Oil and Gas Properties
  F-9




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
     Property and Equipment
  Impairment of Long-Lived Assets
  Asset Retirement Obligations
   Foreign Currency Translation
  F-10




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  Basic Loss Per Share
   2006
    
    
    2005
    
    
    2004Dilutive effects of options
    
    
    2,088,545
    
    
    
    2,875,334
    
    
    
    2,993,037Dilutive effects of warrants
    
    
    867,819
    
    
    
    1,731,764
    
    
    
    7,359,728Dilutive effects of convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    281,460Dilutive effects of restricted shares(1)
    
    
    193,999
    
    
    
    195,000
    
    
    
    Dilutive
effects of performance share units(2)
    
    
    1,911,000
    
    
    
    596,000
    
    
    
    Dilutive
effects of grants awarded during 2006(3)
    
    
    426,517
    
    
    
    
    
    
    
    5,487,880
    
    
    
    5,398,098
    
    
    
    10,634,225
 
 (1)
    
    These shares vest in equal tranches over three years
beginning with grants made in 2006.(2)
    
    800,000 performance share units were reserved in July 2005 for the 2005 Grant. As of December
31, 2006, after forfeitures and releases (such as the performance targets for 2005 not being met or
certain participants leaving the Companys employ prior to vesting), there were 177,500 Base and
355,000 Stretch performance share units available to vest in 2007, assuming time and performance
vesting criteria are met. In March 2006, the Compensation Committee reserved 2,500,000 performance
share units under the LTIP, awarding approximately 715,625 performance share units for Base
objectives to executives, directors, certain employees and consultants on March 17, 2006.
Throughout the balance of 2006, the Compensation Committee made additional awards in respect of new
hires, with the result being that at December 31, 2006, 972,500 performance share units for Base
objectives (net of forfeitures that occurred during 2006 as a result of employees who left the
Companys employ during 2006) were awarded in respect of the 2006 objectives. As of December 31,
2006, there were 778,000 Base and 1,556,000 Stretch performance share units available to vest in
2007 and 2008, assuming time and performance vesting criteria are met. Amounts available to vest in
future years represent performance share units that are net of awards
certified by the Compensation
Committee on March 13, 2007 and are deemed to have vested for
purposes of this table on December 31, 2006. Please see
Note 8, for a description
of performance share units.(3)
    
    On March 13, 2007 the Compensation Committee awarded 134,767 shares for the 2005 grant and
291,750 shares for the 2006 grant based on performance achievements for the respective 2005
and 2006 years milestones.  Fair Value of Financial Instruments
  Income Taxes
  F-11




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##### Table of Contents





TETON ENERGY CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial Statements




Recently Adopted Accounting Pronouncements




Recently Issued Accounting Pronouncements




Note 3  Accounting Change
    F-12




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
   Years Ended December 31,2006
    
    
    2005
    
    

2004Stock
options  employees
    
    $
    28,494
    
    
    $
    
    
    
    $
    LTIP
performance share units  directors, employees and consultants
    
    
    2,623,830
    
    
    
    
    
    
    
    Restricted
common stock  directors, employees and consultants
    
    
    486,518
    
    
    
    
    
    
    
    Non-employee shares issued or awarded
    
    
    
    
    
    
    795,375
    
    
    
    250,390Total
    
    $
    3,138,842
    
    
    $
    795,375
    
    
    $
    250,390
  Note 4  Sale of Goloil
  2006
    
    
    2005
    
    
    2004Sales
    
    $
    
    
    
    $
    
    
    
    $
    6,552,138Cost of sales and expenses
    
    
    
    
    
    
    255,000
    
    
    
    7,072,272Loss from operations
    
    
    
    
    
    
    (255,000
    )
    
    
    (520,134
    )Other income (expense)Interest expense
    
    
    
    
    
    
    
    
    
    
    (166,216
    )Net loss from discontinued operations, before tax
    
    
    
    
    
    
    (255,000
    )
    
    
    (686,350
    )Income tax
    
    
    
    
    
    
    
    
    
    
    (16,829
    )Net loss from discontinued operations, before
gain on disposal
    
    
    
    
    
    
    (255,000
    )
    
    
    (703,179
    )Gain on sale of Goloil stock
    
    
    
    
    
    
    
    
    
    
    13,086,761Income (loss) from discontinued operations
    
    $
    
    
    
    $
    (255,000
    )
    
    $
    12,383,582The gain on sale of Goloil stock is calculated as follows:Sale price for Goloil shares
    
    
    
    
    
    
    
    
    
    $
    8,960,229Less direct transaction expenses:Investment banking fee
    
    
    
    
    
    
    
    
    
    
    (750,000
    )Net fees and expenses
    
    
    
    
    
    
    
    
    
    
    (246,779
    )Net proceeds
    
    
    
    
    
    
    
    
    
    
    7,963,450Net deficit of investment in Goloil at date of sale
    
    
    
    
    
    
    
    
    
    
    5,123,311Gain on disposal of ZAO Goloil
    
    
    
    
    
    
    
    
    
    $
    13,086,761
 F-13




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  Note
5  Acquisitions and Sales of Oil and Gas Assets
 Acquisition of Piceance Basin
    Acquisition of Eastern Denver-Julesburg Basin Acreage and Noble Acreage Earning Agreement
    F-14




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
    Acquisition of Williston Basin Acreage
    Note
6  Senior Bank Facility
    F-15




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
   Note
7  Stockholders Equity
 Changes in Stockholders Equity during 2006
 Placements of Common Stock
      Changes in Stockholders Equity during 2005
 Private Placements of Common Stock
      F-16




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
 Convertible Preferred Stock
  Changes in Stockholders Equity during 2004
 Private Placements of Common Stock
   Private Placements of Series A Convertible Preferred Stock
    WeightedAverageExerciseShares
    
    

PriceOutstanding  December 31, 2003
    
    
    7,389,981
    
    
    $
    5.63Granted
    
    
    4,496,142
    
    
    
    6.00Forfeited/canceled
    
    
    (4,526,396
    )
    
    
    5.98Outstanding  December 31, 2004
    
    
    7,359,727
    
    
    
    5.62Granted
    
    
    406,481
    
    
    
    1.87Exercised
    
    
    (743,868
    )
    
    
    4.77Forfeited/canceled
    
    
    (5,290,576
    )
    
    
    6.00Outstanding  December 31, 2005
    
    
    1,731,764
    
    
    
    3.93Granted
    
    
    
    
    
    
    Exercised
    
    
    (760,959
    )
    
    
    4.65Forfeited/canceled
    
    
    (102,986
    )
    
    
    5.36Outstanding  December 31, 2006
    
    
    867,819
    
    
    $
    3.14
 F-17




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
   Range of Exercise Prices
    
    Number
    
    
    Price*
    
    
    Life*$1.75 - $3.24
    
    
    861,819
    
    
    $
    3.13
    
    
    
    4.6$3.48 - $4.35
    
    
    6,000
    
    
    
    3.81
    
    
    
    1.6Total shares outstanding and exercisable
    
    
    867,819
    
    
    $
    3.14
    
    
    
    4.6
 
 *
    
    Price and Life reflect the weighted average exercise price and
weighted average remaining contractual life (in years), respectively. Note 8  Stock-Based Compensation
       F-18




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
 Stock Options
   WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Average
    
    
    Contractual
    
    
    IntrinsicOutstanding
    
    
    Exercise Price
    
    
    Term
    
    
    Value(in years)Outstanding at December 31, 2005
    
    
    2,875,334
    
    
    $
    3.54Granted
    
    
    
    
    
    $
    Exercised
    
    
    (770,039
    )
    
    $
    3.50Forfeited or expired
    
    
    (16,750
    )
    
    $
    3.11Outstanding at December 31 2006
    
    
    2,088,545
    
    
    $
    3.56
    
    
    
    5.44
    
    
    $
    2,867,126Exercisable at December 31, 2006
    
    
    2,075,212
    
    
    $
    3.56
    
    
    
    5.42
    
    
    $
    2,842,059
 Long Term Incentive Plan
     F-19




---



##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
     2005 Grant Year
    
    
    2006 Grant Year
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageBase
    
    
    Grant
    
    
    Base
    
    
    Grant
    
    
    Base
    
    
    GrantPerformance
    
    
    Date Fair
    
    
    Performance
    
    
    Date Fair
    
    
    Performance
    
    
    Date FairShare Units
    
    
    Value
    
    
    Share Units
    
    
    Value
    
    
    Share Units
    
    
    ValueTotal pool
    
    
    400,000
    
    
    
    
    
    
    
    1,250,000
    
    
    
    
    
    
    
    1,650,000Grants outstanding
at beginning of
year
    
    
    298,000
    
    
    $
    4.88
    
    
    
    
    
    
    $
    
    
    
    
    298,000
    
    
    $
    4.88Grants during the
period
    
    
    60,000
    
    
    $
    5.29
    
    
    
    984,625
    
    
    $
    6.71
    
    
    
    1,044,625
    
    
    $
    6.70Vested and released
    
    
    (106,500
    )
    
    $
    4.97
    
    
    
    (194,500
    )
    
    $
    6.71
    
    
    
    (301,000
    )
    
    $
    6.09Forfeited/cancelled
    
    
    (74,000
    )
    
    $
    4.88
    
    
    
    (12,125
    )
    
    $
    6.90
    
    
    
    (86,125
    )
    
    $
    6.21Outstanding at end
of period
    
    
    177,500
    
    
    $
    4.95
    
    
    
    778,000
    
    
    $
    6.71
    
    
    
    955,500
    
    
    $
    6.38
 Restricted Common Stock
  F-20




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  WeightedAverageRestricted
    
    
    Grant-DateStock Shares
    
    
    Fair ValueNon-vested at December 31, 2005
    
    
    195,000
    
    
    $
    6.06Granted
    
    
    69,000
    
    
    $
    5.82Vested
    
    
    (70,001
    )
    
    $
    6.08Forfeited
    
    
    
    
    
    $
    Non-vested at December 31, 2006
    
    
    193,999
    
    
    $
    5.98
 Note 9  Income Taxes
  2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Total current
    
    $
    
    
    
    $
    
    
    
    $
    Deferred:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Total Deferred
    
    $
    
    
    
    $
    
    
    
    $
    
  2006
    
    
    2005
    
    
    2004Federal statutory income tax
benefit from continuing
operations
    
    $
    (2,003,564
    )
    
    $
    (1,322,107
    )
    
    $
    (1,817,648
    )State income tax benefit,
net of federal income tax
benefit from continuing
operations
    
    
    (171,233
    )
    
    
    (112,282
    )
    
    
    (154,367
    )Other
    
    
    16,320
    
    
    
    4,546
    
    
    
    16,703Change in valuation allowance
    
    
    2,158,477
    
    
    
    1,429,843
    
    
    
    1,955,312Income tax expense
    
    $
    
    
    
    $
    
    
    
    $
    
 F-21




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  2006
    
    
    2005Current Deferred Tax Assets (Liabilities)Other receivables
    
    $
    (264,560
    )
    
    $
    (7,441
    )Prepaid expenses
    
    
    
    
    
    
    (45,157
    )Accounts
payable and accrued liabilities
    
    
    568,942
    
    
    
    550,205Hedge gain
    
    
    (153,089
    )
    
    
    Valuation allowance
    
    
    (151,293
    )
    
    
    (497,607
    )Net current deferred tax asset (liability)
    
    $
    
    
    
    $
    Non-Current Deferred Tax Assets (Liabilities)Depletion,
depreciation, amortization
    
    $
    494,726
    
    
    $
    (3,053
    )Stock-based
compensation
    
    
    1,057,478
    
    
    
    Oil and gas properties
    
    
    (536,881
    )
    
    
    (801,210
    )Net operating loss
    
    
    10,419,166
    
    
    
    9,110,270Valuation allowance
    
    
    (11,434,489
    )
    
    
    (8,306,007
    )Net non-current deferred tax asset (liability)
    
    $
    
    
    
    $
    Net Deferred Tax Asset (Liability)
    
    $
    
    
    
    $
    
   Note  10 Commitments
   F-22




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
       For the Year Ended December 31,2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalOperating lease for
office space
    
    $
    123,000
    
    
    $
    129,000
    
    
    $
    44,000
    
    
    $
    
    
    
    $
    296,000
 F-23




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  Note 11  Subsequent Events
  Note 12  Unaudited Supplemental Oil and Gas Disclosures
   For the Years EndedDecember
31,2006
    
    

2005
    
    

2004Property acquisition costs
    
    $
    14,164,263
    
    
    $
    10,778,408
    
    
    $
    Facilities in progress
    
    
    1,363,644
    
    
    
    120,554
    
    
    
    Wells in progress
    
    
    8,492,150
    
    
    
    2,105,884
    
    
    
    Development costs
    
    
    12,121,160
    
    
    
    1,575,084
    
    
    
    2,988,882Total
    
    $
    36,141,217
    
    
    $
    14,579,930
    
    
    $
    2,988,882The following reflects the Companys capitalized costs associated with oil and gas producing
activities:For the Years EndedDecember
31,2006
    
    

2005
    
    

2004Property acquisition costs:Proved
    
    $
    204,783
    
    
    $
    142,129
    
    
    $
    Unproved
    
    
    13,959,480
    
    
    
    10,636,279
    
    
    
    Facilities in progress
    
    
    1,363,644
    
    
    
    120,554
    
    
    
    Wells in progress
    
    
    8,492,150
    
    
    
    2,105,884
    
    
    
    Development costs
    
    
    12,121,160
    
    
    
    1,575,084
    
    
    
    Subtotal
    
    
    36,141,217
    
    
    
    14,579,930
    
    
    
    Accumulated depletion and valuation allowances
    
    
    (1,832,849
    )
    
    
    (160,653
    )
    
    
    Net capitalized costs
    
    $
    34,308,368
    
    
    $
    14,419,277
    
    
    $
    
 Results of Operations from Oil and Gas Producing Activities
 F-24




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  For the Years
EndedDecember
31,2006
    
    

2005
    
    

2004Oil and gas revenues
    
    $
    3,528,558
    
    
    $
    707,420
    
    
    $
    6,552,138Oil and gas production expenses
    
    
    (325,057
    )
    
    
    (50,932
    )
    
    
    (1,331,273
    )Taxes other than income taxes
    
    
    (250,528
    )
    
    
    (48,196
    )
    
    
    (4,286,025
    )Depletion, depreciation and amortization expense
    
    
    (1,672,196
    )
    
    
    (160,653
    )
    
    
    (747,481
    )Results of operations from oil and gas producing activities
    
    $
    1,280,777
    
    
    $
    447,639
    
    
    $
    187,359
 Reserves (Unaudited)
  For the Years EndedDecember
31,2006
    
    
    2005
    
    
    2004MMCF
    
    

MMCF
    
    

MBBLSProved reserves, beginning of period
    
    
    4,009
    
    
    
    
    
    
    
    8,262Production
    
    
    (737
    )
    
    
    (90
    )
    
    
    (348
    )Extensions and discoveries
    
    
    
    
    
    
    4,099
    
    
    
    Sale of reserves in place
    
    
    
    
    
    
    
    
    
    
    (7,914
    )Revisions of previous estimates
    
    
    3,821
    
    
    
    
    
    
    
    Proved reserves, end of period
    
    
    7,093
    
    
    
    4,009
    
    
    
    Proved developed reserves, beginning of period
    
    
    853
    
    
    
    
    
    
    
    3,816Proved developed reserves, end of period
    
    
    4,927
    
    
    
    853
    
    
    
    
 Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
    F-25




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
   For the Years EndedDecember 31,(in
thousands of dollars)2006
    
    
    2005
    
    
    2004Future cash inflows
    
    $
    29,167
    
    
    $
    30,514
    
    
    $
    Future production costs
    
    
    (10,066
    )
    
    
    (4,643
    )
    
    
    Future development costs
    
    
    (3,419
    )
    
    
    (5,900
    )
    
    
    Future income tax expense
    
    
    
    
    
    
    
    
    
    
    Future net cash flows (undiscounted)
    
    
    15,682
    
    
    
    19,971
    
    
    
    Annual discount of 10% for estimated timing of cash flows
    
    
    (6,977
    )
    
    
    (11,255
    )
    
    
    Standardized measure of future net discounted cash flows
    
    $
    8,705
    
    
    $
    8,716
    
    
    $
    
   For the Years EndedDecember 31,(in thousands of dollars)2006
    
    
    2005
    
    
    2004Standardized measure, beginning of period,
    
    $
    8,716
    
    
    $
    
    
    
    $
    5,993Net changes in prices and production costs
    
    
    (10,798
    )
    
    
    
    
    
    
    Sales of oil and gas produced during period
    
    
    (2,953
    )
    
    
    (608
    )
    
    
    (935
    )Future development costs
    
    
    2,481
    
    
    
    
    
    
    
    Revisions of previous quantity estimates
    
    
    10,387
    
    
    
    
    
    
    
    Extensions and discoveries
    
    
    
    
    
    
    9,324
    
    
    
    Accretion of discount
    
    
    872
    
    
    
    
    
    
    
    300Sale of reserves in place
    
    
    
    
    
    
    
    
    
    
    (5,358
    )Changes in income taxes, net
    
    
    
    
    
    
    
    
    
    
    Standardized measure, end of period
    
    $
    8,705
    
    
    $
    8,716
    
    
    $
    
 F-26




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##### Table of Contents



TETON ENERGY CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
 Note
13  Selected Quarterly Information (Unaudited)
  For
the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    Sept 30,
    
    
    Dec 312006Oil and gas sales
    
    $
    290,249
    
    
    $
    650,234
    
    
    $
    1,468,892
    
    
    $
    1,119,183Loss from continuing operations
(2)
    
    $
    (1,262,625
    )
    
    $
    (1,526,345
    )
    
    $
    (796,964
    )
    
    $
    (2,138,535
    )Net Loss
    
    $
    (1,262,625
    )
    
    $
    (1,526,345
    )
    
    $
    (796,964
    )
    
    $
    (2,138,535
    )Basic and diluted loss per common share for
continuing operations
    
    $
    (0.11
    )
    
    $
    (0.13
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )Basic and diluted loss per common share
    
    $
    (0.11
    )
    
    $
    (0.13
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )2005Oil and gas sales
    
    $
    
    
    
    $
    
    
    
    $
    229,594
    
    
    $
    477,826Loss from continuing operations
    
    $
    (655,507
    )
    
    $
    (1,644,693
    )
    
    $
    (802,285
    )
    
    $
    (674,964
    )Discontinued operations, net of tax,(1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (255,000
    )Net Loss
    
    $
    (655,507
    )
    
    $
    (1,644,693
    )
    
    $
    (802,285
    )
    
    $
    (929,964
    )Basic and diluted loss per common share for
continuing operations
    
    $
    (0.07
    )
    
    $
    (0.17
    )
    
    $
    (0.08
    )
    
    $
    (0.06
    )Basic and diluted loss per common share for
discontinued operations
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    (0.02
    )Basic and diluted loss per common share
    
    $
    (0.07
    )
    
    $
    (0.17
    )
    
    $
    (0.08
    )
    
    $
    (0.08
    )
 
 (1)
    
    The loss from discontinued operations for the quarter ended December 31, 2005 is due to the
repayment of $255,000 to the U.S. Trade Development Agency pursuant to the terms of a Grant
Agreement dated September 20, 1999 (See Note 4).(2)
    
    The loss from continuing operations for the quarters ending March 31, 2006, June 30, 2006,
September 30, 2006 and December 31, 2006 includes $489,023,
$706,995, $325,130, $1,617,694,
respectively, of non-cash stock compensation awards to employees,
directors and consultants included in
general and administrative expenses. F-27




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION.
  72




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 Directors and Executive Officers
  Name
    
    Age
    
    PositionJames J. Woodcock
    
    68
    
    Chairman of the Board of DirectorsKarl F. Arleth
    
    58
    
    President and CEO, DirectorJohn T. Connor, Jr.
    
    65
    
    DirectorThomas F. Conroy
    
    68
    
    DirectorWilliam K. White
    
    64
    
    DirectorRobert F. Bailey
    
    74
    
    DirectorBill I. Pennington
    
    55
    
    Executive Vice President and CFOAndrew Schultz, III
    
    54
    
    Vice President of ProductionRichard Bosher
    
    50
    
    Vice President - Business DevelopmentWilliam P. Brand, Jr.
    
    51
    
    Controller and Chief Accounting Officer
      73




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Committees of the Board Of Directors
      74




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##### Table of Contents



Code of Ethics
  Compliance with Section 16(a) of the Exchange Act
  
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
  Name and Address of
    
    Amount and Nature of
    
    Percent ofBeneficial Owner
    
    Beneficial Ownership
    
    ClassKarl F. Arleth
     410 17th Street, Suite 1850Denver, Colorado 80202
    
    

914,412(1)
    
    
    
    5.72
    %Wellington Management Company, LLP
     75 State St.Boston, MA 02109
    
    

1,691,900(2)
    
    
    
    11.15
    %
 
 (1)
    
    Includes (i) 104,073 shares of common stock, (ii) 83,334 shares underlying
warrants, with an exercise price of $3.24, (iii) 710,338 shares underlying options
with exercise prices ranging from $3.48 to $3.60 per share and
(iv) the vesting of 16,667 shares
issued as a result of the partial vesting of a previously granted
restricted stock award.(2)
    
    Wellington Management Company, LLP, in its capacity as investment
advisor, may be deemed to beneficially own 1,691,900 shares which are held of
record by clients of Wellington Management. 75




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##### Table of Contents



Name and Address of
    
    Amount and Nature of
    
    Percent ofBeneficial Owner
    
    Beneficial Ownership
    
    ClassKarl F. Arleth
410 17th Street, Suite 1850
Denver, Colorado 80202
    
    
    914,412
    (1)
    
    
    5.72
    %James J. Woodcock 
410 17th Street, Suite 1850
Denver, Colorado 80202
    
    
    658,566
    (2)
    
    
    4.20
    %John T. Connor, Jr.
410 17th Street, Suite 1850
Denver, Colorado 80202
    
    
    373,718
    (3)
    
    
    2.43
    %Thomas F. Conroy
410 17th Street, Suite 1850
Denver, Colorado 80202
    
    
    160,731
    (4)
    
    
    1.05
    %William K. White 
410 17th Street, Suite 1850
Denver, Colorado 80202
    
    
    53,334
    (5)
    
    
    *Robert Bailey 
410 17th Street, Suite 1850
Denver, Colorado 80202
    
    
    38,045
    (6)
    
    
    *Bill I. Pennington
410 17th Street, Suite 1850
Denver, CO 80202
    
    
    
    
    
    
    *Richard Bosher
410 17th Street, Suite 1850
Denver, CO 80202
   
    
    1,600

(7)
    
    
    *All executive officers and
Directors as a group (8 persons)
    
    
    2,200,406
    
    
    
    13.07
    %
 
 *
    
    Less than one percent.(1)
    
    Includes (i) 104,073 shares of common stock, (ii) 83,334 shares underlying warrants, with
an exercise price of $3.24 per share, (iii) 710,338 shares underlying options exercisable at $3.48 per share to $3.60 per share and (iv) 16,667 shares
issued as a result of the partial vesting of a previously granted
restricted stock award.(2)
    
    Includes (i) 121,384 shares of common stock, (ii) 87,034 shares underlying warrants, with
exercise prices ranging from $3.24 per share to $3.48 per share, (iii) 410,148 shares
underlying options with exercise prices ranging from $3.48 to $3.60 per share, and (iv) 40,000
shares issued as a result of the partial vesting of a previously granted
restricted stock award.(3)
    
    Includes (i) 198,718 shares of common stock and (ii) 175,000 shares underlying options with
exercise prices ranging from $3.60 to $3.71 per share.(4)
    
    Includes (i) 32,073 shares of common stock, (ii) 25,000 shares underlying warrants
exercisable at $3.24 per share, and (iii) 103,658 shares underlying options with exercise
prices ranging from $3.48 to $3.60 per share.(5)
    
    Includes 45,000 shares of common stock and (ii) 8,334
restricted shares issued as a result of the partial vesting of a previously granted
restricted stock award.(6)
    
    Includes 38,045 shares of common stock.(7)
    
    Includes 1,600 shares of common stock. 76




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 Transactions Involving Mr. Arleth
  Transactions Involving Mr. Pennington
  Transactions Involving Mr. Schultz
  Transactions Involving Mr. Bosher
  Transactions Involving Mr. Brand
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 Audit and Non-Audit Fees
  Fiscal Year2006
    
    
    2005Audit Fees
    
    $
    150,705
    
    
    $
    101,111Audit-Related Fees
    
    
    42,119
    
    
    
    16,034Tax Fees
    
    
    18,500
    
    
    
    9,775Total
    
    $
    211,324
    
    
    $
    126,920
 77




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##### Table of Contents



Audit Fees
 Audit-Related Fees
 Tax Fees
  Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors
  
 PART IV
 
 ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
  Exhibit No.
    
    Description1.1
    
    Underwriting Agreement, dated
July 26, 2006, between Petrie Parkman & Co., Inc., incorporated by
reference to Exhibit 1.1 of Tetons Form 8-K, filed on July 27, 2006.3.1.1
    
    Certificate of Incorporation of EQ Resources Ltd., incorporated by
reference to Exhibit 2.1.1
of Tetons Form 10-SB, filed July 3, 2001.3.1.2
    
    Certificate of Domestication of EQ
Resources Ltd., incorporated by reference to Exhibit 2.1.2 of Tetons Form 10-SB, filed July 3, 2001.3.1.3
    
    Articles of Merger of EQ Resources Ltd. and American-Tyumen Exploration Company, incorporated
by reference to Exhibit 2.1.3 of Tetons Form 10-SB, filed July 3, 2001.3.1.4
    
    Certificate of Amendment of Teton Petroleum Company, incorporated by reference to Exhibit 2.1.4
of Tetons Form 10-SB, filed July 3, 2001.3.1.5
    
    Certificate of Amendment of Teton Petroleum Company, incorporated by reference to Exhibit 2.1.5
of Tetons Form 10-SB, filed July 3, 2001.3.1.6
    
    Certificate of Amendment to Certificate of Incorporation, dated June 28, 2005, incorporated by
reference to Exhibit 10.1 of Tetons Form 10-Q filed on August 15, 2005.3.2
    
    Bylaws, as amended, of Teton Petroleum Company incorporated by reference to Exhibit 3.2 of
Tetons Form 10-QSB, filed August 20, 2002.
 78




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##### Table of Contents



Exhibit No.
    
    Description4.1.1
    
    Certificate of Designation for Series A Convertible Preferred Stock, incorporated by reference
to Exhibit 3.1.6 of Tetons Form SB-2, filed January 27, 2004.4.1.2
    
    Certificate of Designations, Preferences and Rights of the Terms of the Series C Preferred
Stock, incorporated by reference to Exhibit 3.1 of Tetons 8-K filed on June 8, 2005.4.1.3
    
    Rights Agreement between Teton and Computershare Investors Services, LLC, dated June 3, 2005,
incorporated by reference to Exhibit 4.1 of Tetons Form 8-K filed on June 8, 2005.10.1
    
    Confirmation of Grant of Stock Option, dated as of April 9, 2003, incorporated by reference to
Exhibit 10.3 of Tetons Form 10-Q filed November 14, 2005.10.2
    
    Confirmation of Grant of Stock Option, dated March 31, 2004, incorporated by reference to
Exhibit 10.4 of Tetons Form 10-Q filed November 14, 2005.10.3
    
    First Amendment to Purchase and Sale Agreement Niobrara Shallow Gas Project, dated January
2005, incorporated by reference to Exhibit 10.1 of Tetons Form 10-Q filed May 16, 2005.10.4
    
    Membership Interest Purchase Agreement between PGR Partners, LLC and Teton Petroleum Company,
dated February 15, 2005, incorporated by reference to Exhibit 10.3 of Tetons Form 10-Q filed
May 16, 2005.10.5
    
    Purchase and Sale Agreement Niobrara Shallow Gas Project, dated April 13, 2005, incorporated by
reference to Exhibit 10.2 of Tetons Form 10-Q filed May 16, 2005.10.6
    
    Confirmation of Grant of Stock Option, dated as of May 23, 2005, incorporated by reference to
Exhibit 10.1 of Tetons Form 10-Q filed November 14, 2005.10.7
    
    Confirmation of Grant of Stock Option, dated as of May 23, 2005, incorporated by reference to
Exhibit 10.2 of Tetons Form 10-Q filed November 14, 2005.10.8
    
    Letter Agreement dated as of October 6, 2005, between H. Howard Cooper and Teton, incorporated by reference to Exhibit 10.8 of Tetons Form 10-Q filed November 14,
2005.10.9
    
    Form of 2005 Long-Term Incentive Plan and 2005 Performance Share Unit Award Agreement,
Employees and Directors, incorporated by reference to Exhibit 10.5 of Tetons Form 10-Q filed
November 14, 2005.10.10
    
    Form of 2005 Long-Term Incentive Plan and 2005 Performance Share Unit Award Agreement, Patrick
A. Quinn, incorporated by reference to Exhibit 10.6 of Tetons Form 10-Q filed November 14,
2005.
 79




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##### Table of Contents



Exhibit No.
    
    Description10.11
    
    Form of Stock Option Agreement between Teton and Howard Cooper, incorporated
by reference to Exhibit 10.7 of Tetons Form 10-Q filed November 14, 2005.10.12
    
    Acreage Earning Agreement between Teton and Noble Energy, Inc., dated December 31, 2005,
incorporated by reference to Exhibit 10.18 of Tetons Form 10-K filed on March 10, 2006.10.13
    
    First Amendment to Acreage Earning Agreement between Teton and Noble Energy, Inc., dated
December 31, 2005, incorporated by reference to Exhibit 10.19 of Tetons Form 10-K filed on
March 10, 2006.10.14
    
    Employment Agreement, dated
April 1, 2006, between Richard Bosher and Teton, filed herewith.10.15
    
    Employment Agreement, dated April 1, 2006, between Andrew Schultz and Teton,
incorporated by reference to Exhibit 10.3 of Tetons
Form 10-Q filed on May 12, 2006.10.16
    
    Employment Agreement, effective as
of July 20, 2006, between Bill I. Pennington and Teton, incorporated by reference to Exhibit 10.1 of
Tetons Form 8-K filed on July 21, 2006.10.17
    
    Employment Agreement, effective as of September 1, 2006, between Teton and
Karl F. Arleth, incorporated by reference to Exhibit 10.3 of Tetons Form 10-K filed March 31,
2005.10.18
    
    International Swap Dealers
Association, Inc. Master Agreement, dated October 24, 2006,
between BNP Paribas and Teton, filed herewith.10.19
    
    First Amendment to Credit
Agreement, dated as of November 1, 2006, between and among
Teton, as Borrowers, the Guarantors, as Administrative Agent, and the
lenders party thereto, incorporated by reference to Tetons
Form 10-Q for the quarter ended September 30, 2006, filed
on November 14, 2006.10.20
    
    Employment Agreement, dated
December 1, 2006, between Teton and William P. Brand, Jr., filed
herewith.10.21
    
    Employment Agreement, dated
February 1, 2007, between Teton and Dominic J. Bazile II, filed
herewith.14.1
    
    Code of Ethics and Business Conduct, incorporated by reference to Exhibit 14.1 of Tetons 10-K
filed on March 31, 2005.21.1
    
    List of Subsidiaries, incorporated by reference to Exhibit 21.1 of Tetons Form 10-K filed on
March 31, 2005.23.1
    
    Consent of independent registered public accounting firm, filed herewith.23.2
    
    Consent of Independent Petroleum
Engineers and Geologists, filed herewith.



31.1
    
    Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Section 302, filed herewith.31.2
    
    Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Section 302, filed herewith.32.1
    
    Certification by Chief Executive Officer pursuant to 18 U.S. C. Section 1350, filed herewith.32.2
    
    Certification by Chief Financial Officer pursuant to 18 U.S. C. Section 1350, filed herewith.99. 1
    
    Audit Committee Charter
incorporated by reference to Exhibit 99.4 of our Form 10-KSB/A filed on
April 21, 2004.
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##### Table of Contents



SIGNATURES
  TETON ENERGY CORPORATIONBy:
    /s/ Karl F. ArlethKarl. F. Arleth, Chief Executive OfficerDated:  March 19, 2007  Signature
    
    Title
    
    Date/s/ James J. Woodcock
    
    Chairman and Director
    
    March 19, 2007James J. Woodcock/s/ Karl F. Arleth
    
    President and CEO
    
    March 19, 2007Karl F. Arleth
    
    (principal executive officer)/s/ Thomas F. Conroy
    
    Director
    
    March 19, 2007Thomas F. Conroy/s/ John T. Connor
    
    Director
    
    March 19, 2007John T. Connor/s/ William K. White
    
    Director
    
    March 19, 2007William K. White/s/ Robert Bailey
    
    Director
    
    March 19, 2007Robert Bailey/s/ Bill I. Pennington
    
    Chief Financial Officer
    
    March 19, 2007Bill I. Pennington
    
    (principal financial officer)
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EXHIBITS INDEX.
 Exhibit No.
    
    Description1.1
    
    Underwriting Agreement, dated
July 26, 2006, between Petrie Parkman & Co., Inc., incorporated by
reference to Exhibit 1.1 of Tetons Form 8-K, filed on July 27, 2006.3.1.1
    
    Certificate of Incorporation of EQ Resources Ltd., incorporated by
reference to Exhibit 2.1.1
of Tetons Form 10-SB, filed July 3, 2001.3.1.2
    
    Certificate of Domestication of EQ
Resources Ltd., incorporated by reference to Exhibit 2.1.2 of Tetons Form 10-SB, filed July 3, 2001.3.1.3
    
    Articles of Merger of EQ Resources Ltd. and American-Tyumen Exploration Company, incorporated
by reference to Exhibit 2.1.3 of Tetons Form 10-SB, filed July 3, 2001.3.1.4
    
    Certificate of Amendment of Teton Petroleum Company, incorporated by reference to Exhibit 2.1.4
of Tetons Form 10-SB, filed July 3, 2001.3.1.5
    
    Certificate of Amendment of Teton Petroleum Company, incorporated by reference to Exhibit 2.1.5
of Tetons Form 10-SB, filed July 3, 2001.3.1.6
    
    Certificate of Amendment to Certificate of Incorporation, dated June 28, 2005, incorporated by
reference to Exhibit 10.1 of Tetons Form 10-Q filed on August 15, 2005.3.2
    
    Bylaws, as amended, of Teton Petroleum Company incorporated by reference to Exhibit 3.2 of
Tetons Form 10-QSB, filed August 20, 2002.




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##### Table of Contents



Exhibit No.
    
    Description4.1.1
    
    Certificate of Designation for Series A Convertible Preferred Stock, incorporated by reference
to Exhibit 3.1.6 of Tetons Form SB-2, filed January 27, 2004.4.1.2
    
    Certificate of Designations, Preferences and Rights of the Terms of the Series C Preferred
Stock, incorporated by reference to Exhibit 3.1 of Tetons 8-K filed on June 8, 2005.4.1.3
    
    Rights Agreement between Teton and Computershare Investors Services, LLC, dated June 3, 2005,
incorporated by reference to Exhibit 4.1 of Tetons Form 8-K filed on June 8, 2005.10.1
    
    Confirmation of Grant of Stock Option, dated as of April 9, 2003, incorporated by reference to
Exhibit 10.3 of Tetons Form 10-Q filed November 14, 2005.10.2
    
    Confirmation of Grant of Stock Option, dated March 31, 2004, incorporated by reference to
Exhibit 10.4 of Tetons Form 10-Q filed November 14, 2005.10.3
    
    First Amendment to Purchase and Sale Agreement Niobrara Shallow Gas Project, dated January
2005, incorporated by reference to Exhibit 10.1 of Tetons Form 10-Q filed May 16, 2005.10.4
    
    Membership Interest Purchase Agreement between PGR Partners, LLC and Teton Petroleum Company,
dated February 15, 2005, incorporated by reference to Exhibit 10.3 of Tetons Form 10-Q filed
May 16, 2005.10.5
    
    Purchase and Sale Agreement Niobrara Shallow Gas Project, dated April 13, 2005, incorporated by
reference to Exhibit 10.2 of Tetons Form 10-Q filed May 16, 2005.10.6
    
    Confirmation of Grant of Stock Option, dated as of May 23, 2005, incorporated by reference to
Exhibit 10.1 of Tetons Form 10-Q filed November 14, 2005.10.7
    
    Confirmation of Grant of Stock Option, dated as of May 23, 2005, incorporated by reference to
Exhibit 10.2 of Tetons Form 10-Q filed November 14, 2005.10.8
    
    Letter Agreement dated as of October 6, 2005, between H. Howard Cooper and Teton, incorporated by reference to Exhibit 10.8 of Tetons Form 10-Q filed November 14,
2005.10.9
    
    Form of 2005 Long-Term Incentive Plan and 2005 Performance Share Unit Award Agreement,
Employees and Directors, incorporated by reference to Exhibit 10.5 of Tetons Form 10-Q filed
November 14, 2005.10.10
    
    Form of 2005 Long-Term Incentive Plan and 2005 Performance Share Unit Award Agreement, Patrick
A. Quinn, incorporated by reference to Exhibit 10.6 of Tetons Form 10-Q filed November 14,
2005.




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##### Table of Contents



Exhibit No.
    
    Description10.11
    
    Form of Stock Option Agreement between Teton and Howard Cooper, incorporated
by reference to Exhibit 10.7 of Tetons Form 10-Q filed November 14, 2005.10.12
    
    Acreage Earning Agreement between Teton and Noble Energy, Inc., dated December 31, 2005,
incorporated by reference to Exhibit 10.18 of Tetons Form 10-K filed on March 10, 2006.10.13
    
    First Amendment to Acreage Earning Agreement between Teton and Noble Energy, Inc., dated
December 31, 2005, incorporated by reference to Exhibit 10.19 of Tetons Form 10-K filed on
March 10, 2006.10.14
    
    Employment Agreement, dated
April 1, 2006, between Richard Bosher and Teton, filed herewith.10.15
    
    Employment Agreement, dated April 1, 2006, between Andrew Schultz and Teton,
incorporated by reference to Exhibit 10.3 of Tetons
Form 10-Q filed on May 12, 2006.10.16
    
    Employment Agreement, effective as
of July 20, 2006, between Bill I. Pennington and Teton, incorporated by reference to Exhibit 10.1 of
Tetons Form 8-K filed on July 21, 2006.10.17
    
    Employment Agreement, effective as of September 1, 2006, between Teton and
Karl F. Arleth, incorporated by reference to Exhibit 10.3 of Tetons Form 10-K filed March 31,
2005.10.18
    
    International Swap Dealers
Association, Inc. Master Agreement, dated October 24, 2006,
between BNP Paribas and Teton, filed herewith.10.19
    
    First Amendment to Credit
Agreement, dated as of November 1, 2006, between and among
Teton, as Borrowers, the Guarantors, as Administrative Agent, and the
lenders party thereto, incorporated by reference to Tetons
Form 10-Q for the quarter ended September 30, 2006, filed
on November 14, 2006.10.20
    
    Employment Agreement, dated
December 1, 2006, between Teton and William P. Brand, Jr., filed
herewith.10.21
    
    Employment Agreement, dated
February 1, 2007, between Teton and Dominic J. Bazile II, filed
herewith.14.1
    
    Code of Ethics and Business Conduct, incorporated by reference to Exhibit 14.1 of Tetons 10-K
filed on March 31, 2005.21.1
    
    List of Subsidiaries, incorporated by reference to Exhibit 21.1 of Tetons Form 10-K filed on
March 31, 2005.23.1
    
    Consent of independent registered public accounting firm, filed herewith.23.2
    
    Consent of Independent Petroleum
Engineers and Geologists, filed herewith.31.1
    
    Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Section 302, filed herewith.31.2
    
    Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Section 302, filed herewith.32.1
    
    Certification by Chief Executive Officer pursuant to 18 U.S. C. Section 1350, filed herewith.32.2
    
    Certification by Chief Financial Officer pursuant to 18 U.S. C. Section 1350, filed herewith.99. 1
    
    Audit Committee Charter
incorporated by reference to Exhibit 99.4 of our Form 10-KSB/A filed on
April 21, 2004.