**UNITED STATES**

**SECURITIESAND 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 June 30, 2006** |
| ** **                                        |
| **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**

**PRB ENERGY, INC.**

(Exact Name ofRegistrant 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 markwhether the 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 þ     No o

Indicate by check markwhether the 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     Acceleratedfiler     Non-accelerated filer   x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).     Yes o     No þ

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.
| Class                           | ** ** | **Outstanding as of August 10, 2006** |
|---------------------------------|------------|---------------------------------------|
| Common Stock,  $0.001 par value |       | 7,471,894 Shares                      |

 

 

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**TABLE OF CONTENTS**
|                                          |       |                                                                                        |   |   |
|------------------------------------------|------------|---------------------------------------------------------------------------------------------|--------|--------|
| **Caption**                              | ** ** | **Page**                                                                                    |
|                                     |       |                                                                                        |   |   |
| PART I — Financial Information |       |                                                                                        |
| Item 1.                             |       | Financial Statements                                                                        |   | 1      |
| Item 2.                             |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   | 12     |
| Item 3.                             |       | Quantitative and Qualitative Disclosures About Market  Risk                                 |   | 17     |
| Item 4.                             |       | Controls and Procedures                                                                     |   | 17     |
| PART  II — Other Information   |       | 19                                                                                          |
| Item 1.                             |       | Legal  Proceedings                                                                          |   | 19     |
| Item 1A.                                 |       | Risk Factors                                                                                |   | 19     |
| Item 2.                             |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |   | 19     |
| Item 3.                             |       | Defaults Upon Senior Securities                                                             |   | 19     |
| Item 4.                             |       | Submission of Matters to a Vote of Security Holders                                         |   | 19     |
| Item 5.                             |       | Other  Information                                                                          |   | 19     |
| Item 6.                             |       | Exhibits                                                                                    |   | 20     |
|                                     |       | Signatures                                                                                  |   | 22     |

 

When we refer to “PRB,” “the Company,” “us,” “we,” or“our,” we are describing PRB Energy, Inc. and its subsidiary.

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**PART I — FINANCIAL INFORMATION**

**Item 1. FinancialStatements**

**PRB ENERGY, INC.****Condensed Consolidated Balance Sheets**

**(Inthousands, except share amounts)**

 
| ** **                                                                                                                                                                                                     | ** ** | **June 30,  2006** | ** ** | **December 31,   2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **(Unaudited)**         | ** ** | ******                            | ** ** |
| **Assets**                                                                                                                                                                                                     | ** ** | ** **              | ** ** | ** **                        | ** ** |
| Current assets:                                                                                                                                                                                                |       |                    |       |                              |       |
| Cash and cash equivalents                                                                                                                                                                                      |       | $                       | 15,243     |                              | $          | 6,434 |   |
| Restricted cash                                                                                                                                                                                                |       | 3,000                   |       | —                            |       |
| Accounts receivable                                                                                                                                                                                            |       | 1,155                   |       | 789                               |       |
| Inventory                                                                                                                                                                                                      |       | 929                     |       | 1,346                             |       |
| Prepaid expenses                                                                                                                                                                                               |       | 666                     |       | 194                               |       |
| Total current assets                                                                                                                                                                                           |       | 20,993                  |       | 8,763                             |       |
| Oil and gas properties  - successful efforts method of accounting:                                                                                                                                             |       |                    |       |                              |       |
| Proved properties                                                                                                                                                                                              |       | 5,105                   |       | 317                               |       |
| Unproved leaseholds                                                                                                                                                                                            |       | 307                     |       | 136                               |       |
| Wells-in-progress                                                                                                                                                                                              |       | 4,175                   |       | 1,081                             |       |
| Total oil and gas properties                                                                                                                                                                                   |       | 9,587                   |       | 1,534                             |       |
| Less: accumulated depreciation, depletion and  amortization                                                                                                                                                    |       | (34                     | )          | (3                                | )          |
| Net oil and gas properties                                                                                                                                                                                     |       | 9,553                   |       | 1,531                             |       |
| Other property  and equipment                                                                                                                                                                                  |       | 8,850                   |       | 6,992                             |       |
| Less: accumulated depreciation and amortization                                                                                                                                                                |       | (1,507                  | )          | (968                              | )          |
| Net other property and equipment                                                                                                                                                                               |       | 7,343                   |       | 6,024                             |       |
| Other non-current  assets:                                                                                                                                                                                     |       |                    |       |                              |       |
| Deferred debt issuance costs                                                                                                                                                                                   |       | 1,143                   |       | —                            |       |
| Less: accumulated amortization                                                                                                                                                                                 |       | (164                    | )          | —                            |       |
| Net deferred debt issuance costs                                                                                                                                                                               |       | 979                     |       | —                            |       |
| Other non-current assets                                                                                                                                                                                       |       | 1,085                   |       | 1,122                             |       |
| Total other non-current assets                                                                                                                                                                                 |       | 2,064                   |       | 1,122                             |       |
| TOTAL ASSETS                                                                                                                                                                                                   |       | $                       | 39,953     |                              | $          | 17,440 |   |
| ** **                                                                                                                                                                                                     | ** ** | ** **              | ** ** | ** **                        | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                 | ** ** | ** **              | ** ** | ** **                        | ** ** |
| Current liabilities:                                                                                                                                                                                           |       |                    |       |                              |       |
| Accounts payable                                                                                                                                                                                               |       | $                       | 595        |                              | $          | 1,652 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                 |       | 2,364                   |       | 107                               |       |
| Total current liabilities                                                                                                                                                                                      |       | 2,959                   |       | 1,759                             |       |
| Subordinated  convertible notes and other debt, less current portion                                                                                                                                           |       | 21,977                  |       | 17                                |       |
| Other  non-current liabilities                                                                                                                                                                                 |       | 2,517                   |       | 407                               |       |
| Total liabilities                                                                                                                                                                                              |       | 27,453                  |       | 2,183                             |       |
| Commitments and  Contingencies                                                                                                                                                                                 |       |                    |       |                              |       |
| Stockholders’ equity:                                                                                                                                                                                     |       |                    |       |                              |       |
| Capital, 50,000,000 shares authorized, par value  $0.001, 5,639,000 shares undesignated; Series C Convertible Preferred,  4,361,000 shares authorized; 0 and 40,000 issued and outstanding,  respectively |       | —                  |       | *                                 |       |
| Common stock, 40,000,000 shares authorized;  8,261,894 issued; 7,471,894 and 7,431,894 outstanding, respectively                                                                                               |       | 8                       |       | 8                                 |       |
| Treasury stock                                                                                                                                                                                                 |       | (800                    | )          | (800                              | )          |
| Additional paid-in-capital                                                                                                                                                                                     |       | 21,880                  |       | 21,325                            |       |
| Accumulated deficit                                                                                                                                                                                            |       | (8,588                  | )          | (5,276                            | )          |
| Total stockholders’ equity                                                                                                                                                                                |       | 12,500                  |       | 15,257                            |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                               |       | $                       | 39,953     |                              | $          | 17,440 |   |

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****                   *amountsless than one thousand

**             derivedfrom audited balance sheet at December 31, 2005

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

1

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**PRB ENERGY, INC.**

**CondensedConsolidated Statements of Operations**

**(Inthousands, except share amounts)**

**(Unaudited)**
| ****                                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                              |       |                                                |       |                                              |       |   |   |   |   |
| Gas gathering and processing                           |       | $                                                   | 603        |                                              | $          | 715 |   | $ | 1,278 |   | $ | 1,556 |   |
| Natural gas sales                                      |       | 48                                                  |       | —                                            |       | 106 |   | — |   |
| Other                                                  |       | 52                                                  |       | —                                            |       | 146 |   | — |   |
| Total revenues                                         |       | 703                                                 |       | 715                                               |       | 1,530 |   | 1,556 |   |
| Operating expenses:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Gas gathering and processing                           |       | 668                                                 |       | 384                                               |       | 1,256 |   | 875 |   |
| Depreciation, depletion, amortization and accretion    |       | 336                                                 |       | 280                                               |       | 656 |   | 557 |   |
| General and administrative                             |       | 1,129                                               |       | 467                                               |       | 2,146 |   | 728 |   |
| Other expense                                          |       | 48                                                  |       | —                                            |       | 223 |   | — |   |
| Total operating expenses                               |       | 2,181                                               |       | 1,131                                             |       | 4,281 |   | 2,160 |   |
| Operating loss                                         |       | (1,478                                              | )          | (416                                              | )          | (2,751 | ) | (604 | ) |
| Other income (expense):                                |       |                                                |       |                                              |       |   |   |   |   |
| Interest and other income                              |       | 284                                                 |       | 48                                                |       | 471 |   | 48 |   |
| Interest expense                                       |       | (624                                                | )          | (7                                                | )          | (1,032 | ) | (49 | ) |
| Net loss                                               |       | (1,818                                              | )          | (375                                              | )          | (3,312 | ) | (605 | ) |
| Convertible  preferred stock dividends                 |       | —                                              |       | (22                                               | )          | — |   | (205 | ) |
| Net loss applicable to common stockholders             |       | $                                                   | (1,818     | )                                                 | $          | (397 | ) | $ | (3,312 | ) | $ | (810 | ) |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Net loss per  share — basic and diluted           |       | $                                                   | (0.24      | )                                                 | $          | (0.06 | ) | $ | (0.44 | ) | $ | (0.12 | ) |
|                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Basic and  diluted weighted average shares outstanding |       | 7,471,235                                           |       | 6,225,825                                         |       | 7,450,679 |   | 6,635,636 |   |

** **

**Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.**

2

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**PRB ENERGY, INC.****Condensed Consolidated Statements of CashFlows**

**(Inthousands)**

**(Unaudited)**
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                     |       |                                              |       |   |   |
| Net loss                                                                                   |       | $                                                 | (3,312     | ) | $ | (605 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |       |                                              |       |   |   |
| Exploration expense                                                                        |       | 50                                                |       | — |   |
| Depreciation, depletion, amortization and accretion                                        |       | 656                                               |       | 557 |   |
| Amortization of debt issuance costs                                                        |       | 164                                               |       | — |   |
| Share-based compensation expense                                                           |       | 392                                               |       | — |   |
| Warrants issued for services rendered                                                      |       | 71                                                |       | — |   |
| Capitalized interest                                                                       |       | (32                                               | )          | — |   |
| Changes in  assets and liabilities:                                                        |       |                                              |       |   |   |
| Accounts receivable                                                                        |       | (366                                              | )          | (218 | ) |
| Inventory                                                                                  |       | 417                                               |       | — |   |
| Prepaid expenses                                                                           |       | (472                                              | )          | (63 | ) |
| Other non-current assets                                                                   |       | 11                                                |       | (21 | ) |
| Accounts payable                                                                           |       | (1,057                                            | )          | 62 |   |
| Accrued expenses and other current liabilities                                             |       | 757                                               |       | 69 |   |
| Other non-current liabilities                                                              |       | 6                                                 |       | — |   |
| Net cash used in operating activities                                                      |       | (2,715                                            | )          | (219 | ) |
| Cash flows from  investing activities:                                                     |       |                                              |       |   |   |
| Capital expenditures                                                                       |       | (6,204                                            | )          | (85 | ) |
| Restricted cash related to future liabilities of  acquired properties                      |       | (3,000                                            | )          | — |   |
| Sale of fixed assets                                                                       |       | 20                                                |       | — |   |
| Deferred acquisition costs                                                                 |       | (18                                               | )          | — |   |
| Reduction in accrued TOP acquisition costs                                                 |       | —                                            |       | (185 | ) |
| Unproved leaseholds acquisitions                                                           |       | (183                                              | )          | — |   |
| Net cash used in investing activities                                                      |       | (9,385                                            | )          | (270 | ) |
| Cash flows from  financing activities:                                                     |       |                                              |       |   |   |
| Proceeds from convertible notes                                                            |       | 21,965                                            |       | — |   |
| Issuance costs related to convertible notes                                                |       | (1,051                                            | )          | — |   |
| Proceeds from IPO, net of issuance costs                                                   |       | —                                            |       | 11,007 |   |
| Borrowings under bank loan                                                                 |       | —                                            |       | 50 |   |
| Repayment of proceeds from bank loan                                                       |       | —                                            |       | (1,550 | ) |
| Convertible preferred stock dividends                                                      |       | —                                            |       | (338 | ) |
| Repayment of term loan                                                                     |       | (5                                                | )          | — |   |
| Net cash provided by financing activities                                                  |       | 20,909                                            |       | 9,169 |   |
| Net increase in  cash                                                                      |       | 8,809                                             |       | 8,680 |   |
| Cash—beginning  of period                                                             |       | 6,434                                             |       | 320 |   |
| Cash—end of  period                                                                   |       | $                                                 | 15,243     |   | $ | 9,000 |   |
|                                                                                       |       |                                              |       |   |   |
| Supplemental disclosure  of cash flow activity                                             |       |                                              |       |   |   |
| Cash paid for interest                                                                     |       | $                                                 | 808        |   | $ | 49 |   |
| Supplemental schedule  for non-cash activity                                               |       |                                              |       |   |   |
| Issuance of warrants to a related party in  connection with convertible notes              |       | $                                                 | 92         |   | — |   |
| Asset retirement obligations                                                               |       | $                                                 | 2,085      |   | — |   |
| Capitalized  remediation costs of acquired oil and gas properties                          |       | $                                                 | 1,500      |   | — |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

3

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**PRB ENERGY, INC.Notes to Condensed Consolidated Financial StatementsJune 30, 2006**

**(Unaudited)**

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

***Description ofBusiness***

***PRB is an independent energy company engaged in theacquisition, exploration, development and production of natural gas and oil. Inaddition, we provide gas gathering, processing and compression services forproperties we operate and for third party producers. Through June 30, 2006, wealso provided contract management services by operating certain properties fora third party and providing technical and administrative support for thoseproperties. PRB was initially formed under the name “PRB Transportation, Inc.in December 2003, and was incorporated in the State of Nevada. On June 14,2006, PRB’s name was changed to “PRB Energy, Inc.” PRB’s common shares aretraded on the American Stock Exchange under the ticker symbol “PRB.” PRBconducts its primary business activities in Wyoming.***

***Basis ofPresentation***

We have prepared this Quarterly Report onForm 10-Q under the rules and regulations of the United States Securitiesand Exchange Commission (“SEC”). Because this is an interim period filingpresented using a condensed format, certain information and footnotedisclosures normally included in consolidated financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. These interim financial statementsshould be read in conjunction with the audited consolidated financialstatements and the summary of significant accounting policies and notes theretoincluded in our 2005 Annual Report on Form 10-K.  During interim periods, we follow the sameaccounting policies outlined in our 2005 Annual Report on Form 10-K, Note 2 —Summary of Significant Accounting Policies. The condensed consolidatedfinancial statements as of June 30, 2006, and for the three and six monthsended June 30, 2006 and 2005, are unaudited. We derived the condensedconsolidated balance sheet as of December 31, 2005, from the auditedbalance sheet filed in our 2005 Annual Report on Form 10-K. Certainreclassifications have been made to the 2005 unaudited condensed consolidatedfinancial statements to conform to the 2006 presentation. Suchreclassifications had no effect on the 2005 net loss. In the opinion ofmanagement, these interim financial statements contain all adjustments whichare of a normal, recurring nature to fairly present the financial position ofPRB as of June 30, 2006 and the results of our operations and cash flows forthe six months ended June 30, 2006 and 2005. Information for interim periodsmay not be indicative of our results of operations for the entire year.

***Summary of Significant Accounting Policies***

*Useof Estimates*

Management makesestimates and assumptions that affect the amounts reported in the financialstatements and the disclosures made in the accompanying notes. (Some examplesof such estimates are the realizability of inventory, the appropriate levels ofvarious accruals including asset retirement obligations, determining theremaining economic lives and carrying values of property and equipment, oil andgas properties and other long-lived assets.) In addition, we use assumptions toestimate the fair value of share-based compensation. See Share-BasedCompensation below and Note 5 - EquityCompensation Plan.**We believe ourestimates and assumptions are reasonable; however, actual results maydiffer from our estimates.

*Share-BasedCompensation*

Prior to ourJanuary 1, 2006 adoption of Financial Accounting Standards Board (“FASB”)Statement No. 123(R), “*Share-Based Payment*”(“SFAS No. 123(R)”), we accounted for share-based compensation using theintrinsic value method prescribed in Accounting Principles Board Opinion No.25, “*Accounting for Stock Issued to Employees*”(“APB No. 25”) and related interpretations.  Accordingly, because thestock option grant price was equal to or greater than the respective marketprices of our common stock on the grant dates, no compensation expense wasrecognized for Company-issued stock options.  In accordance with Statementof Financial Accounting Standards (“SFAS”) No. 123, “*Accountingfor Stock-based Compensation*” (“SFAS No. 123”) and SFAS No. 148, *“Accounting for Stock-Based Compensation — Transitionand Disclosure,”*we provided pro-forma net loss and net loss pershare disclosures for each period prior to the adoption of SFAS No. 123(R) asif we had applied the fair value-based method in measuring compensation expensefor our share-based compensation plans.

4

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Effective January 1, 2006, we adopted SFAS No. 123(R)using the modified prospective transition method and, as a result, did notretroactively adjust results from prior periods.  SFAS No. 123(R) requiresthat share-based compensation expense be measured using estimates of the fairvalue of all share-based awards and applies to new awards and to awardsmodified, repurchased or cancelled after December 31, 2005, as well as to theunvested portion of awards outstanding as of January 1, 2006. Under themodified prospective transition method, we are recognizing share-basedcompensation expense over the remaining vesting period for awards that wereoutstanding but unvested at January 1, 2006 and we are recognizing share-basedcompensation expense for the fair value of all awards granted on or afterJanuary 1, 2006 as the awards vest. We apply the Black-Scholes valuation modelin determining the fair value of share-based payments to employees.  SeeNote 5 - Equity Compensation Plan forfurther discussion of share-based compensation.

***Net Loss Per Share***

We account for earnings (loss) per share (“EPS”) inaccordance with SFAS No. 128, “*Earnings per Share*”(“SFAS No. 128”). Under SFAS No. 128, basic EPS is computed by dividingthe net loss applicable to common stockholders by the weighted average commonshares outstanding without including any potentially dilutive securities.Diluted EPS is computed by dividing the net loss applicable to common stockholdersfor the period by the weighted average common shares outstanding plus, whentheir effect is dilutive, common stock equivalents.

*Potentiallydilutive securities, which have been excluded from the determination of dilutedEPS because their effect would be anti-dilutive, are as follows:*

|                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|                                        |       |                                          |       |   |   |
| Series C  Convertible Preferred        |       | —                                        |       | 411,000 |   |
| Warrants                                    |       | 300,000                                       |       | 245,000 |   |
| Options                                     |       | 659,250                                       |       | 390,000 |   |
| Convertible  notes                          |       | 3,137,857                                     |       | — |   |
| Total potentially  dilutive shares excluded |       | 4,097,107                                     |       | 1,046,000 |   |

 

***Concentrations of Credit Risk***

We grant credit inthe normal course of business to customers in the United States. Managementperiodically performs a credit analysis and monitors the financial condition ofour customers to reduce credit risk.  Management periodically reviewsaccounts receivable and reduces the carrying amount by a valuation allowancethat reflects management’s best estimate of the amount that may not becollectible.  Allowances for uncollectible accounts receivable are basedon information available and historical experience.  As of June 30, 2006and December 31, 2005, there were no allowances for uncollectible accountsreceivable.

Revenues fromcustomers which represented 10% or more of our sales for the three and sixmonths ended June 30, 2006 and 2005 were as follows:

|                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **Customer**                               | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(% of total revenue)**             | ** ** | **(% of total revenue)**           | ** ** |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| A — Gathering  and processing segment |       | 31                                                  | %          | 60                                                | %          | 37 | % | 61 | % |
| B — Gathering  and processing segment |       | 17                                                  | %          | —                                            |       | 15 | % | — |   |
| C — Gathering  and processing segment |       | 12                                                  | %          | —                                            |       | — |   | — |   |
| D — Gathering and  processing segment |       | —                                              |       | 11                                                | %          | — |   | — |   |

*** ***

5

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*** ***

***Debt Issuance Costs***

***We include debt issuance costs in other non-currentassets.  These costs are associated withthe senior subordinated convertible notes (“Notes”) we issued in March2006.  The remaining unamortized debtissuance costs at June 30, 2006 were $979,000 and are being amortized using theeffective interest rate method over the life of the Notes.***

**Note 2—Acquisitions and Significant Contracts**

***Acquisitions***

In the first quarter of2006, we acquired two gas gathering systems in the Recluse area of Wyoming (togetherour “Recluse” gathering system) for approximately $1.5 million. Also, in twoseparate transactions totaling $183,000, we acquired a combination of workinginterests ranging from 7.5% to 15% in the development of approximately 5,600net acres in the Recluse and Gap areas that offer us the opportunity to expandboth our exploration and production and gas gathering and processingactivities.

On June 30, 2006, we acquiredworking interests in approximately 630 gross (580 net) coal-bed methane wellson approximately 29,000 acres located in the Powder River Basin of Wyoming fromPennaco Energy, Inc. (“Pennaco”). The purchase price of the acquired interestswas approximately $600,000 and the effective date was July 1, 2006. As part ofthe purchase agreement, we issued a $3 million reducing letter of credit to thebenefit of Pennaco to guarantee the funding of the future liability of theplugging costs of wells being purchased from Pennaco. The asset retirementobligation of these wells has been recorded on the balance sheet for $2 millionbased on the discounted present value of the future liability, as furtherreflected in Note 3 below. The letter of credit is collateralized by a $3million certificate of deposit (CD), and is considered restricted cash forpurposes of available working capital. The restricted amount of the CD will be releasedat the same rate annually that the letter of credit is reduced (refer to the Liquidity andCapital Resources section of this report).

Of the 630 gross wells, fewer than200 are currently producing at a rate of between 2.5 to 3 million cubic feetper day. We plan to improve productionby bringing shut-in wells back to a productive status over the next severalmonths, which will require additional capital expenditures. In this regard, anestimate of these capital expenditures by the our technical staff of $1.5million has been included in the 2006 capital budget and has been accrued inoil and gas properties in the June 30, 2006 balance sheet. In addition, weanticipate drilling approximately 300 coal-bed methane wells on the newlyacquired acreage in the near term.

***SignificantContracts***

***Storm Cat Agreement***

EffectiveJanuary 1, 2006, we entered into a gas gathering services agreement (“Agreement”)with Storm Cat, which requires Storm Cat to pay us gas gathering fees onspecific minimum volumes of gas whether or not those volumes are delivered andtransported through our system. The Agreement has a 10-year term,of which thefirst 5 years are noncancelable. The Agreement requires Storm Cat to pay us aminimum of $972,000 in 2006 and a minimum of $3.1 million in gas gathering feesduring the first 3 years of the Agreement.

Duringthe six months ended June 30, 2006, we billed Storm Cat $231,000 in gasgathering fees for actual volumes delivered. The Agreement allows for a cashtrue-up payment at each year-end if the annual volume commitment under theAgreement is not met. The Agreement also provides for our gas gathering ratesto decrease during the fourth and fifth years. We recognize revenues based onour estimate of the average gas gathering rate during the noncancelable term ofthe Agreement. Accordingly, we deferred $24,000 of gas gathering fees as anon-current liability on our balance sheet at June 30, 2006.

6

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***Rocky Mountain Gas Agreement***

OnMarch 20, 2006, PRB terminated a Farmout and Development Agreement datedAugust 1, 2005 (“Farmout Agreement”) with Enterra Energy Trust’s wholly-ownedsubsidiary Rocky Mountain Gas, Inc. (“RMG”). We are also the designated field operator under a Joint OperatingAgreement (“JOA”) with RMG for certain coal-bed methane properties in Wyomingand Montana that are covered by the JOA. In February 2006, RMG executed 19 authorizations for expenditure todrill and complete the Moyer coal pilot wells. After termination of the FarmoutAgreement,  PRB, as operator under theJOA, issued a cash call to RMG for RMG’s share of the estimated well costs fornine wells. In addition, after termination of the Farmout Agreement, RMGrequested its full working interest in all wells drilled after the terminationdate. As of March 31, 2006, the outstanding amount due from RMG was $713,000,which we classified as an account receivable.

PRBdid not receive payment from RMG for the well costs as required under the JOAand issued a notice of default to RMG. The default was not cured within the period prescribed by the JOA and,under the JOA, RMG’s interest was relinquished to PRB until the proceeds fromthe 9 Moyer wells equal 300% of the capital expenditures by PRB on RMG’sbehalf.  As a result, we reclassified the$713,000 account receivable from RMG as additional costs of oil and gasproperties on our June 30, 2006 balance sheet.

OnJune 22, 2006, RMG filed an arbitration demand against PRB, asserting that thearea of mutual interest provision in the terminated Farmout Agreement continuesuntil August 2007 and therefore includes the Pennaco acquisition and that weshould pay 100% of the costs of drilling the 9 Moyer wells for a 50% workinginterest. We deny these assertions. PRB and RMG are currently in settlementdiscussions regarding these issues. The results of these discussions cannot bepredicted at this time. If we are required to respond to the arbitrationdemand, we intend to file significant counterclaims against RMG.

Wealso agreed upon termination of the Farmout Agreement to continue to providemanagement services until June 30, 2006. As of June 30, 2006, we had a receivable due from RMG of $386,000 formanagement services rendered and certain other amounts due from RMG. RMGdisputed the amounts due to us. In July 2006, PRB and RMG entered into aninterim agreement under which, among other things, RMG paid us $175,000 of theamount due at June 30, 2006.  Theremainder of the amount due is to be settled after an audit of the jointaccount by RMG.  No reserve against thisremaining balance has been recorded at June 30, 2006, as we believe the balanceto be fully collectible.

**Note 3—Asset Retirement Obligations**

Werecognize an estimated liability for future costs associated with abandoningour property and equipment used in our gas gathering operations as well as foroil and gas properties. A liability for the fair value of an asset retirementobligation is established when the long-lived asset is acquired, constructedand or completed, with a corresponding increase in the carrying value of theasset. We depreciate the asset retirement obligations associated with ourproperty and equipment, and deplete the amounts recorded in respect to our oil andgas properties, and recognize accretion expense, all over the estimated usefullives of the assets and or remaining recoverable reserves.

We estimate our future retirement obligationsbased on our experience, management estimates and regulatory requirements. Wediscount the estimated future obligations using an estimated credit adjustedrisk-free rate at the time the obligation is incurred or revised. Historicallythis rate has been estimated at 8% to 10%. The estimated obligations may berevised due to changes in our gas gathering system configuration, changes inestimates and or changes in regulations.

A reconciliation of our asset retirementobligation liability for the six months ended June 30, 2006 and 2005, is asfollows:

|                                         | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 30, 2006**    | ** ** | **June 30, 2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**        | ** ** |
|                                    |       |                           |       |   |   |
| Asset retirement  obligation January 1, |       | $                              | 387        |   | $ | 65 |   |
| Acquisition of  Recluse system          |       | 69                             |       | — |   |
| Proved  properties                      |       | 16                             |       | — |   |
| Acquisition of  Pennaco wells           |       | 2,000                          |       | — |   |
| Accretion                               |       | 18                             |       | 2 |   |
| Reclamation  expenditures               |       | (18                            | )          | — |   |
| Ending asset retirement  obligation     |       | $                              | 2,472      |   | $ | 67 |   |

 

7

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**Note 4—Borrowings**

As of June 30, 2006 and December 31, 2005,our borrowings consisted of the following:

|                                        | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **(In thousands)**     | ** ** |
|                                   |       |                        |       |                            |       |
| Senior  subordinated convertible notes |       | $                           | 21,965     |                            | $          | — |   |
| Other term loans                       |       | 22                          |       | 27                              |       |
|                                   |       | 21,987                      |       | 27                              |       |
| Less current  portion                  |       | (10                         | )          | (10                             | )          |
| Total long-term  borrowings            |       | $                           | 21,977     |                            | $          | 17 |   |

* *

*Senior Subordinated Convertible Notes*

In March 2006, weissued a total of approximately $22 million in Notes in a private placement.The Notes are secured by certain gas gathering assets owned by PRB and mature30 months from the date of issue. The Notes bear interest at a fixed rate of10% per annum, payable quarterly in arrears beginning on March 15, 2006. Aregistration statement applicable to the shares of common stock underlying theNotes was filed in May 2006 and declared effective on June 21, 2006. The Notesdo not contain any beneficial conversion features.

Debt issuance costs inthe amount of $1.051 million, excluding the value of warrants issued,  were deferred as other non-current assets andare being amortized as interest expense using the effective interest method overthe 30-month life of each Note. For the six months ended June 30, 2006, weincurred $899,000 in total interest expense applicable to the Notes.

Note holders havethe right to convert the Notes to common stock at a conversion price of $7.00per share, which conversion price is subject to certain anti-dilutionadjustments. In the event that our common stock trades at $14.00 per share orabove for 10 consecutive days, we have a call provision that allows us toretire the Notes upon 10 days prior written notice by paying, in cash theprincipal amount and any accrued but unpaid interest. In addition, we areprohibited from declaring or paying cash dividends on our common stock duringthe period that any Note is outstanding and unpaid.

We followSFAS No. 133, and EITF 00-19, “*Accountingfor Derivative Financial Instruments Index to, and Potentially Settled in, aCompany’s Own Stock*” and related pronouncements. We have evaluatedthe conversion feature embedded in our senior subordinated convertible notesand the liquidated damages provision in the related Registration RightsAgreement and have determined that the entire amount of these securities isproperly classified as long-term debt and are not accounted for as derivativeson our condensed consolidated balance sheet at June 30, 2006.

**Note 5—Equity Compensation Plan**

We have an EquityCompensation Plan (“Option Plan”) that permits us to grant options to purchaseshares of our common stock to eligible employees, contractors and non-employeemembers of the Board of Directors. In accordance with our Option Plan, wereserve shares equal to 10% of our issued and outstanding common stock forissuance under the Option Plan. Our compensation committee may grant options onsuch terms, 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.

All options granted todate under the Option Plan have been granted at exercise prices equal to orgreater than the respective market prices of our common stock on the grantdates. There were 87,939 shares available for grant under the Option Plan as ofJune 30, 2006.

8

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Thefollowing table summarizes activity for options:
| ** **                 | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|----------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                 | ** ** | **Number of  Share**s                              | ** ** | **Weighted Avg.  Exercise Price**             | ** ** | **Number of  Share**s | ** ** | **Weighted Avg.  Exercise Price** | ** ** |
|                       |       |                                                    |       |                                                    |       |   |   |   |   |
| Outstanding at  January 1, |       | 463,250                                                 |       | $                                                       | 6.74       |   | 220,000 |   | $ | 5.50 |   |
| Granted                    |       | 284,500                                                 |       | 6.20                                                    |       | 170,000 |   | 7.58 |   |
| Forfeited                  |       | 88,500                                                  |       | 7.65                                                    |       | — |   | — |   |
| Exercised                  |       | —                                                  |       | —                                                  |       | — |   | — |   |
| Outstanding at  June 30,   |       | 659,250                                                 |       | $                                                       | 6.40       |   | 390,000 |   | $ | 6.41 |   |
| Exercisable at June 30,    |       | 333,125                                                 |       | $                                                       | 6.43       |   | 181,250 |   | $ | 6.38 |   |

 

The fair value of each option granted is estimated onthe date of grant using the Black-Scholes option pricing model. The weightedaverage fair value of options granted during the six months ended June 30, 2006was $3.69. The weighted average remaining contractual life for the optionsoutstanding at June 30, 2006 is 6.5 years.   The weighted average remaining contracturallife for the options exercisable at June 30, 2006 is 2.5 years.

The Black-Scholes option valuation model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable. In addition, option valuation modelsincorporate highly subjective assumptions including the expected stock pricevolatility. Our stock options have characteristics significantly different fromthose of traded options and, as changes in the subjective input assumptions canmaterially affect the fair value estimate, it is management’s opinion that thevaluations as determined by the existing models are different from the valuethat the options would realize if traded in the market.

***Adoption of SFAS No. 123(R)***

***PRB adopted SFAS No. 123(R) on January 1, 2006using the modified prospective transition method as described in SFASNo. 123(R). Under this method, compensation expense is recognized over thevesting period for all share-based payments granted after the effective dateand for all unvested awards granted prior to the effective date. In accordancewith SFAS No. 123(R), prior period amounts were not restated. During thesix months ended June 30, 2006, we recorded share-based compensation expense of$392,000, which was recognized in general and administrative expense with acorresponding credit to additional paid-in-capital. Of the $392,000, $79,000was related to unvested options granted prior to January 1, 2006. Compensationexpense related to unvested options granted, but not yet recognized as of June30, 2006, was $855,000. We expect to recognize this compensation expense overthe vesting period.  The weighted-averagevesting period is 2.4 years.***

Prior to the effectivedate of SFAS No. 123R, our option plan transactions were accounted for underAPB No. 25 and related interpretations. Pro-forma information regarding theimpact of total share-based compensation on net loss and net loss per share forprior periods is required by SFAS No. 123. Such pro-forma information,determined as if we had accounted for our employee stock options under the fairvalue method during the six months ended June 30, 2005, is illustrated in thefollowing table:

|                                                                                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
| ** **                                                                                                                                  | ** ** | **(In thousands)**          | ** ** | **(In thousands)**        | ** ** |
| Net loss  applicable to common stockholders:                                                                                                |       |                             |       |                           |       |
| As reported                                                                                                                                 |       | $                                | (397       | )                              | $          | (810 | ) |
| Less: Total share-based employee compensation  expense determined under fair value-based method for all awards, net of  related tax effects |       | 301                              |       | 324                            |       |
| Pro-forma net  loss                                                                                                                         |       | $                                | (698       | )                              | $          | (1,134 | ) |
|                                                                                                                                        |       |                             |       |                           |       |
| Net loss per  share, basic and diluted:                                                                                                     |       |                             |       |                           |       |
| As reported                                                                                                                                 |       | $                                | (0.06      | )                              | $          | (0.12 | ) |
|                                                                                                                                        |       |                             |       |                           |       |
| Pro-forma                                                                                                                                   |       | $                                | (0.11      | )                              | $          | (0.17 | ) |

 

9

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*DeterminingFair Value*

*Valuationand Amortization Method.*We estimate the fair value of stockoptions granted using the Black-Scholes option valuation model. For optionsgranted before January 1, 2006, we amortize the fair value on an acceleratedbasis. For options granted on or after January 1, 2006, we amortize thefair value on a straight-line basis. All options are amortized over therequisite service periods of the awards, which are generally the vestingperiods.

*ExpectedTerm*. The expected term of options granted represents theperiod of time that they are expected to be outstanding. We estimated theexpected term of options granted using the simplified method in accordance withthe SEC’s Staff Accounting Bulletin No. 107.

*ExpectedVolatility*. Consistent with SFAS No. 123(R),******we base our expectations about thefuture volatility of our stock using the weighted average volatilities ofsimilar companies that operate in our industry, taking into consideration stageof life cycle and size.

*Risk-FreeInterest Rate.*We base the risk-free interest rate that weuse in the Black-Scholes option valuation model on the implied yield in effectat the time of option grant on U.S. Treasury zero-coupon issues with equivalentremaining terms.

*Dividends.*We havenever paid any cash dividends on our common stock and we do not anticipatepaying any cash dividends in the foreseeable future. Consequently, we use anexpected dividend yield of zero in the Black-Scholes option valuation model.

*Forfeitures.*SFASNo. 123(R)******requires us to estimateforfeitures at the time of grant and revise those estimates in subsequentperiods if actual forfeitures differ from those estimates. We use historicaldata to estimate pre-vesting option forfeitures and record share-basedcompensation expense only for those awards that are expected to vest. Forpurposes of calculating pro-forma information under SFAS No. 123, we accountedfor forfeitures as they occurred.

We used thefollowing assumptions to estimate the fair value of options granted for the sixmonths ended June 30, 2006 and 2005:

|                                   | ** ** | **SFAS No. 123(R) Expense** | ** ** | **SFAS No. 123 Pro-Forma** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **Six Months Ended**             | ** ** | **Six Months Ended**            | ** ** |
| ** **                        | ** ** | **June 30, 2006**                | ** ** | **June 30, 2005**               | ** ** |
|                              |       |                                       |       |                                      |       |
| Expected life of  options         |       | 2.5 — 6.25 years                      |       | 5 — 10 years                         |       |
| Expected  volatility              |       | 80                                         | %          | 25                                        | %          |
| Risk-free  interest rate          |       | 4.31 — 5.23                           | %          | 3.89 — 4.73                          | %          |
| Expected dividend yield  of stock |       | 0                                          | %          | 0                                         | %          |

** **

**Note 6—Segment Information**

SFAS No. 131, “*Disclosures about Segments of an Enterprise andRelated Information*”**(“SFASNo.131”) establishes standards for the way in which public companiesdisclose certain information about operating segments in their financialreports. Consistent with SFAS No. 131, we have defined two reportable segments,described below, based on factors such as how we manage operations and how thechief operating decision makers view results. We consider our chief executiveofficer and our chief operating officer as our chief operating decision makers.During the third quarter of 2005, we entered into the oil and gas explorationand production segment and began producing and selling natural gas during thefourth quarter of 2005.

***Gas Gathering andProcessing Segment***

We own and operate gas gathering and processingsystems we acquired in 2004 and during the six months ended June 30, 2006, asearlier described. We charge a fee to our customers for these services based onvolumes of gas transported, and/or based on a monthly minimum fee and/or basedon the level of compression services provided. We have acquired gas gatheringcontracts that include operating leases in 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 for futurefield operations, equipment and maintenance activities with third partyproviders.

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In March 2006, we notified our customers served by theTOP system that we were planning to shut down the TOP system. The system wasshut down effective June 30, 2006. We plan to dismantle the TOP site and sellthe equipment not required for our other activities. We expect that the futurecash flows that we will receive from shutting down the system and/or sellingthe system or its component parts will exceed the carrying value. In 2005 werecorded an impairment for the TOP system of $2.5 million and are amortizingthe remaining balance in 2006.  Theunamortized balance at June 30, 2006 is $112,000.

***Oil and GasExploration and Production Segment***

Beginning in thethird quarter of 2005, we commenced operations in the exploration andproduction segment. Our operations in this segment include exploring for,developing, producing and marketing natural gas from coal-bed methane wells.For the six months ended June 30, 2006, our exploration and production segmentoperated in the Powder River Basin area of Wyoming.

Through a managementservices agreement with RMG, we earned management fee revenues that we haveincluded under Corporate in the following table that details the performance ofour segments.  In March 2006, we electedto terminate the management services agreement; however, we agreed to continueto provide services under the agreement through June 30, 2006.
| ** **                                    | ** ** | **Three Months Ended June 30, 2006** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Gathering  and  Processing**                                | ** ** | **Exploration  and  Production** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(In thousands)**                                       | ** ** |
| ** **                                    | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                             | 603        |   | $ | 48 |   | $ | 52 |   | $ | 703 |   |
| Net loss attributable  to common stockholders |       | $                                                             | (363       | ) | $ | (16 | ) | $ | (1,439 | ) | $ | (1,818 | ) |

 
| ** **                                    | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Gathering  and  Processing**                              | ** ** | **Exploration  and  Production** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(In thousands)**                                     | ** ** |
| ** **                                    | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                           | 1,278      |   | $ | 106 |   | $ | 146 |   | $ | 1,530 |   |
| Net loss  attributable to common stockholders |       | $                                                           | (566       | ) | $ | (150 | ) | $ | (2,596 | ) | $ | (3,312 | ) |
| Identifiable assets:                          |       |                                                        |       |   |   |   |   |   |   |
| Property and  equipment, net                  |       | $                                                           | 6,854      |   | — |   | $ | 489 |   | $ | 7,343 |   |
| Oil and gas  properties, net                  |       | —                                                      |       | $ | 9,553 |   | — |   | $ | 9,553 |   |
| Other non-current  assets                     |       | $                                                           | 1,034      |   | — |   | 51 |   | $ | 1,085 |   |

 

We operated in only one segment during the six monthsended June 30, 2005 and our management reviewed the results of our operationsas a single segment during that period. Accordingly, segment information is notpresented for the three and six months ended June 30, 2005.

**Note 7— Related Party Transactions**

Susan Wright, our corporate secretary and wife of ourchief executive officer, provides corporate secretary services to us on acontract basis. During the six months ended June 30, 2006 and 2005,Mrs. Wright was paid $30,000 and $7,000, respectively, for contractservices.

In January 2006, we issued 40,000 warrants to aformer director for services rendered in respect to our recent convertible debtoffering. These warrants immediately vested with an exercise price of $7.00 pershare.  We recorded $92,000 as theestimated fair value of the warrants as deferred debt issuance costs, with acorresponding increase in additional paid-in-capital.

One of our officers (and director) and two of ourdirectors purchased $100,000 and $1.2 million, respectively, of the Notes thatwere issued in March 2006. During the six months ended June 30, 2006, we havepaid interest of $3,389 and $47,861, respectively.  In addition, a former director had purchased$1 million of the Notes issued and was paid interest of $36,111 during thissame period.

**Note 9 —Subsequent Events**

During the second quarter of 2006, we had contracted with a third partyto acquire approximately 70 miles of gathering lines in the Recluse area whichwill provide additional opportunities for expanding gathering services toproducers in the approximately 100,000 acres surrounding the pipelines. Thetransaction was effective August 1, 2006 and closed on August 4, 2006.  The purchase price for these assets wasapproximately $428,000.

 

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***ITEM*2.**     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the contextrequires otherwise, the terms “PRB,” “the Company,” “us,” “we” and “our” referto PRB Energy, Inc. and its subsidiary.

**Statement ofForward-Looking Statements**

This quarterly report onForm 10-Q contains forward-looking statements within the meaning ofSection 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.You should read statements that contain these words carefully because theydiscuss our future expectations, contain projections of our future results ofoperations or of our financial position, or state other “forward-looking”information. We believe that it is important to communicate our futureexpectations to our investors. There may, however, be events in the future thatwe are not able to accurately predict or control. These forward-lookingstatements are subject to a number of risks, uncertainties and assumptions.

We undertake noobligation to update publicly or revise any forward-looking statements. Youshould not rely upon forward-looking statements as predictions of future eventsor performance. We cannot assure you that the events and circumstancesreflected in the forward-looking statements will be achieved or occur. Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements.

You should read thefollowing discussion in conjunction with the financial statements and relatednotes in Item 1 and our Annual Report on Form 10-K for the year ended December31, 2005.

**General Overview**

PRBis an independent energy company engaged in the acquisition, exploration,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. Through June 30, 2006, we also provided contractmanagement services by operating certain properties for a third party andproviding technical and administrative support for those properties. PRB wasinitially formed under the name “PRB Transportation, Inc. in December 2003 andwas incorporated in the State of Nevada. On June 14, 2006, PRB’s name waschanged to “PRB Energy, Inc.” PRB conducts its primary business activities inWyoming.

***FirstSix Months 2006 - Operational and Financial Highlights***

In the first quarter of2006, we raised approximately $22 million in cash, before expenses, through aprivate offering by issuing senior subordinated convertible notes. These fundswill be used for our exploration, development, and asset acquisition programs.

Also, in the firstquarter, we acquired 2 gas gathering systems in the Recluse area of Wyoming(together our “Recluse” gathering system) for approximately $1.5 million. Also,under two separate transactions totaling $183,000, we acquired a combination ofworking interests ranging from 7.5% to 15% in the development of approximately5,600 net acres in the Recluse and Gap gathering system areas that offer us theopportunity to expand both our exploration and production and gas gathering andprocessing activities.

On June 30, 2006, we acquiredworking interests in approximately 630 gross (580 net) coal-bed methane wellson approximately 29,000 acres located in the Powder River Basin from PennacoEnergy, Inc. The purchase price of the acquired interests was approximately$600,000 and the effective date was July 1, 2006. As part of the purchaseagreement,

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we issued a $3 million reducing letter of credit to thebenefit of Pennaco to guarantee the funding of the future liability of theplugging costs of wells being purchased from Pennaco. The asset retirementobligation of these wells has been recorded on the balance sheet for $2 millionbased on the discounted present value of the future liability, as further reflectedin Note 3 to the financial statements in this report. The letter of credit iscollateralized by a $3 million certificate of deposit, and is consideredrestricted cash for purposes of available working capital (refer to theLiquidity and Capital Resources section of this report).

Of the 630 gross wells, fewer than200 are currently producing at a rate of between 2.5 to 3 million cubic feetper day. PRB plans to improveproduction by bringing shut-in wells back to a productive status over the nextseveral months which will require additional capital expenditures. In thisregard, an estimate by the PRB technical staff of $1.5 million has beenincluded in the 2006 capital budget and has been accrued in oil and gasproperties in the June 30, 2006 balance sheet. In addition, we anticipatedrilling approximately 300 coal-bed methane wells on the newly acquired acreagein the near term.

During the second quarter of 2006, we also contracted with anotherthird party to acquire approximately 70 miles of gathering lines in the Reclusearea, which will provide additional opportunities for expanding gatheringservices to producers in the approximately 100,000 acres surrounding thepipelines. The transaction was effective August 1, 2006 and closed on August 4,2006. The purchase price for these assets was approximately $428,000.

InMarch 2006, we terminated a Farmout and Development Agreement dated August1, 2005 (“Farmout Agreement”) with Enterra Energy Trust’s wholly-ownedsubsidiary Rocky Mountain Gas, Inc. (“RMG”). PRB also is the designated fieldoperator under a Joint Operating Agreement (“JOA”) with RMG for certaincoal-bed methane properties in Wyoming and Montana that are covered by the JOA.In June 2006, RMG filed an arbitration demand against PRB, asserting that thearea of mutual interest provision in the terminated Farmout Agreement continuesuntil August 2007 and therefore includes the Pennaco acquisition and that weshould pay 100% of the costs of drilling the 9 Moyer wells for a 50% workinginterest. We deny these assertions. We are currently in settlement discussionswith RMG regarding these issues.

During the first half of2006, we drilled 27 gross (20.5 net) wells, of which 8 gross (5.5 net) wellsare producing natural gas and 19 gross (14.6 net) wells are in various stagesof drilling or completion.  In addition,there are 12 gross (6.0 net) wells that are producing gas which had beendrilled prior to this year.

During these first 6months, we have increased our average daily net gas production from 77 thousandcubic feet per day (“Mcf/d”) in January 2006, to 121 Mcf/d in June 2006.

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** **

**Results of Operations**

***Three months endedJune 30, 2006 (unaudited) compared to the three months ended June 30, 2005(unaudited)***

**The financial information with respect to the quartersended June 30, 2006 and 2005, which is discussed below, is unaudited. In theopinion of management, such information contains all adjustments, consistingonly of normal recurring accruals, necessary for a fair presentation of theresults for such periods. The results of operations for interim periods are notnecessarily indicative of the results of operations for the full fiscal year.**

*** ***
| ** **                                                    | ** ** | **Quarter Ended June 30,** | ** ** | **Increase /  (Decrease)** | ** ** | **Percentage  Change**    | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                                                    | ** ** | **2006**                                  | ** ** | **2005**                        | ** ** | **2006 v 2005** | ** ** | **2006 v 2005** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**      | ** ** |
|                                                          |       |                                      |       |                            |       |                      |       |   |   |
| Gathering and other revenues                                  |       | $                                         | 703        |                            | $          | 715                       |       | $ | (12 | ) | $ | (2 | )% |
| Gathering and  processing expenses                            |       | 668                                       |       | 384                             |       | 284                       |       | 74 | % |
| Depreciation,  depletion, amortization and accretion expenses |       | 336                                       |       | 280                             |       | 56                        |       | 20 | % |
| General and  administrative expenses                          |       | 1,129                                     |       | 467                             |       | 662                       |       | 142 | % |
| Other expenses                                                |       | 48                                        |       | —                          |       | 48                        |       | 100 | % |
| Total operating expenses                                      |       | 2,181                                     |       | 1,131                           |       | 1,050                     |       | 93 | % |
| Operating loss                                                |       | (1,478                                    | )          | (416                            | )          | (1,062                    | )          | nm |   |
| Interest  (expense) income, net                               |       | (340                                      | )          | 41                              |       | (381                      | )          | nm |   |
| Convertible  preferred stock dividends                        |       | —                                    |       | (22                             | )          | 22                        |       | nm |   |
| Net loss                                                      |       | $                                         | (1,818     | )                               | $          | (397                      | )          | $ | (1,421 | ) | nm |   |
|                                                               |            |                                           |            |                                 |            |                           |            |  |  |  |  |  |  |

----

nm —percentages greater than 200% and comparisons from positive to negative valuesare not considered meaningful.

***Revenues***   

Total revenues decreased $12,000, or 2%, for thequarter ended June 30, 2006 compared to last year’s second quarter as theresult of a $112,000 decrease in gas gathering revenues from our TOP, GAP andBonepile systems resulting from declines in processed volumes due to normalproduction declines of wells being gathered and to weather related shutdowns in2006. This decrease was offset by gas sales from wells of $48,000 andmanagement fee revenues of $52,000. We did not have management fee revenues orgas sales during the quarter ended June 30, 2005.

***Gathering andProcessing Expense***

Gathering and processing expense increased $284,000, or 74%, over lastyear primarily due to the increase in the Recluse gathering system operatingcosts resulting from the first quarter 2006 acquisitions of this system.

***Depreciation, Depletion,Amortization and Accretion Expense***   

Depreciation,depletion, amortization and accretion expense increased $56,000, or 20%,primarily due to additional depreciation and amortization expense applicable tothe Recluse gathering system acquisitions this year.

***General andAdministrative Expense****  *

General andadministrative expense had a significant increase of $662,000 primarily due to(1) the recognition of $182,000 of share-based options and warrantscompensation expense, (2) employee compensation and benefits increasingsignificantly by approximately $200,000 over last year as a result ofsubstantial increases (from 6 to 12) in the number of employees added due toour growth since April 2005, and (3) professional fees increasing approximately$225,000 due to public reporting requirements that include legal, auditing, andfinancial and corporate consulting activities.

***Other Costs***

We began fieldoperations activities in the fourth quarter of 2005 as a result of our entryinto exploration and production activities. Field operations expenses not coveredunder a contract of services provided to a third party totaled approximately$95,000 during the current quarter, less some reductions in other expenses.

14

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***Six months endedJune 30, 2006 (unaudited) compared to the six months ended June 30, 2005 (unaudited)***

**The financial information with respect to the six monthsended June 30, 2006 and 2005 that is discussed below is unaudited. In theopinion of management, such information contains all adjustments, consistingonly of normal recurring accruals, necessary for a fair presentation of theresults for such periods. The results of operations for interim periods are notnecessarily indicative of the results of operations for the full fiscal year.**
| ** **                                                    | ** ** | **Six Months Ended June 30** | ** ** | **Increase /  (Decrease)** | ** ** | **Percentage  Change**    | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                                                    | ** ** | **2006**                                         | ** ** | **2005**                        | ** ** | **2006 v 2005** | ** ** | **2006 v 2005** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**             | ** ** |
|                                                          |       |                                             |       |                            |       |                      |       |   |   |
| Gathering and other revenues                                  |       | $                                                | 1,530      |                            | $          | 1,556                     |       | $ | (26 | ) | (2 | )% |
| Gathering and  processing expenses                            |       | 1,256                                            |       | 875                             |       | 381                       |       | 44 | % |
| Depreciation,  depletion, amortization and accretion expenses |       | 656                                              |       | 557                             |       | 99                        |       | 18 | % |
| General and  administrative expenses                          |       | 2,146                                            |       | 728                             |       | 1,418                     |       | 195 | % |
| Other expenses                                                |       | 223                                              |       | —                          |       | 223                       |       | 100 | % |
| Total operating expenses                                      |       | 4,281                                            |       | 2,160                           |       | 2,121                     |       | 98 | % |
| Operating loss                                                |       | (2,751                                           | )          | (604                            | )          | (2,147                    | )          | nm |   |
| Interest  expense, net                                        |       | (561                                             | )          | (1                              | )          | (560                      | )          | nm |   |
| Convertible  preferred stock dividends                        |       | —                                           |       | (205                            | )          | 205                       |       | nm |   |
| Net loss                                                      |       | $                                                | (3,312     | )                               | $          | (810                      | )          | $ | (2,502 | ) | nm |   |
|                                                          |       |                                             |       |                            |       |                      |       |   |   |
| Cash used in  operating activities                            |       | $                                                | (2,715     | )                               | $          | (219                      | )          | $ | (2,496 | ) | nm |   |
| Cash used in  investing activities                            |       | $                                                | (9,385     | )                               | $          | (270                      | )          | $ | (9,115 | ) | nm |   |
| Cash provided by  financing activities                        |       | $                                                | 20,909     |                            | $          | 9,169                     |       | $ | 11,740 |   | 128 | % |

----

nm —percentages greater than 200% and comparisons from positive to negative valuesare considered not meaningful.

***Revenues***   

Total revenue decreased$26,000, or 2%, for the six months compared to last year as the result of a$278,000 decrease in gas gathering revenues from our TOP, GAP and Bonepilesystems associated with declines in gas volumes being processed due to normalproduction declines of wells being gathered and to weather related shutdowns inthe first quarter of 2006. This decrease was offset by gas sold from wells of$106,000 and management fee revenues of $146,000. We did not have managementfee revenues or gas sales during the six months ended June 30, 2005.

***Gathering andProcessing Expense***

Gas gathering and processing expense increased $381,000, or 44%, mainlydue to the increase in Recluse gathering system operating costs resulting fromthe first quarter 2006 acquisitions of this system. These costs offset adecrease in gathering expenses relating to our TOP system as a result ofreleasing excess compression capacity.

***Depreciation, Depletion,Amortization and Accretion Expense***   

Depreciation,depletion, amortization and accretion expense increased $99,000, or 18%,primarily due to additional depreciation and amortization expense applicable tothe Recluse gathering system acquisitions this year.

***General andAdministrative Expense****  *

General andadministrative expense had a significant increase of $1,418,000 primarily dueto (1) the recognition of $462,000 of share-based options and warrantscompensation expense, (2) employee compensation and benefits increasingsignificantly by approximately $400,000 over last year as a result ofsubstantial increases (from 6 to 12) in the number of employees added due toour growth since April 2005, and (3) professional fees increasing approximately$415,000 due to public reporting requirements which include legal, auditing,and financial and corporate consulting activities.

15

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***Other Costs***

We began fieldoperations activities in the fourth quarter 2005 as a result of our entry intoexploration and production activities. These costs totaled approximately$173,000 during the current six months. Other costs related to exploratoryactivities were also incurred for $50,000 during the period.

**Liquidity and Capital Resources**

***Cash Flows and Capital Expenditures***

At June 30, 2006, cashand cash equivalents totaled $15.2 million. Additionally, we have $3million of restricted cash which collateralizes a reducing letter of creditissued in connection with acquired properties as provided for in the purchaseand sale agreement included as Exhibit 10.17 with this Quarterly Report. Therestricted cash will be released at the same rate annually that the letter ofcredit is reduced. Working capital, excluding the restricted $3 million, was$15 million. During the first quarter of 2006, we raised approximately $22million, before expenses, by issuing senior subordinated convertible notes.These funds will be used for our exploration, development and asset acquisitionprograms.

We believe that our cashand cash equivalents on hand, internally generated cash flows and future financingactivities will be sufficient to fund our planned operational, drilling andacquisition and capital expenditures for the foreseeable future. The amount andallocation of future capital and exploration 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 prices oninvestment opportunities, the availability of capital and borrowing facilitiesand the success of our exploration and development activities could lead tochanges in funding requirements for future development.

***CashFlow Used in Operating Activities******  ***

During the six monthsended June 30, 2006, our net loss of $3.3 million included non-cash charges of$656,000 of depreciation, depletion, amortization and accretion expense,$392,000 of share-based compensation expense and $164,000 of interest expenseresulting from amortization of debt issuance costs.

Cash used in operatingactivities of $2.7 million during the first half of 2006 was $2.5 milliongreater than the same period of 2005. This increase was mainly attributable tohigher general and administrative expense and increased field operations activities.

***CashFlow Used in Investing Activities***

Cash used ininvesting activities was $9.4 million during the first six months of 2006,representing an increase of $9.1 million compared to the 2005 period.During the 2006 period, we acquired various segments of the Recluse gatheringsystem for approximately $1.5 million and acquired interests in 630 grossWyoming coal-bed methane (CBM) wells for approximately $600,000 in cash plus anadditional $132,000 in related transaction expenses. We also invested $3.7million in drilling and completion activities to develop proved properties,$183,000 for undeveloped leaseholds and $300,000 for other plant and equipment.As part of the acquisition of the CBM wells, we issued a $3 million reducingletter of credit to the benefit of Pennaco to guarantee the funding of thefuture liability of the plugging costs of wells being purchased from Pennaco.The letter of credit is collateralized by a $3 million certificate of deposit,and is considered restricted cash for purposes of available working capital. Therestricted cash will be released at the same rate that the letter of credit isreduced.

At June 30, 2006,capitalized costs of wells in progress was approximately $4.2 million andconsisted of 35 wells in various stages of drilling or completion. Twenty-sevenof these wells were drilled in 2006, with the remainder drilled in the latterpart of 2005. None of these wells is in an area requiring major capitalexpenditures before production can begin, nor were any of these wells completedmore than one year ago. These wells are drilling, being completed, or areundergoing de-watering processes. We believe that after the wells have beende-watered, which may require a few months, we will be able to commenceproduction. We believe that this determination will be made for the wells inprogress prior to December 31, 2006.

Currently, our 2006capital expenditure program calls for investing approximately $16 million inoil and gas exploration, development and acquisition projects and gas gatheringsystem projects. Approximately $1.5 million of that amount has been earmarkedfor remediation expenditures for the CBM wells acquired in June.

16

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***Cash Flow from Financing Activities******  ***

Cash provided by financing activities of $20.9 million for the sixmonths ended June 30, 2006 represents an increase of $11.7 million ascompared to last year’s first half. During the first quarter of 2006, we raisedapproximately $22 million from the issuance of senior subordinated convertiblenotes and incurred approximately $1 million in debt issuance costs, excludingthe value of warrants issued. In 2005, we raised $11 million, net of issuancecosts, in a public offering, repaid $1.5 of bank debt and paid $338,000 inconvertible preferred stock dividends.

***Off Balance-Sheet Arrangements******.***

We do not have anyoff-balance sheet financing arrangements as of June 30, 2006, except for ourStorm Cat gas gathering services agreement. Our agreement requires Storm Cat to pay us gas gathering fees onspecific minimum volumes of gas whether or not those volumes are delivered andtransported through our system.  See Note2 — Acquisitions and Significant Contracts in Part I, Item 1 of this report.

**Critical Accounting Policies and Estimates**

***We refer you to the corresponding section in Part II, Item 7of our 2005 Annual Report on Form 10-K, and to the footnote disclosuresincluded in Part I, Item 1 of this report.***

***ITEM 3:***    QUANTITATIVE ANDQUALITATIVE DISCLOSURES 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 PRB’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005.

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

**Conclusion Regarding theEffectiveness of Disclosure Controls and Procedures**

We maintain disclosurecontrols and procedures designed to provide reasonable assurance thatinformation required to be disclosed in our reports under the Securities andExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the Securities ExchangeCommission (“SEC”) rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Principal Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Our management, with the participationand oversight of our Chief Executive Officer and Principal Financial Officer,evaluated the design and effectiveness of our disclosure controls andprocedures. In conducting this evaluation, several significant deficiencieswere identified in our internal control over financial reporting relating tothe preparation and review of financial statements and disclosures, identificationand resolution of complex accounting issues, segregation of duties, accountingpolicies and procedures, information technology systems, and revenuerecognition. Management has determined that these significant deficiencies, inthe aggregate, constitute a material weakness in internal control overfinancial reporting. Specifically, our staffing levels were inadequate tofacilitate the design, implementation and maintenance of an effective system ofinternal control.

On the basis of thesefindings, our Chief Executive Officer and Principal Financial Officer hasconcluded that our disclosure controls and procedures were not effective as ofJune 30, 2006.

17

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**Remediation of theMaterial Weakness**

In response to thecontrol deficiencies listed above, we have taken (or plan to take during 2006)the following steps to institute procedures to remediate the significantdeficiencies and material weakness identified above:

·        We plan to increase theaccounting staff to provide additional expertise in the areas of SEC reportingand complex accounting issues. Additionally, we have engaged outside help toassist us with complex accounting and financial reporting matters. Continuedtraining of current staff and the need for additional resources will beevaluated from time to time.

·        We plan to implementdisclosure controls and procedures and form a Disclosure Committee which willprovide additional oversight and control over the completeness and accuracy ofthe Company’s financial statements and disclosures included in periodic filingswith the SEC.

·       We plan to document our accounting policies andprocedures and enhance our month end close and financial reporting processes toinclude additional controls to improve the completeness and accuracy of ourperiodic financial statements.

·        We are replacing ourcurrent general ledger software with a more robust accounting and reportingsoftware package that will enable us to increase our controls over systemgenerated reports.

Because a number of theseprocedures are recent and ongoing this year, and since financial managementpersonnel changes have been made recently, we have not completed a formalreview of our internal controls, and even upon completion of such review, thereis no assurance that we will have adequately addressed the identifieddeficiencies, as has been characteristic of companies that have completed theirreview of internal control and have had to report on the results of suchreview. Accordingly, our internal control over financial reporting may besubject to additional material weaknesses and significant deficiencies that wehave not identified.

On September 21,2005, the SEC extended the compliance dates related to Section 404 of theSarbanes-Oxley Act (“Section 404”) for non-accelerated filers. Under thisextension a company that is not required to file its annual and quarterlyreports on an accelerated basis (non-accelerated filer) must begin to complywith the Section 404 internal control over financial reporting evaluationand reporting requirements for its first fiscal year ending on or afterJuly 15, 2007. A proposal was announced by the SEC on August 9, 2006 thatthis date may be further extended to fiscal years ending on or after December15, 2007. The SEC also proposes to extend the date by which non-acceleratedfilers must begin to comply with the Section 404(b) requirement to provide anauditor’s attestation report on internal control over financial reporting intheir annual reports.  This deadline would be moved to the first annualreport for a fiscal year ending on or after December 15, 2008.

18

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**PART II OTHER INFORMATION**

**ITEM1:****    LEGAL PROCEEDINGS**

Refer toPart I, Note 2 to our financial statements in this report regarding the RockyMountain Gas Agreement.

**ITEM1A. RISK FACTORS**

Forinformation regarding factors that could affect our results of operations,financial condition and liquidity, see the risk factors discussion providedunder Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2005. See also “Forward-Looking Statements” included in PartI, Item 2 of this Quarterly Report on Form 10-Q.

**ITEM2:****    UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM3:****    DEFAULTS UPONSENIOR SECURITIES**

None.

**ITEM 4:****    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

On June 14, 2006,the Company held its 2006 Annual Meeting of  Stockholders.  Each ofthe following persons was elected a director of the Company  for termsexpiring in 2007:

 
| Name                    | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Withheld** |
|-------------------------|------------|---------------|------------|-------------------|------------|--------------------|
|                    |       |          |       |              |       |               |
| Gus J. Blass III        |       | 6,860,518     |       | 8,535             |       | None               |
|                    |       |          |       |              |       |               |
| William F. Hayworth     |       | 6,860,518     |       | 8,535             |       | None               |
|                    |       |          |       |              |       |               |
|  Reuben Sandler    |       | 6,860,518     |       | 8,535             |       | None               |
|                    |       |          |       |              |       |               |
|  James P. Schadt   |       | 6,860,518     |       | 8,535             |       | None               |
|                    |       |          |       |              |       |               |
|  Joseph W. Skeehan |       | 6,859,588     |       | 9,465             |       | None               |
|                    |       |          |       |              |       |               |
|  Robert W. Wright  |       | 6,860,518     |       | 8,535             |       | None               |
|                    |       |          |       |              |       |               |
|  Justin W. Yorke   |       | 6,860,518     |       | 8,535             |       | None               |

 

The stockholdersof the Company also approved a proposal to amend the articles of incorporationto change the name of the Company from PRB Gas Transportation, Inc. to PRBEnergy, Inc. The voting results for this proposal were as follows:

 
| Votes For:      |   | 6,857,866 |
|-----------------|--------|-----------|
|            |   |      |
| Votes Against:  |   | 4,287     |
|            |   |      |
| Votes Withheld: |   | 6,900     |

** **

**ITEM5:****    OTHER INFORMATION**

None.

19

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**ITEM6:****    EXHIBITS**

 
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                          |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1.1)           |       | Form of Underwriting Agreement (filed as an  exhibit to Form S-1/A filed on April 12, 2005 and  incorporated by reference herein).                                                                                        |
|            |       |                                                                                                                                                                                                                                     |
| (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).                                                                      |
|            |       |                                                                                                                                                                                                                                     |
| (3.2)           |       | 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).                                                                                        |
|            |       |                                                                                                                                                                                                                                     |
| (3.3)           |       | Series A Preferred Stock Certificate of  Designation (filed as an exhibit to Form S-1 filed on  November 1, 2004 and incorporated by reference herein).                                                                   |
|            |       |                                                                                                                                                                                                                                     |
| (3.4)           |       | Series B Preferred Stock Certificate of  Designation Filed (filed as an exhibit to Form S-1 filed on  November 1, 2004 and incorporated by reference herein).                                                             |
|            |       |                                                                                                                                                                                                                                     |
| (3.5)           |       | Series C Preferred Stock Certificate of  Designation Filed (filed as an exhibit to Form S-1/A filed on  January 28, 2005 and incorporated by reference herein).                                                           |
|            |       |                                                                                                                                                                                                                                     |
| (4.1)           |       | Form of Lockup Agreement—Officers, Directors  and 5% Stockholders (filed as an exhibit to Form S-1/A filed on  November 1, 2004 and incorporated by reference herein).                                               |
|            |       |                                                                                                                                                                                                                                     |
| (4.2)           |       | Form of Lockup Agreement—Series A and B  Preferred Stockholders (filed as an exhibit to Form S-1 filed on  November 1, 2004 and incorporated by reference herein).                                              |
|            |       |                                                                                                                                                                                                                                     |
| (4.3)           |       | Form of Underwriter’s Warrant Agreement (filed  as an exhibit to Form S-1/A filed on January 28, 2005 and  incorporated by reference herein).                                                                        |
|            |       |                                                                                                                                                                                                                                     |
| (4.4)           |       | Form of Lockup Agreement—Series C  Preferred Stockholders (filed as an exhibit to Form S-1/A filed on  January 28, 2005 and incorporated by reference herein).                                                  |
|            |       |                                                                                                                                                                                                                                     |
| (4.5)           |       | Sample 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 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 on April 14, 2006 and incorporated by  reference herein). |
|            |       |                                                                                                                                                                                                                                     |
| (5.1)           |       | Opinion of Resch Polster Alpert & Berger  LLP (filed as an exhibit to Form S-8 on September 14, 2005  and incorporated by reference herein).                                                                          |
|            |       |                                                                                                                                                                                                                                     |
| (10.1)*         |       | Equity Compensation Plan (filed as an exhibit to  Form S-1 filed on November 1, 2004 and incorporated by  reference herein).                                                                                                   |
|            |       |                                                                                                                                                                                                                                     |
| (10.2)          |       | Form of Amended and Restated Warrant  Certificate (filed as an exhibit to Form S-1/A filed on  March 1, 2005 and incorporated by reference herein).                                                                       |
|            |       |                                                                                                                                                                                                                                     |
| (10.3)          |       | TOP Gathering, LLC Asset Purchase Agreement (filed  as an exhibit to Form S-1/A filed on January 28, 2005 and  incorporated by reference herein).                                                                              |
|            |       |                                                                                                                                                                                                                                     |
| (10.4)          |       | Bear Paw Energy, LLC Purchase and Sale Agreement  (filed as an exhibit to Form S-1 filed on November 1, 2004  and incorporated by reference herein).                                                                           |
|            |       |                                                                                                                                                                                                                                     |
| (10.5)          |       | Bear Paw Energy, LLC Mortgage, Security Agreement,  Assignment of Proceeds, and Financing Statement (filed as an exhibit to Form S-1/A  filed on January 28, 2005 and incorporated by reference herein).                       |
|            |       |                                                                                                                                                                                                                                     |
| (10.6)          |       | Bear Paw Energy, LLC Promissory Note (filed as an  exhibit to Form S-1/A filed on January 28, 2005 and  incorporated by reference herein).                                                                                     |
|            |       |                                                                                                                                                                                                                                     |
| (10.7)          |       | Bear Paw Energy, LLC Operations Agreement (filed as  an exhibit to Form S-1 filed on November 1, 2004 and  incorporated by reference herein).                                                                                  |
|            |       |                                                                                                                                                                                                                                     |
| (10.8)          |       | Bank of Oklahoma Promissory Note (filed as an  exhibit to Form S-1/A filed on March 1, 2005 and incorporated  by reference herein).                                                                                            |

 

20

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                         |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10.9)          |       | Bank of Oklahoma Mortgage and Security Agreement  (filed as an exhibit to Form S-1/A filed on March 1, 2005 and  incorporated by reference herein).                                                                                           |
|            |       |                                                                                                                                                                                                                                                    |
| (10.10)         |       | Gathering Services Agreement—United Energy Trading,  LLC (filed as an exhibit to Form S-1/A filed on March 1, 2005  and incorporated by reference herein).                                                                               |
|            |       |                                                                                                                                                                                                                                                    |
| (10.11)         |       | Gathering Services Agreement—Pennaco Energy Inc.  (filed as an exhibit to Form S-1/A filed on March 1, 2005 and  incorporated by reference herein).                                                                                      |
|            |       |                                                                                                                                                                                                                                                    |
| (10.12)         |       | Gathering Services Agreement—Natural Gas Fuel  Company, Inc. (filed as an exhibit to Form S-1/A filed on  March 1, 2005 and incorporated by reference herein).                                                                      |
|            |       |                                                                                                                                                                                                                                                    |
| (10.13)         |       | Farmout and Development Agreement dated  August 1, 2005 between Rocky Mountain Gas, Inc. and PRB  Energy, Inc. (filed as an exhibit to Form 8-K filed on  September 9, 2005 and incorporated by reference herein).             |
|            |       |                                                                                                                                                                                                                                                    |
| (10.14)         |       | Management Services Agreement dated August 1,  2005 between Rocky Mountain Gas Inc., Enterra Energy Trust and PRB  Energy, Inc. (filed as an exhibit to Form 8-K filed on  September 9, 2005 and incorporated by reference herein). |
|            |       |                                                                                                                                                                                                                                                    |
| (10.15)         |       | Form of Subscription Agreement between the  Company and the subscribers to the Company’s Senior Subordinated Convertible  Notes (filed as an exhibit to Form 10-K on April 14, 2006 and incorporated by  reference herein).                   |
|            |       |                                                                                                                                                                                                                                                    |
| (10.16)         |       | Gathering Services Agreement - Storm Cat Energy  (USA) Operating Corporation                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                    |
| 10.17           |       | Purchase and Sale Agreement between Pennaco Energy,  Inc. and PRB Energy, Inc., dated May 1, 2006                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                    |
| (14.1)          |       | Code of Business Conduct and Ethics (filed as an  exhibit to Form 10-K on April 14, 2006 and incorporated by reference herein).                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                    |
| (23.1)          |       | Consent of Resch Polster Alpert & Berger  LLP—see exhibit 5.1                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                    |
| (23.3)          |       | Consent of Brownstein, Hyatt and Farber P.C. (filed  as an exhibit to Form S-1/A filed on March 1, 2005 and  incorporated by reference herein).                                                                                               |
|            |       |                                                                                                                                                                                                                                                    |
| 31.3            |       | Principal Executive Officer/ Principal Financial  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                |
|            |       |                                                                                                                                                                                                                                                    |
| 32.3            |       | Principal Executive Officer/ Principal Financial  Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                            |

 

These exhibits are available upon request. Exhibitsidentified in parentheses below are on file with the SEC and are incorporatedherein by reference. All other exhibits are provided as part of this electronicsubmission.

----

( )                Previously filed.

*                    Managementcontract or compensatory plan or arrangements.

 

21

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|        |   | PRB Energy, Inc. |
|--------|--------|------------------|
|   |   | (Registrant)     |
|   |   |             |
|   |   | By:              |   | /s/Robert W. Wright |
|   |   |             |   | Robert W. Wright |
|   |   |             |   | Chairman and Chief Executive Officer |
|   |   |             |   | (Principal Financial Officer) |

 

Dated: August 14, 2006

 

22

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