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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

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

 

**For thequarterly period ended June 30, 2008**

 

**OR**

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

 

**For thetransition period from                to            **

 

**Commissionfile number 001-16749**

 

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**GeoPetro Resources Company**

(Exact name of registrant as specified in itscharter)

 

| **California**                                             | ** ** | **94-3214487**                        |
|------------------------------------------------------------|------------|---------------------------------------|
| (State of incorporation)                                   |       | (IRS Employer  Identification Number) |
|                                                       |       |                                  |
| **One  Maritime Plaza, Suite 700  San Francisco, CA** | ** ** | **94111**                             |
| (Address of principal  executive offices)                  |       | (Zip Code)                            |

 

**(415)398-8186**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  Yes  x      No  o.

 

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

 
| Large accelerated  filer  o          |   | Accelerated  filer  o         |
|------------------------------------------------|--------|-----------------------------------------|
|                                           |   |                                    |
| Non-accelerated  filer  x            |   | Smaller reporting  company  o |
| (Do not check if a smaller  reporting company) |   |                                    |

 

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

 

Therewere 32,784,646 shares of no par value common stock outstanding on August 7,2008.

 

 

 

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Table of Contents

 

**TABLE OFCONTENTS**

 
| PART I. FINANCIAL INFORMATION                                                                       |   |
|----------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial Statements                                                                        |   |
| Item 2. Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   |
| Item 3. Quantitative and Qualitative Disclosures  about Market Risk                                 |   |
| Item 4. Controls and Procedures                                                                     |   |
| PART II.  OTHER INFORMATION                                                                         |   |
| Item 1.  Legal Proceedings                                                                          |   |
| Item 1A.  Risk Factors                                                                              |   |
| Item 2. Unregistered Sales of Securities and Use of  Proceeds                                            |   |
| Item 3. Defaults Upon Senior Securities                                                             |   |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        |   |
| Item 5.  Other Information                                                                          |   |
| Item 6.  Exhibits                                                                                   |   |
| SIGNATURES                                                                                               |   |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.   FinancialStatements.**

 

**GEOPETRORESOURCES COMPANY**

 

**UNAUDITEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                               |       |              |       |                  |       |
| **Current assets:**                                                                                                                                                                      |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                |       | $                 | 4,517,792  |                  | $          | 4,294,565 |   |
| Trade accounts receivable—oil and gas sales                                                                                                                                         |       | 877,607           |       | 965,188               |       |
| Accounts receivable—other                                                                                                                                                           |       | 69,321            |       | 345,862               |       |
| Prepaid expenses                                                                                                                                                                         |       | 220,499           |       | 118,065               |       |
| Total current assets                                                                                                                                                                     |       | 5,685,219         |       | 5,723,680             |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **Oil and gas properties, at cost (full cost  method):**                                                                                                                                 |       |              |       |                  |       |
| Unevaluated properties                                                                                                                                                                   |       | 8,480,457         |       | 5,848,195             |       |
| Evaluated properties                                                                                                                                                                     |       | 47,903,241        |       | 47,428,750            |       |
| Less—accumulated depletion and impairment                                                                                                                                           |       | (15,955,307       | )          | (14,917,700           | )          |
| Net oil and gas properties                                                                                                                                                               |       | 40,428,391        |       | 38,359,245            |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **Furniture, fixtures and equipment, at cost,  net of depreciation**                                                                                                                     |       | 19,531            |       | 26,727                |       |
| **Other assets—deposits and other noncurrent  assets**                                                                                                                              |       | 7,436             |       | 6,954                 |       |
| **Total Assets**                                                                                                                                                                         |       | $                 | 46,140,577 |                  | $          | 44,116,606 |   |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                           |       |              |       |                  |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **Current Liabilities:**                                                                                                                                                                 |       |              |       |                  |       |
| Trade accounts payable                                                                                                                                                                   |       | $                 | 940,713    |                  | $          | 666,293 |   |
| Production taxes payable                                                                                                                                                                 |       | 237,467           |       | 407,246               |       |
| Other taxes payable                                                                                                                                                                      |       | 2,873             |       | 161,032               |       |
| Royalty owners payable                                                                                                                                                                   |       | 1,429,894         |       | 979,743               |       |
| Net profits interest payable                                                                                                                                                             |       | 355,679           |       | 147,513               |       |
| Total current liabilities                                                                                                                                                                |       | 2,966,626         |       | 2,361,827             |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **Asset Retirement Obligations**                                                                                                                                                         |       | 56,349            |       | 53,726                |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **Commitments and Contingencies (Notes 2 and  8)**                                                                                                                                       |       | —            |       | —                |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **Shareholders’ Equity:**                                                                                                                                                           |       |              |       |                  |       |
| Common stock, no par value; 100,000,000  shares authorized; 32,700,970 and 31,950,970 shares issued and  outstanding at June 30, 2008 and December 31, 2007, respectively |       | 51,867,733        |       | 51,492,733            |       |
| Additional paid-in capital                                                                                                                                                               |       | 2,279,820         |       | 2,219,109             |       |
| Accumulated deficit                                                                                                                                                                      |       | (11,029,951       | )          | (12,010,789           | )          |
| Total shareholders’ equity                                                                                                                                                          |       | 43,117,602        |       | 41,701,053            |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                      |       | $                 | 46,140,577 |                  | $          | 44,116,606 |   |

 

***See accompanying notes to these unaudited consolidated financialstatements.***

 

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**GEOPETRORESOURCES COMPANY**

 

**UNAUDITEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited**                                      | ** ** | **(Unaudited)**                                   | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| **Revenues**                                           | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil and gas sales                                      |       | $                                                   | 2,650,992  |                                              | $          | 2,388,850 |   | $ | 4,793,590 |   | $ | 4,212,192 |   |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Costs and expenses:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Lease operating expense                                |       | 646,559                                             |       | 418,830                                           |       | 990,382 |   | 846,107 |   |
| General and administrative                             |       | 604,090                                             |       | 767,563                                           |       | 1,319,513 |   | 1,526,919 |   |
| Net profits interest                                   |       | 260,868                                             |       | 244,384                                           |       | 488,929 |   | 428,588 |   |
| Impairment expense                                     |       | 63,766                                              |       | —                                            |       | 63,766 |   | — |   |
| Depreciation and depletion expense                     |       | 448,305                                             |       | 652,928                                           |       | 982,735 |   | 1,229,870 |   |
| Total costs and expenses                               |       | 2,023,588                                           |       | 2,083,705                                         |       | 3,845,325 |   | 4,031,484 |   |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Income from operations                                 |       | 627,404                                             |       | 305,145                                           |       | 948,265 |   | 180,708 |   |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Other Income and (Expense):                            |       |                                                |       |                                              |       |   |   |   |   |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense                                       |       | —                                              |       | (92,263                                           | )          | — |   | (178,445 | ) |
| Interest income                                        |       | 17,803                                              |       | 28,196                                            |       | 47,868 |   | 56,201 |   |
| Total other income (expense)                           |       | 17,803                                              |       | (64,067                                           | )          | 47,868 |   | (122,244 | ) |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Net Income Before Taxes                                |       | 645,207                                             |       | 241,078                                           |       | 996,133 |   | 58,464 |   |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Income tax expense                                     |       | (8,495                                              | )          | (2,300                                            | )          | (15,295 | ) | (2,300 | ) |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Net Income After Taxes                                 |       | 636,712                                             |       | 238,778                                           |       | 980,838 |   | 56,164 |   |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Net Income Available to Common Shareholders            |       | $                                                   | 636,712    |                                              | $          | 238,778 |   | $ | 980,838 |   | $ | 56,164 |   |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Earnings per Share:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                  |       | $                                                   | 0.02       |                                              | $          | 0.01 |   | $ | 0.03 |   | $ | 0.00 |   |
| Diluted                                                |       | $                                                   | 0.02       |                                              | $          | 0.01 |   | $ | 0.03 |   | $ | 0.00 |   |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Weighted Average Number of Common Shares  Outstanding: |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                  |       | 32,503,168                                          |       | 29,483,676                                        |       | 32,227,069 |   | 28,510,691 |   |
| Diluted                                                |       | 33,139,460                                          |       | 32,068,422                                        |       | 33,174,998 |   | 30,897,006 |   |

 

***See accompanying notes to these unaudited consolidated financialstatements***

 

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**GEOPETRORESOURCES COMPANY**

 

**UNAUDITEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,  2008**                          | ** ** | **June 30,  2007** | ** ** |
| **Cash Flows From Operating Activities:**                                          |       |                                             |       |   |   |
|                                                                               |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 980,838    |   | $ | 56,164 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                             |       |   |   |
| Depreciation and depletion                                                         |       | 982,735                                          |       | 1,229,870 |   |
| Share-based compensation expense                                                   |       | 60,711                                           |       | 69,870 |   |
| Non-cash interest expense                                                          |       | —                                           |       | 108,223 |   |
| Impairment expense                                                                 |       | 63,766                                           |       | — |   |
| Accretion of discount on asset retirement  obligations                             |       | 2,098                                            |       | 1,430 |   |
| Changes in operating assets and liabilities:                                       |       |                                             |       |   |   |
| (Increase) decrease in accounts receivable                                         |       | 87,581                                           |       | (308,189 | ) |
| Decrease in other current assets                                                   |       | 173,625                                          |       | 16,391 |   |
| Increase (decrease) in other current  liabilities                                  |       | 604,801                                          |       | (233,609 | ) |
| Increase in other long term liabilities                                            |       | 525                                              |       | 953 |   |
| Net cash provided by operating activities                                          |       | 2,956,680                                        |       | 941,103 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash Flows from Investing Activities:**                                          |       |                                             |       |   |   |
|                                                                               |       |                                             |       |   |   |
| Oil and gas property expenditures                                                  |       | (3,106,752                                       | )          | (1,430,493 | ) |
| Acquisition of furniture,  fixtures & equipment                           |       | (1,701                                           | )          | (5,881 | ) |
| Decrease in related party notes receivable                                         |       | —                                           |       | 1,000,000 |   |
| Net cash used in investing activities                                              |       | (3,108,453                                       | )          | (436,374 | ) |
|                                                                               |       |                                             |       |   |   |
| **Cash Flows from Financing Activities:**                                          |       |                                             |       |   |   |
|                                                                               |       |                                             |       |   |   |
| Proceeds from sale of common shares, option  and warrant exercises, net            |       | 375,000                                          |       | 620,644 |   |
| Proceeds from promissory notes, net                                                |       | —                                           |       | 1,000,000 |   |
| Payments of loan fee                                                               |       | —                                           |       | (57,000 | ) |
| Repayments of promissory notes                                                     |       | —                                           |       | (100,000 | ) |
| Net cash provided by financing activities                                          |       | 375,000                                          |       | 1,463,644 |   |
|                                                                               |       |                                             |       |   |   |
| **Net Increase in Cash and Cash Equivalents:**                                     |       | 223,227                                          |       | 1,968,373 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash and Cash Equivalents:**                                                     |       |                                             |       |   |   |
| Beginning of period                                                                |       | 4,294,565                                        |       | 734,561 |   |
| End of period                                                                      |       | $                                                | 4,517,792  |   | $ | 2,702,934 |   |
|                                                                               |       |                                             |       |   |   |
| **Supplemental Disclosure of Cash Flow  Information:**                             |       |                                             |       |   |   |
| Cash paid for interest                                                             |       | $                                                | —     |   | $ | 70,222 |   |
|                                                                               |       |                                             |       |   |   |
| Cash paid for income taxes                                                         |       | $                                                | 15,295     |   | $ | — |   |

 

***See accompanying notes to these unaudited consolidated financialstatements.***

 

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**GEOPETRORESOURCES COMPANY**

 

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             ****BASIS OF PRESENTATION AND USE OF ESTIMATES:**

 

The interim consolidatedfinancial statements of GeoPetro Resources Company (“we,” “us,” “our,” “GeoPetro”or the “Company”) are unaudited and contain all adjustments (consistingprimarily of normal recurring accruals) necessary for a fair statement of theresults for the interim periods presented. Results for interim periods are notnecessarily indicative of results to be expected for a full year or forpreviously reported periods due in part, but not limited to, the volatility incrude oil and natural gas commodity prices, interest rates, estimates ofreserves, drilling risks, geological risks, transportation restrictions, thetiming of acquisitions, product demand, market competition, interruption inproduction and our ability to obtain additional capital. You should read theseconsolidated interim financial statements in conjunction with the auditedconsolidated financial statements and notes thereto included in GeoPetro’sAnnual Report on Form 10-K for the year ended December 31, 2007.

 

The accompanying financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) and include theaccounts of GeoPetro and its wholly-owned subsidiaries. Intercompany accountsand transactions are eliminated. In preparing the accompanying financialstatements, management has made certain estimates and assumptions that affectreported amounts in the financial statements. Actual results may differ fromthose estimates. Significant assumptions are required in the valuation of provedoil and natural gas reserves, which may affect the amount at which oil andnatural gas properties are recorded. The computation of share-basedcompensation expense requires assumptions such as volatility, expected life andthe risk-free interest rate. It is at least reasonably possible these estimatescould be revised in the near term, and these revisions could be material.

 

Certain reclassificationshave been made to prior period financial statements to conform with the currentpresentation.

 

**2.****             ****LIQUIDITY:**

 

We hold working interests inundeveloped leases, seismic options, lease options and foreign concessions andwe have participated in seismic surveys and the drilling of test wells onundeveloped properties. Further leasehold acquisitions and seismic operationsare planned for 2008 and future periods.  In addition, exploratory anddevelopmental drilling is scheduled during 2008 and future periods on ourundeveloped properties.  We anticipate that these exploration activitiestogether with others that may be entered into may impose financial requirementswhich may exceed our existing working capital. We may need to raise additionalequity or enter into new borrowing arrangements to finance our continuedparticipation in planned activities. Further, we have farmed-out certain of ourprojects.  However, if additional financing is not available, we may becompelled to reduce the scope of our business activities. If we are unable tofund planned expenditures, it may be necessary to forfeit our interest in proposedwells, farm-out our interest in proposed wells, sell a portion of our interestsin prospects and use the sale proceeds to fund participation for a lesserinterest, reduce general and administrative expenses, or a combination of allof these factors.

 

**3.****             ****RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:**

 

In September 2006, theFASB issued SFAS No. 157, *FairValue Measurements*, which we adopted on January 1, 2008. SFAS 157 provides a definition of fair value, establishes a framework formeasuring fair value, and expands disclosures about fair value measurements forfuture transactions. The adoption of this pronouncement did not impact ourfinancial position or results of operations.

 

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In December 2007, theFASB issued SFAS No. 141 (revised 2007), *BusinessCombinations*(“SFAS No. 141R”). SFAS No. 141R, which amongother things, establishes principles and requirements for how the acquirer in abusiness combination (i) recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquired business, (ii) recognizes andmeasures the goodwill acquired in the business combination or a gain from abargain purchase, and (iii) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination. SFAS No. 141R is effective for fiscalyears beginning on or after December 15, 2008, with early adoptionprohibited. This standard will change our accounting treatment for businesscombinations on a prospective basis.

 

In December 2007, theFASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements, an Amendment of ARB No. 51*(“SFAS No. 160”). SFAS No. 160 establishes accounting and reportingstandards for noncontrolling interests in a subsidiary and for thedeconsolidation of a subsidiary. Minority interests will be recharacterized asnoncontrolling interests and classified as a component of equity. It alsoestablishes a single method of accounting for changes in a parent’s ownershipinterest in a subsidiary and requires expanded disclosures. This statement iseffective for fiscal years beginning on or after December 15, 2008, withearly adoption prohibited. We do not expect the adoption of this statement willhave a material impact on our financial position or results of operations.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities*,an amendment of FASB Statement No. 133.  SFAS 161 amends andexpands the disclosure requirements of FASB Statement No. 133 with theintent to provide users of financial statement with an enhanced understandingof (i) how and why an entity uses derivative instruments, (ii) howderivative instruments and the related hedged items are accounted for underFASB Statement No. 133 and its related interpretations, and (iii) howderivative instruments and related hedged items affect and entity’s financialposition, financial performance and cash flows. SFAS No. 161 is effectivefor financial statements issued for years and interim periods beginning after November 15,2008. We do not expect the adoption of SFAS No. 161 to have a significanteffect on our reported financial position or results of operations.

 

**4.****             ****EARNINGS PER COMMON SHARE:**

 

Basic earnings per shareexcludes dilution and is calculated by dividing net income or loss by theweighted average number of common shares outstanding for the period. Dilutedearnings per share reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock or resulted in the issuance of common stock that then sharedfrom the earnings of the entity. There were 2,196,230 and 196,375 outstandingcommon stock warrants as well as 990,000 and 20,000 outstanding common stockoptions at  June 30, 2008 and June 30,2007, respectively,  that were notincluded in the diluted EPS calculation because the warrants’ and options’exercise prices were greater than the average market price of the commonshares.

 

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| ** **                                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Numerators:                                       |       |                                                |       |                                              |       |   |   |   |   |
| Net Income Available to Common Shareholders       |       | $                                                   | 636,712    |                                              | $          | 238,778 |   | $ | 980,838 |   | $ | 56,164 |   |
|                                              |       |                                                |       |                                              |       |   |   |   |   |
| Denominator:                                      |       |                                                |       |                                              |       |   |   |   |   |
| Weighted Average Shares Outstanding               |       | 32,503,168                                          |       | 29,483,676                                        |       | 32,227,069 |   | 28,510,691 |   |
| Outstanding Options                               |       | 585,651                                             |       | 2,237,546                                         |       | 889,226 |   | 2,123,329 |   |
| Outstanding Warrants                              |       | 50,641                                              |       | 347,200                                           |       | 58,703 |   | 262,986 |   |
| Average Number of Shares for Diluted  Calculation |       | 33,139,460                                          |       | 32,068,422                                        |       | 33,174,998 |   | 30,897,006 |   |
| Diluted EPS                                       |       | $                                                   | 0.02       |                                              | $          | 0.01 |   | $ | 0.03 |   | $ | 0.00 |   |

 

**5.****                ****INCOME TAXES:**

 

The Company files income taxreturns in the U.S. federal jurisdiction and various states.  There arecurrently no federal or state income tax examinations underway. Furthermore, the Company is no longer subject to U.S. federal income taxexaminations by the Internal Revenue Service for tax years before 2005 and forstate and local tax authorities for tax years before 2002.  The Companydoes, however, have net operating losses generated in tax years 1997 and after,which remain open for examination.

 

The Company adopted theprovisions of FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes, on January 1, 2007.  The Company does not foresee thetotal amounts of unrecognized tax benefits significantly increasing within thenext 12 months.  Furthermore, no corresponding interest and penalties havebeen accrued as the Company is in a net operating loss position.

 

The Company provides forincome taxes in accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (“SFAS 109”). SFAS 109 requires the recognition ofdeferred tax assets and liabilities for the expected future tax consequences oftemporary differences between the financial statement carrying amounts and thetax basis of the assets and liabilities. Where it is more likely than not thata tax benefit will not be realized, a valuation allowance is recorded to reducethe deferred tax asset to its realizable value.

 

A valuation allowance hasbeen provided against the Company’s net deferred tax assets as the Companybelieves that it is more likely than not that the net deferred tax assets willnot be realized.

 

The effective tax rate forthe six month period ended June 30, 2008 and for the year ended December 31,2007 is 3.1 percent, and differs from statutory rates primarily due to changesin the valuation allowance.

 

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**6.****                ****COMMON STOCK OPTIONS*:***

 

There were no materialchanges to common stock options from those disclosed in the audited annualconsolidated financial statements for the year ended December 31, 2007except as follows:

 

On June 27, 2008, theCompany issued 820,000 common stock options to officers, directors, andemployees at a price of $4.28 per share with a term of 5 years from the dateissued (expiring  June 26, 2013) andshall vest over five years pursuant to the Stock Option Plan.

 

The weighted average fairvalue of options granted on June 27, 2008, as calculated under theBlack-Scholes pricing model is $2.17. The fair value of each new issued optiongrant is estimated on the date of grant using the Black-Scholes option pricingmodel with the following weighted-average assumptions: risk-free,weighted-average interest rate of 3.5% based on the U.S. Treasury yield curvein effect at the time of grant, expected dividend yield of 0 percent, expectedlife of 5 years from the date of grant, and expected volatility of 65.68%.

 

On April 25, 2008, anofficer and director exercised options to purchase 750,000 shares of commonstock at an exercise price of $0.50 per share. The options were granted on April 30,1996 and had an expiration date of April 30, 2008.

 

The options outstanding asof June 30, 2008 have the following contractual lives:

 
| **Number of  Options  Outstanding** | ** ** | **Number of  Options  Exercisable** | ** ** | **Exercise  Prices** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|----------------------|------------|-------------------------------------------------------------|------------|
|                                     | 1,750,000  |                                     | 1,730,000  |                 | 2.10       |                                                        | 4.92       |   |
|                                     | 150,000    |                                     | 30,000     |                 | 3.85       |                                                        | 2.79       |   |
|                                     | 10,000     |                                     | 6,000      |                 | 4.25       |                                                        | 1.51       |   |
|                                     | 820,000    |                                     | —     |                 | 4.28       |                                                        | 5.00       |   |
|                                     | 10,000     |                                     | 6,000      |                 | 6.25       |                                                        | 1.94       |   |
|                                     | 2,740,000  |                                     | 1,772,000  |                 |       |                                                        |       |   |

 

The total intrinsic value ofoptions outstanding was approximately $3,366,500 and $8,473,700 at June 30,2008 and 2007, respectively. The intrinsic value for exercisable options was$3,309,100 and $7,762,500 at June 30, 2008 and 2007, respectively.

 

As of June 30, 2008,there are 1,772,000 options which are exercisable. The remaining 968,000options will become exercisable over the next five years. The stockcompensation expense related to the unvested awards is $1,934,551.

 

**7.****                ****COMMON STOCK WARRANTS*:***

 

There were no new warrantsissued during the first six months of 2008.

 

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**8.****                ****COMMITMENTS AND CONTINGENCIES*:***

 

There are no materialchanges to commitments and contingencies from those disclosed in the auditedannual consolidated financial statements for the year ended December 31,2007 except as follows:

 

*South Dry Hollow Prospect, Lavaca County, Texas*—On February 26, 2008, the Company’ssubsidiary, South Texas GeoPetro LLC, entered into a participation agreementwherein it acquired a 15% non-operated working interest in the South Dry HollowProspect, which is located in Lavaca County, Texas.  On February 25, 2008, the Company paid a$150,000 prospect fee and advanced $1.1 million to drill the Eichhorn #1 Well.The Eichorn #1 Well was drilled to a depth of approximately 16,650 feet and iscurrently being evaluated for production.

 

**9.****                ****SUBSEQUENT EVENTS*:***

 

On July 2, 2008, the Companyissued 83,676 shares of our common stock pursuant to a cashless exercise of175,125 common stock warrants.

 

*Alaska – Cook Inlet CMBProject**:* On July 31, 2008, the Company enteredinto a third amendment with Pioneer Oil Company (“Pioneer”).  The amendment provides that the Company willadvance to Pioneer the sum of $1,168,093 on or before August 10, 2008,which represents the second and final payment for leases comprising116,806 acres onshore in Cook Inlet, Alaska .  The amendment further provides that the workprogram requiring $2.5 million in expenditures by GeoPetro has been eliminatedin its entirety.

 

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*Thefollowing discussion and analysis should be read in conjunction withaccompanying financial statements and related notes included elsewhere in thisreport. It contains forward looking statements that reflect our future plans,estimates, beliefs and expected performance. The forward looking statements aredependent upon events, risks and uncertainties that may be outside our control.Our actual results could differ materially from those discussed in theseforward looking statements.*

 

*Factorsthat could cause or contribute to such differences include, but are not limitedto, market prices for natural gas and oil, economic and competitive conditions,regulatory changes, estimates of proved reserves, potential failure to achieveproduction from development drilling projects, capital expenditures and otheruncertainties, as well as those factors discussed below and elsewhere in thisreport, particularly in “Risk Factors” and “Cautionary Notes Regarding ForwardLooking Statements”, all of which are difficult to predict and which expresslyqualify all subsequent oral and written forward-looking statements attributableto us or persons acting on our behalf. In light of these risks, uncertaintiesand assumptions, the forward looking events discussed may not occur. We do nothave any intention or obligation to update forward-looking statements includedin this report after the date of this report, except as required by law.*

 

**Overview**

 

We arean oil and gas company in the business of exploring and developing oil andnatural gas reserves on a worldwide basis. Since inception, we have conductedleasehold acquisition, exploration and drilling activities on our NorthAmerican, Australian and Indonesian prospects. These projects currentlyencompass approximately 372,317 gross (158,401 net) acres, consisting ofmineral leases, production sharing contracts and exploration permits that giveus the right to explore for, develop and produce oil and natural gas. Most ofthese properties are in the exploration, appraisal or development drillingphase and have not begun to produce revenue from the sale of oil and naturalgas. Excluding minor interest and dividend income, our only significant cashinflows until 2003 were the recovery of capital invested in projects throughsale or other divestiture of interests in oil and gas prospects to industry partners.

 

Since2003, substantially all of our revenue has been generated from natural gassales derived from the Magness #1, the Fannin #1, and the Mitchell #1 wells inthe Madisonville Field in East Texas under spot gas purchase contracts atmarket prices. Natural gas sales from the Madisonville Field are expected toaccount for substantially all of our revenues for 2008. We expect the majorityof our capital expenditures in 2008 to be spent on the Madisonville Project.

 

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**Resultsof Operations**

 

Thefinancial information with respect to the six months ended June 30, 2008and 2007 that is discussed below is unaudited. In the opinion of management,such information contains all adjustments, consisting only of normal recurringaccruals, necessary for a fair presentation of the results for suchperiods.  The results of operations for interim periods are not necessarilyindicative of the results of operations for the full fiscal years.

 
| ** **                                         | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **June 30, 2008**    | ** ** | **June 30, 2007** | ** ** |
| ** **                                         | ** ** | **(unaudited)**                | ** ** | **(unaudited)** | ** ** |
| **Consolidated Statement of Operations:**          |       |                           |       |   |   |
| **Revenues**                                       |       | $                              | 4,793,590  |   | $ | 4,212,192 |   |
| **Lease operating expense**                        |       | 990,382                        |       | 846,107 |   |
| **General and administrative**                     |       | 1,319,513                      |       | 1,526,919 |   |
| **Net profits expense**                            |       | 488,929                        |       | 428,588 |   |
| **Impairment expense**                             |       | 63,766                         |       | — |   |
| **Depreciation and depletion expense**             |       | 982,735                        |       | 1,229,870 |   |
| **Earnings from operations**                       |       | 948,265                        |       | 180,708 |   |
| **Net income**                                     |       | 980,838                        |       | 56,164 |   |
| **Net income attributable to common shareholders** |       | $                              | 980,838    |   | $ | 56,164 |   |

 

**IndustryOverview for the six months ended June 30, 2008**

 

Thefirst half year of 2008 saw strengthening natural gas prices. The Houston ShipChannel price, the index price prevailing in the locale of our MadisonvilleProject in Madison County, Texas, as quoted in Gas Daily as of June 30,2008, was $12.94 per Mcf versus $6.81 per Mcf as of December 31, 2007.Higher natural gas prices this year and next reflect continued strong demand,high oil prices, and the need to replenish more stocks this year than lastyear, among other factors.

 

**CompanyOverview for the six months ended June 30, 2008**

 

Ournet income after taxes for the six months ended June 30, 2008 was$980,838. From our inception, through mid-2003, we only received nominalrevenues from our oil and natural gas activities, while incurring substantialacquisition and exploration costs and overhead expenses which have resulted inan accumulated deficit through June 30, 2008 of $11,029,951. Commencing inMay 2003, we placed our Madisonville Project into production.Substantially all of our oil and natural gas sales for the six months ended June 30,2008 were derived from our Madisonville Project, from three producing wells,the UMC Ruby Magness #1 well (the “Magness Well”), the Angela Farris Fannin #1well (the “Fannin Well”), and the Mitchell #1 well (the “Mitchell Well”).

 

**Comparisonof Results of Operations for the three months ended June 30, 2008 and 2007**

 

Duringthe three months ended June 30, 2008, we had oil and natural gas revenuesof $2,650,992. Our net production was 374,534 Mcf of natural gas at an averageprice of $7.08 per Mcf. During the three months ended June 30, 2007, wehad oil and natural gas revenues of $2,388,850. Our net production for thethree months ended June 30, 2007 was 583,486 Mcf at an average price of$4.09 per Mcf. Revenues increased in the three months ended June 30, 2008as compared to the prior year period due to higher natural gas prices. The 36%lower production volumes for the three months ended June 30, 2008 ascompared to the same period of 2007 was due to the Magness #1 well shut-in duringthe workover. Natural gas prices were approximately 73% higher for the threemonths ended June 30, 2008 versus the same period in 2007.

 

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Duringthe three months ended June 30, 2008, we incurred lease operating expenseof $646,559. Our average lifting cost for the 2008 period was $1.73 per Mcf.During the three months ended June 30, 2007, we incurred lease operatingexpense of $418,830. Our average lifting cost for the 2007 period was $0.72 perMcf. The average lifting cost per Mcf in 2008 was higher due to major workoversperformed on the Magness well during that period.

 

Duringthe three months ended June 30, 2008, we incurred net profits interestexpense of $260,868 associated with the Magness, the Fannin, and the Mitchellwells as compared to $244,384 during the three months ended June 30, 2007.The 7% increase resulted from higher gas prices in the three months ended June 30,2008 versus 2007. The net profit interest is 12.5% of the net operating profitfrom our Magness, Fannin, and Mitchell wells.

 

Generaland administrative (“**G&A**”)expenses for the three months ended June 30, 2008 were $604,090 comparedto $767,563 for the three months ended June 30, 2007. This represents a$163,473 or 21% decrease over the prior year period. The higher G&A expenseincurred in 2007 was due primarily to costs associated with our initial SECregistration and American Stock Exchange listing.

 

The 2008 second quarter impairment expense was$63,766 versus $0 for the 2007 second quarter. The 2008 impairment expense wasthe remaining balance due to a dry hole drilled in 2007 in the Wildwood projectin Canada. Under the full cost accounting, the impairment is evaluated based oneach cost center on a country by country basis.

 

Depreciationand depletion expense for the three months ended June 30, 2008 was$448,305 as compared to $652,928 in the same period of 2007, which amountsprimarily represent depletion of the oil and gas properties for the threemonths ended June 30, 2008 and 2007, respectively. The 31% decrease wasdue to lower net production in the three months period of 2008.

 

Incomefrom operations totaled $627,404 for the three months ended June 30, 2008as compared to $305,145 for the same period of 2007. The increase in the incomefrom operations was due primarily to higher gas prices and lower expenses.

 

Otherincome for the three months ended June 30, 2008 and 2007 consisted ofinterest income in the amount of $17,803 and $28,196, respectively.  The higher interest income in the threemonths ended June 30, 2007 was due primarily to interest received from anote receivable. The note was paid off on June 29, 2007.

 

Duringthe three months ended June 30, 2008 and 2007, we incurred interestexpense of $0 and $92,263, respectively. We had no outstanding debt during thesecond quarter of 2008 since all loans were paid in full in October 2007.

 

Netincome before taxes for the three months ended June 30, 2008 was $645,207as compared to net income before taxes of $241,078 for the three months ended June 30,2007. The increase in net income during the three months ended June 30,2008 was primarily due to higher gas prices and lower expenses.

 

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Incometax expense for the three months ended June 30, 2008 was $8,495 comparedto $2,300 in the same period of 2007. The increased income tax expense was dueto alternative minimum tax incurred in the second quarter of 2008.

 

**Comparisonof Results of Operations for the six months ended June 30, 2008 and 2007**

 

Duringthe six months ended June 30, 2008, we had oil and natural gas revenues of$4,793,590, and our net production was 825,184 Mcf of natural gas at an averageprice of $5.81 per Mcf. During the six months ended June 30, 2007, we hadoil and natural gas revenues of $4,212,192 and our net production was 1,108,338Mcf at an average price of $3.80 per Mcf. Revenues increased in the six monthsended June 30, 2008 as compared to the prior year period due to highernatural gas prices. The 26% lower production volumes for the six months ended June 30,2008 as compared to the same period of 2007 was due to shut-ins during the workoveractivity on the Company’s wells. Natural gas prices were approximately 53%higher for the six months ended June 30, 2008 versus the same period in2007.

 

Duringthe six months ended June 30, 2008, we incurred lease operating expense of$990,382. Our average lifting cost for the 2008 period was $1.20 per Mcf.During the six months ended June 30, 2007, we incurred lease operatingexpense of $846,107. Our average lifting cost for the 2007 period was $0.76 perMcf. The average lifting cost per Mcf in 2008 was higher due to major workoversperformed on the Magness well during that period.

 

Duringthe six months ended June 30, 2008, we incurred net profits interestexpense of $488,929 associated with the Magness, the Fannin, and the Mitchellwells as compared to $428,588 during the six months ended June 30, 2007.The 14% increase resulted from higher gas prices in the six months ended June 30,2008 versus 2007. The net profit interest is 12.5% of the net operating profitfrom our Magness, Fannin, and Mitchell wells.

 

Generaland administrative (“**G&A**”)expenses for the six months ended June 30, 2008 were $1,319,513 comparedto $1,526,919 for the six months ended June 30, 2007. This represents a$207,406 or 14% decrease over the prior year period. The higher G&A expenseincurred in 2007 was due primarily to costs associated with our initial SECregistration and American Stock Exchange listing.

 

The2008 six months ended June 30, the impairment expense was $63,766 versus$0 for the same period of 2007. The 2008 impairment expense was the remainingcosts associated with a dry hole drilled in 2007 in the Wildwood project inCanada. Under the full cost accounting, the impairment is evaluated based oneach cost center on a country by country basis.

 

Depreciationand depletion expense for the six months ended June 30, 2008 was $982,735as compared to $1,229,870 in the same period of 2007, which amounts primarilyrepresent depletion of the oil and gas properties for the six months ended June 30,2008 and 2007, respectively. The 20% decrease was due to lower net productionin the six months period of 2008.

 

Incomefrom operations totaled $948,265 for the six months ended June 30, 2008 ascompared to income from operations of $180,708 for the six months ended June 30,2007. The increase in the income from operations was due primarily to highergas prices and lower expenses.

 

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Otherincome for the six months ended June 30, 2008 and 2007 consisted ofinterest income in the amount of $47,868 and $56,201, respectively. The higherinterest income in 2007 was due primarily to interest received from a notereceivable. The note was paid off on June 29, 2007.

 

Duringthe six months ended June 30, 2008 and 2007, we incurred interest expenseof $0 and $178,445, respectively. We had no outstanding debt during the sixmonths ended June 30, 2008 since all loans were paid in full in October 2007.

 

Net incomebefore taxes for the six months ended June 30, 2008 was $996,133 ascompared to net income before taxes of $58,464 for the six months ended June 30,2007. The increase in net income during the six months ended June 30, 2008was primarily due to higher gas price and lower expenses.

 

Incometax expense for the six months ended June 30, 2008 was $15,295 compared to$2,300 in the same period of 2007. The increased income tax expense was due toalternative minimum tax incurred in the first half year of 2008.

 

**RecentDevelopments**

 

In2005 we secured a commitment from Madisonville Gas Processing, LP (“MGP”) toinstall and make operational additional treating facilities capable of treating50 MMcf/d, which combined with the capacity of the current in-service treatingfacilities will represent a total designed treating capacity of 68 MMcf/d forthe Madisonville treatment plant.  InOctober 2007, MGP informed us that they had partially completed construction ofthe additional treating facilities. Subsequently in November 2007, MGP commenced phase-in of the additionaltreating capacity reaching a temporary peak inlet volume of 21 mmcf/d out ofthe total contracted 50 mmcf/d design capacity at such facilities. However,operations at the additional treating facilities were suspended by MGP inDecember 2007 in order to make the necessary modifications to effectively dealwith the presence of diamondoids  in thegas stream produced from the Rodessa Formation. A diamondoid is a rare,naturally occurring compound that can segregate out of the gas stream upon adecrease in temperature and pressure and as such, could cause operationalproblems for the nitrogen rejection portion of the additional treatingfacilities.  MGP previously obtained adetail laboratory composition analysis of the diamondoids, conducted a pilottest of a diamondoid removal process at the field level and is currentlydesigning modifications to the operating system.  MGP indicates that removal of the diamondoidswill require flowing the natural gas stream through a hydrocarbon contactorafter the gas stream has had the hydrogen sulfide and carbon dioxideremoved.  Through this contactor process,the hydrocarbons will absorb the diamondoids from the gas stream prior to entryinto the nitrogen removal tower.  In the meantime, the existing, inservice portion of the plant continues to treat inlet gas.

 

On April 25,2008, an officer and director exercised options to purchase 750,000 shares ofcommon stock at an exercise price of $0.50 per share. The options were grantedon April 30, 1996 and had an expiration date of April 30, 2008.

 

On February 26,2008, the Company’s subsidiary, South Texas GeoPetro LLC, entered into aparticipation agreement wherein it acquired a 15% non-operated working interestin the South Dry Hollow Prospect, which is located in Lavaca County, Texas. On February 25,2008, the Company paid a $150,000 prospect fee and advanced $1.1 million todrill the Eichhorn #1 Well. The Eichorn #1 Well was drilled to a depth ofapproximately 16,650 feet and is currently being evaluated for production.

 

On July 31,2008, the Company entered into a third amendment with Pioneer Oil Company (“Pioneer”).  The amendment provides that the Company willadvance to Pioneer the sum of $1,168,093 on or before August 10, 2008,which represents the second and final payment for leases comprising116,806 acres onshore in Cook Inlet, Alaska.  The amendment further provides that the workprogram requiring $2.5 million in expenditures by GeoPetro has been eliminatedin its entirety.

 

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**Liquidityand Capital Resources**

 

We hada working capital surplus of $2,718,593 at June 30, 2008 versus $3,361,853at December 31, 2007. Our working capital decreased during six monthsended June 30, 2008 due primarily to our participation in the drilling ofa well in South Texas.

 

Wehave historically financed our business activities principally throughissuances of common shares, promissory notes and common share purchase warrantsin private placements and an initial public offering. However, during the sixmonths ended June 30, 2008, we had minor financing activities. Thesefinancings are summarized as follows:

 
| ** **                                                     | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **June 30, 2008**    | ** ** | **June 30, 2007** | ** ** |
| Proceeds from sale of common shares and warrant exercises, net |       | $                              | 375,000    |   | $ | 620,644 |   |
| Proceeds from promissory notes                                 |       | —                         |       | 1,000,000 |   |
| Payments of loan fee                                           |       | —                         |       | (57,000 | ) |
| Repayments of promissory notes                                 |       | —                         |       | (100,000 | ) |
|                                                           |       |                           |       |   |   |
| Net cash provided by financing activities                      |       | $                              | 375,000    |   | $ | 1,463,644 |   |

 

Thenet proceeds of our equity financings have been primarily invested in oil andnatural gas properties totaling $3,106,752 and $1,430,493 for the six monthsended June 30, 2008 and 2007, respectively.

 

Ourcash balance at June 30, 2008 was $4,517,792 compared to a cash balance of$4,294,565 at December 31, 2007. The change in our cash balance issummarized as follows:

 
| Cash balance at December 31, 2007       |   | $          | 4,294,565 |   |
|----------------------------------------------|--------|------------|-----------|--------|
| Sources of cash:                             |   |       |      |
| Cash provided by operating activities        |   | 2,956,680  |      |
| Cash provided by financing activities        |   | 375,000    |      |
| Total sources of cash including cash on hand |   | 7,626,245  |      |
|                                         |   |       |      |
| Uses of cash:                                |   |       |      |
| Cash used in investing activities:           |   |       |      |
| Oil and natural gas property expenditures    |   | (3,106,752 | )         |
| Furniture, fixtures and equipment            |   | (1,701     | )         |
| Total uses of cash                           |   | (3,108,453 | )         |
|                                         |   |       |      |
| Cash balance at June 30, 2008           |   | $          | 4,517,792 |   |

 

Ourcurrent cash and cash equivalents and anticipated cash flow from operations maynot be sufficient to meet our working capital, capital expenditures and growthstrategy requirements for the foreseeable future. See “Outlook for 2008” for adescription of our expected capital expenditures for 2008. If we are unable togenerate revenues necessary to finance our operations over the long-term, wemay have to seek additional capital through the sale of our equity orborrowing. As noted in the annual report on form 10-K for the year ended December 31,2007 in “Recent Developments,” we periodically borrowed funds pursuant to shortterm promissory notes to finance our activities.

 

Asdiscussed in the “Outlook for 2008/2009”, we are forecasting capitalexpenditures of $29.2 million during 2008. We will need to obtain adequatesources of cash to fund our anticipated capital expenditures through the end of2008 and to follow through with plans for continued investments in oil and gasproperties. Our success, in part, depends on our ability to generate additionalfinancing and farm-out certain of our projects.

 

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Sinceour inception, we have participated as a working interest owner in theacquisition of undeveloped leases, seismic options, lease options and foreignconcessions and have participated in seismic surveys and the drilling of testwells on our undeveloped properties. Further leasehold acquisitions, drillingand seismic operations are planned for 2008 and future periods. In addition,exploratory and development drilling is scheduled during 2008 and futureperiods on our undeveloped properties. It is anticipated that these explorationactivities together with others that may be entered into will impose financialrequirements which will exceed our existing working capital. We may raiseadditional equity and/or debt capital, and we may farm-out certain of ourprojects to finance our continued participation in planned activities. However,if additional financing is not available, we may be compelled to reduce thescope of our business activities. If we are unable to fund plannedexpenditures, it may be necessary to:

 
| 1.     |   | forfeit our interest in  wells that are proposed to be drilled;                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                         |
| 2.     |   | farm-out our interest  in proposed wells;                                                                                    |
|   |   |                                                                                                                         |
| 3.     |   | sell a portion of our  interest in prospects and use the sale proceeds to fund our participation for  a lesser interest; and |
|   |   |                                                                                                                         |
| 4.     |   | reduce general and  administrative expenses.                                                                                 |

 

**ContractualObligations**

 

Wehave assumed various contractual obligations and commitments in the normalcourse of our operations and financing activities.  We have describedthese obligations and commitments in our “Management’s Discussion and Analysisof Financial Condition and Results of Operations” section in our Annual Reporton Form 10-K for the year ended December 31, 2007.  There wereno material changes to our contractual obligations since December 31, 2007,except as mentioned in “Recent Developments.”

 

**Off BalanceSheet Arrangements**

 

Fromtime to time, we enter into off-balance sheet arrangements and transactionsthat can give rise to off-balance sheet obligations. As of June 30, 2008,our off-balance sheet arrangements and transactions include operating lease agreementsand gas transportation commitments. We do not believe that these arrangementsare reasonably likely to materially affect our liquidity or availability of, orrequirements for, capital resources.

 

**FinancialInstruments**

 

Wecurrently have no natural gas price financial instruments or hedges in place.Similarly, we have no financial derivatives. Our natural gas marketingcontracts use “spot” market prices. Given the uncertainty of the timing andvolumes of our natural gas production this year, we do not currently plan toenter into any long term fixed-price natural gas contracts, swap or hedgepositions, other gas financial instruments or financial derivatives in 2008.

 

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**Outlookfor 2008/2009**

 

Dependingon capital availability, we are forecasting capital spending of up toapproximately $29.2 million during the year 2008/2009, allocated asfollows:

 
| 1.     |   | Madisonville Project,  Madison County, Texas. Approximately $16.5 million may be expended in  the Madisonville Field area as follows: $1.5 million toward the fracture  stimulation and hook up costs of the Wilson Well and $15.0 million toward the  drilling of a deep well. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| 2.     |   | Central Alberta  Project. Up to approximately $2.7 million may be expended to drill an  exploratory well in the Swan Hills Prospect.                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.     |   | Cook Inlet, Alaska. Up  to $5.0 million may be expended toward the drilling and completion of one  exploratory well and an additional $2.0 million to be utilized for land  acquisition and geologic and geophysical costs.                                                          |
|   |   |                                                                                                                                                                                                                                                                                 |
| 4.     |   | Indonesia. Up to $3.0  million may be expended toward the drilling, completion and testing of wells  as well as the acquisition of seismic data in the Bengara II PSC as well as  acquisition costs associated with new ventures.                                                    |

 

Wemay, in our discretion, decide to allocate resources towards other projects inaddition to or in lieu of, those listed above should other opportunities ariseand as circumstances warrant. We currently do not have sufficient workingcapital to fund all of the capital expenditure listed above. See “Liquidity andCapital Resources.”

 

Weexpect commodity prices to be volatile, reflecting the current tight supply anddemand fundamentals for North American natural gas and world crude oil.Political events around the world, which are difficult to predict, willcontinue to influence both oil and gas prices. Higher prices for oil and gasoften lead to higher levels of drilling activity which in turn lead to highercosts to explore, develop and acquire oil and gas reserves due to greatercompetition for resources and supplies. These higher costs could affect thereturns on our capital expenditures. Higher crude prices could also help keepnatural gas prices high by keeping alternative fuels, such as heating oil andresidual fuel, expensive.

 

**Impactof Inflation & Changing Prices**

 

We arehighly dependent upon natural gas pricing. A material decrease in current andprojected natural gas prices could impair our ability to raise additionalcapital on acceptable terms. Likewise, a material decrease in current andprojected natural gas prices could also impact our revenues and cash flows.This could impact our ability to fund future activities.

 

GeoPetroanticipates an increase in gas price in 2008 from 2007. This would have amaterially positive impact on our cash flow and revenues.

 

Changingprices have had a significant impact on costs of drilling and completing wells,particularly in the Madisonville Field area where we are currently the mostactive. The estimated cost of drilling and completing a Rodessa formation wellat approximately 12,300 feet of depth has increased from $3.0 million in 2001to $7.5 million in 2008 due to higher costs associated with tubular goods, wellequipment, and day rates for drilling contracts, among other factors. Thesehigher costs have impacted and will continue to impact our income fromoperations in the form of higher depletion expense.

 

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**CriticalAccounting Estimates**

 

Ourconsolidated financial statements have been prepared by management inaccordance with U.S. GAAP. We refer you to the corresponding section in Part II,Item 7 and the notes to the consolidated financial statements of our AnnualReport on Form 10-K for the year ended December 31, 2007 for thedescription of critical accounting policies and estimates.

 

**Risksand Uncertainties**

 

There area number of risks that face participants in the U.S., Canadian andinternational oil and natural gas industry, including a number of risks thatface us in particular. Accordingly, there are risks involved in an ownership ofour securities. See “Risk Factors” in our Annual Report on Form 10-K forthe year ended December 31, 2007 for a description of the principal risksfaced by us.

 

**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

We areexposed to market risks arising from fluctuating prices of crude oil, naturalgas and interest rates as discussed below.

 

*Commodity Risk.*  Our major commodity price risk exposure isto the prices received for our natural gas production. Realized commodityprices received for our production are the spot prices applicable to naturalgas in the East Texas region. Prices received for natural gas are volatile andunpredictable and are beyond our control. For the six months ended June 30,2008, a 10% change in the prices received for natural gas production would havehad an approximate $700,000 impact on our revenues.

 

*Currency Translation Risk.  *Because our revenues and expenses areprimarily in U.S. dollars, we have little exposure to currency translationrisk, and, therefore, we have no plans in the foreseeable future to implementhedges or financial instruments to manage international currency changes.

 

*Hedging.* We did not enter into any hedging transactions duringthe six months ended June 30, 2008 and 2007.

 

**Item 4. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Basedon their evaluation as of the end of the second quarter ended June 30,2008, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) are effective to ensure that informationrequired to be disclosed in reports that we file or submit under the ExchangeAct are recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and in providing reasonableassurance that information required to be disclosed by the Company in suchreports is accumulated and communicated to the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosures.

 

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Duringthe most recent fiscal quarter, there have been no changes in our internalcontrol over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

Fromtime to time, we are party to litigation or other legal and administrativeproceedings that we consider to be a part of the ordinary course of ourbusiness. Currently, we are not involved in any legal proceedings nor are weparty to any pending or threatened claims that could, individually or in theaggregate, reasonably be expected to have a material adverse effect on ourfinancial condition, cash flow or results of operations.

 

**Item 1A.  Risk Factors.**

 

As ofthe date of this filing, there have been no material changes from the riskfactors previously disclosed in our “Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2007, referred to as our 2007 AnnualReport. An investment in our securities involves various risks. Whenconsidering an investment in our company, you should consider carefully all ofthe risk factors described in our 2007 Annual Report. These risks anduncertainties are not the only ones facing us and there may be additionalmatters that we are unaware of or that we currently consider immaterial.

 

**Item 2.**  **UnregisteredSales of Securities and Use of Proceeds.**

 

**UnregisteredSales of Securities**

 

On April 29,2008, we issued 750,000 shares of common stock to an officer and director, anaccredited investor, pursuant to an exercise of stock options at $0.50 pershare for proceeds of $375,000.  Theseshares were issued pursuant to Rule 701 promulgated under the SecuritiesAct, in that they were offered and sold pursuant to a written contract relatingto compensation, as provided by Rule 701.

 

**Use ofProceeds**

 

On ourregistration statement on Form S-1 (Reg. No. 333-135485) weregistered up to 16,499,991 shares of our common stock, no par value per share,including 4,301,355 shares of common stock issuable upon exercise of warrantsand options, for resale by selling shareholders. The registration statement wasdeclared effective by the Securities and Exchange Commission in February 2007.The offering commenced in February 2007 and has not terminated. On ourregistration statement on Form S-1 (Reg. No. 333-146557) weregistered up to 2,002,599 shares of outstanding common stock and the resale ofup to 780,857 shares of common stock issuable upon exercise of warrants, forresale by selling shareholders. The registration statement was declaredeffective by the Securities and Exchange Commission in October 2007. Theoffering commenced in October 2007 and has not terminated. We will notreceive any proceeds from the sale of our common stock by the selling shareholdersunder the registration statements; however if all warrants and options toacquire our common stock being registered thereunder are exercised, we willrealize cash proceeds of approximately $16,572,574, which we expect to use forgeneral working capital purposes and the drilling of wells in our Texas,Alaska, California and Indonesian prospects.

 

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Ifless than the $16,572,574 proceeds are realized from the exercise of suchwarrants and options, the proceeds will be spent in the following order ofpriority:

 
| 1.     |   | Alaska Cook Inlet  Project, up to approximately $5.0 million will be expended for the drilling  of pilot program wells.                                                                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                            |
| 2.     |   | Madisonville Project,  Madison County, Texas. Up to approximately $11 million will be expended in  the Madisonville Field area towards the drilling and completion of one deep  exploratory well location to an estimated depth of 18,000 feet. |
|   |   |                                                                                                                                                                                                                                            |
| 3.     |   | General working  capital.                                                                                                                                                                                                                       |

 

We donot know if, or how many, of the warrants or options will be exercised. This isour best estimate of our use of proceeds generated from the possible exerciseof warrants or options based on the current state of our business operations,our current plans and current economic and industry conditions. Any changes inthe projected use of proceeds will be made at the sole discretion of our boardof directors.

 

**Item 3.  Defaults Upon Senior Securities**

 

**               **Not applicable.

 

**Item 4.  Submission of Matters to a Vote of theSecurity Holders.**

 

               Not applicable

 

**Item 5.  Other Information.**

 

               Not applicable

 

**Item 6.  Exhibits**

 

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1 (2)             |       | Amended and Restated  Articles of Incorporation of GeoPetro Resources Company                                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.2 (8)             |       | Second Amended and  Restated Bylaws of the GeoPetro Resources Company                                                                                                                                                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1 (2)             |       | Form of Warrant  issued by GeoPetro Resources Company to various investors on various dates.                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.2 (3)             |       | Specimen Common Stock  Certificate                                                                                                                                                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.3                 |       | Form of common  stock purchase warrant issued to various investors dated August 13, 2007  (filed as exhibit 4.1 to the Company’s Report on Form 8-K as filed with  the Securities and Exchange Commission on August 16, 2007, and  incorporated herein by reference)                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.4                 |       | Registration Rights  Agreement between GeoPetro Resources Company and various investors dated  August 13, 2007 (filed as Exhibit B to the Form of Unit  Subscription Agreement dated August 13, 2007 filed as Exhibit 10.20  to the Company’s Report on Form 8-K as filed with the Securities and  Exchange Commission on August 16, 2007 and incorporated herein by  reference) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.5 (6)             |       | Placement Agent Warrant  dated August 13, 2007                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 5.1 (6)             |       | Opinion of Greene  Radovsky Maloney Share & Hennigh LLP                                                                                                                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1 (2)            |       | Joint Venture Agreement  Bengara II, Dated January 1, 2000                                                                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2 (2)            |       | Production Sharing  Contract Bengara II, Dated December 4, 1997                                                                                                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4 (2)            |       | Exploration Permit#408,  Dated July 2, 1997                                                                                                                                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5 (2)            |       | Madisonville Field  Development Agreement Dated August 1, 2005                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6 (2)            |       | Alaska Cook Inlet Option  dated April 20, 2005                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7 (2)†      |       | The 2001 Stock  Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8 (2)†      |       | The 2004 Stock Option  and Appreciation Rights Plan                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9 (2)†      |       | Stuart Doshi Employment  Agreement, Dated July 28, 1997 (effective July 1, 1997) and  amendments dated January 11, 2001,  July 1, 2003, April 20, 2004, May 9, 2005, July 28, 2005  and January 30, 2006                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10 (2)†     |       | David Creel Employment  Agreement, Dated April 28, 1998 and amendments dated  June 15, 2000, May 12, 2003 and  January 1, 2005                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11 (2)†     |       | J. Chris Steinhauser  Employment Agreement, Dated June 19, 2000 and amendments dated  December 12, 2002 and January 1, 2005                                                                                                                                                                                                                                                                               |

 

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|            | 10.12 (2) |                                                                                                                                    | Office Lease Agreement,  Dated effective March 1, 2004 |   |
|-----------------|-----------|-----------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|--------|
|            |      |                                                                                                                                    |                                                        |   |
| 10.13 (4)       |      | Form of  Subscription Agreement for GeoPetro Resources Company stock executed by various  investors on various dates.              |
|            |      |                                                                                                                                    |
| 10.19 (5)       |      | Shares Sale &  Purchase Agreement Dated September 29, 2006                                                                |
|            |      |                                                                                                                                    |
| 10.20 (6)       |      | Form of Unit  Subscription Agreement Dated August 13, 2007                                                                    |
|            |      |                                                                                                                                    |
| 10.22 (6)       |      | Promissory Note to  Stuart Doshi dated February 12, 2007                                                                           |
|            |      |                                                                                                                                    |
| 10.23 (7)† |      | Third Amendment to J.  Chris Steinhauser Employment Agreement dated December 18, 2007                                              |
|            |      |                                                                                                                                    |
| 31.1 (1)        |      | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                           |
|            |      |                                                                                                                                    |
| 31.2 (1)        |      | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                           |
|            |      |                                                                                                                                    |
| 32.1 (1)        |      | Certification of Chief  Executive Officer and Chief Financial Officer of GeoPetro Resources Company  pursuant to 18 U.S.C. § 1350. |
|                 |           |                                                                                                                                         |                                                             |        |

 

----

| (1)    | Filed herewith.                                                                                                                                                                                                                          |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                     |   |
| (2)    | Filed as the  identically numbered exhibit to the Registration Statement on Form S-1,  (No. 333-135485), as filed with the Securities and Exchange Commission  on June 30, 2006, and incorporated herein by reference.    |
|   |                                                                                                                                                                                                                                     |   |
| (3)    | Filed as the  identically numbered exhibit to the Registration Statement on Form S-1,  (No. 333-135485), as filed with the Securities and Exchange Commission  on January 31, 2007, and incorporated herein by reference. |
|   |                                                                                                                                                                                                                                     |   |
| (4)    | Filed as  Exhibit 10.14 to the Registration Statement on Form S-1  (No. 333-135485) as filed with the Securities and Exchange Commission on  June 30, 2006, and incorporated herein by reference.                    |
|   |                                                                                                                                                                                                                                     |   |
| (5)    | Filed as the  identically numbered exhibit to the Registration Statement on Form S-1  (No. 333-135485), as filed with the Securities and Exchange Commission  on January 9, 2007, and incorporated herein by reference.   |
|   |                                                                                                                                                                                                                                     |   |
| (6)    | Filed as the  identically numbered exhibit to the Registration Statement on Form S-1  (No. 333-146557), as filed with the Securities and Exchange Commission  on October 9, 2007, and incorporated herein by reference.   |
|   |                                                                                                                                                                                                                                     |   |
| (7)    | Filed as  Exhibit 10.1 to the Company’s Report on Form 8-K, as filed with the  Securities and Exchange Commission on December 21, 2007 and incorporated  herein by reference.                                        |
|        |                                                                                                                                                                                                                                          |  |  |

 

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| (8)    | Filed as the  identically numbered exhibit to the Registration Statement on Form S-1  (No. 333-135485), as filed with the Securities and Exchange Commission  on April 25, 2008, and incorporated herein by reference. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                  |   |
| † | Indicates a management  or compensatory plan or arrangement                                                                                                                                                                           |

 

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**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, on August 7, 2008.

 
|   | **GEOPETRO  RESOURCES COMPANY** |
|--------|---------------------------------|
|   | By:                             | /s/ Stuart J. Doshi |
|   |                            | Stuart J. Doshi |
|   |                            | Chairman of the Board  of Directors, President and  Chief Executive Officer |
|   |                            |
|   | By:                             | /s/ J. Chris  Steinhauser |
|   |                            | J. Chris Steinhauser |
|   |                            | Vice President of  Finance and |
|   |                            | Chief Financial  Officer, Principal |
|   |                            | Accounting Officer and  Director |

 

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