**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**(Mark One)**
| **x**                                                                                                                                                            | ** ** | **QUARTERLY REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                       | ** ** | ** **                                                                                                                         |
| **For the quarterly period ended September 30, 2007**                                                                                                            |
| ** **                                                                                                                                                       | ** ** | ** **                                                                                                                         |
| **Or**                                                                                                                                                           |
| ** **                                                                                                                                                       | ** ** | ** **                                                                                                                         |
| **o**                                                                                                                                                            | ** ** | **TRANSITION REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                       | ** ** | ** **                                                                                                                         |
| **For the transition period from            to            ** |

 

**Commission file number 001-32471**

 

**PRBENERGY, INC.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Nevada**                               | ** ** | **20-0563497**      |
|------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction             |       | (I.R.S. Employer    |
| of Incorporation or Organization)        |       | Identification No.) |
|                                     |       |                |
| **1875 Lawrence Street, Suite 450**      | ** ** | ** **          |
| **Denver, CO**                           | ** ** | **80202**           |
| (Address of Principal Executive Offices) |       | (Zip Code)          |

 

Telephone Number: **(303) 308-1330**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x   No  o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o  Acceleratedfiler  o  Non-acceleratedfiler  x

 

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

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

| **Class**                      | ** ** | **Outstanding  as of November 9, 2007** |
|--------------------------------|------------|-----------------------------------------|
| Common Stock, $0.001 par value |       | 8,721,994 Shares                        |

 

 

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**TABLE OF CONTENTS**

 
| PART I — Financial Information | 1                                                                                           |
|-------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                             | Financial Statements                                                                        | 1 |
| Item 2.                             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 10 |
| Item 3.                             | Quantitative and Qualitative Disclosures  About Market Risk                                 | 14 |
| Item 4.                             | Controls and Procedures                                                                     | 14 |
| PART II — Other Information    | 14                                                                                          |
| Item 1.                             | Legal Proceedings                                                                           | 14 |
| Item 1A.                            | Risk Factors                                                                                | 15 |
| Item 6.                             | Exhibits                                                                                    | 15 |
|                                | Signatures                                                                                  | 16 |

 

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**PRB ENERGY, INC.**

**ConsolidatedBalance Sheets**

**(In thousands, except share amounts)**

** **
| ** **                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                        | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                   |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                         |       | $                      | 2,432      |                  | $          | 11,157 |   |
| Restricted cash                                                                                                                                   |       | 1,009                  |       | 2,078                 |       |
| Accounts receivable, net                                                                                                                          |       | 508                    |       | 2,527                 |       |
| Note receivable                                                                                                                                   |       | 2,250                  |       | —                |       |
| Inventory                                                                                                                                         |       | 136                    |       | —                |       |
| Prepaid expenses                                                                                                                                  |       | 609                    |       | 789                   |       |
| **Total current assets**                                                                                                                          | ** ** | **6,944**              | ** ** | **16,551**            | ** ** |
| Oil and gas properties accounted for under  the successful efforts method of accounting:                                                          |       |                   |       |                  |       |
| Proved properties                                                                                                                                 |       | 5,498                  |       | 5,436                 |       |
| Unproved leaseholds                                                                                                                               |       | 9,749                  |       | 9,282                 |       |
| Wells-in-progress                                                                                                                                 |       | 8,731                  |       | 5,794                 |       |
| Total oil and gas properties                                                                                                                      |       | 23,978                 |       | 20,512                |       |
| Less: accumulated depreciation, depletion  and amortization                                                                                       |       | (2,019                 | )          | (766                  | )          |
| **Net oil and gas properties**                                                                                                                    | ** ** | **21,959**             | ** ** | **19,746**            | ** ** |
| Gathering and other property and equipment                                                                                                        |       | 15,863                 |       | 11,603                |       |
| Less: accumulated depreciation and  amortization                                                                                                  |       | (3,420                 | )          | (1,919                | )          |
| **Net gathering and other property and  equipment**                                                                                               | ** ** | **12,443**             | ** ** | **9,684**             | ** ** |
| Other non-current assets:                                                                                                                         |       |                   |       |                  |       |
| Deferred debt issuance costs                                                                                                                      |       | 2,221                  |       | 2,086                 |       |
| Less: accumulated amortization                                                                                                                    |       | (1,140                 | )          | (375                  | )          |
| Net deferred debt issuance costs                                                                                                                  |       | 1,081                  |       | 1,711                 |       |
| Other non-current assets                                                                                                                          |       | 1,418                  |       | 2,151                 |       |
| **Total other non-current assets**                                                                                                                | ** ** | **2,499**              | ** ** | **3,862**             | ** ** |
| **Total Assets**                                                                                                                                  | ** ** | **$**                  | **43,845** | ** **            | **$**      | **49,843** | ** ** |
| ** **                                                                                                                                        | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                    | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                              |       |                   |       |                  |       |
| Accounts payable                                                                                                                                  |       | $                      | 1,679      |                  | $          | 1,854 |   |
| Accrued expenses and other current  liabilities                                                                                                   |       | 2,905                  |       | 979                   |       |
| Deferred gain                                                                                                                                     |       | 785                    |       | —                |       |
| Current portion of secured notes and  debentures                                                                                                  |       | 36,965                 |       | —                |       |
| **Total current liabilities**                                                                                                                     | ** ** | **42,334**             | ** ** | **2,833**             | ** ** |
| Secured notes, debentures and other debt,  less current portion                                                                                   |       | —                 |       | 36,972                |       |
| Discount on debentures, net of amortization                                                                                                       |       | (2,693                 | )          | (4,326                | )          |
| Capital lease, less current portion                                                                                                               |       | 2,974                  |       | —                |       |
| Other non-current liabilities                                                                                                                     |       | 2,867                  |       | 3,140                 |       |
| **Total liabilities**                                                                                                                             | ** ** | **45,482**             | ** ** | **38,619**            | ** ** |
| Commitments and Contingencies                                                                                                                     |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                        |       |                   |       |                  |       |
| Common stock, 40,000,000 shares authorized;  8,721,994 and 8,231,894 issued, respectively, and 8,721,994 and 7,471,894  outstanding, respectively |       | 10                     |       | 10                    |       |
| Treasury stock                                                                                                                                    |       | (1,257                 | )          | (1,257                | )          |
| Additional paid-in-capital                                                                                                                        |       | 26,941                 |       | 26,406                |       |
| Accumulated deficit                                                                                                                               |       | (27,331                | )          | (13,935               | )          |
| **Total stockholders’ equity**                                                                                                               | ** ** | **(1,637**             | **)**      | **11,224**            | ** ** |
| **Total Liabilities and Stockholders’ Equity**                                                                                               | ** ** | **$**                  | **43,845** | ** **            | **$**      | **49,843** | ** ** |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

1

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**PRB ENERGY, INC.**

**ConsolidatedStatements of Operations**

**(In thousands, except share and per share amounts)**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                             | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                              |       |                             |       |                            |       |   |   |   |   |
| Natural gas sales                                      |       | $                                | 387        |                            | $          | 776 |   | $ | 1,146 |   | $ | 882 |   |
| Gas gathering and processing                           |       | 253                              |       | 314                             |       | 1,125 |   | 1,592 |   |
| Other                                                  |       | 11                               |       | 8                               |       | 25 |   | 154 |   |
| Total revenues                                         |       | 651                              |       | 1,098                           |       | 2,296 |   | 2,628 |   |
| Natural gas gathering expense                          |       | (101                             | )          | (93                             | )          | (204 | ) | (120 | ) |
| Natural gas production taxes                           |       | (37                              | )          | (88                             | )          | (114 | ) | (104 | ) |
| **Net revenues**                                       | ** ** | **513**                          | ** ** | **917**                         | ** ** | **1,978** | ** ** | **2,404** | ** ** |
| Operating expenses:                                    |       |                             |       |                            |       |   |   |   |   |
| Natural gas lease operating                            |       | 273                              |       | 580                             |       | 1,491 |   | 737 |   |
| Gas gathering and processing                           |       | 459                              |       | 332                             |       | 1,485 |   | 1,561 |   |
| Depreciation, depletion, amortization and  accretion   |       | 1,410                            |       | 759                             |       | 3,215 |   | 1,415 |   |
| General and administrative                             |       | 1,420                            |       | 977                             |       | 4,214 |   | 3,123 |   |
| Other expense                                          |       | 7                                |       | —                          |       | 62 |   | 50 |   |
| **Total operating expenses**                           | ** ** | **3,569**                        | ** ** | **2,648**                       | ** ** | **10,467** | ** ** | **6,886** | ** ** |
| **Operating loss**                                     | ** ** | **(3,056**                       | **)**      | **(1,731**                      | **)**      | **(8,489** | **)** | **(4,482** | **)** |
| Other income (expense):                                |       |                             |       |                            |       |   |   |   |   |
| Interest and other income                              |       | 161                              |       | 583                             |       | 1,014 |   | 1,054 |   |
| Gain on RMG settlement and sale of assets,  net        |       | —                           |       | —                          |       | 240 |   | — |   |
| Interest and other expense:                            |       |                             |       |                            |       |   |   |   |   |
| Convertible notes and debentures                       |       | (1,053                           | )          | (618                            | )          | (3,124 | ) | (1,650 | ) |
| Debt issuance costs and discount on  debentures        |       | (868                             | )          | —                          |       | (2,418 | ) | — |   |
| Other                                                  |       | (223                             | )          | —                          |       | (620 | ) | — |   |
| **Total other expense**                                | ** ** | **(1,983**                       | **)**      | **(35**                         | **)**      | **(4,908** | **)** | **(596** | **)** |
| **Net loss**                                           | ** ** | **$**                            | **(5,039** | **)**                           | **$**      | **(1,766** | **)** | **$** | **(13,397** | **)** | **$** | **(5,078** | **)** |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| **Net loss per share — basic and diluted**        | ** ** | **$**                            | **(0.58**  | **)**                           | **$**      | **(0.24** | **)** | **$** | **(1.55** | **)** | **$** | **(0.68** | **)** |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and diluted weighted average shares  outstanding | ** ** | **8,721,994**                    | ** ** | **7,471,894**                   | ** ** | **8,639,796** | ** ** | **7,458,708** | ** ** |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

2

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**PRB ENERGY, INC.**

**ConsolidatedStatements of Cash Flows**

**(In thousands)**

**(Unaudited)**

** **
| ** **                                                                                 | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,**          | ** ** |
| ** **                                                                                 | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| **Cash flows from operating activities:**                                                  |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (13,397    | ) | $ | (5,078 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |       |                            |       |   |   |
| Depreciation, depletion, amortization and  accretion                                       |       | 3,215                           |       | 1,465 |   |
| Amortization of debt issuance costs                                                        |       | 785                             |       | 267 |   |
| Amortization of discount on debentures                                                     |       | 1,633                           |       | — |   |
| Non share-based warrants issued for  services rendered                                     |       | —                          |       | 70 |   |
| Gain on sale of asset                                                                      |       | (344                            | )          | — |   |
| Loss on sale of assets                                                                     |       | 104                             |       | — |   |
| Bad debt expense                                                                           |       | 359                             |       | (311 | ) |
| Share-based compensation expense                                                           |       | 535                             |       | 415 |   |
| Changes in assets and liabilities:                                                         |       |                            |       |   |   |
| Accounts receivable                                                                        |       | 1,448                           |       | (701 | ) |
| Inventory                                                                                  |       | (90                             | )          | 417 |   |
| Prepaid expenses                                                                           |       | 180                             |       | (585 | ) |
| Other non-current assets                                                                   |       | (267                            | )          | (190 | ) |
| Accounts payable                                                                           |       | (190                            | )          | (19 | ) |
| Accrued expenses and other current  liabilities                                            |       | 317                             |       | 947 |   |
| Deferred revenue                                                                           |       | 70                              |       | 44 |   |
| Deferred gain                                                                              |       | (138                            | )          | — |   |
| Other non-current liabilities                                                              |       | (321                            | )          | 261 |   |
| Net cash used in operating activities                                                      |       | (6,101                          | )          | (2,998 | ) |
| **Cash flows from investing activities:**                                                  |       |                            |       |   |   |
| Capital expenditures                                                                       |       | (4,966                          | )          | (4,362 | ) |
| Capitalized interest                                                                       |       | (253                            | )          | (77 | ) |
| Capital remediation cost                                                                   |       | (312                            | )          | — |   |
| Restricted cash related to future  liabilities of acquired properties                      |       | 2,069                           |       | (3,039 | ) |
| Sale of fixed assets                                                                       |       | —                          |       | 350 |   |
| Acquisition of natural gas properties and  gathering facilities                            |       | —                          |       | (4,922 | ) |
| Net cash used in investing activities                                                      |       | (3,462                          | )          | (12,050 | ) |
| **Cash flows from financing activities:**                                                  |       |                            |       |   |   |
| Proceeds from convertible notes                                                            |       | —                          |       | 21,965 |   |
| Proceeds from RMG settlement                                                               |       | 1,000                           |       | — |   |
| Issuance costs related to debentures and  convertible notes                                |       | (155                            | )          | (1,051 | ) |
| Repayment of term loan                                                                     |       | (7                              | )          | (8 | ) |
| Net cash provided by financing activities                                                  |       | 838                             |       | 20,906 |   |
| Net (decrease) increase in cash                                                            |       | (8,725                          | )          | 5,858 |   |
| Cash—beginning of period                                                              |       | 11,157                          |       | 6,434 |   |
| **Cash—end of period**                                                                |       | $                               | 2,432      |   | $ | 12,292 |   |
|                                                                                       |       |                            |       |   |   |
| Supplemental disclosure of cash flow  activity:                                            |       |                            |       |   |   |
| Cash paid for interest                                                                     |       | $                               | 4,019      |   | $ | 1,369 |   |
| Supplemental schedule for non-cash  activity:                                              |       |                            |       |   |   |
| Issuance of warrants in connection with  convertible notes                                 |       | $                               | —     |   | $ | 92 |   |
| Capital remediation cost                                                                   |       | $                               | —     |   | $ | 1,056 |   |
| Asset retirement obligations                                                               |       | $                               | 296        |   | $ | 2,085 |   |
| Capital lease                                                                              |       | $                               | 3,050      |   | $ | — |   |
| Deferred gain on RMG settlement                                                            |       | $                               | 785        |   | $ | — |   |
|                                                                                       |       |                            |       |   |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

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**PRB ENERGY, INC.**

**Notes toConsolidated Financial Statements**

**September 30, 2007**

**(Unaudited)**

 

**Note 1—Description of Business,Basis of Presentation and Summary of Significant Accounting Policies**

 

***Description ofBusiness***

 

PRBEnergy, Inc. and its subsidiaries (“PRB,” “PRB Energy,” “the Company,” “us,” “our”or “we”) operate as an independent energy company engaged in the acquisition,exploitation, development and production of natural gas and oil. In addition,we provide gas gathering, processing and compression services for properties weoperate and for third-party producers. We were initially incorporated in Nevadaunder the name “PRB Transportation, Inc.” in December 2003.  On June 14,2006, we changed our name to “PRB Energy, Inc.”  Our common stock is tradedon the American Stock Exchange (“AMEX”) under the ticker symbol “PRB.”  PRB Energy operates through two wholly-owned subsidiaries, PRB Oil andGas, Inc., a Colorado corporation formed in July 2005 that focuses on gas andoil exploitation and production, and PRB Gathering, Inc., a Coloradocorporation formed in August 2006 that focuses on gathering andprocessing.  We conduct our business activities in Wyoming, Colorado andNebraska.

 

***Basis ofPresentation***

 

Wehave prepared this Quarterly Report on Form 10-Q under the rules andregulations of the United States Securities and Exchange Commission. Becausethis is an interim period filing, using a condensed format, certain informationand footnote disclosures normally included in consolidated financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted. These interimfinancial statements should be read in conjunction with the auditedconsolidated financial statements and the summary of significant accountingpolicies and notes thereto included in our 2006 Annual Report onForm 10-K.  During interim periods, we follow the same accountingpolicies outlined in our 2006 Annual Report on Form 10-K, Note 2 — Summary ofSignificant Accounting Policies. The consolidated financial statements as ofSeptember 30, 2007, and for the three and nine months ended September 30, 2007and September 30, 2006 are unaudited. Certain reclassifications have been madeto the 2006 unaudited condensed consolidated financial statements to conform tothe 2007 presentation. Such reclassifications had no effect on the 2006 netloss. In the opinion of management, these interim financial statements containall adjustments which are of a normal, recurring nature to fairly present thefinancial position of PRB as of September 30, 2007 and the results of ouroperations for the three and nine months ending September 30, 2007 andSeptember 30, 2006, and cash flows for the nine months ended September 30, 2007and September 30, 2006. Information for interim periods may not be indicativeof our results of operations for the entire year.

 

***Summary of Significant Accounting Policies***

 

*Use of Estimates*

 

Managementmakes estimates and assumptions that affect the amounts reported in thefinancial statements and the disclosures made in the accompanying notes. Someexamples of such estimates are the allowance for accounts receivable, theappropriate levels of various accruals, including asset retirement obligations,determining the remaining economic lives and carrying values of property andequipment and the estimates of gas reserves that affect the depletioncalculations and impairments for gas properties and other long-lived assets. Inaddition, we use assumptions to estimate the fair value of share-basedcompensation. We believe our estimates and assumptions are reasonable; however,actual results may differ from our estimates.

 

*Share-Based Compensation*

 

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)No. 123(R), “*Share-Based Payment,”* using themodified prospective transition method and, as a result, did not retroactivelyadjust results from prior periods.  SFAS No. 123(R) requires thatshare-based compensation expense be measured using estimates of the fair valueof all share-based awards and applies to new awards and to awards modified,repurchased or cancelled after December 31, 2005, as well as to the unvestedportion of awards outstanding as of January 1, 2006. Under the modifiedprospective transition method, we are recognizing share-based compensationexpense over the remaining vesting period for awards that were outstanding butunvested at January 1, 2006, and we are recognizing share-based compensationexpense for the fair value of all awards granted on or after January 1, 2006 asthe awards vest. We apply the Black-Scholes option valuation model indetermining the fair value of share-based payments to employees.  See Note7 – 2007 Equity Incentive Plan for further discussion of share-basedcompensation.

 

*Net Loss Per Share*

 

Weaccount for earnings (loss) per share (“EPS”) in accordance with SFASNo. 128, “*Earnings per Share.*”  Under SFAS No. 128, basic EPS is computed bydividing the net loss applicable to common stockholders by the weighted averagecommon shares outstanding without including any potentially dilutive securities.Diluted EPS is computed by dividing the net loss applicable to commonstockholders for the period by the weighted average common shares outstanding,plus, when their effect is dilutive, common stock equivalents. Basic anddiluted shares outstanding at September 30, 2007 and September 30, 2006, usedfor our EPS calculation

 

4

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were8,639,796 and 7,458,708, respectively. The following are potentially dilutiveshares that are excluded from the calculation as they are anti-dilutive:

 
| ** **                                 | ** ** | **Nine Months Ended   September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(equivalent shares)**                              | ** ** |
| Warrants                                   |       | 375,000                                                   |       | 300,000 |   |
| Options                                    |       | 831,375                                                   |       | 625,875 |   |
| Convertible notes                          |       | 3,137,857                                                 |       | 3,137,857 |   |
| Total potentially dilutive shares excluded |       | 4,344,232                                                 |       | 4,063,732 |   |

 

*Concentrations of Credit Risk*

 

Wegrant credit in the normal course of business to customers in the United States.Management periodically performs a credit analysis and monitors the financialcondition of our customers to reduce credit risk.  Management periodicallyreviews accounts receivable and reduces the carrying amount by a valuationallowance that reflects management’s best estimate of the amount that may notbe collectible.  Allowances for uncollectible accounts receivable arebased on information available and historical experience.  As of September30, 2007 and December 31, 2006, there were balances of $69,500 and $604,000,respectively, as an allowance for uncollectible accounts receivable. Thesignificant reduction in the balance of the allowance from December 31, 2006was due to the Rocky Mountain Gas, Inc. (“RMG”) settlement payment. See Note 10— Subsequent Events.

 

Revenuesfrom customers which represented 10% or more of our gas sales or gathering feesfor the three and nine months ended September 30, 2007 and September 30, 2006were as follows:

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Customer**                        | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(% of total revenue)**                  | ** ** | **(% of total revenue)**                 | ** ** |
| A – Exploration and Production |       | 58                                                       | %          | 58.2                                                    | %          | 48 | % | 24.3 | % |
| B – Gathering and Processing   |       | 28                                                       | %          | 18.1                                                    | %          | 38 | % | 16.3 | % |
| C – Gathering and Processing   |       | —                                                   |       | —                                                  |       | — |   | 24.0 | % |

 

*Debt Issuance Costs and Discount on Debt*

 

 Weinclude debt issuance costs in other non-current assets.  These costs areassociated with the senior subordinated convertible notes (“Notes”) that weissued in March 2006 and the senior secured debentures (“Debentures”) that weissued in December 2006.  The remaining unamortized debt issuance cost was$1,081,000 at September 30, 2007 and is being amortized using the effectiveinterest rate method over the term of the debt.

 

Thediscount on the Debentures of $4,326,000 is reflected as a liability on thebalance sheet at December 31, 2006. The remaining unamortized discount atSeptember 30, 2007 was $2,693,000 and is being amortized using the effectiveinterest rate method over the term of the debt.

 

*Capital Initiatives*

 

TheCompany is in the process of looking for additional capital and/or financingagreements to meet capital budget requirements. Although the Company isactively seeking such financing there can be no assurance that the Company willbe able to raise additional capital on acceptable terms or at all.

 

**Note 2—Recent AccountingPronouncements**

 

InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, “*Accounting forUncertainty in Income Taxes”* (“FIN 48”) - an interpretation of FASB Statement No. 109,*“Accounting for Income Taxes*”. FIN 48 requires thatrealization of an uncertain income tax position must be “more likely than not”(i.e. greater than 50% likelihood of receiving a benefit) before it can berecognized in the financial statements. Further, this interpretation prescribesthe benefit to be recorded in the financial statements as the amount mostlikely to be realized assuming a review by tax authorities having all relevantinformation and applying current conventions. FIN 48 also clarifies thefinancial statement classification of tax-related penalties and interest andsets forth new disclosures regarding unrecognized tax benefits. FIN 48 iseffective for fiscal years beginning after December 15, 2006, and weadopted this interpretation effective January 1, 2007. See Note 6 – IncomeTaxes for further discussion.

 

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements”*(“SFAS No. 157”). This statement defines fair value, establishesa framework for measuring fair value and expands disclosures about fair valuemeasurements. SFAS No. 157 will become effective for our fiscal yearbeginning January 1, 2008, and we will assess its potential impact on ourfinancial statements prior to that date.

 

InFebruary 2007, the FASB issued SFAS No. 159, “**The Fair Value Option for Financial Assetsand Financial Liabilities”****(“SFAS No. 159”),** which permits an entity tomeasure certain financial assets and financial liabilities at fair value. Theobjective of 

 

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SFAS No. 159 is to improvefinancial reporting by allowing entities to mitigate volatility in reportedearnings caused by the measurement of related assets and liabilities usingdifferent attributes without having to apply complex hedge accountingprovisions. Under SFAS No. 159, entities that elect the fair value option (byinstrument) will report unrealized gains and losses in earnings at eachsubsequent reporting date. The fair value option election is irrevocable,unless a new election date occurs. SFAS No. 159 establishes presentation anddisclosure requirements to help financial statement users understand the effectof the entity’s election on its earnings but does not eliminate disclosurerequirements of other accounting standards. Assets and liabilities that aremeasured at fair value must be displayed on the face of the balance sheet. SFASNo. 159 is effective beginning January 1, 2008, and we will assess itspotential impact on our financial statements prior to that date.

 

**Note 3—Significant Agreements**

 

*Compressor Lease Agreement*

 

OnFebruary 12, 2007, PRB Gathering, Inc. entered into a 5-year lease agreementwith J-W Power Company (“J-W”), effective January 24, 2007.  Underthe terms of the agreement, J-W will supply us with gas compression equipmentand related services.  The compression equipment will service our gasgathering pipelines in the Powder River Basin.

 

Thelease meets the criteria under SFAS No. 13, “*Accountingfor Leases*,” for classification as a capital lease on the balancesheet.  As a result, a capital lease asset of $3,050,000, which representsthe estimated fair value of the property, was recorded in January 2007. Therelated liability, less the current portion of $84,000, is shown as anon-current liability of $2,974,000 on the balance sheet at September 30,2007.  In addition, a cash payment of $650,000 was made to J-W forfuture maintenance repairs in connection with the lease. The capital lease andprepayment will be amortized as expenses over the term of the lease. Monthly lease payments ranging from $100,000 to $150,000 will reduce theliability and will also include interest and executory (sales tax andenvironmental fees) expenses.

 

*RMG Settlement Agreement*

 

OnMay 15, 2007, RMG and PRB reached a settlement and terminated their arbitrationproceedings. RMG agreed to pay PRB $3,250,000 total, represented by twocash payments of $500,000 each made on May 22nd and June 21st,2007, with the balance due on or before October 31, 2007.  A promissorynote dated June 1, 2007 (the “RMG Note”) for the remaining balance was alsoreceived from RMG.  The Note bears an interest rate of 10% per annum andis secured by a mortgage.  The interest applicable for financing the RMGNote totaled $150,000, which is payable at maturity of the RMG Note.  Thisamount will be recognized as interest income over the term of the RMGNote.  The RMG Note balance at September 30, 2007 is $2,250,000 and isreflected as a Notes Receivable on the balance sheet.

 

OnJune 15, 2007, as a condition for obtaining the consent of the lenders, whoheld a security interest in the PRB Assets to be transferred to RMG, we agreedto pay the lenders, as a reduction of our outstanding balance due on theDebentures, one-half of the final $2,250,000 payment to be received fromRMG.  Under our agreement with the lenders, upon receipt of the RMGpayment we will pay the lenders $1,125,000, plus any associated interest andfees due under the provisions of the Debentures.  The payment to the lenderswill partially redeem, on a pro rata basis, a portion of the principal andinterest amounts due under the Debentures.

 

**Note 4—Asset Retirement Obligations**

 

Werecognize an estimated liability for future costs associated with abandoningour property and equipment used in the production of natural gas from our wellsand in our gas gathering operations. A liability for the fair value of an assetretirement obligation is established when the long-lived asset is acquired,constructed or completed, with a corresponding increase in the carrying valueof the asset. We depreciate the asset retirement obligations associated withour property and equipment, deplete the amounts recorded in respect to our gasproperties, and recognize accretion expense of the liability, all based on theestimated useful lives of the assets and remaining recoverable reserves.

 

Weestimate our future retirement obligations based on our experience, managementestimates and regulatory requirements. We discount the estimated futureobligations using an estimated credit adjusted risk-free rate at the time theobligation is incurred or revised. Historically this rate has been estimated at10%. The estimated obligations may be revised due to changes in expected livesof gas wells, gas gathering system configuration, estimates and regulations.

 

**Note 5—Borrowings**

 

Asof September 30, 2007 and December 31, 2006, our borrowings consisted of thefollowing:

 

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| **(In thousands)**               | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Senior subordinated convertible notes |       | $                                | 21,965     |                            | $          | 21,965 |   |
| Senior secured debentures             |       | 15,000                           |       | 15,000                          |       |
| Other term loans                      |       | 10                               |       | 17                              |       |
|                                  |       | 36,975                           |       | 36,982                          |       |
| Less current portion                  |       | (36,975                          | )          | (10                             | )          |
| Total long-term borrowings            |       | $                                | —     |                            | $          | 36,972 |   |

 

***Senior Subordinated Convertible Notes***

 

InMarch 2006, we issued the Notes approximating a principal amount of $22 millionin a private placement.  The Notes are secured by certain of our gasgathering assets and mature 30 months from the date of issue.  The Notesbear interest at a fixed rate of 10% per annum, payable quarterly inarrears.  A registration statement applicable to the shares of commonstock underlying the Notes was declared effective in June 2006.  The Notesdo not contain any beneficial conversion features. Note holders have the rightto convert the Notes to common stock at a conversion price of $7.00 per share,which is subject to certain anti-dilution adjustments.  In addition, theCompany is prohibited from declaring or paying cash dividends on the commonstock during the period that the Notes are outstanding and unpaid.

 

AtSeptember 30, 2006, debt issuance costs of the Notes totaling approximately$1.1 million, excluding the value of issued warrants, were reflected asother non-current assets and have been amortized as interest expense in eachapplicable period.  For the nine months ended September 30, 2007, $343,000of the deferred cost of the Notes was amortized as interest expense and anadditional $1,666,000 of interest paid in cash was expensed.

 

Wefollow SFAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities”* andEITF 00-19, *“Accounting for Derivative FinancialInstruments Index to, and Potentially Settled in a Company’s Own Stock”*and the related pronouncements.  We have evaluated the conversion featureembedded in the Notes and the liquidated damages provision in the relatedregistration rights agreement and have determined that the entire amount ofthese securities is properly classified as debt and is not accounted for as aderivative on the consolidated balance sheet at September 30, 2007.

 

***Senior Secured Debentures***

 

Inconnection with the December 2006 acquisition of the NE Colorado Field in theNiobrara formation, we entered into a Securities Purchase Agreement with twoprivate lenders.  Pursuant to that agreement, we issued to the lenders $15million in Debentures and 1,250,000 shares of our common stock.

 

TheDebentures are payable on August 31, 2008 and bear interest at a rate of 13%per annum. Interest payments are due quarterly in arrears. Pursuant to theterms of a Pledge and Security Agreement that we entered into with the lenders,the Debentures are collateralized by substantially all of our assets, exceptfor certain excluded assets as described in the Pledge and Security Agreement.

 

AtSeptember 30, 2007, debt issuance costs of the Debentures totalingapproximately $1.1 million were reflected as other non-current assets and havebeen amortized as interest expense in each applicable period. For the ninemonths ended September 30, 2007, $442,000 of the deferred cost of theDebentures was amortized as interest expense and an additional $1,458,000 ofinterest paid in cash was expensed.

 

Theamortized portion of the discount on the Debentures of $1,633,000 was recordedas interest expense during the nine months ended September 30, 2007.

 

**Note 6—Income Taxes**

 

Thevaluation allowance for deferred taxes at December 31, 2006 was $4.6million.  As of September 30, 2007, no change has been made on the balancesheet to reflect any deferred tax asset, as management believes that thisallowance amount continues to be reasonable and appropriate. The effectiveincome tax rate was 37% for 2006 and the nine months ended September 2007.

 

InJune 2006, the FASB issued FIN 48, “*Accounting for Uncertaintyin Income Taxes”*—*an interpretation of FASBStatement No. 109,* “*Accounting for IncomeTaxes.”*  FIN 48 addresses thedetermination of whether tax benefits claimed or expected to be claimed on atax return should be recorded in the financial statements. Under FIN 48, we mayrecognize the tax benefit from an uncertain tax position only if it is morelikely than not that the tax position will be sustained on examination by thetaxing authorities, based on the technical merits of the position. The taxbenefits recognized in the financial statements from such a position should bemeasured based on the largest benefit that has a greater than 50 percentlikelihood of being realized upon ultimate settlement. FIN 48 also providesguidance on derecognition, classification, interest recognition, penalties onincome taxes, accounting for taxes in interim periods, and increaseddisclosures in financial statements.

 

Weadopted the provisions of FIN 48 effective January 1, 2007 and determined thatthere was no adjustment required to retained earnings. We recognize potentialaccrued interest and penalties, if any, related to unrecognized tax benefits inincome tax expense, which is consistent with the recognition of these items inprior reporting periods. No interest or penalties related to uncertain taxpositions were incurred at September 30, 2007.

 

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Wehave not had any material changes to our unrecognized tax benefits since weadopted FIN 48, nor do we anticipate significant changes to the total amount ofunrecognized tax benefits within the next 12 months.

 

Asof January 1, 2007, we remain subject to examination of our Federal andColorado tax returns for the tax years 2004 through 2006.

 

**Note 7—2007 Equity Incentive Plan**

 

Our2007 Equity Incentive Plan (the “2007 Plan”) allows us to grant non-qualifiedstock options, shares of restricted stock or other types of equity-basedcompensation of up to 20% of our outstanding shares to our non-employeedirectors, officers, employees and consultants. The 2007Plan replaces our previous Equity Compensation Plan (“Option Plan”)that was adopted in May 2004. The 2007 Plan will be administered by acommittee appointed by our Board of Directors, which may grant options on suchterms, including vesting and payment forms, as it deems appropriate in itsdiscretion. However, no option may be exercised more than 10 years after itsgrant, and the purchase price may not be less than 100% of the fair marketvalue of our common stock on the date of grant.

 

Alloptions granted to date under both the 2007 Plan and the Option Plan have beengranted at exercise prices equal to or greater than the respective marketprices of our common stock on the grant dates. There were 913,024 sharesavailable for grant under the 2007 Plan as of September 30, 2007.

 

Thefollowing table summarizes the activity for options:

 
| ** **                   | ** ** | **Nine Months Ended**  | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| ** **                   | ** ** | **Number of**               | ** ** | **Weighted Avg.**           | ** ** | **Number of** | ** ** | **Weighted Avg.** | ** ** |
| ** **                   | ** ** | **Shares**                       | ** ** | **Exercise Price**          | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding at January 1,    |       | 617,250                          |       | $                                | 6.35       |   | 463,250 |   | $ | 6.74 |   |
| Granted                      |       | 381,000                          |       | 3.32                             |       | 314,250 |   | 6.08 |   |
| Forfeited                    |       | (166,875                         | )          | 5.70                             |       | (151,625 | ) | 7.21 |   |
| Exercised                    |       | —                           |       | —                           |       | — |   | — |   |
| Outstanding at September 30, |       | 831,375                          |       | $                                | 4.99       |   | 625,875 |   | $ | 6.40 |   |
| Exercisable at September 30, |       | 358,250                          |       | $                                | 5.63       |   | 296,875 |   | $ | 6.46 |   |

 

Asof September 30, 2007, the weighted average fair value of options grantedduring the previous nine months was $2.02, the weighted average remainingcontractual life for the options outstanding is 6.8 years, and the weightedaverage remaining contractual life for the options exercisable is 3.2 years. Thefair value of each option granted is estimated on the date of grant using theBlack-Scholes option valuation model.

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable. In addition, option valuation models incorporate highlysubjective assumptions including the expected stock price volatility. Our stockoptions have characteristics significantly different from those of tradedoptions and, as changes in the subjective input assumptions can materiallyaffect the fair value estimate, it is management’s opinion that the valuationsas determined by the existing models are different from the value that theoptions would realize if traded in the market.

 

Weused the following assumptions to estimate the fair value of options grantedfor the nine months ended September 30, 2007 and 2006:

 
| ** **                       | ** ** | **SFAS No. 123(R)**    | ** ** | **SFAS No. 123(R)**    | ** ** |
|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **Nine Months Ended**  | ** ** | **Nine Months Ended**  | ** ** |
| ** **                       | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| Expected life of options         |       | 3.2 — 6.8 years             |       | 2.4 — 6.7 years             |       |
| Expected volatility              |       | 70 — 85%                    |       | 80%                              |       |
| Risk-free interest rate          |       | 4.76 — 5.12%                |       | 4.31 — 5.23%                |       |
| Expected dividend yield of stock |       | 0%                               |       | 0%                               |       |

 

**Note 8 —Segment Information**

 

SFASNo. 131, “*Disclosures about Segments of anEnterprise and Related Information*” establishes standards for theway in which public companies disclose certain information about operatingsegments in their financial reports. Consistent with SFAS No. 131, we havedefined three reportable segments, described below, based on factors such asthe management of our operations and the views of our chief operating decisionmakers with respect to the results of our operations. We consider our chiefexecutive officer and our chief operating officer as our chief operatingdecision makers.

 

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***Oil and Gas Exploitation and ProductionSegment***

 

Ouroperations during the first three quarters of 2007 in this segment includedeveloping, producing and marketing natural gas primarily from coal-bed methanewells. Our exploitation and production segment currently operates in the PowderRiver Basin area of Wyoming and the Denver-Julesburg (“D-J”) Basin in Colorado.

 

***Gas Gathering andProcessing Segment***

 

Weown and operate gas gathering and processing systems that we acquired from 2004through 2006. We charge a fee to our customers for gathering and processingservices based on volumes of gas transported, a monthly minimum fee, and/or thelevel of compression services provided. We have acquired gas gatheringcontracts that include operating leases with respect to surface-use rights thatare cancelable in the event that gas gathering activities cease as a result ofdeclining production. We also have cancelable purchase commitments withthird-party providers for future field operations, equipment and maintenanceactivities.

 

***Corporate Segment***

 

Thissegment consists of general corporate functions and costs consisting primarilyof administrative, financial, legal and professional staff services, includingrelated office facilities.

 
| ** ** | ** ** | **Three Months Ended September 30, 2007 (in thousands)** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **Exploitation**                                                                            | ** ** | **Gathering** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **and**                                                                                     | ** ** | **and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Production**                                                                              | ** ** | **Processing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues   |       | $                                                                                           | 387        |   | $ | 253 |   | $ | 11 |   | $ | 651 |   |
| Net loss   |       | $                                                                                           | (707       | ) | $ | (816 | ) | $ | (3,516 | ) | $ | (5,039 | ) |

 
| ** **                  | ** ** | **Nine Months Ended September 30, 2007 (in thousands)** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Exploitation**                                                                           | ** ** | **Gathering** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **and**                                                                                    | ** ** | **and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Production**                                                                             | ** ** | **Processing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                    |       | $                                                                                          | 1,146      |   | $ | 1,125 |   | $ | 25 |   | $ | 2,296 |   |
| Net loss                    |       | $                                                                                          | (2,151     | ) | $ | (1,878 | ) | $ | (9,368 | ) | $ | (13,397 | ) |
| Identifiable assets:        |       |                                                                                       |       |   |   |   |   |   |   |
| Oil and gas properties, net |       | $                                                                                          | 21,959     |   | $ | — |   | $ | — |   | $ | 21,959 |   |
| Property and equipment, net |       | $                                                                                          | —     |   | $ | 11,724 |   | $ | 719 |   | $ | 12,443 |   |
| Other non-current assets    |       | $                                                                                          | —     |   | $ | 1,305 |   | $ | 1,195 |   | $ | 2,500 |   |

 

**Note 9—Related Party Transactions**

 

SusanWright, wife of our CEO and a corporate officer, provides services to us as theCorporate Secretary on a contractual basis. During the nine months endedSeptember 30, 2007, Ms. Wright was paid $91,000 for these contract services.

 

Oneof our officers (and a director) and three of our directors, in the aggregate,purchased $100,000 and a total of $1,275,000, respectively, of the Notes thatwere issued in the first quarter of 2006. During the nine months endedSeptember 30, 2007, we paid interest of $7,600 and $97,000, respectively, onthese Notes. In addition, an investment fund, of which one of our formerdirectors is a consultant, purchased on behalf of its investors, $1,000,000 ofthe Notes. The investors were paid $76,000 in interest during the nine monthsended September 30, 2007.

 

**Note 10 —Subsequent Events**

 

***Amendment to Agreement with RMG***

 

OnOctober 31, 2007, the Company entered into Amendment No. 1 to the RMG Note (the“Amendment”). The Amendment extends the final maturity date of the Note fromOctober 31, 2007 to February 29, 2008. The Amendment also provides that RMGwill make payments to the Company of $850,000 on October 31, 2007, $400,000 oneach of November 30, 2007, December 31, 2007 and January 31, 2008 and allremaining principal and accrued interest on February 29, 2008. The Companyreceived the $850,000 payment on October 31, 2007.

 

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**ITEM*2.    * MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Unlessthe context requires otherwise, the terms “PRB,” “the Company,” “us,” “we” and “our”refer to PRB Energy, Inc. and its subsidiaries.

 

**Forward-Looking Statements**

 

Thisquarterly report on Form 10-Q contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Thesestatements identify prospective information. Important factors could causeactual results to differ, possibly materially, from those in theforward-looking statements. In some cases you can identify forward-lookingstatements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,”“plan,” “intend,” “may,” “should,” “will” and “would” or other similar words. Youshould read statements that contain these words carefully because they discussour future expectations, contain projections of our future results of operationsor of our financial position or state other “forward-looking” information. Webelieve that it is important to communicate our future expectations to ourinvestors. There may, however, be events in the future that we are not able toaccurately predict or control. These forward-looking statements are subject toa number of risks, uncertainties and assumptions, including those listed underItem 1A “Risk Factors” in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

 

Weundertake no obligation to update publicly or revise any forward-lookingstatements. You should not rely upon forward-looking statements as predictionsof future events or performance. We cannot assure you that the events andcircumstances reflected in the forward-looking statements will be achieved oroccur. Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements.

 

Youshould read the following discussion in conjunction with the consolidated financialstatements and related notes in Item 1 and our Annual Report on Form 10-K forthe year ended December 31, 2006.

 

**General Overview**

 

Weare an independent energy company engaged in the acquisition, exploitation,development and production of natural gas and oil. In addition, we provide gasgathering, processing and compression services for properties we operate andfor third-party producers. We were initially formed under the name “PRBTransportation, Inc.” in December 2003 and were incorporated in the State ofNevada. On June 14, 2006, our name was changed to “PRB Energy, Inc.”  We conduct our primary business activities inWyoming, Colorado and Nebraska.  We operate through two wholly-ownedsubsidiaries:  PRB Oil and Gas, Inc., anoil and gas exploitation and production company and PRB Gathering, Inc., agathering and processing company.

 

**Three and Nine Months Ended September 30, 2007 - Operationaland Financial Highlights**

 

For the first nine months of 2007, we had a net lossof $13.4 million, 46% of which was due to interest expense and amortized costsrelated to the debt incurred in 2006. This debt is comprised of the seniorsubordinated convertible notes (the “Notes”) and the senior secured debentures(the “Debentures”). The components of these expenses consisted of thefollowing:

 
| ** **                                           | ** ** | **(In thousands)** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| Interest on Convertible Notes and  Debentures        |       | $                       | 3,124      |   |
| Amortization of Debt Issuance Costs and  Discount on |       |                    |       |
| Notes and Debentures                                 |       | $                       | 2,418      |   |
| Interest on Capital Lease Obligation                 |       | $                       | 873        |   |
| Capitalized Interest on Capital Lease  Obligation    |       | $                       | (253       | ) |
| Total Interest and Amortization Expense              |       | $                       | 6,162      |   |

 

The balance of the net loss for the nine months endedSeptember 30, 2007 was primarily due to recognizing amortization of leaseholdcosts related to producing properties and the incurrence of infrastructurecosts necessary to build operational and administrative capability enabling ourgrowth initiatives. Additionally, we experienced severe winter weatherconditions and other mechanical inefficiencies inhibiting our productioncapabilities in the first quarter of 2007. Our revenue stream has also beennegatively impacted throughout the first nine months of the year as a result ofdownward pressure on our realized natural gas sales prices stemming fromregional constraints in moving and selling our natural gas production intohigher demand markets. However, we expect a significant improvement in naturalgas prices with the opening of the Rocky Mountain Express pipeline scheduledfor completion in late 2007 or early 2008. With greater access to mid-westmarkets facilitated via this pipeline, we expect prices on Rockies-areaproduction to be much more competitive as measured against other majorproducing regions.

 

A primary focus of our oil and gas exploitation and productionsegment for the first nine months of 2007 centered on dewatering the Wyomingcoal-bed methane (“CBM”) wells to enable production of the underlying gasreserves. As of September 30, 2007, we had 58 gross (54 net) CBM wells in thedewatering stage. Also in Wyoming, we had 113 gross (103 net) CBM wells

 

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producing commercial gas from which we sold a net243,000 thousand cubic feet (“Mcf”) of gas, resulting in sales revenue of$792,000 for the nine months ended September 30, 2007. For the comparable ninemonth period of 2006, we sold 188,000 Mcf of gas resulting in revenues$882,000. The Wyoming well count was down from previous quarters due touneconomic production wells being shut-in or plugged.

 

During the third quarter of 2007, we drilled anadditional 11 wells (7 wells producing in the third quarter) in continuation ofour Colorado Niobrara exploitation program. As of quarter end, we had 17gross/net wells in production. From our Colorado operations, we sold 93,000 Mcfof gas resulting in sales revenue of $354,000 for the nine months endedSeptember 30, 2007. We had no comparable sales for 2006 as our Coloradooperations were not acquired until December 28, 2006.

 

Our gas gathering and processing segment operationsgenerated revenues of $1,125,000 (net of affiliated revenue) for the first ninemonths of 2007. We continue to operate our gas gathering systems for thebenefit of third-party producers in addition to transporting affiliated segmentproduction.

 

In the second quarter of 2007, we reached asettlement with Rocky Mountain Gas Inc. (“RMG”) in lieu of arbitration, whereinwe agreed to transfer our interest in certain well and leasehold assets to RMGin exchange for RMG’s interest in specific wells and a commitment to pay us$3,250,000 plus interest at 10%. During the second quarter of 2007, RMG paid us$1,000,000 according to schedule, and on June 1, 2007, RMG issued a promissorynote due October 31, 2007 to us for the remaining $2,250,000 plus interest. OnOctober 31, 2007 RMG paid us $850,000 and issued a revised promissory note tous to pay the remaining $1,400,000 plus interest in installments over a fourmonth period beginning November 30, 2007.

 

**We will recognize a** total reported gain from this settlement of$1,267,000 over the second quarter of 2007 through the first quarter of 2008. Ascash is received, a proportionate amount of the total gain will be recognizedin the financial statements. The portion of the gain from this settlement thatis reflected for the first nine months of 2007 is $344,000.

 

**Results of Operations**

 

**Threemonths ended September 30, 2007 (unaudited) compared to the three months endedSeptember 30, 2006 (unaudited)**

 

 Thefinancial information with respect to the three months ended September 30, 2007and 2006, which 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 such periods. Theresults of operations for interim periods are not necessarily indicative of theresults of operations for the full fiscal year.

 
| ** **                               | ** ** | ** **                                     | ** ** | ** **     | ** ** | **Increase /**       | ** ** | **Percentage**            | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|----------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                               | ** ** | **Quarter Ended September 30,** | ** ** | **(Decrease)** | ** ** | **Change**                | ** ** |
| ** **                               | ** ** | **2007**                                       | ** ** | **2006**       | ** ** | **2007 v 2006** | ** ** | **2007 v 2006** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)**           | ** ** | ** **     | ** ** | ** **                | ** ** |
| **Revenue**                              | ** ** | ** **                                     | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas sales                        |       | $                                              | 387        |           | $          | 776                       |       | $                         | (389       | ) | (50 | )% |
| Gas gathering and processing             |       | 253                                            |       | 314            |       | (61                       | )          | (19                       | )%         |
| Other                                    |       | 11                                             |       | 8              |       | 3                         |       | 38                        | %          |
| Total revenue                            |       | 651                                            |       | 1,098          |       | (447                      | )          | (41                       | )%         |
| Natural gas gathering expenses and taxes |       | (138                                           | )          | (181           | )          | 43                        |       | (24                       | )%         |
| **Net revenue**                          | ** ** | **513**                                        | ** ** | **917**        | ** ** | **(404**                  | **)**      | **(44**                   | **)%**     |
| **Operating expenses**                   | ** ** | ** **                                     | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas lease operating              |       | 273                                            |       | 580            |       | (307                      | )          | (53                       | )%         |
| Gas gathering and processing operations  |       | 459                                            |       | 332            |       | 127                       |       | 38                        | %          |
| Depreciation, depletion and amortization |       | 1,410                                          |       | 759            |       | 651                       |       | 86                        | %          |
| General and administrative               |       | 1,420                                          |       | 977            |       | 443                       |       | 45                        | %          |
| Other expense                            |       | 7                                              |       | —         |       | 7                         |       |                      | *          |
| **Total expenses**                       | ** ** | **3,569**                                      | ** ** | **2,648**      | ** ** | **921**                   | ** ** | **35**                    | **%**      |
| **Operating loss**                       | ** ** | **(3,056**                                     | **)**      | **(1,731**     | **)**      | **(1,325**                | **)**      | **(77**                   | **)%**     |
| Interest and other income (expense), net |       | (1,983                                         | )          | (35            | )          | (1,948                    | )          |                      | *          |
| **Net loss**                             | ** ** | **$**                                          | **(5,039** | **)**          | **$**      | **(1,766**                | **)**      | **$**                     | **(3,273** | **)** | **(185** | **)%** |

 

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*—Percentages greater than 200% and comparisons frompositive to negative values are not shown.

 

***Revenues***

 

Naturalgas sales for the 2007 third quarter were 50% less in comparison to 2006 due toa combination of unfavorable price and volume variances. The average salesprice during the 2007 quarter was $2.10 per Mcf lower than the average salesprice for the prior year period ($2.52 for 2007 compared to $4.62 for 2006)resulting in a revenue decline of $322,000. Sales volumes were also lower in2007 by 14,423 Mcf causing a revenue decline of $67,000 based on third quarteraverage pricing. Sales volumes decreased primarily as a result of the shut-inor plugging of uneconomic wells within our Wyoming production. Gas gatheringrevenues for the third quarter of 2007 were lower by $61,000, or 19%, comparedto the third quarter of 2006 mainly as a result of decreased throughput volumesas third party shippers reduced production in response to sales price declines.

 

11

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***Natural Gas Lease Operating Expenses***

 

Naturalgas lease operating expenses in 2007 decreased $307,000, or 53%, from 2006 as aresult of significant field operations expenditures incurred in the 2006 thirdquarter in conjunction with the mid-year 2006 Pennaco acquisition. Similar levels of operations expenditures have not been experienced in 2007 dueto cost control initiatives combined with a reduction in production volumes.

 

***Gas Gathering and Processing OperationsExpenses***

 

Gasgathering and processing operations expenses increased $127,000, or 38%, forthe current quarter compared to last year’s quarter primarily due tomaintenance expenses incurred in preparation for winter operating conditions. In2006, we did not undertake our winterizing preparations until the fourthquarter.

 

***Depreciation, depletion, amortization andimpairments (“DD&A”)***

 

DD&Aexpense for the quarter ending September 30, 2007 increased $651,000, or 86%, comparedto last year’s third quarter resulting from the acquisition of additionalproperties in mid and late 2006.

 

***General and Administrative Expenses***

 

Generaland administrative (“G&A”) expenses were higher than 2006 by $443,000, or45%, primarily due to employee compensation and benefits increasing as a resultof employees added in response to an increase in operations. We do notanticipate significant G&A expense escalations in the near-term quarters aswe believe current staff levels are sufficient to manage our ongoingoperations.

 

***Interest and Other Income and Expense***

 

Interestexpense for the quarter ended September 30, 2007 increased $1,526,000 over the 2006quarter due to (1) interest payments on Debentures, (2) amortization of thedebt issuance costs and the discount on Debentures and (3) interest on acompressor capital lease. Interest income on cash deposits and notes receivablewas lower in the 2007 third quarter by $114,000 and other income was also lowerdue to the 2006 third quarter recognition of a gain of $308,000 on the sale ofgathering assets.

 

**Ninemonths ended September 30, 2007 (unaudited) compared to the nine months endedSeptember 30, 2006 (unaudited)**

 

 Thefinancial information with respect to the nine months ended September 30, 2007and 2006, which 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 such periods. Theresults of operations for interim periods are not necessarily indicative of theresults of operations for the full fiscal year.

 
| ** **                               | ** ** | ** **                                              | ** **  | ** **     | ** ** | **Increase /**       | ** ** | **Percentage**            | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|-------------|----------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                               | ** ** | **Nine Months Ended September 30,** | ** **  | **(Decrease)** | ** ** | **Change**                | ** ** |
| ** **                               | ** ** | **2007**                                                | ** **  | **2006**       | ** ** | **2007 v 2006** | ** ** | **2007 v 2006** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)**                    | ** **  |
| **Revenue**                              | ** ** | ** **                                              | ** **  | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas sales                        |       | $                                                       | 1,146       |           | $          | 882                       |       | $                         | 264        |   | 30 | % |
| Gas gathering and processing             |       | 1,125                                                   |        | 1,592          |       | (467                      | )          | (29                       | )%         |
| Other                                    |       | 25                                                      |        | 154            |       | (129                      | )          | (84                       | )%         |
| Total revenue                            |       | 2,296                                                   |        | 2,628          |       | (332                      | )          | (13                       | )%         |
| Natural gas gathering expenses and taxes |       | (318                                                    | )           | (224           | )          | (94                       | )          | 42                        | %          |
| **Net revenue**                          | ** ** | **1,978**                                               | ** **  | **2,404**      | ** ** | **(426**                  | **)**      | **(18**                   | **)%**     |
| **Operating expenses**                   | ** ** | ** **                                              | ** **  | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas lease operating              |       | 1,491                                                   |        | 737            |       | 754                       |       | 102                       | %          |
| Gas gathering and processing operations  |       | 1,485                                                   |        | 1,561          |       | (76                       | )          | (5                        | )%         |
| Depreciation, depletion and amortization |       | 3,215                                                   |        | 1,415          |       | 1,800                     |       | 127                       | %          |
| General and administrative               |       | 4,214                                                   |        | 3,123          |       | 1,091                     |       | 35                        | %          |
| Other expense                            |       | 62                                                      |        | 50             |       | 12                        |       |                      | *          |
| **Total expenses**                       | ** ** | **10,467**                                              | ** **  | **6,886**      | ** ** | **3,581**                 | ** ** | **52**                    | **%**      |
| **Operating loss**                       | ** ** | **(8,489**                                              | **)**       | **(4,482**     | **)**      | **(4,007**                | **)**      | **(89**                   | **)%**     |
| Interest and other income (expense), net |       | (4,908                                                  | )           | (596           | )          | (4,312                    | )          | *                         |       |
| **Net loss**                             | ** ** | **$**                                                   | **(13,397** | **)**          | **$**      | **(5,078**                | **)**      | **$**                     | **(8,319** | **)** | **(164** | **)%** |

 

----

*—Percentages greater than 200% and comparisons frompositive to negative values are not shown.

 

***Revenues***

 

Totalrevenues decreased $332,000, or 13%, for the nine months ended September 30,2007 compared to last year’s results. The $264,000 increase in natural gassales generated from the Pennaco properties acquired in mid 2006 was more thanoffset by the $467,000 reduction in fees previously received from Pennaco forgathering Pennaco’s production volumes prior to PRB’s acquisition of the

 

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productionassets. Other revenue declined $129,000 due to the discontinuance of managementfees recorded in 2006 related to services provided to RMG that ended inconjunction with the RMG settlement.

 

***Natural Gas Lease Operating Expenses***

 

Naturalgas lease operating expenses in 2007 increased $754,000, or 102%, over 2006 asa result of the Pennaco field operations acquired in mid 2006.  Wesubstantially increased field operations over the same period last year as aresult of the Pennaco (Wyoming) and D-J Basin (Colorado/Nebraska) acquisitions.

 

***Gas Gathering and Processing OperationsExpenses***

 

Gasgathering and processing operations expenses decreased $76,000, or 5%, for thenine months ended September 30, 2007 compared to last year’s results primarilydue to the reduced use of third-party services resulting from our cost controlinitiatives, partially offset by maintenance expenses in preparation for winteroperating conditions.

 

***Depreciation, depletion, amortization andimpairments (“DD&A”)***

 

DD&Aexpense in 2007 increased $1,800,000, or 127%, as a result of propertiesacquired in mid and late 2006.

 

***General and Administrative Expenses***

 

Generaland administrative expenses increased over 2006 by $1,091,000, or 35%, primarilydue to employee compensation and benefits increasing as a result of employeesadded in response to an increase in operations, partially offset by recovery of$200,000 in administrative services expenses provided to a third party in thedesign and engineering of a processing plant.

 

***Interest and Other Income and Expense***

 

Interestexpense for the nine months ending September 30, 2007 increased $4,512,000 over2006 due to (1) interest payments on the Notes and Debentures, (2) amortizationof the debt issuance costs and the discount on Debentures and (3) interest ona  compressor capital lease. The interestexpense increase was partially offset by a $344,000 gain on the sale of the RMGassets less a loss of approximately $100,000 on the sale of other gatheringassets.

 

**Liquidity and Capital Resources**

 

***Cash Flows and Capital Expenditures***

 

AtSeptember 30, 2007, cash and cash equivalents totaled $2.4 million. Additionally,we have $1.0 million of restricted cash classified as a current asset whichcollateralizes a reducing letter of credit issued in connection with potentialplugging liabilities of Wyoming properties acquired in June 2006. Therestricted cash will be released on or before July 29, 2008. At September 30,2007, working capital, excluding the restricted cash, was $(36.4) million. Thesignificant decrease in working capital from previous quarters is due to thereclassification of $35.8 million attributed to the Notes and Debentures due inthe third quarter of 2008, from non-current to current liabilities.

 

In2006, we raised approximately $22 million by issuing the Notes and $15 million,before expenses, by issuing the Debentures. These funds have been utilized inthe exploitation, development and acquisition of properties in Wyoming andColorado. Current levels of cash flows from ongoing operations will beinsufficient to meet our repayment obligations on these borrowings when due inthe third quarter of 2008. We are actively pursuing supplemental capitalraising alternatives, including asset sales, to fund our ongoing debt servicesand working capital requirements as well as to provide for the furtherdevelopment of our producing assets. Regarding potential asset sales, we havereceived and are currently evaluating multiple bids for various components ofboth our natural gas production and gathering assets. While we have initiatedactions to immediately resolve the unfavorable working capital position, wecannot assure that we will be able to raise additional capital or obtainfinancing on acceptable terms, or at all, before such capital or financing willbe required.

 

As noted in our risk factors(See Item 1A of our 2006 Annual Report on Form 10-K and Part II, Item 1A ofthis Quarterly Report on Form 10-Q), cash and cash equivalents on hand,internally generated cash flows and future financing activities will requireaugmentation from bank financing, asset sales or other equity or debt financingto fund our debt service, working capital requirements, planned drilling, potentialacquisition and other capital expenditures in the future. The amount andallocation of future capital and exploitation expenditures will depend upon anumber of factors including the number and size of acquisitions and drillingopportunities, our cash flows from operating and financing activities and ourability to assimilate acquisitions. Also, the impact of oil and gas marketprices on investment opportunities, the availability of capital and borrowingfacilities and the success of our exploitation and development activities,particularly in Colorado, could lead to changes in funding requirements forfuture development. If we failed to secure financing for the futuredevelopment, we would pursue other financial arrangements through joint venturepartners, farm-out agreements or the sale of assets.

 

*Cash Flow Used in Operating Activities*

 

Duringthe nine months ended September 30, 2007, our net loss of $13.4 millionincluded non-cash charges of $3.2 million of DD&A expense, $2.4 million ofinterest expense resulting from amortization of debt issuance costs anddiscount on the Debentures and $0.5 million of share-based compensationexpense.

 

Cashused in operating activities of $6.1 million during the nine months of 2007 was$3.1 million more than the same period of 2006. The increase was mainlyattributable to the higher debt interest payments and increased general andadministrative expenses due to staff additions offset by a partial collectionof outstanding receivables.

 

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*Cash Flow Used in Investing Activities*

 

Cashused in investing activities was $3.5 million during the nine months endedSeptember 30, 2007 representing a $8.6 million, or 71%, decrease compared to2006.  The reduction in cash outflows was attributed to the 2006 assetacquisitions of $4.9 million in addition to the availability of $3.0 millioncash that had been restricted in 2006. We used $5.0 million of the availablecash for capital expenditures related to our drilling and gathering activitiesin 2007, which was approximately $0.6 million higher than was spent during thecomparable 2006 nine-month period. This was offset by $2.1 million release of arestricted CD during the quarter for expiring liabilities related to acquiredproperties.

 

Particularto our gas exploitation and production segment, our 2007 capital expendituresof approximately $3.5 million were used for our drilling program in thenortheastern Colorado D-J Basin in addition to our de-watering efforts relativeto the Wyoming coal-bed methane (“CBM”) wells. At September 30, 2007, we had 17gross/net wells completed and in production in Colorado and 58 gross (54 net)CBM wells in various stages of completion in Wyoming.  These wellsare being completed or are undergoing de-watering processes.  We believethat after the wells have been de-watered, we will be able to commenceproduction.

 

Inthe first quarter of 2007, we entered into a $3.1 million five-year capitallease arrangement for gas compression equipment and related services. Thecompression equipment is servicing our gas gathering pipelines in the PowderRiver Basin.

 

*Cash Flow from Financing Activities*

 

Cashprovided by financing activities was approximately $0.8 million for the ninemonths ended September 30, 2007, or a reduction of $20 million from 2006. During the first quarter of 2006, we raised $22.0 million from the issuance ofNotes and incurred approximately $1.1 million in debt issuance costs, excludingthe value of warrants issued.  The 2007 financings included the RMGsettlement proceeds received of $1.0 million, offset by additional Debenturecosts totaling $0.2 million.

 

*Off Balance-Sheet Arrangements*

 

Wedo not have any off-balance sheet financing arrangements as of September 30,2007. Previous quarterly reports had disclosed a gas gathering servicesagreement with a third-party shipper that included a minimum paymentarrangement under which the shipper was obligated to pay us gas gathering feeson specific minimum volumes of gas. During the third quarter of 2007, thatagreement was rescinded and replaced with a straight gathering servicescontract with renegotiated gathering rates per volume transported.

 

**Critical Accounting Policies andEstimates**

 

Werefer you to the corresponding section in Part II, Item 7 of our 2006 AnnualReport on Form 10-K and to the footnote disclosures included in Part I, Item 1of this report.

 

**ITEM 3:    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Therehave been no material changes in market risk from the information providedunder “Quantitative and Qualitative Disclosures about Market Risk” inItem 7A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006.

 

**ITEM 4:***   ***CONTROLS AND PROCEDURES**

 

Wemaintain disclosure controls and procedures as defined in Section 13 a - 15 (e)and 15 d - 15 (e) of the Securities Exchange Act of 1934, which are designed toprovide reasonable assurance that information required to be disclosed in ourreports is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms andthat such information is accumulated and communicated to our management,including our Chief Executive Officer and Principal Financial Officer to allowtimely decisions regarding required disclosure. Our management, with theparticipation and oversight of our Chief Executive Officer and PrincipalFinancial Officer, evaluated the design and effectiveness of our disclosurecontrols and procedures as of September 30, 2007. Based on this evaluation, ourChief Executive Officer and our Principal Financial Officer have concluded thatour disclosure controls and procedures were effective, as of September 30,2007.

 

Duringthe period covered by this report, there were no changes in our internalcontrol over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART IIOTHER INFORMATION**

 

**ITEM 1:    LEGAL PROCEEDINGS**

 

RockyMountain Gas Inc. (“RMG”) filed an arbitration demand against us in 2006. (Refer to Part I, Item 3 in our 2006 Annual Report on Form 10-K regarding theRocky Mountain Gas Agreement and Claims Dispute.)

 

In the quarter ended June 30, 2007, we reached asettlement with RMG, wherein we agreed to transfer our interest in certain welland leasehold assets to RMG in exchange for RMG’s interest in specific wellsand a commitment to pay us $3,250,000 plus interest at a rate of 10%. Duringthe quarter ended June 30, 2007, RMG paid us $1,000,000 according to scheduleand issued a promissory note to us for the remaining $2,250,000 plus interestwhich was due on October 31, 2007. On October 31, 2007 RMG paid us $850,000 andissued a revised promissory note to us for the remaining $1,400,000 plusinterest in installments over a four month period beginning November 30, 2007.

 

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**ITEM 1A. RISK FACTORS**

 

Forinformation regarding additional factors that could affect our results ofoperations, financial condition and liquidity, see the risk factors discussionprovided under Item 1A of our 2006 Annual Report on Form 10-K. Otherthan as provided below, there are no material changes from the risk factorsdiscussed in our 2006 Annual Report on Form 10-K. See also “Forward-LookingStatements” included in Part I, Item 2 of this Quarterly Report on Form10-Q.

 

***Our debt level could negativelyimpact our financial condition, results of operations and business prospects.***

 

     Ourhigh level of debt could have important consequences to our shareholders,including the following: 
| • | requiring us  to dedicate a substantial portion of our cash flow for required debt service  payments, thereby reducing the availability of cash flow for working capital,  capital expenditures, operations and other general business activities; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | limiting our  ability to obtain additional financing in the future for working capital,  capital expenditures, acquisitions and general corporate and other  activities;                                                                           |
| • | limiting our  flexibility in planning for, or reacting to, changes in our business and the  industry in which we operate;                                                                                                                          |
| • | increasing  our vulnerability to both general and industry-specific adverse economic  conditions; and                                                                                                                                              |
| • | placing us  at a competitive disadvantage against less leveraged competitors.                                                                                                                                                                      |

     If weare not be able to generate sufficient cash flow to pay our debt service,equity financings or proceeds from the sale of assets may not be available topay or refinance the amounts owed. We may not be able to successfully completeany such offering or sale of assets. Our debt is collateralized bysubstantially all of our assets. If we default on our debt payments, theholders of our debt could foreclose on such assets or we could be forced intobankruptcy.

 

***Our development operations andour debt payments require substantial capital and we may be unable to make suchdebt payments or obtain additional needed capital or financing on satisfactoryterms.***

 

     Theoil and natural gas industry is capital intensive.  We make and expect tocontinue to make substantial capital expenditures in our business andoperations for development, production and acquisition of oil and natural gasreserves.  To date, we have financed capital expenditures primarily withproceeds from the issuance of debt and equity plus cash generated byoperations.  We intend to finance our future capital expenditures withcash flow from operations, sale of properties and our access to othercapital.  Our cash flow from operations and access to capital are subjectto a number of variables, including:
| • | our proved reserves;                                                                    |
|--------|-----------------------------------------------------------------------------------------|
| • | the level of oil and natural gas we are able to produce from existing  wells;           |
| • | the prices at which oil and natural gas are sold;                                       |
| • | our ability to acquire, locate and produce new reserves;                                |
| • | our ability to dispose of assets or properties in a timely manner at acceptable  prices |

If our revenues decrease as aresult of lower oil and natural gas prices, operating difficulties, declines inreserves or for any other reason, then we may have limited ability to obtainthe capital necessary to sustain our operations at current levels.  Wemay, from time to time, need to seek additional financing.  There can beno assurance as to the availability or terms of any additional financing.

 

**ITEM 6:    EXHIBITS**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                           |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                      |
| (3.1)       |       | Amended  Articles of Incorporation of the Registrant (filed as an exhibit to  Form S-1/A filed on January 28, 2005 and incorporated by reference  herein).                                                                                                                 |
| (3.3)       |       | Amended  By-laws of the Registrant (filed as an exhibit to Form S-1/A filed on  January 28, 2005 and incorporated by reference herein).                                                                                                                                    |
| (4.5)       |       | Form  of Common Stock Certificate (filed as an exhibit to Form 8-A filed on  April 8, 2005).                                                                                                                                                                               |
| (4.6)       |       | Form of  Senior Subordinated Convertible Note (filed as an exhibit to Form 10-K  filed on April 14, 2006 and incorporated by reference herein).                                                                                                                            |
| (4.7)       |       | Form of  Registration Rights Agreement between the Company and the holders of the  Company’s Senior Subordinated Convertible Notes (filed as an exhibit to  Form 10-K filed on April 14, 2006 and incorporated by reference herein).                                  |
| (4.8)       |       | Form  of Senior Secured Debentures (filed as an exhibit to Form 8-K filed on  January 5, 2007 and incorporated by reference herein).                                                                                                                                                 |
| (4.9)       |       | Pledge  and Security Agreement, dated as of December 28, 2006, by and among PRB  Energy, Inc., PRB Oil &Gas, Inc., PRB Gathering, Inc., and the Secured  Parties named therein (filed as an exhibit to Form 8-K filed on January 5,  2007 and incorporated by reference herein). |
| (4.10)      |       | Secured  Guaranty, dated as of December 28, 2006, made by PRB Energy, Inc. and PRB  Gathering, Inc. (filed as an exhibit to Form 8-K filed on January 5, 2007 and  incorporated by reference herein).                                                                                |
| (4.11)      |       | Registration  Rights Agreement, dated as of December 28, 2006, by and among PRB Energy,  Inc. and the Buyers named therein (filed as an exhibit to Form 8-K filed on  January 5, 2007 and incorporated by reference herein).                                                         |
| 31.1        |       | Chief  Executive Officer Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                              |
| 31.2        |       | Principal  Financial Officer Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                          |
| 32.1        |       | Chief  Executive Officer and Principal Financial Officer Certifications pursuant to  18 U.S.C. 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                |

 

These exhibits are available upon request. Exhibits identified in parentheses above are on file with the SecuritiesExchange Commission and are incorporated herein by reference.  All otherexhibits are provided as part of this electronic submission.

 

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()                                         Previouslyfiled.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                      | PRB  Energy, Inc. |
|---------------------------|-------------------|
|                      | (Registrant)      |
|                      |              |   |
|                      | By:               | /s/  Robert W. Wright |
|                      |              | Name:  Robert W. Wright |
|                      |              | Title:  Chairman and Chief Executive Officer |
|                      |              |   |
|                      | By:               | /s/  Rick H. Lawler |
|                      |              | Name:  Rick H. Lawler |
|                      |              | Title:  Vice President—Finance and Treasurer |
|                      |              | (Principal  Financial Officer) |
|                      |              |   |
|                      |              |   |
| Dated:  November 14, 2007 |              |   |

 

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