** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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** **

**Form 10-K**

** **

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** **

**(MarkOne)**

** **
| **x**      | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **For  The Fiscal Year Ended December 31, 2007**                                                   |
| ** ** | ** ** | ** **                                                                                              |
| **or**     |
| ** ** | ** ** | ** **                                                                                              |
| **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 NUMBER333-122935-02**

### ** **

**REEFGLOBAL ENERGY VII, L.P.**

(Exact name of registrant as specified in its charter)

** **

| **Nevada**                                                      | ** ** | **20-3963203**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1901 N. Central Expressway, Suite 300, Richardson, TX 75080-3610**

(Address of principal executive offices including zip code)

 

**(972)-437-6792**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of theAct:  **None**

 

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

 

**General and Limited Partnership Interests**

(Title of Class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.Yes o No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.Yes  oNo x

 

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

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  x

 

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

 

Large accelerated filer o               Accelerated filer o               Non-accelerated filer  o              Smaller reportingcompany  x

 

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

 

No market currently exists for the limited and generalpartnership interests of the registrant.

 

As of March 31, 2008, the registrant had 48.620units of general partner interest held by the managing general partner, 741.001units of additional general partner interest and 182.783 units of limitedpartner interest outstanding.

 

##### Documents incorporated by reference:  None

#####  

 

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REEF GLOBAL ENERGY VII, L.P.

FORM 10-K

TABLE OF CONTENTS

 
| **Part I**   |       |                                                                                                                |       |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** ** | ** **                                                                                                          | ** ** |
| Item 1.           |       | Business                                                                                                            |       |
| Item 1A.          |       | Risk Factors                                                                                                        |       |
| Item 1B.          |       | Unresolved Staff  Comments                                                                                          |       |
| Item 2.           |       | Properties                                                                                                          |       |
| Item 3.           |       | Legal Proceedings                                                                                                   |       |
| Item 4.           |       | Submission  of matters to a Vote of Security Holders                                                                |       |
|              |       |                                                                                                                |       |
| **PART II**  |       |                                                                                                                |       |
|              |       |                                                                                                                |       |
| Item 5.           |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |
| Item 6.           |       | Selected Financial Data                                                                                             |       |
| Item 7.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       |
| Item 7A.          |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |
| Item 8.           |       | Financial  Statements and Supplementary Data                                                                        |       |
| Item 9.           |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |       |
| Item 9A(T).       |       | Controls and Procedures                                                                                             |       |
| Item 9B.          |       | Other Information                                                                                                   |       |
|              |       |                                                                                                                |       |
| **PART III** |       |                                                                                                                |       |
|              |       |                                                                                                                |       |
| Item 10.          |       | Directors,  Executive Officers and Corporate Governance                                                             |       |
| Item 11.          |       | Executive Compensation                                                                                              |       |
| Item 12.          |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       |
| Item 13.          |       | Certain  Relationships and Related Transactions, and Director Independence                                          |       |
| Item 14.          |       | Principal  Accounting Fees and Services                                                                             |       |
|              |       |                                                                                                                |       |
| **PART IV**  |       |                                                                                                                |       |
|              |       |                                                                                                                |       |
| Item 15.          |       | Exhibits and  Financial Statement Schedules                                                                         |       |
|              |       | Signatures                                                                                                          |       |

 

2

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** **

**PART I**

 
| **ITEM  1.** | **BUSINESS** |
|--------------|--------------|

** **

**Introduction**

** **

ReefGlobal Energy VII, L.P. (the Partnership) is the second in a series of fourNevada limited partnerships comprising a program called Reef Global EnergyVentures II (the Program). The Partnership was formed in the state of Nevada onDecember 29, 2005.  The Partnershippurchases working interests in oil and natural gas prospects and participatesin the drilling of wells on those prospects. The primary objectives of thePartnership are to generate revenue from the production of oil and natural gas,distribute cash to the partners, and provide tax benefits. Reef Oil &Gas Partners, L.P. (Reef) is the managing general partner of the Partnership.

 

ThePartnership was formed to drill, complete and own working interests in oil andnatural gas wells located onshore in the continental United States. ThePartnership purchased working interests in six developmental prospects locatedin Lavaca, San Patricio, and Glasscock County, Texas, Park County, Wyoming,Terrebonne Parish, Louisiana, and Eddy County, New Mexico upon which it hasdrilled twenty-one wells. The Partnership purchased working interests in sevenexploratory prospects located in Iberville, St. Mary, and Cameron Parish,Louisiana, and Lavaca (2 prospects), San Patricio, and Galveston County, Texasupon which it has drilled seven exploratory wells and one developmental well.At December 31, 2007, twenty-five wells had completed drilling operations,and the remaining four wells completed drilling operations during the firstquarter of 2008. The Partnership has no plans to purchase additional prospects.Additional wells may be drilled on the Partnership’s Sand Dunes prospect inEddy County, New Mexico.

 

Otherpartnerships formed as a part of the Program also own working interests in someof the prospects owned by this Partnership. Reef has also purchased workinginterests in certain partnership prospects for some of the other partnershipsit manages. In such cases where the percentage ownership of the Partnership andReef-affiliated entities in a prospect has been large enough, Reef Exploration,L.P. (RELP) has served as operator of the prospect. RELP serves as operator ofthree developmental and two exploratory Partnership prospects. RELP operateseight successful wells located on one developmental prospect, operates onesuccessful developmental well drilled on one of the Partnership’s exploratoryprospects, and operates eight wells on the Partnership’s Sand Dunesdevelopmental prospect, four of which are undergoing extended testing andevaluation in order to determine their potential commercial productivity, andfour of which are temporarily shut-in due to the high cost associated with saltwater disposal and generator rental.  Inthis Annual Report on Form 10-K (Annual Report), we use the term “successful”to refer to wells that are drilled, tested, and either capable of or actuallyproducing in commercial quantities. We use the term “unsuccessful” to refer towells that do not meet one or more of these criteria.

 

Theattainment of the Partnership’s business objectives, including the generationof revenue from Partnership operations, the distribution of cash to thepartners and the provision of tax benefits, will depend upon many factors,including:

 
| · | Reef’s  ability to select productive prospects;                                         |
|--------|----------------------------------------------------------------------------------------------|
| · | the  drilling and completion of wells in an economical manner;                               |
| · | the  successful management of prospects;                                                     |
| · | the  level of oil and natural gas prices in the future;                                      |
| · | the  degree of governmental regulation over the production and sale of oil and  natural gas; |
| · | the  future economic conditions in the United States and throughout the world; and           |
| · | changes  in the U.S. Internal Revenue Code of 1986 (the Code).                               |

 

Accordingly,there can be no assurance that the Partnership will achieve its businessobjectives.  In addition, distributionsto partners will decrease over time because oil and natural gas wells aredepleting assets, and production rates will decline over the life of anindividual well.  Distribution levelswill also be highly dependent upon oil and natural gas prices. Distributionswill be partially sheltered by the percentage depletion allowance.

 

3

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** **

**Acquisitionand Drilling of Undeveloped Prospects**

** **

ThePartnership purchased working interests in three developmental and oneexploratory prospect internally sourced by RELP, and three developmental andsix exploratory prospects generated by and purchased from third parties. Afterthe drilling of an unsuccessful exploratory well on one non-operatedexploratory prospect, RELP took over as prospect operator and drilled asuccessful development well on the prospect. A “prospect” is generally defined as a contiguous oil and gas leaseholdestate, or lesser interest in a leasehold estate, upon which drillingoperations may be conducted. A prospect may be characterized as “exploratory”or “developmental” based upon the type of well to be drilled on theprospect.  A development well is a welldrilled within a proved area of an oil or gas reservoir to the depth of astratigraphic horizon known to be productive. Generally an exploratory well isany well that is not a development well, including wells drilled to find andproduce oil or gas in an unproven area, wells drilled to find a new reservoirin a field previously found to be productive of oil or gas, or wells drilled toextend a known reservoir.

 

Prospectswere evaluated utilizing data generated by RELP or provided by unaffiliatedthird parties to RELP. This data included well logs, production records fromother area wells, seismic, geological and geophysical information, and suchother information available and considered useful. Prospects in which thePartnership purchased a working interest were evaluated by petroleum engineers,geophysicists, geologists, and other technical consultants employed by orretained by RELP on the Partnership’s behalf.

 

ThePartnership prospects were acquired pursuant to an arrangement in which thePartnership purchased part of the working interest. A working interest bears aspecified portion of the costs of development, operation and maintenance of aprospect.  A working interest is subjectto landowners’ royalty interests and may be subject to other royalty interestspayable to unaffiliated third parties. Where the Partnership acquired less than100% of the working interest, costs were reduced proportionately. ThePartnership’s limited partnership agreement (the Partnership Agreement)prohibits Reef or any of its affiliates from retaining any overriding royaltyinterest, that is, any royalty interest that would be paid out of thePartnership’s working interest, in any working interest purchased by thePartnership. The Partnership is a non-operator working interest owner in allprospects purchased by the Partnership. RELP serves as operator for threedevelopmental and two exploratory prospects purchased by the Partnership.

 

**Consulting Agreements forProspect Acquisitions**

** **

Reefentered into, and allowed to expire, two agreements (the CMI Agreements) withChallenger Minerals Inc. (CMI), a subsidiary of GlobalSantaFe Corporation and ascreener of oil and gas prospects in the Gulf of Mexico and North Sea regions.The CMI Agreements provided Reef the opportunity to review and selectivelyparticipate in exploratory and developmental prospects either originated orpreviewed by CMI. Reef paid CMI for the geological and geophysical servicesprovided by CMI under the CMI agreements. The agreements expired in January andNovember, 2006.

 

Reefalso entered into an agreement with Access Exploration Corp. (AEC), a screenerof domestic oil and gas prospects both onshore and in the Gulf of Mexico. Thisagreement provided Reef the opportunity to review and selectively participatein exploratory and developmental prospects previewed by AEC. Reef paid AEC forthe geological and geophysical services provided by AEC under this agreement.This agreement expired in October 2007.

 

Prospectsapproved for acquisition by Reef under these agreements could be assigned tothis Partnership as well as other limited partnerships formed as part of theProgram. Each partnership formed as a part of the Program paid Reef, on a prorata basis, a portion of the fees paid by Reef under these agreements duringthe term of the Program. Total reimbursements to Reef by the partnershipsformed as a part of this Program were equal to the actual fees paid by Reefunder these agreements. The Partnership paid Reef $150,736 as its pro ratashare of these fees. This amount has been capitalized as geological andgeophysical costs in accordance with the full cost method of accounting for oiland gas properties.

 

4

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** **

**Drilling andCompletion Phase of Operations**

** **

RELPis currently the operator of three developmental and two exploratory prospects,and serves as operator of seventeen wells in which the Partnership has aworking interest. RELP also served as operator for two unsuccessful Partnershipwells. As a well operator, RELP receives operator fees during the drilling andproduction phase of each well at the competitive rate in the geographical areawhere the prospect is located.  Thesefees are charged as a monthly fee per well as agreed to in an operatingagreement signed by the Partnership and participating third parties in thewell. The wells are subject to a model form operating agreement issued by theAmerican Association of Petroleum Landmen and an accounting procedure for jointoperations issued by the Council of Petroleum Accountants Societies of NorthAmerica.

 

RELPcontracted the drilling of all operated wells to an independent third party,and the resulting costs of the wells to the Partnership were determined by theactual third party costs, plus RELP’s monthly charges for supervision,engineering, geology, accounting and other services at the competitive rate forthe geographical area where the well is located.

** **

Wellsdrilled that fail to result in the discovery of oil or natural gas, or that aredetermined to be unable to produce oil or natural gas in commercial quantities,are plugged and abandoned in accordance with applicable regulations.

 

Ofthe eight Sand Dunes prospect wells, four wells are undergoing extended testingand evaluation in order to determine their potential commercial productivity.The Partnership estimates that it may take between 90 and 120 days from thedate of this Annual Report to finish the evaluation process. Following initialtesting which confirmed the presence of oil and natural gas, the remaining fourSand Dunes prospect wells were temporarily shut in due to the high costassociated with salt water disposal and generator rental.

 

Currently,generators have been rented to power the four producing Sand Dunes prospectwells undergoing the evaluation process, and salt water produced is beingtrucked off-site by an independent vendor. In order to reduce overall costs,installation of electric service to the well-site locations is proceeding, anda more cost effective method of salt water disposal is being explored. To date,RELP, the operator of these wells, has been unsuccessful in locating along-term economic solution for disposing of produced salt water; however, RELPis currently evaluating its options for salt water disposal, and estimates thatit will be at least 90 to 120 days from the date of this Annual Report for theSand Dunes prospect to have electricity and efficient salt water disposalcapability in place.

 

**ProductionPhase of Operations**

** **

Forany well capable of producing quantities of oil and/or natural gas in commercialquantities, production operations commence once the well has been completed byinstalling all surface equipment necessary to control the flow of production orto shut down the well, and by installing any storage facilities, gatheringlines, or sales lines required to produce and sell the oil and/or natural gasproduction from the well. The Partnership drilled ten successful developmentalwells and one successful exploratory well. The successful exploratory well hasceased producing during 2007. Three developmental and six exploratory wellswere dry holes and have been plugged and abandoned. One additional successfuldevelopmental well finished drilling during the first quarter of 2008 and isexpected to begin production during the second quarter of 2008.

 

ThePartnership sells oil and/or natural gas production from its wells torefineries, industrial users, gas brokers, interstate pipelines or localutilities.  In many cases the Partnershiphas elected to sell its production under marketing arrangements entered into bythe operator of the well. The Partnership sells the oil and/or natural gasproduced from successful wells on a competitive basis at the best availableterms and prices.  Domestic sales of oilare at market prices. Generally, purchase contracts for the sale of oil arecancelable on 30 days’ notice, but purchase contracts for the sale of naturalgas may have a longer term.  ThePartnership sells natural gas discovered by it at negotiated pricesdomestically, based upon a number of factors, such as the quality of the gas,well pressure, estimated reserves, prevailing supply conditions and anyapplicable price regulations promulgated by the Federal Energy RegulatoryCommission (FERC).

 

Historically,the oil and gas market has experienced significant price fluctuations. Pricesare impacted by local weather, supply in the area, availability and price ofcompetitive fuels, seasonal variations in local demand, limited transportationcapacity to other regions, and the worldwide supply and demand balance forcrude oil.

 

5

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ThePartnership has not engaged in and does not expect to engage in commodityfutures trading or hedging activities, and has not entered into derivativefinancial instrument transactions for trading or other speculative purposes.Accordingly, the Partnership is at risk for the volatility in commodity pricesinherent in the oil and gas industry, and the level of commodity prices has asignificant impact on the Partnership’s results of operations.  See “Item 7A. Quantitative and QualitativeDisclosures About Market Risk.”

 

ThePartnership’s share of revenue from productive wells is burdened by and/orsubject to royalties and overriding royalties, monthly operating charges, andother operating costs.  These items ofexpenditure involve amounts payable solely out of, or expenses incurred solelyby reason of, production operations.  ThePartnership deducts operating expenses from the production revenue for thecorresponding period.

 

**MajorCustomers**

** **

The Partnership sellscrude oil and natural gas on credit terms to refiners, pipelines, marketers,and other users of petroleum commodities. Revenues are received directly fromthese parties or, in certain circumstances, paid to the operator of theproperty who disburses to the Partnership its percentage share of the revenues.During the year ended December 31, 2007, two marketers accounted for 79.4%and 16.5% of the Partnership’s oil and natural gas revenues, respectively. Asof December 31, 2006 and 2005, the Partnership had no oil and natural gasproduction and, therefore, had no customers. Due to the competitive nature ofthe market for purchase of crude oil and natural gas, the Partnership does notbelieve that the loss of any particular purchaser would have a material adverseimpact on the Partnership.

 

**Insurance**

** **

ThePartnership is a named insured under blowout, pollution, public liability andworkmen’s compensation insurance policies obtained by RELP. Such insurance,however, may not be sufficient to cover all liabilities.  Each unit held by general partners representsan open-ended security for unforeseen events including, without limitation,blowouts, lost circulation, and stuck drill pipe that may result inunanticipated additional liability materially in excess of a general partner’sinitial investment in the Partnership.

 

ThePartnership is a named insured under various insurance policies and intends tomaintain such policies subject to its analysis of their premium costs, coverageand other factors.  In the exercise ofReef ‘s fiduciary duty as managing general partner, Reef has obtained insuranceon behalf of the Partnership to provide the Partnership with such coverage asReef believes is sufficient to protect the partners other than the managinggeneral partner (the investor partners) against the foreseeable risks ofdrilling and production.  Reef reviewedthe Partnership insurance coverage prior to commencing drilling operations andperiodically evaluates the sufficiency of insurance. In no event will thePartnership maintain public liability insurance of less than two times thePartnership’s capitalization.****Subjectto the foregoing, Reef may, in its sole discretion, increase or decrease thepolicy limits and types of insurance from time to time as Reef deemsappropriate under the circumstances, which may vary materially.

 

Reefwill notify all investor general partners of the Partnership at least 30 daysprior to any material change in the amount of the Partnership’s insurancecoverage.  Within this 30-day period andotherwise after the expiration of one year following the closing of theoffering of the Partnership, investor general partners have the right toconvert their units into units of limited partnership interest by giving Reef writtennotice of their intent to convert. At any time during this 30-day period, uponreceipt of the required written notice from an investor general partner of hisintent to convert, Reef will amend the Certificate of Limited Partnership ofthe Partnership and will file the amendment with the State of Nevada prior tothe effective date of the change in insurance coverage.  This amendment to the Certificate of LimitedPartnership of the Partnership will effectuate the conversion of the interestof the former investor general partner to that of a limited partner.  Effecting conversion is subject to theexpress requirement that the conversion will not cause a termination of thePartnership for federal income tax purposes. Investor general partners willhave limited liability as a limited partner for any Partnership operationsconducted after their conversion date, effective upon the filing of anamendment to the Certificate of Limited Partnership of the Partnership.However, even after an election of conversion, the investor partner willcontinue to have unlimited liability regarding partnership activities thatoccurred while he was an investor general partner.

 

6

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**Competition**

** **

Thereare thousands of oil and natural gas companies in the United States.  Competition is strong among persons andentities involved in the exploration for and production of oil and naturalgas.  Reef expects the Partnership toencounter strong competition at every phase of business.  The Partnership competes with entities havingfinancial resources and staffs substantially larger than those available to it.

 

Thenational supply of natural gas is widely diversified, with no one entitycontrolling over 5% of the supply.  As aresult of deregulation of the natural gas industry enacted by Congress andFERC, natural gas prices are generally determined by competitive marketforces.  Prices of crude oil, condensateand natural gas liquids are not currently regulated and are generallydetermined by competitive market forces.

 

Thereis competition among operators for drilling equipment, goods, and drillingcrews. Such competition may affect the ability of the Partnership to developprospects suitable for development by the Partnership once they are acquired.

 

**Markets**

** **

Themarketing of oil and natural gas produced by the Partnership is affected by anumber of factors that are beyond the Partnership’s control and whose exacteffect cannot be accurately predicted. These factors include:

 
| · | the  amount of crude oil and natural gas imports;                                                                                                                     |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | the  availability, proximity and cost of adequate pipeline and other  transportation facilities;                                                                      |
| · | the success of efforts to market competitive  fuels, such as coal and nuclear energy and the growth and/or success of  alternative energy sources such as wind power; |
| · | the  effect of United States and state regulation of production, refining,  transportation and sales;                                                                 |
| · | other  matters affecting the availability of a ready market, such as fluctuating  supply and demand; and                                                              |
| · | general  economic conditions in the United States and around the world.                                                                                               |

 

Thesupply and demand balance of crude oil and natural gas in world markets hascaused significant variations in the prices of these products over recentyears.  The North American Free TradeAgreement eliminated trade and investment barriers between the United States,Canada, and Mexico, resulting in increased foreign competition for domesticnatural gas production.  New pipelineprojects recently approved by, or presently pending before, FERC as well asnondiscriminatory access requirements could further substantially increase theavailability of gas imports to certain U.S. markets.  Such imports could have an adverse effect onboth the price and volume of gas sales from Partnership wells.

 

Membersof the Organization of Petroleum Exporting Countries (OPEC) establish pricesand production quotas for petroleum products from time to time with the intentof affecting the global supply of crude oil and reducing, increasing ormaintaining certain price levels.  Reefis unable to predict what effect, if any, such actions will have on the amountof or the prices received for oil produced and sold from the Partnership’swells.

 

Inseveral initiatives, FERC has required pipelines to develop electroniccommunication and to provide standardized access via the Internet toinformation concerning capacity and prices on a nationwide basis, so as tocreate a national market.  Paralleldevelopments toward an electronic marketplace for electric power, mandated byFERC, are serving to create multi-national markets for energy productsgenerally.  These systems will allowrapid consummation of natural gas transactions. Although this system may initially lower prices due to increasedcompetition, it is anticipated to expand natural gas markets and to improvetheir reliability.

 

7

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**Regulation**

** **

ThePartnership’s operations will be affected from time to time in varying degreesby domestic and foreign political developments, and by federal and state laws and regulations.

 

*Production.*  In mostareas of operations within the United States the production of oil and naturalgas is regulated by state agencies that set allowable rates of production andotherwise control the conduct of oil and natural gas operations. Among the waysthat states control production is through regulations that establish thespacing of wells or limit the number of days in a given month during which awell can produce.

 

*Environmental.*  ThePartnership’s drilling and production operations are also subject toenvironmental protection regulations established by federal, state, and localagencies that may necessitate significant capital outlays that, in turn, wouldmaterially affect the financial position and business operations of thePartnership. These regulations, enacted to protect against waste, conservenatural resources and prevent pollution, could necessitate spending funds onenvironmental protection measures, rather than on drilling operations. If anypenalties or prohibitions were imposed on the Partnership for violating suchregulations, the Partnership’s operations could be adversely affected.

 

*Natural Gas Transportation and Pricing.*  FERC regulates the rates for interstatetransportation of natural gas as well as the terms for access to natural gaspipeline capacity. Pursuant to the Wellhead Decontrol Act of 1989, however,FERC may not regulate the price of gas. Such deregulated gas production may besold at market prices determined by supply and demand, Btu content, pressure,location of wells, and other factors. Reef anticipates that all of the gasproduced by the Partnership’s wells will be considered price-decontrolled gasand that the Partnership’s gas will be sold at fair market value.

 

*ProposedRegulation.*Various legislative proposals are being consideredin Congress and in the legislatures of various states, which, if enacted, maysignificantly and adversely affect the petroleum and natural gas industries.Such proposals involve, among other things, the imposition of price controls onall categories of natural gas production, the imposition of land use controls,such as prohibiting drilling activities on certain federal and state lands inprotected areas, as well as other measures. At the present time, it isimpossible to predict what proposals, if any, will actually be enacted byCongress or the various state legislatures and what effect, if any, suchproposals will have on the Partnership’s operations.

 

**Employees**

** **

ThePartnership has no employees, and is managed by its managing general partner,Reef. Through January 1, 2006, OREI Inc. (OREI), an affiliate of Reef,employed a staff including geologists, petroleum engineers, landmen, andaccounting personnel who administered all of the Partnership’s operations. On January 2,2006, the employees of OREI were transferred to RELP, a new Reef affiliateformed during 2005. RELP now employs this staff of geologists, geophysicists,petroleum engineers, landmen and accounting personnel who administer all of thePartnership’s operations. The Partnership reimburses OREI and RELP fortechnical and administrative services at cost. See “Item 11. Executive Compensation.”

 

**FORWARD-LOOKING STATEMENTS**

** **

ThisAnnual Report contains forward-looking statements that involve risks anduncertainties.  You should exerciseextreme caution with respect to all forward-looking statements made in thisAnnual Report.  Specifically, thefollowing statements are forward-looking:

 
| · |   | statements regarding the Partnership’s overall  strategy for acquiring prospects, including its intent to diversify the  Partnership’s investments;                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | statements estimating any number or specific type  or size of prospects the Partnership may acquire or size of the interest the  Partnership may acquire in such prospects;                                                 |
| · |   | statements regarding the state of the oil and gas  industry and the opportunity to profit within the oil and gas industry,  competition, pricing, level of production, or the regulations that may affect  the Partnership; |

 

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| · |   | statements regarding the plans and objectives of  Reef for future operations, including, without limitation, the uses of  Partnership funds and the size and nature of the costs the Partnership  expects to incur and people and services the Partnership may employ; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | any statements using the words “anticipate,”  “believe,” “estimate,” “expect” and similar such phrases or words; and                                                                                                           |
| · |   | any statements of other than historical fact.                                                                                                                                                                                                                          |

 

Reefbelieves that it is important to communicate its future expectations to thepartners.  Forward-looking statementsreflect the current view of management with respect to future events and aresubject to numerous risks, uncertainties and assumptions, including, withoutlimitation, the risk factors listed in Item 1A of this Annual Report captioned “RISKFACTORS.” Although Reef believes that the expectations reflected in suchforward-looking statements are reasonable, Reef can give no assurance that suchexpectations will prove to have been correct. Should any one or more of these or other risks or uncertainties materializeor should any underlying assumptions prove incorrect, actual results are likelyto vary materially from those described herein. There can be no assurance that the projected results will occur, thatthese judgments or assumptions will prove correct or that unforeseendevelopments will not occur.

 

Reefdoes not intend to update its forward-looking statements.  All subsequent written and oralforward-looking statements attributable to Reef or persons acting on its behalfare expressly qualified in their entirety by the applicable cautionarystatements.

** **
| **ITEM  1A.** | **RISK FACTORS** |
|---------------|------------------|

** **

**Ourbusiness activities are subject to certain risks and hazards, including therisks discussed below. If any of these events should occur, it could materiallyand adversely affect our business, financial condition, cash flow, or resultsof operations. The risks below are not the only risks we face. We mayexperience additional risks and uncertainties not currently known to us or, asa result of developments occurring in the future, conditions that we currentlydeem to be immaterial may also materially and adversely affect our business,financial condition, cash flow, and results of operations.**

** **

**Oil andnatural gas prices are volatile, and fluctuate due to a number of factorsoutside of our control.**

** **

Thefinancial condition, results of operations, and the carrying value of our oiland natural gas properties depend primarily upon the prices received for ouroil and natural gas production. Oil and natural gas prices historically havebeen volatile and likely will continue to be volatile given currentgeopolitical conditions. Cash flow from operations is highly dependent upon thesales prices received from oil and natural gas production. The prices for oiland natural gas are subject to a variety of factors beyond our control. Thesefactors include:

 
| · |   | the domestic and foreign supply of oil and natural  gas; consumer demand for oil and gas, and market expectations regarding  supply and demand; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | the  ability of the members of  OPEC to  agree to and maintain oil price and production controls;                                          |
| · |   | domestic  government regulations and taxes;                                                                                                     |
| · |   | the  price and availability of foreign exports and alternative fuel sources;                                                                    |
| · |   | weather  conditions, including hurricanes and tropical storms in and around the Gulf  of Mexico;                                                |
| · |   | political  conditions in oil and natural gas producing regions, including the Middle  East, Nigeria, and Venezuela; and                         |
| · |   | domestic  and worldwide economic conditions.                                                                                                    |

 

Thesefactors and the volatility of the energy markets make it extremely difficult topredict price movements. Also, oil and natural gas prices do not necessarilymove in tandem. Declines in oil and natural gas prices would not only reducerevenues and cash flow available for distributions to partners, but couldreduce the amount of oil and natural gas that can be economically produced fromsuccessful wells drilled by the Partnership, and, therefore, have an adverseeffect upon financial condition, results of operations, oil and gas reserves,and the carrying value of the Partnership’s oil and natural gas properties.Approximately 43.5% of the Partnership’s estimated proved reserves were oilreserves and 56.5% were gas reserves at December 31, 2007. As a result,the Partnership’s financial results are sensitive to fluctuations in both oiland natural gas prices.

 

9

----

 

ThePartnership, while not prohibited from engaging in commodity trading or hedgingactivities in an effort to reduce exposure to short-term fluctuations in theprice of oil and natural gas, has not engaged in such activities. Accordingly,the Partnership is at risk for the volatility in oil and natural gas prices,and the level of commodity prices has a significant impact upon the Partnership’sresults of operations.

** **

**Oil andnatural gas well drilling is a speculative activity involving numerous risksand substantial and uncertain costs which could adversely affect thePartnership.**

** **

Drillingoil and natural gas wells involves numerous risks, including the risk that nocommercially productive oil and/or natural gas reserves will be discovered.There can be no assurance that wells drilled by the Partnership will beproductive or recover all or any portion of the investment in such wells.Drilling and completion costs are substantial and uncertain, and drillingoperations may be curtailed, delayed, or cancelled due to a variety of factorsbeyond our control, including shortages or delays in the availability ofdrilling rigs and crews, unexpected drilling conditions, title problems,pressure or irregularities in formations, equipment failures or accidents,adverse weather conditions, and compliance with environmental and othergovernmental regulations. Our drilling activities may not be successful and, ifunsuccessful, will have an adverse effect on the Partnership’s results of operationsand cash flow available for distribution to the partners.

 

**We aresubject to substantial operating risks that may adversely affect the results ofoperations.**

** **

Thereare numerous hazards involved in the drilling and operation of oil and naturalgas wells, including blowouts involving possible damages to property and thirdparties, bodily injuries, mechanical failures, explosions, uncontrollable flowsof oil, natural gas or well fluids, fires, formations with abnormal pressure,pollution, releases of toxic gas and other environmental hazards and risks. ThePartnership could suffer substantial losses as a result of any of these risks.The Partnership is not fully insured against all risks inherent to the oil andgas business. Uninsured liabilities would reduce the funds available to thePartnership, may result in the loss of Partnership properties and may createliability for the general partners. Although the Partnership maintainsinsurance coverage in amounts Reef deems appropriate, it is possible thatinsurance coverage may be insufficient. In that case Partnership assets mayhave to be sold to pay personal injury and property claims and the cost ofcontrolling blowouts or replacing damaged equipment rather than for drillingactivities.

 

**Continuedinability to dispose of produced salt water may limit production on our oil andnatural gas properties.**

** **

Currently,the Partnership does not have an economically efficient manner in which todispose of the salt water produced from the eight Sand Dunes prospectwells.  The Partnership anticipates itwill be at least 90 to 120 days from the date of this Annual Report for theSand Dunes prospect to have efficient salt water disposal capabilities inplace.  The Partnership will be unable toobtain full production from each well until a long-term economic solution forthe disposing of produced salt water is determined and implemented.  If the Sand Dunes prospect wells aredetermined capable of producing in commercial quantities prior toimplementation of such long-term economic solution, there will be significantdelays in obtaining full production from each well, as well as significantdelays in the receipt of production distributions by the investor partners.

 

**Wecannot control activities on non-operated properties.**

** **

ThePartnership has limited ability to exercise influence over and control therisks associated with operations on properties not operated by RELP. Thefailure of an operator of our wells to adequately perform operations, anoperator’s breach of the applicable agreements, or an operator’s failure to actin ways that are in our best interest could reduce our production and revenues.The success and timing of drilling and development activities on propertiesoperated by others depends upon a number of factors outside of our control,including the operator’s

 

10

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| · |   | timing  and amount of capital expenditures;             |
|--------|--------|---------------------------------------------------------|
| · |   | expertise  and financial resources;                     |
| · |   | inclusion  of other participants in drilling wells; and |
| · |   | use  of technology.                                     |

 

Inaddition, the Partnership could be held liable for the joint interestobligations of other working interest owners, such as nonpayment of costs andliabilities arising from the actions of the other working interest owners. Fulldevelopment of prospects may be jeopardized in the event other working interestowners cannot pay their share of drilling and completion costs.

 

**Oil andnatural gas reserve data are estimates based upon assumptions that may beinaccurate and upon existing economic and operating conditions that may differfrom future economic and operating conditions.**

** **

Securitiesand Exchange Commission (SEC) rules require the Partnership to presentannual estimates of reserves. Reservoir engineering is a subjective and inexactprocess of estimating underground accumulations of oil and natural gas thatcannot be measured in an exact manner, and is based upon assumptions that mayvary considerably from actual results. Accordingly, reserve estimates may besubject to upward or downward adjustments. Actual production, revenues andexpenditures with respect to reserves will likely vary from estimates, and suchvariances could be material.

 

You should not assumethat any present value of future net cash flows from our producing reserves shownin this Annual Report is the market value for our estimated oil and natural gasreserves. The estimated discounted future net cash flows from our provedreserves are based upon prices and costs in effect at the end of the periodheld constant and discounted at 10%. Actual future prices and costs may bematerially higher or lower. Further, actual future net cash flows will beaffected by factors such as the amount and timing of actual developmentexpenditures, the rate and timing of production, and changes in governmentalregulations and tax rates.

 

**Reef and its affiliates havesponsored ventures in the past that have produced dry holes and abandonedwells.**

** **

Reef Global Energy VenturesII is the second public drilling program sponsored by Reef as the managinggeneral partner, and Reef Global Energy VII, L.P. is the second limitedpartnership offered under that Program. Reef and its affiliate OREI havesponsored 68 ventures from 1996 to the present. Among these ventures, (i) eightwere dedicated almost exclusively to the purchase of interests in alreadyproducing reserves, (ii) one was dedicated primarily to the purchase ofinterests in already producing reserves but has the ability to use up to 20% ofcapital raised for development purposes, and (iii) three were dedicated toboth the purchase of interests in producing wells and the use of up to 50% ofcapital raised for development of proven reserves.  We refer to the programs described in clause (i) inthe preceding sentence as “income fund” ventures and to the programs describedin clauses (ii) and (iii) as “income and development fund” ventures.Reef and its affiliates have also sponsored 52 drilling ventures, three 3-Dseismic ventures, and one salt water disposal venture since 1996. Together,these ventures have drilled 132 wells (104 by drilling ventures and 28 byincome fund and income and development fund ventures). Of the wells drilled byReef and its affiliates’ ventures, 63 were exploratory wells and 69 weredevelopmental wells. Forty-nine of the wells drilled were dry holes, and threewells were completed but were non-commercial. Of the 80 wells that werecommercial, 60 are still owned by Reef or its affiliates’ ventures and arecurrently producing, eighteen have been plugged and abandoned or soldessentially for salvage value, one has been sold, and one is currently used asa salt water disposal well. Using this data, approximately 60.6% of the wellsdrilled by these ventures were completed as commercially producing and 39.4%were dry holes (including the three wells that were completed but failed tobecome commercial producers). Approximately 13.6% of the wells drilled by ourventures were subsequently abandoned or sold essentially for salvage valueprior to abandonment.

** **

**ThePartnership Agreement limits Reef’s liability to each partner and thePartnership and requires the Partnership to indemnify Reef against certainlosses.**

** **

Reefwill have no liability to the Partnership or to any partner for any losssuffered by the Partnership, and will be indemnified by the Partnership againstloss sustained by it in connection with the Partnership if:

 

11

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| · |   | Reef determines in good  faith that its action was in the best interest of the Partnership; |
|--------|--------|---------------------------------------------------------------------------------------------|
| · |   | Reef was acting on behalf  of or performing services for the Partnership; and               |
| · |   | Reef’s actions did not  constitute negligence or misconduct.                           |

** **

**Drillingexploratory wells is riskier than drilling developmental wells.**

** **

Manyof the wells drilled by Reef and its affiliates since 1996 have beenexploratory wells. Drilling exploratory wells involves greater risks of dryholes and loss of the partners’ investment than the drilling of developmentalwells.  Drilling developmental wellsgenerally involves less risk of dry holes, although sometimes developmentalacreage is more expensive and subject to greater royalties and other burdens onproduction. The Partnership purchased working interests in seven exploratoryprospects upon which seven exploratory and one developmental well were drilled.Six exploratory wells were unsuccessful, and one exploratory well wassuccessful but has ceased production as of December 31, 2007. Thedevelopmental well was successful and is currently producing oil and naturalgas.

 

**Theproduction and producing life of Partnership wells is uncertain.**

** **

Productionwill decline. It is not possible to predict the life and production of anywell. The actual life could differ from that which is anticipated. Sufficientoil or natural gas may not be produced for a partner to receive a profit oreven to recover his initial investment. In addition, production from thePartnership’s oil and natural gas wells, if any, will decline over time, anddoes not indicate any consistent level of future production. This productiondecline may be rapid and irregular when compared to a well’s initialproduction.

 

**Extreme weather conditions mayadversely affect production operations and partner distributions.**

** **

ThePartnership conducts operations in the coastal regions of Louisiana and Texas.This area is susceptible to extreme weather conditions, especially thoseassociated with hurricanes. In the event of a hurricane and related stormactivity, such as windstorms, storm surges, floods and tornados, Partnershipoperations in the region may be adversely affected. The occurrence of ahurricane or other extreme weather may harm or delay the Partnership’soperations or distribution of revenues, if any.

 

**Our dependence on third parties for the processingand transportation of oil and gas may adversely affect the Partnership’srevenues and, consequently, the distribution of net cash flows to investorpartners*.***

*** ***

We rely on third parties to process and transport the oil and gasproduced by the Partnership’s successful wells. In the event a third party uponwhom we rely is unable to provide transportation or processing services, andanother third party is unavailable to provide such services, the Partnershipmay have to temporarily shut-in successful wells, and revenues to thePartnership and distributions to investor partners related to those wells maybe delayed.

 

**Highdemand for drilling contractors, field services and equipment, and the abilityof suppliers to meet demand may limit our ability to drill and produce our oiland natural gas properties.**

** **

Due tocurrent industry demands, drilling contractors, well service providers andrelated equipment and personnel are in short supply. This is causing escalatingprices, delays in drilling and other exploration activities, and thepossibility of poor service coupled with potential damage to downholereservoirs and personnel injuries. Such pressures will likely increase theactual cost of services, extend the time to secure such services, and add costsfor damages due to any accidents sustained from overuse of equipment andinexperienced personnel.

 

**We facestrong competition within the energy industry.**

** **

Theoil and gas industry is highly competitive. Competition is encountered in allaspects of Partnership operations, including the requisition of drilling andservice contractors. Many of our competitors are larger, well-establishedcompanies with substantially larger operating staffs and greater capitalresources than those of the Partnership, Reef and its affiliates. We may not beable to conduct our operations successfully, obtain drilling and servicecontractors, consummate transactions, and obtain technical, managerial andother professional personnel in this highly competitive environment.Specifically, larger competitors may be able to pay more for competentpersonnel than the Partnership, Reef and its affiliates. In addition, suchcompetitors may be able to expend greater resources on the existing andchanging technologies that will be increasingly important to success. Suchcompetitors may also be in a better position to secure drilling and oilfieldservices, as well as equipment, more timely or on more favorable terms.Finally, oil and gas producers are increasingly facing competition fromproviders of non-fossil energy, and government policy may favor thosecompetitors in the future.

 

12

----

 

**ThePartnership has limited external sources of funds, which could result in ashortage of working capital.**

** **

ThePartnership intends to utilize substantially all available capital for thedrilling and completion of wells and acquisition of the prospects. ThePartnership only has nominal funds available for partnership purposes untilthere are revenues from Partnership operations. The Partnership Agreement permits the Partnership to borrow money forfuture development of prospects drilled by the Partnership with the originalavailable Partnership capital.  Anyfuture requirement for additional funding will have to come, if at all, fromthe Partnership’s revenues or from borrowings. Reef cannot assure the partnersthat Partnership operations will be sufficient to provide the Partnership withnecessary additional funding.  Reefcannot assure the partners that the Partnership will be able to borrow fundsfrom third parties on commercially reasonable terms or at all.

 

**ThePartnership may be required to pay delay rentals to hold properties, which maydeplete Partnership capital.**

** **

Oiland gas leases generally require that the property must be drilled upon by acertain date or additional funds known as delay rentals must be paid to keepthe lease in effect.  Delay rentalstypically must be paid within a year of the entry into the lease if noproduction or drilling activity has commenced. If delay rentals become due on any property the Partnership acquires,the Partnership will have to pay its share of such delay rentals or lose itslease on the property.  These delayrentals could equal or exceed the cost of the property.  Further, payment of these delay rentals couldseriously deplete the Partnership’s capital available to fund drillingactivities when they do commence.

 

**ThePartnership may incur liability for liens against its subcontractors.**

** **

AlthoughReef will try to determine the financial condition of nonaffiliatedsubcontractors, if subcontractors fail to timely pay for materials andservices, the properties of the Partnership could be subject to materialmen’s andworkmen’s liens.  In that event, thePartnership could incur excess costs in discharging such liens.

 

**Other partnerships Reef sponsorswill compete with the Partnership for equipment, contractors, and personnel.**

** **

Reefplans to offer interests in other partnerships to be formed for substantiallythe same purposes as those of the Partnership. Therefore, a number ofpartnerships with unexpended capital funds, including those partnerships to beformed in future oil and gas programs sponsored by Reef, may exist at the sametime.  Due to competition among thepartnerships for equipment, contractors, and Reef’s personnel, the fact thatother partnerships organized by Reef and its affiliates may still be purchasingprospects and drilling and completing wells when the Partnership is attemptingto drill and complete wells on its prospects may make such activities of thePartnership more difficult.

** **
| **ITEM  1B.** | **UNRESOLVED STAFF COMMENTS** |
|---------------|-------------------------------|

** **

**None.**

** **
| **ITEM  2.** | **PROPERTIES** |
|--------------|----------------|

** **

**Drilling Activities and Productive Wells**

** **

Partnershipprospects are located onshore in Texas, Louisiana, New Mexico, and Wyoming. ThePartnership purchased working interests in six developmental prospects. ThePartnership drilled nine successful developmental wells on two developmentalprospects located in Glasscock County, Texas (8 wells) and Park County,Wyoming. The Partnership drilled one successful and one unsuccessfuldevelopmental well on a prospect located in Terrebonne Parish, Louisiana, anddrilled two unsuccessful developmental wells on two developmental prospectslocated in Lavaca and San Patricio County, Texas.

 

13

----

 

The Partnership has participated in the drilling of eight developmentalwells on the Sand Dunes developmental prospect in Eddy County, New Mexico.  Of the eight Sand Dunes prospect wells, fourwells are undergoing extended testing and evaluation in order to determinetheir potential commercial productivity. The Partnership estimates that it maytake between 90 and 120 days from the date of this Annual Report to finish theevaluation process. Following initial testing which confirmed the presence ofoil and natural gas, the remaining four Sand Dunes prospect wells weretemporarily shut in due to the high cost associated with salt water disposaland generator rental.

 

Currently, generators have been rented to power the four producing SandDunes prospect wells undergoing the evaluation process, and salt water producedis being trucked off-site by an independent vendor. In order to reduce overallcosts, installation of electric service to the well-site locations isproceeding, and a more cost effective method of salt water disposal is beingexplored. To date, RELP, the operator of these wells, has been unsuccessful inlocating a long-term economic solution for disposing of produced salt water;however, RELP is currently evaluating its options for salt water disposal, andestimates that it will be at least 90 to 120 days from the date of this AnnualReport for the Sand Dunes prospect to have electricity and efficient salt waterdisposal capability in place.

 

ThePartnership purchased working interests in seven exploratory prospects, uponwhich one successful exploratory well, one successful developmental well, andsix unsuccessful exploratory wells have been drilled. The successfulexploratory well in San Patricio, County has ceased production as of December 31,2007. The Partnership drilled one unsuccessful exploratory well and onesuccessful developmental well on a prospect located in Galveston County, Texas.The Partnership also drilled five unsuccessful exploratory wells on fiveexploratory prospects located in Lavaca (2 prospects) County, Texas andIberville, St. Mary, and Cameron Parish, Louisiana.

 

Theunproved properties owned by the Partnership at December 31, 2007 consistof un-drilled leasehold interests (11 potential drilling locations) in the SandDunes prospect. The Partnership does not have available capital to drill thesepotential locations. The Partnership may sell all or a part of these leaseholdinterests to third parties or other Partnerships managed by Reef.Alternatively, the Partnership is permitted to borrow funds or utilize cashflows from existing productive properties in order to conduct futuredevelopmental drilling on this prospect. Partner approval would not need to beobtained for borrowing activity, as the estimated additional cost is not inexcess of 25% of the Partnership’s original aggregate capital contributions.Until such time as the productive capability of the eight wells already drilledcan be fully analyzed (see Note 8 to the Partnership’s financial statements),it is unknown whether the Partnership will drill additional wells on the SandDunes prospect or sell all or a portion of the acreage. The estimated cost tothe Partnership of participating in future drilling operations at its currentworking interest ownership is approximately $169,000-$225,000 per location.

 

ThePartnership currently has ten successful productive wells, one successful wellthat has ceased production, one successful well which is expected to beginproduction during the second quarter of 2008, and is continuing its extendedtesting and evaluation of four Sand Dunes wells. The remaining four Sand Dunesprospect wells are temporarily shut-in due to the high cost associated withsalt water disposal and generator rental.

 

**ProvedOil and Gas Reserves**

** **

ThePartnership uses an independent petroleum engineer to prepare its year endestimate of net proved oil and natural gas reserves. Net proved oil and naturalgas reserves as of December 31, 2007 have been estimated by GleasonEngineering, of Arlington, Texas. The quantities of proved oil and gas reservesdiscussed in this section include only the amounts which we reasonably expectto recover in the future from known oil and gas reservoirs under the currenteconomic and operating conditions. Proved reserves include only quantities thatwe expect to recover commercially using current prices, costs, existingregulatory practices, and technology. Therefore, any changes in future prices,costs, regulations, technology or other unforeseen factors could materiallyincrease or decrease the proved reserve estimates. The Partnership had noproved reserves at December 31, 2006 and 2005. The estimated net proved oiland natural gas reserves at December 31, 2007 are summarized below.

 

14

----

 
| ** **                                       | ** ** | **Oil (BBL)** | ** ** | **Gas (MCF)** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| Net proved reserves as of December 31, 2007 |       | 96,871             |       | 755,717            |       |

 

Thestandardized measure of discounted future net cash flows as of December 31,2007 is computed by applying year-end prices, costs, and legislated tax ratesand a discount factor of 10% to net proved reserves. The standardized measureof discounted future net cash flows does not purport to present the fair valueof our oil and natural gas reserves.

 
| Standardized measure of discounted future net cash flows as of  December 31, 2007 |   | $ | 7,199,362 |   |
|----------------------------------------------------------------------------------------|--------|---|-----------|--------|

** **

Duringthe years ended December 31, 2007 and 2006, the Partnership recordedproperty impairment costs totaling $10,739,537 and $1,825,482 as a result ofthe net capitalized costs of oil and gas properties exceeding the standardizedmeasure of discounted future net cash flows.

 

**Title to Properties**

** **

ThePartnership’s interests in producing and non-producing acreage are in the formof assigned direct interests in leases held by the Partnership or by Reef onbehalf of the Partnership. Such properties are subject to customary royaltyinterests and could be subject to liens incident to operating agreements, liensfor current taxes and overriding royalty interests and other burdens.  The Partnership believes that none of theseburdens will materially interfere with the use of such properties in theoperation of the Partnership’s business and that it has or will obtainsatisfactory title to all of its leases. Title will be held by the Partnershipor by Reef on behalf of the Partnership.

** **
| **ITEM  3.** | **LEGAL PROCEEDINGS** |
|--------------|-----------------------|

** **

The Partnership is not, and has not been, a party to anylegal proceedings.

** **
| **ITEM  4.** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS** |
|--------------|----------------------------------------------------------|

** **

None.

 

**PART II**

** **
| **ITEM  5.** | **MARKET FOR REGISTRANT’S COMMON  EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|--------------|------------------------------------------------------------------------------------------------------------------------|

 

As of December 31,2007, the Partnership had one managing general partner, 173 limited partners,and 709 additional general partners. Reef holds a total of 48.620 generalpartner units and the investor partners hold 741.001 general partner units and182.783 limited partner units. No established trading market exists for theunits.

 

Cashwhich, in the sole judgment of the managing general partner, is not required tomeet the Partnership’s obligations is distributed to the partners at leastquarterly in accordance with the Partnership Agreement. The Partnership beganmaking monthly cash distributions to the partners of interest income and netoil and natural gas revenues in August 2006.  Cash distributions are distributed 15.45% tothe managing general partner (based upon the 11% interest not represented byunits and the 4.45% interest represented by Partnership units) and 84.55% toinvestor partners.

 

Investor limited andgeneral partner interests are transferable, subject to certain restrictionscontained in the Partnership Agreement; however, no assignee of a unit in thePartnership can become a substituted partner without the written consent ofboth the transferor and Reef.

 

ThePartnership has adopted a unit repurchase program. Under the terms of theprogram, the managing general partner is obligated to purchase up to 5% of theunits in the Partnership per year in the sixth through tenth years after thePartnership closes unless changes in oil and gas pricing meet certain criteriaspecified in the prospectus supplement, dated November 15, 2005. However,the managing general partner’s obligation to purchase units is limited to$500,000 per year in the aggregate for all partnerships previously orsubsequently organized by the managing general partner or its affiliates. ThePartnership did not repurchase any units in 2007.

 

15

----

 

**Use of Proceeds**

** **

Inconnection with the Registration Statement filed on form S-1 (No. 333-122935)and declared effective July 7, 2005, Reef filed a final prospectus for theProgram on July 8, 2005. On November 15, 2005, Reef filed aprospectus supplement describing the Partnership and commenced the offering ofunits in the Partnership. All sales of Partnership units were made through theProgram’s dealer-manager, Reef Securities, Inc., and a number ofsoliciting dealers. The offering terminated April 28, 2006. Under theterms of the offering, a minimum of 40 Partnership units at a price of $25,000per unit were required to be sold in order to form the Partnership. Uponmeeting this requirement, the Partnership was formed on December 29, 2005.

 

ThePartnership registered a total of 240 units of limited partner interests and960 units of general partner interests. The aggregate offering amountregistered was $30,000,000. During the offering period that terminated on April 28,2006, the Partnership sold 923.784 units to investor partners, consisting of182.783 units of limited partner interest and 741.001 units of additionalgeneral partner interest. Reef purchased 48.620 general partner units, equaling5.00% of the total Partnership units sold. The Partnership did not sell theremaining registered units. Total offering proceeds were $24,127,769. Reef alsois obligated to contribute 1% of all leasehold, drilling, and completion costsas incurred. At December 31, 2007, Reef had contributed $182,815 andaccrued $10,969 as a payable to the Partnership in connection with thisobligation.

 

Allunits except those purchased by Reef paid a 15% management fee to Reef to payfor the Partnership organization and offering costs, including sales commissions.These costs totaled $3,464,188, leaving capital contributions of $20,857,365available for Partnership oil and gas operations. As of December 31, 2007,the Partnership had expended $20,867,467 on property acquisitions andprepayments and $137,516 on general and administrative expenses. ThePartnership will expend additional funds on the drilling and completion of fourwells during the first and second quarters of 2008, and may expend funds onsalt water disposal facilities for the wells located on the Sand Dunesprospect. Expenditures in excess of available capital will be deducted fromPartnership distributions during 2008.

 
| **ITEM  6.** | **SELECTED FINANCIAL DATA** |
|--------------|-----------------------------|

 

Thefollowing table sets forth selected financial data. The selected financial datapresented below has been derived from the audited financial statements of thePartnership.

 
| ** **                         | ** ** | **Year ended  December 31,  2007** | ** ** | **Year ended  December 31,  2006** | ** ** | **Period from  Inception  (December 29,  2005) to  December 31  2005** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
|                               |       |                                         |       |                                         |       |                                                                                       |       |
| Oil and gas sales revenue          |       | $                                            | 1,517,970  |                                         | $          | —                                                                                     |       | $ | — |   |
| Interest income                    |       | 317,661                                      |       | 691,667                                      |       | 1,212                                                                                      |       |
| Costs and expenses                 |       | (12,187,144                                  | )          | (1,894,563                                   | )          | (50,475                                                                                    | )          |
| Partnership net loss               |       | (10,351,513                                  | )          | (1,202,896                                   | )          | (49,263                                                                                    | )          |
|                               |       |                                         |       |                                         |       |                                                                                       |       |
| Allocation of net loss:            |       |                                         |       |                                         |       |                                                                                       |       |
| Managing general partner           |       | (476,894                                     | )          | (12,240                                      | )          | (73                                                                                        | )          |
| General partner units              |       | (7,920,794                                   | )          | (956,084                                     | )          | (38,450                                                                                    | )          |
| Limited partner units              |       | (1,953,825                                   | )          | (234,572                                     | )          | (10,740                                                                                    | )          |
| Net loss per managing partner unit |       | (9,808.55                                    | )          | (251.74                                      | )          | (20.58                                                                                     | )          |
|                                    |            |                                              |            |                                              |            |                                                                                            |            |  |  |  |

 

16

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| ** **                                      | ** ** | **Year ended  December 31,  2007** | ** ** | **Year ended  December 31,  2006** | ** ** | **Period from  Inception  (December 29,  2005) to  December 31  2005** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
|                                            |       |                                         |       |                                         |       |                                                                                       |       |
| Net loss per general partner unit               |       | (10,689.32                                   | )          | (1,290.26                                    | )          | (729.60                                                                                    | )          |
| Net loss per limited partner unit               |       | (10,689.32                                   | )          | (1,283.33                                    | )          | (719.23                                                                                    | )          |
|                                            |       |                                         |       |                                         |       |                                                                                       |       |
| Total assets                                    |       | 8,620,722                                    |       | 21,786,620                                   |       | 1,594,304                                                                                  |       |
| Distributions to managing general partner       |       | 238,316                                      |       | 45,578                                       |       | —                                                                                     |       |
| Distributions to investor partners              |       | 1,304,184                                    |       | 249,422                                      |       | —                                                                                     |       |
| Distributions per general partner unit          |       | 1,411.78                                     |       | 270.00                                       |       | —                                                                                     |       |
| Distributions per limited partner unit          |       | 1,411.78                                     |       | 270.00                                       |       | —                                                                                     |       |
| Distributions per managing general partner unit |       | 4,901.60                                     |       | 937.43                                       |       | —                                                                                     |       |
|                                            |       |                                         |       |                                         |       |                                                                                       |       |
| **Operating Data**                              |       |                                         |       |                                         |       |                                                                                       |       |
| Annual sales volume:                            |       |                                         |       |                                         |       |                                                                                       |       |
| Gas (MCF)                                       |       | 48,301                                       |       | —                                       |       | —                                                                                     |       |
| Oil (BBL)                                       |       | 14,032                                       |       | —                                       |       | —                                                                                     |       |
|                                            |       |                                         |       |                                         |       |                                                                                       |       |
| Average sales price:                            |       |                                         |       |                                         |       |                                                                                       |       |
| Gas (per MCF)                                   |       | $                                            | 8.59       |                                         | $          | —                                                                                     |       | $ | — |   |
| Oil (per BBL)                                   |       | $                                            | 78.60      |                                         | $          | —                                                                                     |       | $ | — |   |

** **
| **ITEM  7.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|-------------------------------------------------------------------------------------------------|

 

The following discussion will assist you in understanding thePartnership’s financial position, liquidity, and results of operations. Theinformation should be read in conjunction with the audited financial statementsand notes to financial statements contained herein. The discussion containshistorical and forward-looking information.

 

For a discussion of risk factors that could impact the Partnership’sfinancial results, please see Item 1A of this Annual Report.

** **

**Critical Accounting Policies**

** **

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires us to make estimates and assumptions that can affect the reporting ofassets, liabilities, equity, revenues, and expenses. We base our estimates onhistorical experience and various other assumptions that are believed to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions. We are also required toselect among alternative acceptable accounting policies. See Note 2 to thefinancial statements for a complete list of significant accounting policies.

 

**Oil and Gas Properties**

** **

ThePartnership follows the full cost method of accounting for crude oil andnatural gas properties. Under this method, all direct costs and certainindirect costs associated with acquisition of properties and successful as wellas unsuccessful exploration and development activities are capitalized.Depreciation, depletion, and amortization of capitalized crude oil and naturalgas properties and estimated future development costs, excluding unprovedproperties, are based on the unit-of-production method using estimated provedreserves.  Proved gas reserves areconverted to equivalent barrels at a rate of 6 Mcf to 1 Bbl. Net capitalizedcosts of crude oil and natural gas properties, as adjusted for asset retirementobligations, are limited to the lower of unamortized cost or the cost ceiling,defined as the sum of the present value of estimated future net revenues fromproved reserves based on prices in effect at the end of the period heldconstant and discounted at 10 percent, plus the lower of cost or estimated fairvalue of  unproved properties, if any. Pursuantto full cost accounting rules, the Partnership performs a ceiling testquarterly as of the balance sheet date on its proved oil and natural gasproperties. Excess capitalized costs are charged to property impairmentexpense. No gain or loss is recognized upon sale or disposition of crude oiland natural gas properties, unless such a sale would significantly alter therate of depletion and amortization. During the years ended December 31,2007 and 2006, the Partnership recognized property impairment expense of provedproperties totaling $10,739,537 and $1,825,482, respectively.

 

17

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Unprovedproperties consist of undeveloped leasehold interest. Investments in unprovedproperties are not depleted pending determination of the existence of provedreserves. Unproved properties are assessed for impairment quarterly as of thebalance sheet date by considering the primary lease term, the holding period ofthe properties, geologic data obtained relating to the properties, and otherdrilling activity in the immediate area of the properties. Any impairmentresulting from this quarterly assessment is reported as property impairmentexpense in the current period, as appropriate. During the years ended December 31,2007 and 2006, and the period from inception (December 29, 2005) to December 31,2005, the Partnership recognized no impairment of unproved properties.

 

The estimate of proved oil and natural gas reserves used todetermine property impairment expense, and also utilized in the Partnership’sdisclosures of supplemental information regarding oil and natural gas producingactivities, including the standardized measure of discounted cash flows, hasbeen prepared by an independent petroleum engineer at December 31, 2007.The Partnership had no proved reserves at December 31, 2006 and 2005.Reservoir engineering is a subjective and inexact process of estimatingunderground accumulations of oil and natural gas that cannot be measured in anexact manner, and is based upon assumptions that may vary considerably fromactual results. Accordingly, reserve estimates may be subject to upward ordownward adjustments. Actual production, revenues andexpenditures with respect to reserves will likely vary from estimates, and suchvariances could be material.

 

The determination of depreciation,depletion and amortization expense recognized in the financial statements isalso dependent upon the estimates of proved oil and natural gas reserves andwill be computed using the units-of-production method based upon this estimateof proved reserves. During the year ended December 31, 2007, thePartnership had depreciation, depletion, and amortization expense totaling$1,075,372. The Partnership had no productive oil and gas properties as of December 31,2006 and 2005.

 

The Partnership follows Statement ofFinancial Accounting Standards No. 143, “Accounting for Asset RetirementObligations,” for all productive oil and gas wells drilled by the Partnership. Assetretirement costs and liabilities associated with future site restoration andabandonment of long-lived assets are initially measured at fair value whichapproximates the cost a third party would incur in performing the tasksnecessary to retire such assets. The fair value is recognized in the financialstatements as the present value of expected future cash expenditures for siterestoration and abandonment. Subsequent to the initial measurement, the effectof the passage of time on the liability for the net asset retirement obligation(accretion expense) and the amortization of the asset retirement cost arerecognized in the results of operations. Uponsettlement of the obligation a gain or loss is recognized to the extent actualcharges are less than or exceed the liability recorded. During the year ended December 31,2007, the Partnership recognized $121,062 of asset retirement obligations andadditional capitalized cost in connection with successful wells drilled by thePartnership.  The Partnership had noproductive oil and gas properties at December 31, 2006 and 2005.

 

**Recognitionof Revenue**

 

The Partnership has entered into salescontracts for disposition of its share of oil and natural gas production fromproductive wells. Revenue is recognized based upon the metered volumes deliveredto those purchasers each month. Any significant over or under balanced gaspositions are disclosed in the financial statements. As of December 31,2007, 2006 and 2005, the Partnership had no material gas imbalance positions.

 

18

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**Overview**

** **

Reef Global Energy VII, L.P. is a Nevada limitedpartnership formed to acquire, explore, develop, and produce crude oil, naturalgas, and natural gas liquids for the benefit of its investor partners. ThePartnership’s primary purposes are to generate revenues from the production ofoil and gas, distribute cash flow to investors, and provide tax benefits toinvestors. The majority of the Partnership’s proceeds will be used to purchaseprospects and drill oil and natural gas wells upon those prospects.

 

The Partnership raised capital from the sale ofPartnership units to investor partners and Reef, and uses those funds for thepurchase of working interests in prospects and for drilling operations andadministrative costs during its drilling phase of operations. The Partnershipdid not borrow funds during the drilling phase of operations, and interestincome and oil and gas revenues from successful wells, net of expenses, arebeing distributed to the partners. The Partnership is allowed to borrow fundsin accordance with the Partnership Agreement, or utilize cash flows fromsuccessful wells in order to drill additional development wells and constructfacilities on prospects where successful wells were drilled during the drillingphase of operations. The Partnership completed its drilling phase of operationsduring the first quarter of 2008.

 

The Partnership does not operate in any otherindustry segment. The Partnership has expended approximately $1,949,000 for thepurchase of working interests in six developmental prospects, which includesapproximately $172,500 for 11 un-drilled locations on its Sand Dunes prospect,and expended approximately $605,000 for the purchase of working interests inseven exploratory prospects. The Partnership has seven prospects in Texas, fourin Louisiana, one in Wyoming, and one in New Mexico, all of which are locatedonshore. The Partnership has drilled twenty-two developmental and sevenexploratory wells on these prospects, three of which were drilled during 2006,twenty-two of which were drilled during 2007, and four of which completeddrilling during the first quarter of 2008. The Partnership currently has elevensuccessful developmental wells, ten of which are currently productive and oneexpected to begin production activity during the second quarter of 2008, andthree unsuccessful developmental wells. The Partnership drilled one successfulexploratory well and six unsuccessful exploratory wells. The successfulexploratory well has ceased production. The Partnership also has participatedin the drilling of eight wells on its Sand Dunes prospect.  Of the eight Sand Dunes prospect wells, fourwells are undergoing extended testing and evaluation in order to determinetheir potential commercial productivity. The Partnership estimates that it maytake between 90 and 120 days from the date of this Annual Report to finish theevaluation process. Following initial testing which confirmed the presence ofoil and natural gas, the remaining four Sand Dunes prospect wells were temporarilyshut in due to the high cost associated with salt water disposal and generatorrental.  Up to 11 additional wells may bedrilled on the Sand Dunes prospect.

 

Should the Partnership elect to borrow monies foradditional development activity on the Sand Dunes prospect, it will be subjectto the interest rate risk inherent in borrowing activities. The Partnership ispermitted but is not expected to engage in commodity futures trading or hedgingactivities, and therefore is subject to commodity price risk.   See “Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.”

 

During the fourth quarter of 2007, the Partnershipcompleted drilling one unsuccessful developmental well. At December 31,drilling operations were in progress on the sidetracking of a Partnershipdevelopmental well that was unsuccessful earlier in 2007. The sidetrackingoperations were successfully completed during February 2008, and the wellis currently being completed and expected to begin production during the secondquarter of 2008. The Partnership completed drilling operations on five SandDunes prospect wells during the fourth quarter, and drilling operations thatwere in progress on three additional Sand Dunes wells at December 31, 2007were completed during the first quarter of 2008.

** **

**Liquidityand Capital Resources**

** **

ThePartnership was funded with initial capital contributions totaling $24,127,769.Reef purchased 48.620 general partner units, or 5% of the total units sold, for$1,033,179. Investor partners purchased 741.001 general partner units and182.783 limited partner units for $23,094,590. As of December 31, 2007,Reef has also contributed $182,815 and accrued $10,969 in connection with itsobligation to pay 1% of all leasehold, drilling, and completion costs. Organizationand offering costs totaled $3,464,188, leaving capital contributions of$20,857,365 available for Partnership activities. The Partnership was formed onDecember 29, 2005, and the last partner was admitted to the Partnership onApril 28, 2006.

 

19

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The$20,857,365, plus any additional contributions made by Reef in connection withthe 1% obligation mentioned above, is the total amount available to thePartnership for the purchase of prospects and for drilling and administrativecosts.  As of December 31, 2007, thePartnership had expended $20,867,467 on property acquisitions and prepaymentsand $137,516 on general and administrative expenses. The Partnership willexpend additional funds on the drilling and completion of four wells during thefirst and second quarters of 2008, and will also expend funds on salt waterdisposal facilities for the wells located on the Partnership’s Sand Dunesprospect during 2008. Expenditures in excess of available capital will bededucted from Partnership distributions during 2008.

 

Pleasesee Item 1A of this Annual Report for a list of risk factors that could impactthe Partnership.

 

Thetable below summarizes Partnership drilling expenditures during the drillingphase of operations by type and classification of well:

 
| ** **              | ** ** | **Leasehold  Costs** | ** ** | **Drilling,  Completion,  and Facilities  Costs** | ** ** | **Total Costs** | ** ** |
|-------------------------|------------|----------------------|------------|--------------------------------------------------------|------------|----------------------|------------|
| Developmental wells     |       | $                    | 1,948,957  |                                                   | $          | 11,756,615           |       | $ | 13,705,572 |   |
| Exploratory wells       |       | 605,200              |       | 6,556,695                                              |       | 7,161,895            |       |
| Total                   |       | $                    | 2,554,157  |                                                   | $          | 18,313,310           |       | $ | 20,867,467 |   |
|                    |       |                 |       |                                                   |       |                 |       |
| Successful wells        |       | $                    | 1,538,536  |                                                   | $          | 9,110,969            |       | $ | 10,649,505 |   |
| Unsuccessful wells      |       | 717,574              |       | 7,809,523                                              |       | 8,527,097            |       |
| Wells under development |       | 125,600              |       | 1,392,818                                              |       | 1,518,418            |       |
| Unproved properties     |       | 172,447              |       | —                                                 |       | 172,447              |       |
| Total                   |       | $                    | 2,554,157  |                                                   | $          | 18,313,310           |       | $ | 20,867,467 |   |

 

20

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ThePartnership had working capital of $673,856 at December 31, 2007, whichincludes interest income and net revenues available for distribution topartners, and $430,096 of deferred organization and offering costs.

 

Theunproved properties owned by the Partnership at December 31, 2007 consistof un-drilled leasehold interests (11 potential drilling locations) in the SandDunes prospect. The Partnership does not have available capital to drill thesepotential locations. The Partnership may sell all or a part of these leaseholdinterests to third parties or other Partnerships managed by Reef. However, thePartnership is permitted to borrow funds or utilize cash flows from existingproductive properties in order to conduct future developmental drilling on thisprospect. Partner approval would not need to be obtained for borrowingactivity, as the estimated additional cost is not in excess of 25% of thePartnership’s original aggregate capital contributions. Until such time as theproductive capability of the eight wells already drilled can be fully analyzed(see Note 9 to the Partnership’s financial statements), it is unknown whetherthe Partnership will drill additional wells on the Sand Dunes prospect or sellall or a portion of the acreage. The estimated cost to the Partnership ofparticipating in future drilling operations at its current working interestownership is approximately $169,000-$225,000 per location.

 

ThePartnership will expend more than its available capital in connection with thetwenty-nine wells that had been drilled or were drilling at December 31,2007. Expenditures in excess of available capital will be deducted fromPartnership distributions during 2008.

 

**Resultsof Operations**

** **

**Yearended December 31, 2007 compared to Year Ended December 31, 2006**

** **

During2007, the Partnership incurred a net loss of $10,351,513, compared to a netloss of $1,202,896 incurred during 2006.

 

During2006, the Partnership drilled three wells, all of which were unsuccessful. ThePartnership had no oil and natural gas revenues from productive wells. ThePartnership had interest income earned from the short-term investment ofunexpended partner capital of $691,667, offset by $69,081 of general andadministrative costs and $1,825,482 of property impairment cost, which resultedin a net loss of $1,202,896.

 

During2007, the Partnership drilled eleven successful wells, ten of which areproductive as of December 31, 2007. The first productive well of thePartnership began operations in March 2007. Six wells began productionoperations during the second quarter of 2007, and four wells began productionoperations during the third quarter of 2007. The Partnership also has participated in the drilling of eight wells onits Sand Dunes prospect, three of which completed drilling operations duringthe first quarter of 2008.  Of the eightSand Dunes prospect wells, four wells are undergoing extended testing andevaluation in order to determine their potential commercial productivity. ThePartnership estimates that it may take between 90 and 120 days from the date ofthis Annual Report to finish the testing and evaluation process. Followinginitial short-term tests which confirmed the presence of oil and natural gas,the remaining four Sand Dunes prospect wells were temporarily shut in due tothe high cost associated with salt water disposal and generator rental.

 

Oiland natural gas sales revenues and barrels of oil equivalent (BOE) sold byquarter are detailed below. The Partnership had no comparative oil and naturalgas sales revenue for 2006, as all three wells drilled by the Partnershipduring 2006 were unsuccessful.

 
| ** **                              | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| 2007 Oil and Natural Gas Sales Revenues |       | $                    | 9,579      |                 | $          | 147,135              |       | $                    | 635,516    |   | $ | 725,740 |   |
|                                    |       |                 |       |                 |       |                 |       |                 |       |
| Barrels of Oil Equivalent (BOE) Sold *  |       | 178                  |       | 2,359                |       | 9,344                |       | 10,201               |       |
|                                         |            |                      |            |                      |            |                      |            |                      |            |  |  |  |  |

 

----

*BOE (Barrels of oil equivalent (6 MCF of natural gas equals 1 BOE)

 

21

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Productionexpenses totaled $231,989 during the year ended December 31, 2007, and aredetailed on both an overall and a BOE basis by quarter below. There were nocomparable expenses during 2006.

 
| ** **                  | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|-----------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| 2007 Production expenses    |       | $                    | 1,556      |                 | $          | 25,362               |       | $                    | 86,054     |   | $ | 119,017 |   |
|                        |       |                 |       |                 |       |                 |       |                 |       |
| Production expenses per BOE |       | $                    | 8.74       |                 | $          | 10.75                |       | $                    | 9.21       |   | $ | 11.67 |   |

 

Theincrease in production expenses on a BOE basis during the fourth quarter of2007 relates directly to the eight wells on the Partnership’s Cole Ranchprospect. Oil and natural gas sales revenues from these eight wells declined by16.8% during the fourth quarter of 2007 to $499,274, as compared to $599,788during the third quarter, while production expenses increased from $82,723 to$96,344. The Partnership reduced the estimated reserves it expects to recoverfrom the Cole Ranch prospect wells in the third quarter of 2007 because peakproduction from the wells was less than originally anticipated. However, thisreduction was offset by reserves from new discoveries during the third quarter,and the Partnership recorded no property impairment expense during the thirdquarter of 2007.  The declining productionrates and increasing production expenses during the fourth quarter have led toadditional reductions in the estimated recoverable reserves from these eightwells. Combined with the unsuccessful development well drilled during thefourth quarter, these two items have caused the Partnership to record propertyimpairment expense totaling $6,315,241 during the fourth quarter. ThePartnership had earlier recorded property impairment expense totaling$4,424,296 during the first two quarters of 2007 as a result of fourunsuccessful wells, for a total 2007 property impairment expense of$10,739,537. The Partnership recorded property impairment expense totaling$1,825,482 during 2006 because all three wells completed during 2006 wereunsuccessful.

 

Generaland administrative costs totaled $135,603 during 2007 as compared to$69,081during 2006. Administrative costs paid to Reef rose from $5,203 to$57,221, accounting for a substantial portion of the increase. These costs weredirectly related to the Partnership well count increasing from three wellsduring 2006 to twenty-nine wells during 2007.  Legal, accounting, and printing costs related to the Partnership’srequired SEC filings rose from $59,792 in 2006 to $74,912 during 2007.

 

Theproperty impairment expense of $10,739,537 was the primary factor in the netloss of $10,351,513 for 2007.

 

**YearEnded December 31, 2006 compared to the Period from Inception (December 29,2005) thru December 31, 2005**

** **

ThePartnership began operations in December 2005. The 2005 net loss of$49,263 shown in the financial statements represents a charge of $50,000 fororganization expenses and $475 for other general and administrative expenses,offset by interest income of $1,212 earned from the short-term investment ofpartner capital contributions. The Partnership did not purchase any prospectsor engage in any oil and gas activities during 2005.

 

During2006, the Partnership purchased working interests in 12 prospects, upon whichthe Partnership had drilled twenty wells at December 31, 2007 and had onewell drilling. Drilling operations began during the third quarter of 2006.During 2006, drilling operations were completed on two exploratory wells andone developmental well. The wells were all unsuccessful and have been pluggedand abandoned. The costs incurred in the drilling of these three wells,totaling $1,825,482, were expensed as property impairment cost during 2006. ThePartnership drilled no successful wells during 2006 and had no oil and gasrevenues for the year ended December 31, 2006. The Partnership incurredgeneral and administrative expenses totaling $69,081, which included $5,203 inadministrative costs provided by Reef, and $59,792 in legal, accounting, andprinting costs related to SEC filings. Administrative costs incurred by Reefare primarily related to the number of wells administered by Reef, and, assuch, these costs increased from $0 in 2005, when Reef had no oil and gasactivities. The Partnership had no legal, accounting, and printing costsrelated to SEC filings during the period from inception (December 29,2005) to December 31, 2005. Interest income earned is a function of theamount of unexpended partner capital available for short-term investment, andthe number of days available for investment. Interest income totaled $691,667for calendar year 2006, as compared to $1,212 for the period from inception (December 29,2005) to December 31, 2005.   The interestincome of $691,667, offset by these general and administrative costs totaling$69,081 and property impairment costs totaling $1,825,482, resulted in thePartnership net loss for 2006 of $1,202,896.

 

22

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**Off-BalanceSheet Arrangements**

** **

The Partnership does not participate in transactionsthat generate relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structure finance orspecial purpose entities (SPEs), which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes.  As of December 31,2007 and 2006, the Partnership was not involved in any unconsolidated SPEtransactions or any other off-balance sheet arrangements.

 

**Contractual Obligations Table**

 
| ** **                   | ** ** | **Payment due by period** | ** ** |
|------------------------------|------------|------------------------------------------|------------|
| **Contractual  obligations** | ** ** | **Total**                                | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 years** | ** ** | **More than 5  Years** | ** ** |
| Purchase obligations *       |       | $                                        | 760,096    |   | $ | 330,000 |   | $ | 430,096 |   | — |   | — |   |
|                              |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

* The 15% management fee due Reef fororganization and offering costs, including sales commissions, is payable in twoparts. Reef initially received an amount, not to exceed 13.5%, to recoveractual commissions and organization and offering costs. As of December 31,2007, the Partnership is obligated to pay Reef $760,096 representing theportion of the management fee in excess of actual commissions and organizationand offering costs, from the oil and gas cash flows available for partnerdistributions at a rate not to exceed $1 million per year. The Partnershipbegan paying this balance at a rate of $30,000 per month beginning in February 2008.

** **
| **ITEM 7A.** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|--------------|-----------------------------------------------------------------|

** **

**Interest Rate Risk**

** **

ThePartnership has not borrowed any funds to date. The Partnership Agreementallows borrowings from banks or other financial sources of up to 25% of theaggregate capital contributions to the Partnership without investor approval,provided the lender agrees it will have no recourse against individual investorpartners, and allows borrowings in excess of 25% of the aggregate capitalcontributions to the Partnership with the consent of investor partners. Shouldthe Partnership elect to borrow monies for additional development activity onPartnership properties, it will be subject to the interest rate risk inherentin borrowing activities. Changes in interest rates could significantly affectthe Partnership’s results of operations and the amount of net cash flowavailable for partner distributions. Also, to the extent that changes ininterest rates affect general economic conditions, the Partnership will beaffected by such changes.

 

**Commodity Price Risk**

** **

ThePartnership has not and does not expect to engage in commodity futures tradingor hedging activities or enter into derivative financial instrumenttransactions for trading or other speculative purposes.  The Partnership sells a vast majority of itsproduction from successful oil and gas wells on a month-to-month basis atcurrent spot market prices. Accordingly, the Partnership is at risk for thevolatility in commodity prices inherent in the oil and gas industry, and thelevel of commodity prices has a significant impact on the Partnership’s resultsof operations.

 

Assumingthe production levels we attained during the year ended December 31, 2007,a 10% change in the price received for our crude oil would have had anapproximate $110,000 impact on our oil revenues, and a 10% change in the pricereceived for our natural gas would have had an approximate $41,500 impact onour natural gas revenues.

** **
| **ITEM 8.** | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA** |
|-------------|--------------------------------------------------|

 

ThePartnership’s financial statements and supplementary data are set forth in aseparate section to this Annual Report, beginning on page F-1.

 

23

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| **ITEM 9.** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

** **

None.

 
| **ITEM 9A(T).** | **CONTROLS AND  PROCEDURES** |
|-----------------|------------------------------|

** **

**Evaluation of Disclosure Controls and Procedures**

** **

As the managinggeneral partner of the Partnership, Reef maintains a system of controls and proceduresdesigned to provide reasonable assurance as to the reliability of the financialstatements and other disclosures included in this Annual Report, as well as tosafeguard assets from unauthorized use or disposition. The Partnership, underthe supervision and with participation of its management, including theprincipal executive officer and principal financial officer of the Partnership’smanaging general partner, Reef Oil & Gas Partners, L.P., evaluated theeffectiveness of its “disclosure controls and procedures” as such term isdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934,as amended (the “Exchange Act”), as of the end of the period covered by thisAnnual Report. Based on that evaluation, the principal executive officer and principal financial officer of ourmanaging general partner have concluded that the Partnership’s disclosurecontrols and procedures are effective to ensure that information required to bedisclosed by the Partnership in reports that it files or submits under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified in Securities and Exchange Commission rules and forms,and includes controls and procedures designed to ensure that informationrequired to be disclosed by us in such reports is accumulated and communicatedto our management, including the principal executive officer and principalfinancial officer of our managing general partner, as appropriate to allowtimely decisions regarding financial disclosure.

 

**Management Report on Internal Control Over FinancialReporting**

** **

Management of thePartnership is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).Our management conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on this evaluation under the framework in InternalControl – Integrated Framework, management of the Partnership concluded thatthe Partnership’s internal control over financial reporting was effective as ofDecember 31, 2007.

 

Thisannual report does not include an attestation report of the Partnership’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by thePartnership’s registered public accounting firm pursuant to temporary rules ofthe SEC that permit the Partnership to provide only management’s report in thisannual report.

 

**Changes in Internal Controls**

** **

There have not been any changes in the Partnership’sinternal controls over financial reporting during the fiscal quarter ended December 31,2007 that have materially affected, or are reasonably likely to materiallyaffect, the Partnership’s internal control over financial reporting.

**** ****
| **ITEM 9B.** | **OTHER  INFORMATION** |
|--------------|------------------------|

**** ****

****None.****

 

24

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**PART III**

** **
| **ITEM 10.** | **DIRECTORS,  EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE** |
|--------------|--------------------------------------------------------------|

 

ThePartnership has no directors or executive officers.  Its managing general partner is Reef Oil &Gas Partners, L.P.

 

**Reef Oil & Gas Partners, L.P. and Reef Exploration, L.P.**

** **

The Manager, officersand key personnel of the managing general partner, their ages, currentpositions with the managing general partner and/or RELP, and certain additionalinformation are set forth below:

** **
| **Name**                       | ** ** | **Age** | ** ** | **Positions and Offices Held**                                                         |
|--------------------------------|------------|---------|------------|----------------------------------------------------------------------------------------|
| Michael J. Mauceli             |       | 51      |       | Manager of Reef Oil & Gas Partners GP, LLC;   Chief Executive Officer of RELP |
| Kellam Colquitt                |       | 60      |       | Chief Operating Officer of RELP                                                        |
| H. Walt Dunagin                |       | 50      |       | Vice President—Land Manager of RELP                                               |
| Lawrence J. Harrison, Jr. |       | 57      |       | Vice President – Business Development of RELP                                     |
| Byron H. Dean                  |       | 58      |       | Manager of Acquisitions and Divestitures of RELP                                       |
| Daniel C. Sibley               |       | 56      |       | Chief Financial Officer of Reef and of RELP                                            |
| David M. Tierney               |       | 55      |       | Controller––Reef Global Energy Ventures II                                   |

 

**Michael J. Mauceli** is the Manager and a member of Reef Oil & GasPartners, GP, LLC, which is the general partner of Reef, as well as the ChiefExecutive Officer of RELP. Mr. Mauceli has been the principal executiveofficer of Reef since its formation in February 1999. He has served inthis position with RELP since January 2006 and has served in this positionwith its predecessor entity, OREI, since 1987. Mr. Mauceli attended the University of Mississippi where he majoredin business management and marketing as well as the University of Houston wherehe received his Commercial Real Estate License. He entered the oil and naturalgas business in 1976 when he joined Tenneco Oil & Gas Company.  Mr. Mauceli moved to Dallas in 1979,where he was independently employed by several exploration and developmentfirms in planning exploration and marketing feasibility of privately sponsoreddrilling programs.

 

**Kellam Colquitt**joined RELP as Chief Operating Officer on February 14,2006. Mr. Colquitt has over thirty-five years of experience in the oil andgas industry. Prior to joining RELP, Mr. Colquitt served as VicePresident-Exploration of Vintage Petroleum, Inc. in Tulsa Oklahoma from2001-2006. He also served as the General Manager-Exploration of VintagePetroleum, Inc. from 2000-2001. Prior to that, Mr. Colquitt wasemployed from 1995-2000, first as Vice President-International ExplorationWestern Hemisphere and later as Vice President-U.S. Operations for Ranger OilLimited. He is a 1971 graduate of Texas A&M University with a degree in geology.He is a member of the American Association of Petroleum Geologists, the HoustonPetroleum Club, the Tulsa Geological Society, and the Houston GeologicalSociety.

 

**H. Walt Dunagin** is Vice President - Land Manager of RELP. He has held thisposition since January 2006 and has served in this position with itspredecessor entity, OREI, since 1990. He is responsible for all contracts withother industry partners and all land activities required for exploration,development and production, including lease acquisition, title opinions,curative, permitting, unitization, rights-of-way and environmental issues. Agraduate of the University of Mississippi in 1969 with a B.B.A. degree, Walt’scareer has also involved land work for ExxonMobil, ChevronTexaco, UNOCAL, SantaFe Energy and Oryx Energy (now Kerr-McGee). Walt is a member of the DallasAssociation of Petroleum Landmen and the Association of International PetroleumNegotiators.

 

**Lawrence J.Harrison, Jr.**is Vice President – Business Development of RELP. Hejoined RELP in October 2006 following fourteen years with The Oil &Gas Asset Clearinghouse, a leading acquisition and divestiture advisory firm. Mr. Harrisonhas served as an independent landman verifying title ownership and acquiringleases and other agreements in support of clients drilling programs. He workedfor Mobil Oil Corporation and several other companies before joining TheClearinghouse. Mr. Harrison is a 1972 graduate of the University ofSouthern Mississippi with a Bachelor of Science degree in Communications. Mr. Harrisonis a past president of the Houston Association of Professional Landmen and apast member of the American Association of Professional Landmen ExecutiveCommittee. He is currently a Director of the Louisiana Oil & GasAssociation (LOGA) and a member of the ADAM Energy Forum and the IndependentPetroleum Association of America.

 

25

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**Byron H. (Howard)Dean**is Manager – Acquisitions and Divestitures of RELP and isresponsible for solicitation and technical evaluation of acquisition anddevelopment opportunities for Reef. A registered petroleum engineer, Mr. Deanhas over 30 years of industry experience with oil and natural gas operationsand reservoir engineering, both domestic onshore and offshore. Prior to joiningRELP, Mr. Dean was Senior Petroleum Engineer and Acquisition andDivestiture Specialist for PLS, Inc. and Noble Royalties, Inc. He isa 1974 graduate of the University of Texas at Arlington with a Bachelor ofScience degree in Civil Engineering. Mr. Dean is an active member of theSociety of Petroleum Engineers, the Society of Petroleum Evaluation Engineers, theADAM Energy Forum, and Texas Independent Producer and Royalty OwnersAssociation.

 

**Daniel C. Sibley**became Chief Financial Officer of Reef in December 1999.He has served in the same position for RELP since January 2006, and hasserved in this position with RELP’s predecessor entity, OREI, since 1998. Mr. Sibleywas employed as a Certified Public Accountant with Grant Thornton from 1977 to1980. From 1980 to 1994, he was involved in the private practice of law. Hereceived a B.B.A. in accounting from the University of North Texas in 1973, alaw degree (J.D.) from the University of Texas in 1977, and a Master of Laws-Taxationdegree (L.L.M.) from Southern Methodist University in 1984.

 

**David M. Tierney** has been employed by RELP since January 2006 and waspreviously with its predecessor entity, OREI, since March 2001.  Mr. Tierney is the Controller of theReef Global Energy Ventures and Reef Global Energy Ventures II partnerships. Mr. Tierneyreceived a Bachelor’s degree from Davidson College in 1974, a Masters ofBusiness Administration from Tulane University in 1976, and is a TexasCertified Public Accountant. Mr. Tierney has worked in public accounting,and has worked in the oil and gas industry since 1979. From 1992 through 2000he served as controller/treasurer of an independent oil and gas explorationcompany.

 

**Audit Committee and Nominating Committee**

** **

Because the Partnership has no directors, it doesnot have an audit committee, an audit committee financial expert or anominating committee.

 

**Code of Ethics**

** **

Because the Partnership hasno employees, it does not have a code of ethics.  Employees of the Partnership’s managinggeneral partner, Reef, must comply with Reef’s Code of Ethics, a copy of whichwill be provided to any person, without charge, upon request made to Reef Oil &Gas Partners, L.P., 1901 N. Central Expressway, Suite 300, Richardson,Texas 75080, Attention: Daniel C. Sibley.

** **
| **ITEM 11.** | **EXECUTIVE  COMPENSATION** |
|--------------|-----------------------------|

 

The following table summarizes the items of compensationto be received by Reef as the managing general partner from the Partnership.

 
| **Recipient**                                | ** ** | **Form of Compensation**                                                                        | ** ** | **Amount**                  |
|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-----------------------------|
| Managing  General Partner                    |       | Partnership interest (excluding any partnership  interest resulting from the purchase of units) |       | 10%  interest               |
| Managing  General Partner                    |       | Management  fee                                                                                      |       | 15%  of subscriptions       |
| Managing General Partner and  its Affiliates |       | Direct  and administrative costs                                                                     |       | Reimbursement  at cost      |
| Affiliate of the Managing General Partner    |       | Operator’s  per-well charges                                                                    |       | Competitive  prices         |
| Managing General Partner and its Affiliates  |       | Payment  for equipment, supplies, marketing, and other services                                      |       | Cost  or competitive prices |

 

 

26

----

 

Reef’s“partnership interest,” as described in the table above, refers only to itsinterest as managing general partner and does not include the interest Reef hasas the result of its purchase of units in the Partnership, or the 1% interestReef has as the result of its payment of 1% of all leasehold, drilling, andcompletion costs.  Reef purchased 5.00%of the outstanding Partnership units. Reef received a 10% interest as managinggeneral partner of the Partnership and a 1% interest as a result of Reef’spayment of 1% of all leasehold, drilling, and completion costs for a total ofan 11% interest.  This 11% interest isnot represented by Partnership units. Reef has a total interest in the Partnership of 15.45%.

 

Reefis entitled to receive a management fee equal to 15% of the Partnershipsubscriptions exclusive of the units purchased by Reef. From this amount Reefpays all of the Partnership’s organization and offering costs, including salescommissions. The management fee is payable to Reef in two parts. Reef initiallyreceived an amount not to exceed 13.5% to cover actual sales commissions andactual organization and offering costs. The remainder of the management fee ispaid to Reef from the net cash flow available for partner distributions, at arate not to exceed $1 million per year. The total management fee owed Reef is$3,464,188. The Partnership recorded $3,414,188 of this amount as offeringcosts, and $50,000 as organization costs. Of this amount, $2,689,092 has beenpaid to Reef to cover actual sales commissions and organization and offeringcosts, $15,000 has been paid to Reef from net cash flow, and $760,096 has beenaccrued at December 31, 2007 as an account payable to be paid to Reef fromfuture net cash flows of the Partnership.

 

Reefwill be reimbursed for direct costs and all documented out-of-pocket expensesincurred on behalf of the Partnership, including administrative costs. Duringthe years ended December 31, 2007 and 2006, the Partnership reimbursedReef $945,521 and $217,183, respectively, for technical services costs whichhave been capitalized as project costs, and $57,221 and $5,203, respectively,for administrative costs included as general and administrative expenses. Therewere no reimbursable costs incurred by Reef for the period from inception (December 29,2005) to December 31, 2005.

 

Asa well operator, RELP receives operator fees during the drilling and productionphase of each well at the competitive rate in the geographical area where theprospect is located.  These fees arecharged as a monthly fee per well as agreed to in an operating agreement signedby the Partnership and participating third parties in the well. During the yearended December 31, 2007, the Partnership paid operator fees totaling$51,700 to RELP. No fees were paid during the year ended December 31, 2006and during the period from inception (December 29, 2005) to December 31,2005. RELP serves as operator for four Partnership prospects upon which ninesuccessful and two unsuccessful wells have been drilled, and for the Sand Dunesprospect, where the Partnership has participated in the drilling of eightwells. Of the eight Sand Dunes prospect wells, four wells are undergoingextended testing and evaluation in order to determine their potentialcommercial productivity. The Partnership estimates that it may take between 90and 120 days from the date of this Annual Report to finish the evaluationprocess. Following initial testing which confirmed the presence of oil andnatural gas, the remaining four Sand Dunes prospect wells were temporarily shutin due to the high cost associated with salt water disposal and generatorrental.

 

**CompensationCommittee**

** **

Becausethe Partnership has no directors, it does not have a compensation committee.

 
| **ITEM 12.** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS** |
|--------------|------------------------------------------------------------------------------------------------------|

 

The following table sets forth information as of December 31,2007 concerning all persons known by Reef to own beneficially more than 5% ofthe interests in the Partnership. Unless expressly indicated otherwise, eachpartner exercises sole voting and investment power with respect to theinterests beneficially owned.

 

27

----

 
| **Person or Group**              | ** ** | **Number of Units   Beneficially  Owned** | ** ** | **Percent of Total   Partnership Units  Outstanding** | ** ** | **Percentage of  Total Partnership  Interests  Beneficially  Owned** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| Reef Oil & Gas Partners, L.P. (1) |       | 48.620                                                   |       | 5.00                                                                      | %          | 4.45                                                                           | %          |
| Reef Oil & Gas Partners, L.P. (1) |       | —                                                   |       | —                                                                    |       | 11.00                                                                          | %          |

 

----

(1) ReefOil & Gas Partners, L.P.’s address is 1901 N. Central Expressway, Suite 300,Richardson, Texas 75080.

 

The managing general partner received a 10% interestin the Partnership as compensation for forming the Partnership, and also holdsa 1% interest in the Partnership as a result of paying 1% of all leasehold,drilling and completion costs. In addition to this 11% interest not representedby Partnership units, Reef purchased 5% of the 972.404 Partnership units and,therefore, holds 5% of the 89% interest in the Partnership (4.45%) held by theunit holders.

 
| **ITEM 13.** | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE** |
|--------------|--------------------------------------------------------------------------------|

** **

The Partnership is managed by a managing general partner and does nothave directors. Reef is the managing general partner of the Partnership.  Along with its affiliates, Reef has enteredinto agreements with, and received compensation from, the Partnership forservices it performs for the Partnership. See “Item 11. EXECUTIVE COMPENSATION.”

** **
| **ITEM 14.** | **PRINCIPAL  ACCOUNTING FEES AND SERVICES** |
|--------------|---------------------------------------------|

** **

ThePartnership incurred professional audit and tax fees from its principal auditorBDO Seidman, LLP, as disclosed in the table below:

 
| ** **         | ** ** | **2007** | ** **   | **2006** | ** ** |
|--------------------|------------|----------|--------------|----------|------------|
| Audit fees    |       | $        |  43,561 |     | $          |  45,249 | ** ** |
| Audit related fees |       | —   |         | —   |       |
| Tax  fees     |       | 866      |         | 615      |       |
| All other fees     |       | —   |         | —   |       |
|                    |            |          |              |          |            |  |  |

 

Tax feesare for review of the Partnership’s tax return.

 

Asindicated in Item 10 above, the Partnership does not have any directors or anaudit committee.

 

28

----

 

**PART IV**

 
| **ITEM 15.** | **EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES** |
|--------------|-------------------------------------------------|

 
| (a)    | 1. Financial Statements                                  |   |
|--------|----------------------------------------------------------|--------|
|   |                                                     |   |
|   | Report of  Independent Registered Public Accounting Firm | F-1    |
|   | Balance Sheets                                           | F-2    |
|   | Statements of  Operations                                | F-3    |
|   | Statements of  Partnership Equity                        | F-4    |
|   | Statements of Cash  Flows                                | F-5    |
|   | Notes to Financial  Statements                           | F-6    |
|   |                                                     |   |
|   |                                                     |   |
|   | 2.  Financial Statement Schedules                        | None   |
|   |                                                     |   |
|   | 3.  Exhibits                                             |   |

 

Alist of the exhibits filed or furnished with this Annual Report (or incorporatedby reference to exhibits previously filed or furnished by us) is provided inthe Exhibit Index in this Annual Report. Those exhibits incorporated by reference herein are indicated as such bythe information supplied in the parenthetical thereafter. Otherwise, theexhibits are filed herewith.

 

29

----

** **

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| Date:   April 15,  2008 | ** ** | ** ** | **REEF  GLOBAL ENERGY VII, L.P.**       |
|---------------------------------------------|------------|------------|-----------------------------------------|
| ** **                                  | ** ** | ** ** | ** **                              |
| ** **                                  | ** ** | ** ** | ** **                              |
|                                        |       |       | Reef  Oil & Gas Partners, L.P. |
|                                        |       |       | Managing  General Partner               |
|                                        |       |       |                                    |
|                                        |       |       | By:                                     | Reef  Oil & Gas Partners, GP, LLC |
|                                        |       |       |                                    |   |
|                                        |       |       | By:                                     | /s/  Michael J. Mauceli |
|                                        |       |       |                                    | Michael  J. Mauceli |
| ** **                                  | ** ** | ** ** | ** **                              | **Manager (Principal Executive Officer)** |

 

30

----

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**           | ** ** | **Title**                                                              | ** ** | **Date**            |
|-------------------------|------------|------------------------------------------------------------------------|------------|---------------------|
|                    |       |                                                                   |       |                |
| /s/  Michael J. Mauceli |       | Manager  and Member of the general partner of Reef Oil & Gas  |       | April 15, 2008 |
| Michael J. Mauceli      |       | Partners,  L.P. (*Principal Executive Officer*)                        |       |                |
|                    |       |                                                                   |       |                |
| /s/  Daniel C. Sibley   |       | Chief  Financial Officer (*Principal Financial  Officer and Principal* |       | April 15, 2008 |
| Daniel  C. Sibley       |       | *Accounting  Officer*)                                                 |       |                |

 

31

----

 

Reef Global Energy VII, L.P.

 

Financial Statements

 

For the Years Ended December 31,2007 and 2006, and the Period from Inception (December 29, 2005) to December 31,2005

 

**Contents**

 
| Report of Independent  Registered Public Accounting Firm | F-1    |
|----------------------------------------------------------|--------|
|                                                     |   |
| Audited  Financial Statements                            |   |
|                                                     |   |
| Balance Sheets                                           | F-2    |
| Statements of Operations                                 | F-3    |
| Statements of Partnership Equity                         | F-4    |
| Statements of Cash Flows                                 | F-5    |
| Notes to Financial Statements                            | F-6    |

 

----

 

Report of IndependentRegistered Public Accounting Firm

 

ThePartners

ReefGlobal Energy VII, L.P.

 

We have audited theaccompanying balance sheets of Reef Global Energy VII, L.P. as of December 31,2007 and 2006, and the related statements of operations, partnership equity,and cash flows for the years ended December 31, 2007 and 2006, and theperiod from inception (December 29, 2005) to December 31, 2005. Thesefinancial statements are the responsibility of the Partnership’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Partnership is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Partnership’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Reef Global Energy VII, L.P. at December 31,2007 and 2006, and the results of its operations and its cash flows for theyears ended December 31, 2007 and 2006, and the period from inception (December 29,2005) to December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America.

 

/s/BDO Seidman, LLP

 

 

Dallas,Texas

April 11,2008

 

F-1

----

 

**Reef Global Energy VII, L.P.**

**Balance Sheets**

 
| **December 31,**                                                          | ** ** | **2007**      | ** **    | **2006**       | ** ** |
|--------------------------------------------------------------------------------|------------|---------------|---------------|----------------|------------|
|                                                                           |       |          |          |           |       |
| **Assets**                                                                     |       |          |          |           |       |
|                                                                           |       |          |          |           |       |
| **Current assets:**                                                            |       |          |          |           |       |
| Cash and cash equivalents                                                      | ** ** | $             | 1,261,615     |           | $          | 14,571,339 | ** ** |
| Accounts receivable from affiliates                                            |       | 10,969        |          | 40,437         |       |
| **Total current assets**                                                       | ** ** | **1,272,584** | ** **    | **14,611,776** | ** ** |
| ** **                                                                     | ** ** | ** **    | ** **    | ** **     | ** ** |
| **Oil and gas properties, full cost method of  accounting:**                   |       |          |          |           |       |
| Proved properties, net of accumulated depletion of $13,640,391 and  $1,825,482 |       | 7,175,691     |          | —         |       |
| Unproved properties                                                            |       | 172,447       |          | 3,211,249      |       |
| **Net oil and gas properties**                                                 | ** ** | **7,348,138** | ** **    | **3,211,249**  | ** ** |
|                                                                           |       |          |          |           |       |
| **Other assets:**                                                              |       |          |          |           |       |
| Prepaid drilling costs                                                         |       | —        |          | 3,963,595      |       |
| **Total other assets**                                                         | ** ** | **—**    | ** **    | **3,963,595**  | ** ** |
|                                                                           |       |          |          |           |       |
| **Total assets**                                                               | ** ** | **$**         | **8,620,722** | ** **     | **$**      | **21,786,620** | ** ** |
|                                                                           |       |          |          |           |       |
| **Liabilities and partnership equity**                                         |       |          |          |           |       |
|                                                                           |       |          |          |           |       |
| **Current liabilities:**                                                       |       |          |          |           |       |
| Accounts payable to affiliates                                                 |       | 598,728       |          | 1,542,848      |       |
| **Total current liabilities**                                                  | ** ** | **598,728**   | ** **    | **1,542,848**  | ** ** |
|                                                                           |       |          |          |           |       |
| **Long-term liabilities:**                                                     |       |          |          |           |       |
| Asset retirement obligation                                                    |       | 125,705       |          | —         |       |
| Accounts payable to affiliates                                                 |       | 430,096       |          | 1,028,110      |       |
| **Total long-term liabilities**                                                | ** ** | **555,801**   | ** **    | **1,028,110**  | ** ** |
|                                                                           |       |          |          |           |       |
| **Commitments and Contingencies (Note 6)**                                     |       |          |          |           |       |
|                                                                           |       |          |          |           |       |
| **Partnership equity**                                                         |       |          |          |           |       |
| General partners                                                               |       | 5,624,838     |          | 14,591,765     |       |
| Limited partners                                                               |       | 1,387,493     |          | 3,599,369      |       |
| Managing general partner                                                       |       | 453,862       |          | 1,024,528      |       |
| **Partnership equity**                                                         | ** ** | **7,466,193** | ** **    | **19,215,662** | ** ** |
| ** **                                                                     | ** ** | ** **    | ** **    | ** **     | ** ** |
| **Total liabilities and partnership equity**                                   | ** ** | **$**         | **8,620,722** | ** **     | **$**      | **21,786,620** | ** ** |

 

*Seeaccompanying notes to financial statements.*

 

F-2

----

 

**Reef Global Energy VII, L.P.**

**Statements of Operations**

 
| ** **                                 | ** ** | **Year ended  December  31, 2007** | ** **      | **Year ended  December  31, 2006** | ** ** | **Period from  inception  (December  29, 2005) to  December  31, 2005** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|-----------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                   | ** **      | ** **                                   | ** ** | ** **                                                                                  | ** ** |
| **Revenues:**                              | ** ** | **$**                                        | **1,517,970**   | ** **                                   | **$**      | **—**                                                                                  | ** ** | **$** | **—** | ** ** |
| ** **                                 | ** ** | ** **                                   | ** **      | ** **                                   | ** ** | ** **                                                                                  | ** ** |
| **Costs and expenses:**                    | ** ** | ** **                                   | ** **      | ** **                                   | ** ** | ** **                                                                                  | ** ** |
| Lease operating expenses                   |       | 149,307                                      |            | —                                       |       | —                                                                                      |       |
| Production taxes                           |       | 82,682                                       |            | —                                       |       | —                                                                                      |       |
| Depreciation, depletion and amortization   |       | 1,075,372                                    |            | —                                       |       | —                                                                                      |       |
| Property impairment                        |       | 10,739,537                                   |            | 1,825,482                                    |       | —                                                                                      |       |
| Accretion of asset retirement obligation   |       | 4,643                                        |            | —                                       |       | —                                                                                      |       |
| General and administrative                 |       | 135,603                                      |            | 69,081                                       |       | 475                                                                                         |       |
| Organization expenses                      |       | —                                       |            | —                                       |       | 50,000                                                                                      |       |
| **Total costs and expenses**               | ** ** | **12,187,144**                               | ** **      | **1,894,563**                                | ** ** | **50,475**                                                                                  | ** ** |
| ** **                                 | ** ** | ** **                                   | ** **      | ** **                                   | ** ** | ** **                                                                                  | ** ** |
| **Loss from operations**                   | ** ** | **(10,669,174**                              | **)**           | **(1,894,563**                               | **)**      | **(50,475**                                                                                 | **)**      |
| ** **                                 | ** ** | ** **                                   | ** **      | ** **                                   | ** ** | ** **                                                                                  | ** ** |
| **Other income:**                          | ** ** | ** **                                   | ** **      | ** **                                   | ** ** | ** **                                                                                  | ** ** |
| Interest income                            |       | 317,661                                      |            | 691,667                                      |       | 1,212                                                                                       |       |
| **Total other income**                     | ** ** | **317,661**                                  | ** **      | **691,667**                                  | ** ** | **1,212**                                                                                   | ** ** |
| ** **                                 | ** ** | ** **                                   | ** **      | ** **                                   | ** ** | ** **                                                                                  | ** ** |
| **Net loss**                               | ** ** | **$**                                        | **(10,351,513** | **)**                                        | **$**      | **(1,202,896**                                                                              | **)**      | **$** | **(49,263** | **)** |
| ** **                                 | ** ** | ** **                                   | ** **      | ** **                                   | ** ** | ** **                                                                                  | ** ** |
| Net loss per general partner unit          | ** ** | **$**                                        | **(10,689.32**  | **)**                                        | **$**      | **(1,290.26**                                                                               | **)**      | **$** | **(729.60** | **)** |
| Net loss per limited partner unit          | ** ** | **$**                                        | **(10,689.32**  | **)**                                        | **$**      | **(1,283.33**                                                                               | **)**      | **$** | **(719.23** | **)** |
| Net loss per managing general partner unit | ** ** | **$**                                        | **(9,808.55**   | **)**                                        | **$**      | **(251.74**                                                                                 | **)**      | **$** | **(20.58** | **)** |

 

*Seeaccompanying notes to financial statements.*

 

F-3

----

 

**Reef Global Energy VII, L.P.**

**Statements of Partnership Equity**

** **
| ** **                                    | ** ** | **General partners** | ** ** | **Limited partners** | ** ** | **Managing general  partner** | ** ** | **Total**  | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **Units**                 | ** ** | **Amount**                | ** ** | **Units**                          | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** |
| Partner  contributions, net of offering costs |       | 52.700                    |       | $1,158,836                |       | 14.932                             |       | $328,352   |       | 3.560 |   | $75,641 |   | 71.192 |   | $1,562,829 |   |
| Partner  distributions                        |       | —                    |       | —                    |       | —                             |       | —     |       | — |   | — |   | — |   | — |   |
| Net loss                                      |       | —                    |       | (38,450                   | )          | —                             |       | (10,740    | )          | — |   | (73 | ) | — |   | (49,263 | ) |
| Balance at  December 31, 2005            |       | 52.700                    |       | 1,120,386                 |       | 14.932                             |       | 317,612    |       | 3.560 |   | 75,568 |   | 71.192 |   | 1,513,566 |   |
|                                          |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Distribution  amount per partnership unit     |       |                      |       | —                    |       |                               |       | —     |       |   |   | — |   |   |   |   |   |
|                                          |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2005            |       | 52.700                    |       | 1,120,386                 |       | 14.932                             |       | 317,612    |       | 3.560 |   | 75,568 |   | 71.192 |   | 1,513,566 |   |
| Partner  contributions, net of offering costs |       | 688.301                   |       | 14,627,534                |       | 167.851                            |       | 3,565,680  |       | 45.060 |   | 1,006,778 |   | 901.212 |   | 19,199,992 |   |
| Partner  distributions                        |       | —                    |       | (200,071                  | )          | —                             |       | (49,351    | )          | — |   | (45,578 | ) | — |   | (295,000 | ) |
| Net loss                                      |       | —                    |       | (956,084                  | )          | —                             |       | (234,572   | )          | — |   | (12,240 | ) | — |   | (1,202,896 | ) |
| Balance at  December 31, 2006            |       | 741.001                   |       | 14,591,765                |       | 182.783                            |       | 3,599,369  |       | 48.620 |   | 1,024,528 |   | 972.404 |   | 19,215,662 |   |
|                                          |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Distribution  amount per partnership unit     |       |                      |       | 270.00                    |       |                               |       | 270.00     |       |   |   | 937.43 |   |   |   |   |   |
|                                          |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2006            |       | 741.001                   |       | 14,591,765                |       | 182.783                            |       | 3,599,369  |       | 48.620 |   | 1,024,528 |   | 972.404 |   | 19,215,662 |   |
| Partner  contributions                        |       | —                    |       | —                    |       | —                             |       | —     |       | — |   | 144,544 |   | — |   | 144,544 |   |
| Partner distributions                         |       | —                    |       | (1,046,134                | )          | —                             |       | (258,050   | )          | — |   | (238,316 | ) | — |   | (1,542,500 | ) |
| Net loss                                      |       | —                    |       | (7,920,793                | )          | —                             |       | (1,953,826 | )          | — |   | (476,894 | ) | — |   | (10,351,513 | ) |
| Balance at  December 31, 2007            |       | 741.001                   |       | $5,624,838                |       | 182.783                            |       | $1,387,493 |       | 48.620 |   | $453,862 |   | 972.404 |   | $7,466,193 |   |
|                                          |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Distribution  amount per partnership unit     |       |                      |       | $1,411.78                 |       |                               |       | $1,411.78  |       |   |   | $4,901.60 |   |   |   |   |   |

 

*Seeaccompanying notes to financial statements.*

 

F-4

----

** **

**Reef Global Energy VII, L.P.**

**Statements of Cash Flows**

 
| ** **                                                                       | ** ** | ** **          | ** **    | ** **            | ** ** | **Period from  inception  (December  29, 2005) to** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|---------------|-----------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Year Ended** | ** **    | **December 31,** | ** ** |
| ** **                                                                       | ** ** | **2007**            | ** **    | **2006**              | ** ** | **2005**                                                           | ** ** |
| **Operating Activities**                                                         |       |                |          |                  |       |                                                               |       |
| Net loss                                                                         |       | $                   | (10,351,513   | )                     | $          | (1,202,896                                                         | )          | $ | (49,263 | ) |
| Adjustments for non-cash transactions:                                           |       |                |          |                  |       |                                                               |       |
| Depreciation, depletion and amortization                                         |       | 1,075,372           |          |                  |       | —                                                             |       |
| Property impairment                                                              |       | 10,739,537          |          | 1,825,482             |       | —                                                             |       |
| Accretion of asset retirement obligation                                         |       | 4,643               |          |                  |       | —                                                             |       |
| Adjustments to reconcile net loss to net cash provided by operating  activities: |       |                |          |                  |       |                                                               |       |
| Changes in operating assets and liabilities:                                     |       |                |          |                  |       |                                                               |       |
| Accounts receivable                                                              |       | —              |          | 1,177                 |       | (1,177                                                             | )          |
| Accounts payable                                                                 |       | —              |          | (475                  | )          | 475                                                                |       |
| Accounts payable to affiliates                                                   |       | 21,118              |          | (80,263               | )          | 80,263                                                             |       |
| **Net cash provided by operating activities**                                    | ** ** | **1,489,157**       | ** **    | **543,025**           | ** ** | **30,298**                                                         | ** ** |
| ** **                                                                       | ** ** | ** **          | ** **    | ** **            | ** ** | ** **                                                         | ** ** |
| **Investing Activities**                                                         | ** ** | ** **          | ** **    | ** **            | ** ** | ** **                                                         | ** ** |
| Property acquisition and development                                             |       | (13,162,379         | )             | (3,493,883            | )          | —                                                             |       |
| Prepaid drilling costs                                                           |       | —              |          | (3,963,595            | )          | **—**                                                         | ** ** |
| **Net cash used in investing activities**                                        | ** ** | **(13,162,379**     | **)**         | **(7,457,478**        | **)**      | **—**                                                         | ** ** |
| ** **                                                                       | ** ** | ** **          | ** **    | ** **            | ** ** | ** **                                                         | ** ** |
| **Financing Activities**                                                         | ** ** | ** **          | ** **    | ** **            | ** ** | ** **                                                         | ** ** |
| Partner capital contributions                                                    |       | 174,012             |          | 22,445,763            |       | 1,690,809                                                          |       |
| Offering costs                                                                   |       | (268,014            | )             | (2,182,457            | )          | (203,621                                                           | )          |
| Partner distributions                                                            |       | (1,542,500          | )             | (295,000              | )          | —                                                             |       |
| **Net cash provided by (used in) financing  activities**                         | ** ** | **(1,636,502**      | **)**         | **19,968,306**        | ** ** | **1,487,188**                                                      | ** ** |
| ** **                                                                       | ** ** | ** **          | ** **    | ** **            | ** ** | ** **                                                         | ** ** |
| **Net increase (decrease) in cash and cash  equivalents**                        | ** ** | **(13,309,724**     | **)**         | **13,053,853**        | ** ** | **1,517,486**                                                      | ** ** |
| Cash and cash equivalents at beginning of period                                 |       | 14,571,339          |          | 1,517,486             |       | —                                                             |       |
| **Cash and cash equivalents at end of period**                                   | ** ** | **$**               | **1,261,615** | ** **            | **$**      | **14,571,339**                                                     | ** ** | **$** | **1,517,486** | ** ** |
| ** **                                                                       | ** ** | ** **          | ** **    | ** **            | ** ** | ** **                                                         | ** ** |
| Non-cash investing transactions                                                  |       |                |          |                  |       |                                                               |       |
| Property additions included in accounts payable to affiliates                    | ** ** | $                   | 247,610       |                  | $          | 1,542,848                                                          |       | $ | — |   |
| Property additions and asset retirement obligation                               | ** ** | $                   | 121,062       |                  | $          | —                                                             |       | $ | — |   |
| Non-cash financing transactions:                                                 | ** ** |                | ** **    | ** **            | ** ** | ** **                                                         | ** ** |
| Managing partner contributions included in accounts receivable from  affiliates  | ** ** | $                   | 10,969        |                  | $          | 40,437                                                             |       | $ | 75,641 |   |
| Offering costs included in accounts payable to affiliates                        | ** ** | $                   | 330,000       |                  | $          | —                                                             |       | $ | — |   |
| Offering costs included in non-current accounts payable to affiliates            | ** ** | $                   | 430,096       |                  | $          | 1,028,110                                                          |       | $ | — |   |

 

*Seeaccompanying notes to financial statements.*

 

F-5

----

 

Reef Global Energy VII, L.P.

Notes to Financial Statements

December 31, 2007

 

**1.Organization and Basis of Presentation**

 

ReefGlobal Energy VII, L.P. (the “Partnership”) is the second in a series of fourNevada limited partnerships comprising a program called Reef Global EnergyVentures II (the “Program”), pursuant to an S-1 Registration Statement declaredeffective by the Securities and Exchange Commission (the “SEC”) on July 7,2005. In order to be formed, each partnership was required to sell a minimum of40 partnership units at $25,000 per unit, including units purchased by themanaging general partner. Each partnership formed as a part of the Programoffered a minimum of 1,000 and a maximum of 2,000 units for sale. The Programwas authorized to sell up to 1,600 limited partner units and 6,400 generalpartner units during the period beginning July 8, 2005 through July 7,2007. The Partnership offered 1,200 units for sale ($30,000,000), consisting ofup to 240 limited partner units and up to 960 general partner units. Investorfunds were held in escrow and were subject to reimbursement with interest ifthe minimum number of units was not sold. The Program filed a prospectussupplement with the SEC on November 15, 2005 describing the Partnership,and commenced offering units in the Partnership. Upon reaching the minimumsubscription level, the Partnership was formed on December 29, 2005. ThePartnership offering closed April 28, 2006, with sales to outsideinvestors totaling 741.001 general partner units and 182.783 limited partnerunits, and sales to the managing general partner totaling 48.620 generalpartner units.

 

ThePartnership is a Nevada limited partnership formed under the Nevada UniformLimited Partnership Act. Reef Oil & Gas Partners, L.P. (“Reef”) servesas the Partnership’s managing general partner. Partnership interests are heldby the managing general partner and investor partners who are general andlimited partners (“investor partners”). The managing general partner received a10% interest in the Partnership as compensation for forming the Partnership,and also holds a 1% interest in the Partnership as a result of paying 1% of allleasehold, drilling and completion costs. This 11% interest is not representedby Partnership units. In addition, Reef purchased 5% of the Partnership unitsand, therefore, holds 5% of the 89% interest in the Partnership (4.45%) held bythe unit holders. The Partnership purchased working interests in exploratoryand developmental drilling prospects and drilled oil and gas wells locatedonshore in the continental United States. Other partnerships formed as a partof this Program, as well as other partnerships managed by Reef also owninterests in some of the prospects purchased by this Partnership. In instanceswhere Reef-affiliated entities own a majority working interest in a prospect,wells drilled on that prospect may be operated by Reef Exploration, L.P.(“RELP”), an affiliate of Reef.

 

Duringthe year following completion of the drilling phase of the Partnership, allinvestor general partner units will be converted into limited partner units.Limited partners do not have any rights to convert their units to generalpartner units.

 

Underthe terms of the partnership agreement, certain income and expense items are allocateddifferently between the managing general partner and the investor partners.Allocations of income and expense to the managing general partner and investorpartner are made quarterly based upon the number and type of partnership unitsheld at the end of the quarter.

 

F-6

----

 

Reef Global Energy VII, L.P.

Notes to Financial Statements (continued)

 

Organizationand offering costs are allocated 100% to investor partners, as the managinggeneral partner purchases its units net of the 15% fee for organization andoffering costs. Monthly cash distributions to partners are based upon thenumber and type of partnership units held at the close of the prior month.  Cash distributions to partners of the netcash flow from interest income and oil and natural gas sales revenues, lessoperating, general and administrative, and other costs are distributed 15.45%to the managing general partner (based upon the 11% interest not represented byunits and the 4.45% interest represented by Partnership units) and 84.55% toinvestor partners.

 

**2.Summary of Accounting Policies**

 

**Use ofEstimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from theseestimates.

 

**Cashand Cash Equivalents**

 

ThePartnership considers all highly liquid investments with maturity dates of nomore than three months from the purchase date to be cash equivalents. Cash andcash equivalents consist of demand deposits and money market investmentsinvested with a major national bank. The carrying value of the Partnership’scash equivalents approximates fair value.

 

**Risksand Uncertainties**

 

Historically,the oil and gas market has experienced significant price fluctuations. Pricesare impacted by local weather, supply in the area, availability and price ofcompetitive fuels, seasonal variations in local demand, limited transportationcapacity to other regions, and the worldwide supply and demand balance forcrude oil.

 

ThePartnership has not engaged in commodity futures trading or hedging activitiesand has not entered into derivative financial instrument transactions fortrading or other speculative purposes. Accordingly, the Partnership is at riskfor the volatility in commodity prices inherent in the oil and gas industry,and the level of commodity prices has a significant impact on the Partnership’sresults of operations.

 

F-7

----

 

Reef Global Energy VII, L.P.

Notes to Financial Statements (continued)

 

**Organizationand Offering Costs**

 

Organization and offeringcosts total 15% of investor capital contributions, except for units purchasedby the managing general partner, which are purchased net of the 15% cost.Partnership organization costs totaling $50,000 have been expensed in thefinancial statements for the period from inception (December 29, 2005) to December 31,2005. Offering costs represent costs incurred in conjunction with the offeringof partnership units. These costs, totaling $3,414,188 have been recorded as areduction of the proceeds of the offering.

 

# **Oiland Natural Gas Properties**

# ** **

ThePartnership follows the full cost method of accounting for crude oil andnatural gas properties. Under this method, all direct costs and certainindirect costs associated with acquisition of properties and successful as wellas unsuccessful exploration and development activities are capitalized.Depreciation, depletion, and amortization of capitalized crude oil and naturalgas properties and estimated future development costs, excluding unprovedproperties, are based on the unit-of-production method using estimated provedreserves.  For these purposes, proved gasreserves are converted to equivalent barrels at a rate of 6 Mcf to 1 Bbl. Netcapitalized costs of crude oil and natural gas properties, as adjusted forasset retirement obligations, are limited to the lower of unamortized cost orthe cost ceiling, defined as the sum of the present value of estimated futurenet revenues from proved reserves based on prices in effect at the end of theperiod held constant and discounted at 10 percent, plus the lower of cost orestimated fair value of  unprovedproperties, if any. Pursuant to full cost accounting rules, the Partnershipperforms a ceiling test quarterly as of the balance sheet date on its provedoil and natural gas properties. Excess capitalized costs are charged toproperty impairment expense. No gain or loss is recognized upon sale ordisposition of crude oil and natural gas properties, unless such a sale wouldsignificantly alter the rate of depletion and amortization. During the yearsended December 31, 2007 and 2006, the Partnership recognized propertyimpairment expense of proved properties totaling $10,739,537 and $1,825,482,respectively.

 

Unproved propertiesconsist of undeveloped leasehold interest. Investments in unproved propertiesare not depleted pending determination of the existence of proved reserves.Unproved properties are assessed for impairment quarterly as of the balancesheet date by considering the primary lease term, the holding period of theproperties, geologic data obtained relating to the properties, and otherdrilling activity in the immediate area of the properties. Any impairmentresulting from this quarterly assessment is reported as property impairmentexpense in the current period, as appropriate. During the years ended December 31,2007 and 2006, and the period from inception (December 29, 2005) to December 31,2005, the Partnership recognized no impairment of unproved properties.

 

# **Restoration,Removal, and Environmental Liabilities**

# ** **

ThePartnership is subject to extensive Federal, state and local environmental lawsand regulations. These laws regulate the discharge of materials into theenvironment and may require the Partnership to remove or mitigate theenvironmental effects of the disposal or release of petroleum substances atvarious sites. Environmental expenditures are expensed or capitalized dependingon their future economic benefit. Expenditures that relate to an existingcondition caused by past operations and that have no future economic benefitare expensed.

 

F-8

----

 

Reef Global Energy VII, L.P.

Notes to Financial Statements (continued)

 

Liabilitiesfor expenditures of a non-capital nature are recorded when environmentalassessments and/or remediation is probable, and the costs can be reasonablyestimated. Such liabilities are generally undiscounted values unless the timingof cash payments for the liability or component is fixed or reliablydeterminable.

 

ThePartnership accounts for its asset retirement obligations in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 143, “Accountingfor Asset Retirement Obligations” (“SFAS No. 143”). Asset retirement costsand liabilities associated with future site restoration and abandonment oflong-lived assets are initially measured at fair value which approximates thecost a third party would incur in performing the tasks necessary to retire suchassets. The fair value is recognized in the financial statements as the presentvalue of expected future cash expenditures for site restoration andabandonment. Subsequent to the initial measurement, the effect of the passageof time on the liability for the net asset retirement obligation (accretionexpense) and the amortization of the asset retirement cost are recognized inthe results of operations.

 

Thefollowing table summarizes the Partnership’s asset retirement obligation forthe year ended December 31, 2007.

 
| ** **                            | ** ** | **2007** | ** ** |
|---------------------------------------|------------|----------|------------|
| Beginning asset retirement obligation | ** ** | **$**    | **—** | ** ** |
| Additions related to new properties   |       | 121,062  |       |
| Accretion expense                     |       | 4,643    |       |
| Ending asset retirement obligation    | ** ** | **$**    | 125,705    | ** ** |

 

**Recognitionof Revenue**

 

ThePartnership enters into sales contracts for disposition of its share of oil andnatural gas production from productive wells. Revenues are recognized basedupon the Partnership’s share of metered volumes delivered to its purchaserseach month. The Partnership had no material gas imbalances at December 31,2007, 2006, and 2005.

 

**IncomeTaxes**

 

ThePartnership’s net income or loss flows directly through to its partners, whoare responsible for the payment of Federal taxes on their respective share ofany income or loss. Therefore, there is no provision for federal income taxesin the accompanying financial statements.

 

Asof December 31, 2007, the tax basis of the Partnership’s assets exceedsthe financial reporting basis of the assets by approximately $125,000,primarily due to the difference between property impairment costs deducted forfinancial reporting purposes and intangible drilling costs deducted for incometax purposes.

 

F-9

----

 

Reef Global Energy VII, L.P.

Notes to Financial Statements (continued)

 

**FairValue of Financial Instruments**

 

Thecarrying amounts of the Partnership’s short-term financial instruments,including cash equivalents, accounts receivable and accounts payable,approximate their fair values based on the short maturities of thoseinstruments.

 

**Reclassifications**

 

Certain information providedfor prior years has been reclassified to conform to the current yearpresentation adopted as of December 31, 2007.

 

**3.Transactions with Affiliates**

 

ThePartnership settles its balances with Reef and RELP on a quarterly basis.

 

Reef,as managing general partner, contributes 1% of all leasehold, drilling, andcompletion costs when incurred. In addition, Reef purchased 5% of the units andpays 5% of the 99% of these costs paid by the unit holders (4.95%). Inconnection with the 1% obligation, Reef owed the Partnership $10,969 and$40,437 at December 31, 2007 and 2006, respectively.

 

ThePartnership has no employees. RELP employs a staff including geologists,petroleum engineers, landmen and accounting personnel who administer all of thePartnership’s operations. The Partnership reimburses RELP for technical andadministrative services at cost. During the years ended December 31, 2007and 2006, the Partnership incurred technical services and administrative coststotaling $1,002,742 and $222,386, respectively. Of these amounts, $945,521 and$217,183 represent technical services costs capitalized as project costs, and$57,221 and $5,203 represent administrative costs included as general andadministrative expenses. At December 31, 2007 and 2006, the Partnershipowed RELP $86,932 and $210,250, respectively, for technical and administrativeservices.

 

RELPprocesses joint interest billings and revenue payments on behalf of thePartnership. At December 31, 2007 and 2006, the Partnership owed RELP$181,796 and $1,181,862, respectively, for net drilling and operating costs inexcess of revenues processed by RELP.

 

Accountspayable to affiliates as of December 31, 2007 and 2006 also includes$760,096 and $1,028,110, respectively, for the unpaid portion of the 15%management fee due Reef for organization and offering costs, including salescommissions. The management fee is payable in two parts. Reef initiallyreceived an amount not to exceed 13.5% to recover actual commissions andorganization and offering costs. The portion of the management fee in excess ofactual commissions and organization and offering costs is paid to Reef from oiland gas cash flows available for partner distributions, at a rate not to exceed$1 million per year. During 2007, the Partnership paid Reef $253,014 representingactual commissions and organization and offering costs, and $15,000representing the portion of the management fee in excess of actual commissionsand organization and offering costs. Beginning in February 2008, thePartnership is reimbursing the $760,096 to Reef at a rate of $30,000 per month.As such, $330,000 of this amount has been classified as a current liability,and the remaining $430,096 has been classified as a long term liability toaffiliates at December 31, 2007.

 

F-10

----

 

Reef Global Energy VII, L.P.

Notes to Financial Statements (continued)

 

Reefentered into, and allowed to expire, two agreements (the “CMI Agreements”) withChallenger Minerals Inc. (“CMI”), a subsidiary of GlobalSantaFe Corporation anda screener of oil and gas prospects in the Gulf of Mexico and North Searegions. The CMI Agreements provided Reef the opportunity to review andselectively participate in exploratory and developmental prospects eitheroriginated or previewed by CMI. Reef paid CMI for the geological andgeophysical services provided by CMI under the CMI agreements. The agreementsexpired in January and November, 2006.

 

Reefalso entered into an agreement with Access Exploration Corp. (“AEC”), ascreener of domestic oil and gas prospects both onshore and in the Gulf ofMexico. This agreement provided Reef the opportunity to review and selectivelyparticipate in exploratory and developmental prospects previewed by AEC. Reefpaid AEC for the geological and geophysical services provided by AEC under thisagreement. This agreement expired in October 2007.

 

Prospectsapproved for acquisition by Reef under these agreements could be assigned tothis Partnership as well as other limited partnerships formed as part of theProgram. Each partnership formed as a part of the Program paid Reef, on a prorata basis, a portion of the fees paid by Reef under these agreements duringthe term of the Program. Total reimbursements to Reef by the partnershipsformed as a part of this Program were equal to the actual fees paid by Reefunder these agreements. At December 31, 2006, the Partnership had apayable to Reef of $150,736 in connection with this obligation, which was paidto Reef during the first quarter of 2007. The payment has been capitalized asgeological and geophysical costs in accordance with the full cost method ofaccounting for oil and gas properties.

 

Ifan affiliate of Reef serves as operator of a Partnership prospect, thenoperator fees will be payable to the affiliate. Under such circumstances, suchaffiliate will receive fees at the competitive rate in the geographical areawhere the prospect is located during the drilling and production phase ofoperations. These fees are charged as a monthly fee per well as agreed to in anoperating agreement signed by the Partnership and other participating workinginterest owners in the well. During the year ended December 31, 2007, thePartnership paid drilling overhead fees totaling $28,398 and operating overheadfees totaling $23,302 to RELP.  No feeswere paid during the year ended December 31, 2006 and during the periodfrom inception (December 29, 2005) to December 31, 2005.

 

F-11

----

 

Reef Global Energy VII,L.P.

Notes to FinancialStatements (continued)

 

**4.Prepaid Drilling Costs**

 

AtDecember 31, 2006, the Partnership had prepaid $3,963,595 in connectionwith intangible drilling costs to be incurred on wells in which the Partnershipowns a working interest and which were drilling at December 31, 2006, ordrilled during the first quarter of 2007.

 

**5.Major Customers**

 

ThePartnership sells crude oil and natural gas on credit terms to refiners,pipelines, marketers, and other users of petroleum commodities. Revenues arereceived directly from these parties or, in certain circumstances, paid to theoperator of the property who disburses to the Partnership its percentage shareof the revenues. During the year ended December 31, 2007, two marketersaccounted for 79.4% and 16.5% of the Partnership’s oil and natural gasrevenues, respectively. As of December 31, 2006 and 2005, the Partnershiphad no oil and natural gas production and, therefore, had no customers. Due tothe competitive nature of the market for purchase of crude oil and natural gas,the Partnership does not believe that the loss of any particular purchaserwould have a material adverse impact on the Partnership.

 

**6.Commitments and Contingencies**

 

ThePartnership is not currently involved in any legal proceedings.

 

**7. Partnership Equity**

 

Salesof Partnership units began on November 15, 2005. Proceeds received wereplaced into an interest bearing escrow account until the Partnership reachedthe minimum subscription level of 40 units. The Partnership was formed on December 29,2005 and the sale of Partnership units was closed on April 28, 2006. ThePartnership raised $23,094,590 from the sale of 923.784 Partnership units toinvestor partners. Reef purchased 48.620 units (5%) for $1,033,179. Reef alsocontributes 1% of all leasehold, drilling, and completion costs when incurred,in addition to paying its pro rata share (4.95%) of the leasehold, drilling,and completion costs paid by the Partnership. In connection with thisobligation, Reef paid $174,012 and $8,803 during the years ended December 31,2007 and 2006, and has accrued an additional $10,969 at December 31, 2007,which was paid to the Partnership during the first quarter of 2008.

 

Allunits, except those purchased by Reef, paid a 15% management fee to Reef to payfor Partnership organization and offering costs, including sales commissions.These costs totaled $3,464,188, leaving net capital contributions of$20,857,365 available for Partnership oil & gas activities. Of the$3,464,188 management fee, offering costs were $3,414,188 and organizationcosts were $50,000.  The Partnership hasdrilled twenty-five wells at December 31, 2007 and has four wells wheredrilling is in progress at December 31, 2007.  The Partnership will substantially completeits drilling operations during the first quarter of 2008.

 

F-12

----

 

Reef Global Energy VII,L.P.

Notes to FinancialStatements (continued)

 

Reefexclusively manages and controls all aspects of the business of thePartnership. The Partnership agreement prohibits participation by investorpartners in the Partnership’s day-to-day business decisions.

 

**8.Partnership Prospects**

 

Asof December 31, 2007, the Partnership owns working interests in sixdevelopmental prospects and seven exploratory prospects, upon which a total oftwenty-five wells have been drilled and four wells are drilling. All four ofthe wells drilling at December 31, 2007 completed drilling operationsduring the first quarter of 2008. Three of these wells, located on thePartnership’s Sand Dunes prospect, are currently shut-in (see Note 9), and thefourth well, located on another prospect, is undergoing completion operationsand is expected to begin production operations during the second quarter of2008.

 

ThePartnership has drilled eleven successful developmental wells, including thewell currently being completed, and three unsuccessful developmental wells. ThePartnership has drilled one successful exploratory well and six unsuccessfulexploratory wells. The successful exploratory well has ceased production as of December 31,2007. The Partnership has also participated in the drilling of eight wells onits Sand Dunes prospect (see Note 9). Five wells located on the Partnership’s SandDunes prospect in Eddy County, New Mexico completed drilling operations during2007, and three of the five tested for the presence of hydrocarbons in December 2007.Also, in December 2007, the Partnership began drilling three additionalwells on the Partnership’s Sand Dunes prospect, and completed drilling duringthe first quarter of 2008. The Partnership has expended substantially all ofits available capital in the drilling of these wells.

 

Theunproved properties owned by the Partnership at December 31, 2007 consistof un-drilled leasehold interests (11 potential drilling locations) in the SandDunes prospect. The Partnership does not have available capital to drill thesepotential locations. The Partnership may sell all or a part of these leasehold intereststo third parties or other Partnerships managed by Reef. However, thePartnership is permitted to borrow funds or utilize cash flows from existingproductive properties in order to conduct future developmental drilling on thisprospect. Partner approval would not need to be obtained for borrowingactivity, as the estimated additional cost is not in excess of 25% of thePartnership’s original aggregate capital contributions. Until such time as theproductive capability of the eight wells already drilled can be fully analyzed(see Note 9), it is unknown whether the Partnership will drill additional wellson the Sand Dunes prospect or sell all or a portion of the acreage. Theestimated cost to the Partnership of participating in future drilling operationsat its current working interest ownership is approximately $169,000-$225,000per location.

 

**9. Subsequent Events**

 

ThePartnership has participated in the drilling of eight wells on the Sand Dunesprospect located in Eddy County, New Mexico, five of which were drilled during2007 and three of which completed drilling operations during the first quarterof 2008. Three of the five Sand Dunes prospect wells drilled in 2007 tested forthe presence of hydrocarbons during short-term testing in 2007.  The remaining five wells were completed andunderwent short-term testing during the first quarter of 2008. All eight wellstested for the presence of hydrocarbons.

 

F-13

----

 

Reef Global Energy VII,L.P.

Notes to FinancialStatements (continued)

 

Ofthe eight Sand Dunes prospect wells, four wells are undergoing extended testingand evaluation in order to determine their potential commercial productivity.The Partnership estimates that it may take between 90 and 120 days from thedate of this report to finish the evaluation process. Following initial testingwhich confirmed the presence of oil and natural gas, the remaining four SandDunes prospect wells were temporarily shut in due to the high cost associatedwith salt water disposal and generator rental.

 

Currently,generators have been rented to power the four producing Sand Dunes prospectwells undergoing the evaluation process, and salt water produced is beingtrucked off-site by an independent vendor. In order to reduce overall costs,installation of electric service to the well-site locations is proceeding, anda more cost effective method of salt water disposal is being explored. To date,RELP, the operator of these wells, has been unsuccessful in locating a long-termeconomic solution for disposing of produced salt water; however, RELP iscurrently evaluating its options for salt water disposal, and estimates that itwill be at least 90 to 120 days from the date of this report for the Sand Dunesprospect to have electricity and efficient salt water disposal capability inplace.

 

Inaddition to the three Sand Dunes prospect wells drilling at December 31,2007, a fourth well on a different prospect was drilling at December 31,2007. The well finished drilling operations during February 2008, iscurrently being completed, and is expected to begin production during thesecond quarter of 2008.

 

**10. Supplemental Information on Oil & Natural Gas Explorationand Production Activities (unaudited)**

 

**Capitalized Costs**

 

Thefollowing table presents the Partnership’s aggregate capitalized costs relatingto oil and gas activities at the end of each of the years indicated:

 
| **December 31,**                                | ** ** | **2007**       | ** **    | **2006**      | ** ** |
|------------------------------------------------------|------------|----------------|---------------|---------------|------------|
| ** **                                           | ** ** | ** **     | ** **    | ** **    | ** ** |
| **Oil and natural gas properties:**                  | ** ** | ** **     | ** **    | ** **    | ** ** |
| Unproved properties                                  | ** ** | $              | 172,447       |          | $          | 3,211,249 | ** ** |
| Proved properties                                    |       | 20,816,082     |          | 1,825,482     |       |
| ** **                                           | ** ** | **20,988,529** | ** **    | **5,036,731** | ** ** |
| Less:                                                | ** ** | ** **     | ** **    | ** **    | ** ** |
| Accumulated depreciation, depletion and amortization |       | (1,075,372     | )             | —        |       |
| Property impairment                                  |       | (12,565,019    | )             | (1,825,482    | )          |
| **Total**                                            | ** ** | **$**          | **7,348,138** | ** **    | **$**      | **3,211,249** | ** ** |

 

F-14

----

 

Reef Global Energy VII,L.P.

Notes to FinancialStatements (continued)

 

**Costs Incurred**

 

Thefollowing table sets forth costs incurred in oil and gas exploration anddevelopment activities during the years ended December 31, 2007 and 2006:

 
| ** **                          | ** ** | **2007**   | ** **     | **2006**   | ** ** |
|-------------------------------------|------------|------------|----------------|------------|------------|
| ** **                          | ** ** | ** ** | ** **     | ** ** | ** ** |
| **Oil and natural gas properties:** |       |       |           |       |       |
| Exploration                         | ** ** | $          | 3,691,736      |       | $          | 3,482,548 | ** ** |
| Development                         |       | 12,260,062 |           | 1,554,183  |       |
| **Total**                           | ** ** | **$**      | **15,951,798** | ** ** | **$**      | **5,036,731** | ** ** |

 

**Results of Operations**

 

The following table sets forth results ofoperations from oil and gas producing activities for the years ended December 31,2007 and 2006.

 
| ** **                                          | ** ** | **2007**    | ** **      | **2006**   | ** ** |
|-----------------------------------------------------|------------|-------------|-----------------|------------|------------|
| ** **                                          | ** ** | ** **  | ** **      | ** ** | ** ** |
| **Oil and gas producing activities:**               | ** ** | ** **  | ** **      | ** ** | ** ** |
| Oil sales                                           | ** ** | $           | 1,102,915       |       | $          | — | ** ** |
| Natural gas sales                                   |       | 415,055     |            | —     |       |
| Production expenses                                 |       | (231,989    | )               | —     |       |
| Accretion of asset retirement obligation            |       | (4,643      | )               | —     |       |
| Depreciation , depletion and amortization           |       | (1,075,372  | )               | 1,825,482  |       |
| Property impairment expense                         |       | (10,739,537 | )               | —     |       |
| **Results of operations from producing activities** | ** ** | **$**       | **(10,533,571** | **)**      | **$**      | **1,825,482** | ** ** |
|                                                | ** ** | ** **  | ** **      | ** ** | ** ** |
| Depletion rate per BOE                              | ** ** | $           | 48.70           |       | $          | — | ** ** |

 

BOE = Barrels of Oil Equivalent (6 MCF equals 1 BOE)

 

**Oil and Natural Gas Reserves**

 

Thefollowing information describes changes during the year and balances of provedoil and natural gas reserves as of December 31, 2007. The Partnership hadno proved oil and natural gas reserves at December 31, 2006 and 2005. Thedefinitions used are in accordance with applicable Securities and ExchangeCommission regulations.

 

Provedoil and natural gas reserves are the estimated quantities of crude oil, naturalgas and natural gas liquids which geological and engineering data demonstratewith reasonable certainty to be recoverable in future years from knownreservoirs under existing economic and operating conditions, that is, pricesand costs as of the date the estimate is made.

 

F-15

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Reef Global Energy VII,L.P.

Notes to FinancialStatements (continued)

 

Pricesinclude consideration of changes in existing prices provided by contractualarrangements, but not escalations based upon future conditions. Additionaldevelopment costs required to recover these proved reserves are estimated atapproximately $274,087 as of December 31, 2007. All of the Partnership’sreserves are located in the United States.

 
| ** **                                                  | ** ** | **Oil  (BBL) (1)** | ** ** | **Gas  (mcf)** | ** ** | **BOE (2)** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|----------------|------------|-------------|------------|
| Net proved reserves for properties owned by the Partnership | ** ** | ** **              | ** ** | ** **     | ** ** | ** **  | ** ** |
| Reserves at December 31, 2006                          | ** ** | **—**              | ** ** | **—**     | ** ** | **—**  | ** ** |
| New discoveries                                             |       | 110,903                 |       | 804,018        |       | 244,906     |       |
| Production                                                  |       | (14,032                 | )          | (48,301        | )          | (22,082     | )          |
| Reserves at December 31, 2007                          |       | 96,871                  |       | 755,717        |       | 222,824     |       |

 

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(1)                Oil includesboth oil and natural gas liquids

(2)                BOE (barrels ofoil equivalent) is calculated by converting 6 MCF of natural gas to 1 BBLof oil. A BBL (barrel) of oil is one stock tank barrel, or 42 U.S. gallonsliquid volume, of crude oil or other liquid hydrocarbons.

 

**Standardized Measure of Discounted Future Net Cash Flows**

 

As required by theFinancial Accounting Standards Board, the standardized measure of discountedfuture net cash flows is computed by applying year-end prices, costs andlegislated tax rates and a discount factor of 10 percent to net provedreserves.

 

Changes in the demand foroil and natural gas, inflation, and other factors make such estimatesinherently imprecise and subject to substantial revision. This table should notbe construed to be an estimate of the current market value of the Partnership’sproved reserves.

 
| **December 31,**                                    | ** ** | **2007**   | ** **    |
|----------------------------------------------------------|------------|------------|---------------|
| Oil and natural gas properties owned by the Partnership: |       |       |          |
| Future cash inflows                                      | ** ** | $          | 13,857,388    | ** ** |
| Future production costs                                  |       | (4,277,881 | )             |
| Future development costs                                 |       | (274,087   | )             |
| Future net cash flows                                    | ** ** | **$**      | **9,305,420** | ** ** |
| Effect of discounting net cash flows at 10%              |       | (2,106,058 | )             |
| Discounted future net cash flows                         | ** ** | **$**      | **7,199,362** | ** ** |

 

F-16

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Reef Global Energy VII,L.P.

Notes to FinancialStatements (continued)

 

**Changes in the StandardizedMeasure of Discounted Future Net Cash flows Relating to Proved Oil and NaturalGas Reserves**

 
| **December 31,**                                    | ** ** | **2007**   | ** **    |
|----------------------------------------------------------|------------|------------|---------------|
| Oil and natural gas properties owned by the Partnership: |       |       |          |
| Standardized measure at beginning of period              |       | $          | —        | ** ** |
| Extensions and discoveries                               |       | 8,480,700  |          |
| Sales net of production costs                            |       | (1,281,338 | )             |
| Net increase                                             |       | 7,199,362  | ** **    |
| Standardized measure at end of year                      | ** ** | **$**      | **7,199,362** | ** ** |

 

**11. Supplementary Quarterly Financial Data (Unaudited)**

** **
| **Period from Inception  (December 29, 2005) to  December 31, 2005** | ** ** | **4th Qtr** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------|------------|
| Total oil and natural gas sales                                                                         | ** ** | $                | —     |       | $          | — | ** ** |
| Loss from operations                                                                                    |       | (50,475          | )          | (50,475    | )          |
| Net loss                                                                                                |       | (49,263          | )          | (49,263    | )          |
| Net loss per managing general partner unit                                                              |       | (20.58           | )          | (20.58     | )          |
| Net loss per general partner unit                                                                       |       | (729.60          | )          | (729.60    | )          |
| Net loss per limited partner unit                                                                       |       | (719.23          | )          | (719.23    | )          |
|                                                                                                         |            |                  |            |            |            |  |  |

 

Net loss allocated to partners other than the managing general partnerdiffers due to the allocation of interest income among the partners.

** **
| **Year ended December 31,  2006**    | ** ** | **1st Qtr** | ** ** | **2nd Qtr** | ** ** | **3rd Qtr** | ** ** | **4th Qtr** | ** ** | **Totals** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| Total oil and natural gas sales                     | ** ** | $                | —     |             | $          | —           |       | $                | —     |       | $          | — |   | $ | — | ** ** |
| Loss from operations                                |       | (19,153          | )          | (37,339          | )          | (545,482         | )          | (1,292,589       | )          | (1,894,563 | )          |
| Net income (loss)                                   |       | 17,602           |       | 148,668          |       | (319,810         | )          | (1,049,356       | )          | (1,202,896 | )          |
| Net income (loss) per managing general partner unit |       | (55.05           | )          | 587.25           |       | 11.04            |       | (794.98          | )          | (251.74    | )          |
| Net income (loss) per general partner unit          |       | 19.99            |       | 130.62           |       | (346.78          | )          | (1,094.09        | )          | (1,290.26  | )          |
| Net income (loss) per limited partner unit          |       | 29.92            |       | 127.62           |       | (346.78          | )          | (1,094.09        | )          | (1,283.33  | )          |
|                                                     |            |                  |            |                  |            |                  |            |                  |            |            |            |  |  |  |  |  |

 

Propertyimpairment expense included in the above amounts is as follows:

1stquarter — $0,   2nd quarter — $0,   3rd quarter — $525,746,  4th quarter — $1,299,736

 

F-17

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Reef Global Energy VII,L.P.

Notes to FinancialStatements (continued)

 

Net loss allocated to partners other than the managing general partnerdiffers due to the allocation of interest income among the partners.

 
| **Year ended December 31,  2007**    | ** ** | **1st Qtr** | ** ** | **2nd Qtr** | ** ** | **3rd Qtr** | ** ** | **4th Qtr** | ** ** | **Totals**  | ** ** |
|-----------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|-------------|------------|
| Total oil and natural gas sales                     |       | $                | 9,579      |             | $          | 147,135          |       | $                | 635,516    |        | $          | 725,740 |   | $ | 1,517,970 | ** ** |
| Income (loss) from operations                       |       | (3,967,639       | )          | (551,505         | )          | 221,902          |       | (6,371,932       | )          | (10,669,174 | )          |
| Net income (loss)                                   |       | (3,824,681       | )          | (451,722         | )          | 274,075          |       | (6,349,185       | )          | (10,351,513 | )          |
| Net income (loss) per managing general partner unit |       | (4,411.83        | )          | (228.53          | )          | 1,458.46         |       | (6,626.65        | )          | (9,808.55   | )          |
| Net income (loss) per general partner unit          |       | (3,908.03        | )          | (476.97          | )          | 219.93           |       | (6,524.25        | )          | (10,689.32  | )          |
| Net income (loss) per limited partner unit          |       | (3,908.03        | )          | (476.97          | )          | 219.93           |       | (6,524.25        | )          | (10,689.32  | )          |
|                                                     |            |                  |            |                  |            |                  |            |                  |            |             |            |  |  |  |  |  |

 

Propertyimpairment expense included in the above amounts is as follows:

1stquarter — $3,884,152,   2ndquarter — $540,144,   3rdquarter — $0,  4th quarter — $6,315,241

 

F-18

 

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**EXHIBIT INDEX**

** **
| 3.1        |       | Certificate of Limited Partnership (incorporated  by reference to Exhibit 3.1 to Form 8-A, SEC File  No. 000-52540, as filed with the SEC on March 30, 2007).                                                                                             |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                    |
| 3.2        | ** ** | Form of Limited Partnership  Agreement (incorporated by reference to Appendix A to the prospectus filed as  part of Post-Effective Amendment No. 2 to Registration Statement on  Form S-1, SEC File No.333-122935, filed with the SEC on July 7,  2006).  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                    |
| 10.1       |       | Letter Agreement, dated November 7,  2001, by and between Reef Partners LLC and Challenger Minerals Inc.  (incorporated by reference to Exhibit 10.2 of the Report on  Form 10-K of Reef Global Energy Ventures as filed with the SEC on  March 5, 2002). |
|       |       |                                                                                                                                                                                                                                                                          |
| 23.2       | *          | Consent  of Gleason Engineering.                                                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                    |
| 31.1       | *          | Certification  of Principal Executive Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934.                                                                                                                                                |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                    |
| 31.2       | *          | Certification  of Principal Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934.                                                                                                                                                |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                    |
| 32.1       | *          | Certification  of Principal Executive Officer pursuant to 18 U.S.C. §1350.                                                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                    |
| 32.2       | *          | Certification  of Principal Financial Officer pursuant to 18 U.S.C. §1350.                                                                                                                                                                                               |

 

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*Attachedherewith

 

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