Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

----

 

**Form 10-K**

** **

| **x**                                                 | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                            |
| **For the fiscal year ended December 31,  2008** |
| ** **                                            |
| **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  001-16749**

** **

----

 

**GeoPetroResources Company**

(Exact name of registrant as specified in its charter)

 

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

 

**(415)398-8186**

(Registrant’stelephone number, including area code)

 

**Securitiesregistered pursuant to Section 12(b) of the Act:**

 

| **Title of  Each Class**   | ** ** | **Name of  Each Exchange on Which Registered** |
|----------------------------|------------|------------------------------------------------|
| Common Stock, No Par Value |       | NYSE Alternext US                              |

 

Securitiesregistered pursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o  No x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

 

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

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |   | Smaller Reporting Company o |
|----------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

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

 

The aggregate market value of the registrant’s commonstock held by non-affiliates was approximately $108,170,063 based on theclosing sale price of $4.01 per share as reported by the American StockExchange on June 30, 2008.

 

The number of shares of the registrant’s common stockoutstanding on March 23, 2009 was 34,284,646.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the registrant’s Proxy Statement relatingto the 2009 Annual Meeting of Shareholders to be filed on or before April 30,2009, are incorporated by reference into Part III of this Form 10-K.

 

 

 

----

Table of Contents

 

**GEOPETRO RESOURCES COMPANY**

 

**TABLE OFCONTENTS**

 
| ** **                                | ** **                                                                                                             | ** ** | **Page**   |
|-------------------------------------------|------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I**                           | ** **                                                                                                             | ** ** | ** ** |
| ** **                                | ** **                                                                                                             | ** ** | ** ** |
| Item 1.                                   | Business                                                                                                               |       | 3          |
| Item 1A.                                  | Risk Factors                                                                                                           |       | 9          |
| Item 1B.                                  | Unresolved Staff Comments                                                                                              |       | 21         |
| Item 2.                                   | Properties                                                                                                             |       | 21         |
| Item 3.                                   | Legal Proceedings                                                                                                      |       | 32         |
| Item 4.                                   | Submission of Matters to a Vote of Security  Holders                                                                   |       | 32         |
|                                      |                                                                                                                   |       |       |
| **PART II**                          | ** **                                                                                                             | ** ** | ** ** |
| Item 5.                                   | Market for the Registrant’s Common Equity,  Related Shareholder Matters and Issuer Purchases of Equity Securities |       | 33         |
| Item 6.                                   | Selected Consolidated Financial Data                                                                                   |       | 35         |
| Item 7.                                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            |       | 37         |
| Item 7A.                                  | Quantitative and Qualitative Disclosures  About Market Risk                                                            |       | 48         |
| Item 8.                                   | Financial Statements and Supplementary Data                                                                            |       | 48         |
| Item 9.                                   | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                                  |       | 48         |
| Item 9A.                                  | Controls and Procedures                                                                                                |       | 48         |
| Item 9B.                                  | Other Information                                                                                                      |       | 48         |
|                                      |                                                                                                                   |       |       |
| **PART III**                         | ** **                                                                                                             | ** ** | ** ** |
| Item 10.                                  | Directors, Executive Officers and Corporate  Governance                                                                |       | 49         |
| Item 11.                                  | Executive Compensation                                                                                                 |       | 49         |
| Item 12.                                  | Security Ownership of Certain Beneficial  Owners and Management and Related Shareholder Matters                        |       | 49         |
| Item 13.                                  | Certain Relationships and Related  Transactions and Director Independence                                              |       | 49         |
| Item 14.                                  | Principal Accountant Fees and Services                                                                                 |       | 49         |
|                                      |                                                                                                                   |       |       |
| **PART IV**                          | ** **                                                                                                             | ** ** | ** ** |
| Item 15.                                  | Exhibits and Financial Statement Schedules                                                                             |       | 50         |
|                                      |                                                                                                                   |       |       |
| **Signatures**                            | ** **                                                                                                             | **51**     |
| ** **                                | ** **                                                                                                             | ** ** |
| **Index to  Financial Statements**        | ** **                                                                                                             | **F-1**    |
| ** **                                | ** **                                                                                                             | ** ** |
| **Glossary of Oil and Natural Gas Terms** | ** **                                                                                                             | **52**     |

 

----

Tableof Contents

 

**Forward-LookingStatements**

 

*ThisAnnual Report on Form 10-K contains forward-looking statements within themeaning of Section 27A of the Securities Act as of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended and we intend that suchforward-looking statements be subject to the safe harbors created thereby.  These statements are related to future eventsor our future financial performance.  Wehave attempted to identify forward-looking statements with terminology,including “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,”“intend,” “may,” “plan,” “will,” or similar expressions as they relate to usand our business, industry and markets. All statements other than statements of historical fact are statementsthat could be deemed forward-looking statements, such as those statements thataddress activities, events or developments that we expect, believe oranticipate will or may occur in the future. These statements are based oncertain assumptions and analyses made by us in light of our experience andperception of historical trends, current conditions, expected futuredevelopments and other factors we believe are appropriate in the circumstances.Such forward looking statements are subject to change based on factors beyond ourcontrol. Certain factors that may affect our financial condition and results ofoperations are discussed in Item 1A “Risk Factors” , Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andItem 7A “Quantitative and Qualitative Disclosures About Market Risk” of thisAnnual Report on Form 10-K, and may be discussed from time to time in ourreports filed with the Securities and Exchange Commission subsequent to thisreport.  We assume no obligation, nor dowe intend to update these forward-looking statements, unless required by law.Unless the context requires otherwise, references in this Annual Report on Form 10-Kto “GeoPetro,” “Company”, “we,” “us” and “our” refer to GeoPetro ResourcesCompany and its consolidated subsidiaries.*

 

2

----

Table ofContents

 

**PART I**

 

**Item 1. *Business***

 

We were incorporated inthe State of Wyoming in August 1994 under the name GeoPetro Company as anoil and gas exploration, development drilling and production company. In June 1996,we merged with our wholly-owned subsidiary, GeoPetro Resources SubsidiaryCompany, a California corporation, and the resulting merged company isincorporated in the state of California under the California GeneralCorporation Law under the name GeoPetro Resources Company.

 

Our principal andregistered office is located at One Maritime Plaza, Suite 700, SanFrancisco, California, USA 94111.  Wemaintain a website located at www.geopetro.com.

 

**Intercorporate Relationships**

** **

We hold 100% of theshares of Redwood Energy Company, a Texas corporation, “**Redwood.**” Redwood is the general partner of, and holds a 5% interest in, RedwoodEnergy Production, L.P., “**Redwood LP**”,a Texas limited partnership. We are the sole limited partner of Redwood LPand own the remaining 95% partnership interest in Redwood LP. Redwood alsoholds a 100% interest in Madisonville Midstream, LLC, “**MadisonvilleMidstream**”, a Texas  limitedliability company.

 

In addition, we hold a12% interest in Continental-GeoPetro (Bengara II) Ltd., “**C-G Bengara**” which is a British VirginIslands company and a 50% interest in CG Xploration Inc., “**CG Xploration**”, which is a Delawarecorporation.

 

We also hold 100% of theshares of GeoPetro Canada Ltd., “**GeoPetroCanada**”, an Alberta company, 100% of the shares of GeoPetroAlaska LLC “**GeoPetro Alaska**”,an Alaska limited liability company, and 100% of the shares of South TexasGeoPetro, LLC, “**South Texas GeoPetro**”, a Texaslimited liability company.

 

OurCompany also holds 100% of the shares of GeoPetro International Ltd., a BritishVirgin Islands company, 100% of the shares of GeoPetro Resources Pte. Ltd., aRepublic of Singapore Company, 100% shares of GeoPetro Resources (South Bengara– II) Pte, Ltd., a Republic of Singapore Company and 25% of the shares of ACG(South Bengara – II) Pte, Ltd., a Republic of Singapore Company.

 

**GENERAL DEVELOPMENT OF THE BUSINESS**

** **

During the past five years, we have conducted leasehold acquisition,exploration and drilling activities on our North American, Australian andIndonesian prospects. These projects currently encompass approximately 379,547gross (161,171 net) acres, consisting of mineral leases, production sharingcontracts and exploration permits that give us the right to explore for,develop and produce oil and natural gas. Most of these properties are in theexploration, appraisal or development drilling phase and have not begun toproduce revenue from the sale of oil and natural gas. Excluding minor interestand dividend income, our only cash inflows until 2003 were the recovery ofcapital invested in projects through sale or other divestiture of interests inoil and gas prospects to industry partners.

 

In December 2000, we acquired working interests in oil and naturalgas leases in the Madisonville Field in Madison County, Texas, includinginterests in the Rodessa Formation. Also included in the acquisition was theMagness Well, an existing well that had been drilled, cased and productiontested in the Rodessa Formation. In October 2001, we re-completed andtested the Magness Well over a 12-day period. In October 2002, we drilled,completed and successfully tested an injection well to dispose of waste productsresulting from the treating process for gas produced from the RodessaFormation. The Madisonville Field gas treatment plant and associated pipelines,which were built specifically for this project, were placed into service in May 2003,and the Magness Well began production in late May 2003. Since 2003,substantially all of our revenue has been generated from natural gas salesderived from the Madisonville Field, and the Madisonville Project was ourprimary source of revenue in 2008. The first development well in theMadisonville Field, the Fannin Well, was drilled in 2005 and was tested atrates of up to 25.7 MMcf/d. In 2006, we drilled the Wilson and Mitchellwells. In March 2009, the Fannin, Mitchell and Magness wells are producingwhile the Wilson well is shut-in awaiting a fracture stimulation. We own a 100%working interest in the four wells. Historically, our wells have beenproduction constrained by the gas treatment plant at the Madisonville Field,which had a treating capacity limit of approximately 18,000 Mcf per day. In2003, we entered into an agreement with the then plant owner, Madisonville GasProcessing, LP (“MGP”), an unaffiliated third party, which required, amongother things, that MGP expand the design treating capacity of the plant from18,000 to 68,000 Mcf per day 

 

3

----

Table of Contents

 

to treat additional volumes from our producing wells. Inlate 2007, MGP began operations of the additional treating facilities andthe additional treating capacity at such facilities; however, full operationswere never reached due to the presence of diamondoids in the gas streamproduced from the Rodessa Formation.  On December 31,2008, GeoPetro acquired the MGP gas treatment plant, as well as therelated gas gathering pipelines and facilities.   This acquisition is expected to allowthe Company to improve operating efficiencies by consolidating the upstream andmidstream portions of Madisonville project. By owning the midstream portion ofthe Madisonville project, we not only expect better net price realizations andoperational efficiencies (i.e. improved volume realizations), but we also willcontrol the timing and design of the current expansion of the plant facilitiesas well as future expansions, if needed.  See “Properties — Description of the Properties — Texas — TheMadisonville Midstream Gas Treatment Plant and Gathering Facilities.”

 

As of March 23, 2009, we have 34,284,646 shares of common stockoutstanding as a result of raising approximately $56 million of equity, net ofoffering costs, by way of private placements and a public offering in Canada.These funds have been used primarily to acquire, explore and develop our oiland natural gas prospects.

 

**GrowthStrategy**

** **

Our growth strategy is tomaximize shareholder value through the exploration and development drilling ofoil and natural gas prospects. To carry out this philosophy we employ thefollowing business strategies:

 

·       identifyand pursue potential projects which individually have the potential to be “companymakers” which we define as projects which could generate a minimum unrisked netpresent value of $50 million net to our interest using a 10% discountfactor;

 

·       performgeological, engineering and geophysical evaluations;

 

·       gain controlof key acreage;

 

·       generate highquality drillable exploration and development drilling prospects;

 

·       retaina large working interest in those projects which involve low risk appraisal ordevelopment drilling, exploitation or appraisal of proved, probable andpossible reserves; and

 

·       minimizeearly investment and exploration risk in higher risk exploratory prospectsthrough farmouts to other oil and natural gas companies and maintain meaningfulinterests with a “carry” through the exploration phase.

 

**RisksAssociated With Foreign Operations**

** **

Our business activities in Indonesia, Canada and the United Statesare subject to political and economic risks, including: loss of revenue, propertyand equipment as a result of unforeseen events like expropriation,nationalization, war, terrorist attacks and insurrection; risks of increases inimport, export and transportation regulations and tariffs, taxes andgovernmental royalties; renegotiation of contracts with governmental entities;changes in laws and policies governing operations of foreign-based companies inIndonesia; exchange controls, and numerous other factors. While we expect theserisks are greater in Indonesia, especially political risk, any one or more ofsuch political or economic conditions could change in the United States orCanada to our detriment. For a related discussion of the risks attendant withour foreign operations, see “Risk Factors.”

 

**Financial Information About GeographicAreas**

 

Please see the notes tothe financial statements for information concerning oil and gas propertieslocated in the United States and foreign countries.

 

4

----

Table of Contents

 

**Regulations**

** **

Domestic exploration,production and sale of oil and gas are extensively regulated at both thefederal and state levels. Our business is and will be directly or indirectlyaffected by numerous governmental laws and regulations applicable to the energyindustry, including:

 

·       Federalenvironmental laws and regulations

 

·       Stateenvironmental laws and regulations

 

·       Localenvironmental laws and regulations

 

·       Federalenergy laws and regulations

 

·       Conservation laws andregulations

 

·       Taxand other laws and regulations pertaining to the energy industry

 

Legislation, rules andregulations affecting the oil and gas industry are under constant review foramendment or expansion, frequently increasing the regulatory burden. Anychanges in the existing legislation, rules or regulations could adverselyaffect our business. The regulatory burdens are often costly to comply with andcarry substantial penalties for failure to comply.

 

As of December 2008, we have re-completed an existing producingwell and drilled three additional producing wells and an injection well in theMadisonville Project as operator. In addition, we may drill oil, gas anddisposal wells in the future as the operator and will be required to obtainlocal government and other permits to drill such wells. There can be noassurance that such permits will be available on a timely basis or at all.Texas and other states have statutes or regulations pertaining to conservationmatters which, among other matters, regulate the unitization or pooling of gasproperties and the spacing, plugging and abandonment of such wells and setlimits on the maximum rates of natural gas that can be produced from gas wells.

 

Our operations andactivities are subject to numerous federal, state and local environmental lawsand regulations. These laws and regulations:

 

·       Requirethe acquisition of permits

 

·       Restrictthe type, quantities and concentration of various substances that can bedischarged into the environment

 

·       Limitor prohibit drilling and other activities on wetlands and other designated,protected areas

 

·       Regulatethe generation, handling, storage, transportation, disposal and treatment ofwaste materials

 

·       Imposecriminal or civil liabilities for pollution resulting from oil and natural gasoperations

 

We expect that with theincrease in our exploratory and development drilling activities, the impact ofenvironmental laws and regulations on our business and operations will alsoincrease. We may be required in the future to make substantial outlays of moneyto comply with environmental laws and regulations. Additional changes inoperating procedures and expenditures to comply with future environmental lawscannot be predicted.

 

Other than our U.S.projects, we do not operate oil and gas properties in which we own an interest.In those instances, we are not in the position to exert direct control overcompliance with most of the rules and regulations discussed above. We aresubstantially dependent on the operators of our non-operated oil and gasproperties to monitor, administer and oversee such compliance. The failure ofthe operator to comply with such rules and regulations could result insubstantial liabilities to us.

 

As the operator of the Madisonville Project, among other variousenvironmental laws and regulations, we are subject to the U.S. ComprehensiveEnvironmental Response, Compensation and Liability Act (“**CERCLA**”)and any comparable legislation adopted by Texas which imposes strict, joint andseveral liability on owners and operators of properties and on persons whodispose or arrange for the disposal of “hazardous substances” found on or underthe sites of such properties.

 

Under CERCLA, one owner, lessee or other party, having responsibilityfor and an interest in a site requiring cleanup may, under certaincircumstances, be required to bear a disproportionate share of liability forthe cost of such cleanup if payments cannot be obtained from other responsibleparties. The Resource Conservation and Recovery Act (“**RCRA**”)and comparable rules adopted by Texas and other states regulate thegeneration, management and disposal of hazardous oil and gas waste.

 

5

----

Table of Contents

 

The Texas Railroad Commission has been delegated the responsibility andauthority to regulate and prevent pollution from oil and gas operations,including the prevention of pollution of surface or subsurface water resultingfrom the drilling of oil and gas wells and the production of oil and gas. Inaddition to regulating the generation, management and disposal of hazardous oiland gas waste, the Texas Railroad Commission has been delegated authority toregulate underground hydrocarbon storage, saltwater disposal pits and injectionwells.

 

The drilling of oil andgas wells in Texas requires operators to obtain drilling permits, file anorganization report and a performance bond or other form of financial security,such as a letter of credit, and obtain a permit to maintain pits to store anddispose of drilling fluids, saltwater and waste as well as other types of pitsfor other purposes. The issuance of such permits is conditioned upon the TexasRailroad Commission’s determination that these pits will not result in waste orpollution of surface or subsurface water.

 

Other states in which wehave an interest in oil and gas properties may impose similar or more stringentregulations than imposed under CERCLA or RCRA.

 

In re-completing the existing well on the Madisonville Project, we wererequired to drill a well for injection or disposal of produced waste gas fromwells. Injection wells are subject to regulation under the Safe Drinking WaterAct (“**SDWA**”) and the regulations andprocedures which have been adopted by the Environmental Protection Agency (“**EPA**”) under that Act. Generally, enforcement proceduresunder the SDWA are administered by the EPA unless such authority has beendelegated by the EPA to a state which has primary enforcement responsibilitybased on the EPA’s determination that the state has adopted drinking waterregulations no less stringent than the national primary drinking waterregulations and meets certain other criteria. Underground injection wells notused for the underground injection of natural gas for storage are generallyunlawful and subject to penalties under the SWDA unless authorized by:

 

·       permitissued by the EPA or a state having primary enforcement responsibility, or

 

·       rule pursuantto an underground injection control program established by a state or the EPA.

 

To the extent our pipelines transport natural gas in interstatecommerce, the rates, terms and conditions of that transportation service aresubject to regulation by the Federal Energy Regulatory Commission, or FERC,pursuant to Section 311 of the Natural Gas Policy Act of 1978, or NGPA,which regulates, among other things, the provision of transportation servicesby an intrastate natural gas pipeline on behalf of an interstate natural gaspipeline.  Under the Energy Policy Act of2005, the FERC has authority to impose penalties for violations of the NaturalGas Act, up to $1 million per day for each violation and disgorgement ofprofits associated with any violation.

 

The regulatory burden on the natural gas and oil industry increases ourcost of doing business.  Futuredevelopments, such as stricter requirements of environmental or health andsafety laws and regulations affecting our business or more stringent interpretationsof, or enforcement policies with respect to, such laws and regulations, couldadversely affect us. To meet changing permitting and operational standards, wemay be required, over time, to make site or operational modifications at ourfacilities, some of which might be significant and could involve substantialcapital expenditures. There can be no assurance that material costs orliabilities will not arise from these or additional environmental matters thatmay be discovered or otherwise may arise from future requirements of law.   See “Risk Factors — Risks Related to OurBusiness”

 

**ForeignRegulations**

** **

We own a working interest in an oil and gas project located inIndonesia. We have farmed out our interest in this project to a third party whois the operator of this project. In exploring for, drilling and developing thisproperty, this operator will be required to comply with the environmental,conservation, tax and other laws and regulations of Indonesia. We ownnon-operated working interests in oil and gas projects located in Canada.  In exploring for, drilling and developingthese properties, these operators will be required to comply with theenvironmental, conservation, tax and other laws and regulations in Canada.

 

**Technology**

 

We participate in projects utilizing economically feasible explorationtechnology in our exploration and development drilling activities to reducerisks, lower costs, and more efficiently produce oil and gas. We believe thatthe availability of 

 

6

----

Table of Contents

 

cost effective 2-D and 3-D seismic data makes its use in explorationand development drilling activities attractive from a risk managementperspective in certain areas.

 

Briefly, through the use of a seismograph, a seismic survey sendspulses of sound from the surface down into the earth, and records the echoesreflected back to the surface. By calculating the speed at which sound travelsthrough the various layers of rock, it is possible to estimate the depth to thereflecting surface. It then becomes possible to infer the structure of rockdeep below the earth’s surface. We evaluate substantially all of ourexploratory prospects using 2-D seismic data. In addition, we own approximately12 square miles of 3-D seismic data covering our leasehold and adjacentlands in the Madisonville Project.

 

The use of seismic technology does not entirely remove the risk ofexploration and development drilling of oil and natural gas deposits. It isimportant to consider the following:

 

·       wemay not recognize significant geological features due to errors ininterpretation, processing limitations, the presence of certain geologicalenvironments that are out of our control or other factors;

 

·       seismicgenerally becomes less reliable with increasing depth of the geologicalhorizon; and

 

·       theuse of this technology may increase our finding cost.

 

**PrincipalProducts**

** **

Our principal products are the production of natural gas and crude oilfrom properties in which we own an interest. Since our inception, we haverealized only limited production of natural gas and crude oil from theproperties in which we own an interest. We have working interests in variousundeveloped oil and gas properties. See****“Properties”****for a general description of theseproperties.

 

During the last three fiscal years, 100% of our revenues have beenderived from the sale of natural gas. Substantially all of our natural gassales, over 98%, have been generated by three producing wells, theMagness #1, Fannin #1 and Mitchell #1 wells, located in the MadisonvilleField in East Texas. Natural gas produced by the wells is delivered to agathering pipeline and transported to a nearby gas treatment plant where it istreated to remove impurities. On December 31, 2008, we purchased thisnatural gas treatment plant and related gathering pipeline from MadisonvilleGas Processing, LP (“MGP”), an unaffiliated third party.   Prior to the plant being purchased, ouruntreated natural gas was sold at the well head to MGP.  Upon completion of the purchase of thetreatment plant and gathering pipeline facilities, all future natural gas saleswill occur upon delivery to our common carriers.   From the plant, the natural gas istransported approximately nine miles to one of two common carrier pipelinesfrom which point it is delivered to the greater Dallas, Texas area. The pricereceived for the natural gas is the Houston Ship Channel price index lesscertain adjustments for the quality of the gas delivered and gathering andtransportation costs.

 

For financial information regarding our business activities, please seeour Financial Statements beginning on page F-1 of this annual report.Substantially all of our revenue is produced from natural gas sales in theMadisonville Field located in East Texas.

 

**Reserves**

** **

The volume of productionfrom oil and natural gas properties generally declines as reserves aredepleted, with the rate of decline depending on reservoir characteristics. Ourproved reserves will decline as reserves are produced from our propertiesunless we are able to acquire or develop new reserves.

 

**Acquisitionof Producing Properties**

** **

We may supplement ourexploration efforts with acquisitions of producing oil and gas properties. Wemay seek to acquire producing properties that are underperforming relative totheir potential.

 

**Patents,Trademarks, Licenses, Franchises and Concessions Held**

** **

Permits and licenses are important to our operations, since they allowthe search for the extraction of any oil, gas and minerals discovered on theareas covered. See****“Properties”for a general description of the permits and licenses under which 

 

7

----

Table of Contents

 

we operate. Provided we establish a commercial discovery thereon, theBengara PSC in Indonesia grants us the right to produce oil and gas from thePSC area until 2027.

 

**Seasonalityof Business**

** **

Our business is notseasonal.

 

**WorkingCapital Items**

** **

The majority of ourcurrent assets are in the form of cash received from the sale of natural gasfrom our Madisonville Project in Texas, amounts received from issuance oflong-term notes and from the sale of common stock in private placements. We usethis cash to pay for the cost of our operations, service of debt facilities,and other administrative activities. For further information see, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

**Customers**

** **

Substantially all of ourrevenues to date have been derived from sales by MGP to two customers, LuminantEnergy Company, and ETC Katy Pipeline, Ltd., of natural gas produced from ourMadisonville Project in Texas. We have not committed any forward sales of ournatural gas. We contract to sell the gas with spot-market based contracts thatvary with market forces. No other customer accounts for in excess of 10% of ourrevenues.  The loss of either of thesecustomers could result in the loss of our revenues, which would have a materialadverse effect on our results of operations. See “Risk Factors”.

 

**Competition**

** **

The natural gas and oil industry is intensely competitive andspeculative in all of its phases. We encounter competition from other naturalgas and oil companies in all areas of our operations. In seeking suitablenatural gas and oil properties for acquisition, we compete with other companiesoperating in our areas of interest, including large natural gas and oilcompanies and other independent operators, which have greater financialresources and in many instances, have been engaged in the exploration andproduction business for a much longer time than we have. Many of ourcompetitors also have substantially larger operating staffs than we do. Many ofthese competitors not only explore for and produce natural gas and oil but alsomarket natural gas and oil and other products on a regional, national orworldwide basis. These competitors may be able to pay more for productivenatural gas and oil properties and exploratory prospects and define, evaluate,bid for and purchase a greater number of properties and prospects than us. Inaddition, these competitors may have a greater ability to continue explorationactivities during periods of low market prices. Our ability to acquireadditional properties and to discover reserves in the future will depend on ourability to evaluate and select suitable properties and to consummatetransactions in a highly competitive environment.

 

The prices of our natural gas production are controlled by marketforces. However, competition in the natural gas and oil exploration industryalso exists in the form of competition to acquire leases and obtain favorabletransportation prices. Our Company is relatively small and may have difficultyacquiring additional acreage and/or projects and may have difficulty arrangingfor the transportation of our production. We also face competition in obtainingnatural gas and oil drilling rigs and in sourcing the manpower to run them andprovide related services.

 

**Employees**

** **

Currently, we have 20 employees, all of whom are full time. We use theservices of independent consultants and contractors to perform variousprofessional services, including reservoir engineering, land, legal,environmental and tax services. On those properties where we are not the operator,we rely on outside operators to drill, produce and market our natural gas andoil.

 

8

----

Tableof Contents

 

**Available Information**

*** ***

***We maintain a website located at http://www.geopetro.com andelectronic copies of our annual, quarterly and current reports, and any amendmentsto those reports, are available free of charge under the Investor Relationslink on our website.  This information isavailable on our website, as soon as practicable after such material is filedwith, or furnished to, the Securities and Exchange Commission.***

*** ***

**Item 1A. *Risk Factors***

 

Inaddition to risks and uncertainties in the ordinary course of business that arecommon to all businesses, important factors that are specific to our industryand our company could materially impact our future performance and results ofoperations. We have provided below a list of these risk factors that should bereviewed when considering our securities. These are not all the risks we faceand other factors currently considered immaterial or unknown to us may impactour future operations.

 

**Risks Related to Our Business**

** **

***As of December 31,2008, we have capitalized costs totaling $59 million as evaluated andunevaluated oil and gas properties whereas we have generated revenues of only$36 million since January 1, 2003 and revenues of only $6.2 million duringthe fiscal year ended December 31, 2008.***

** **

Since inception, our activities have been primarily related toacquiring and exploring leasehold interests in oil and natural gas propertiesin Texas, California, Alaska, Canada, Indonesia and Australia. We incursubstantial acquisition and exploration costs and overhead expenses in ouroperations, and until 2003, excluding minor interest and dividend income, ouronly significant cash inflows were the recovery of capital invested in projectsthrough sale or other divestitures of interests in oil and gas prospects toindustry partners. As a result, we have sustained an accumulated deficitthrough December 31, 2008 of $12.2 million. Our production activities werecommenced in May 2003. Since May 2003, over 98% of our revenue hasbeen generated from natural gas sales derived from wells in the MadisonvilleField in Texas. It is possible that in the future we will be unable to continueto generate revenues from our sales of natural gas from our Madisonville Fieldwells because our proved reserves decline as reserves are produced from thewells. The drilling of exploratory oil and natural gas wells is highlyspeculative and often unproductive. Our participation in future drillingactivities to explore, develop and exploit the properties in which we have aninterest, or in which we may acquire interests, may be unsuccessful, may failto generate positive cash flow, and may not enable us to maintain profitabilityin the future.

 

***We may be unable to integrate successfully the operations of theMadisonville Gas Treatment Plant with our operations and we may not realize allthe anticipated benefits of the Madisonville Gas Treatment Plant.***

 

We formerly contracted withMadisonville Gas Processing, LP, (“MGP”) which owned and operated gatheringpipelines and a dedicated natural gas treatment plant (which we refer to as theMadisonville Gas Treatment Plant), to treat impurities in the natural gasgenerated by our Madisonville Project. Effective December 31, 2008, we acquired the Madisonville GasTreatment Plant from MGP through our indirect wholly-owned subsidiary,Madisonville Midstream LLC.  We plan tocomplete the expansion of the Madisonville Gas Treatment Plant’s treatmentcapacity from 18 MMcf/d to 68 MMcf/d. Operations in the additional facilities were suspended by MGP in December 2007in order to deal with the presence of diamondoids in the gas stream producedfrom the Rodessa Formation.  During March 2009,  the Fannin, Magness and Mitchell wells areproducing at a combined restricted rate of approximately 7 MMcf/d while theWilson  well is shut-in.    There can be no assurance that we will beable to accomplish the expansion and achieve a full treatment capacity of 68MMcf/d.

 

***Even if we are able to successfully complete the expansion of theMadisonville Gas Treatment Plant from 18 MMcf/d to 68 MMcf/d, third parties mayseek access to the plant through regulatory proceedings, which could limit ouruse of the Plant and disrupt our production operations.***

 

Third parties have, and mayin the future, seek access to the Madisonville Gas Treatment Plant throughregulatory proceedings, which could restrict our access to the Plant, disruptour production operations and negatively impact our revenues.  An example of such a proceeding is thecomplaint filed by Crimson with the Texas Railroad Commission described under “Properties— Description of the Properties — Texas — The Madisonville Gas Treatment Plantand Gathering Facilities.”  On August 9,2006, the Texas Railroad Commission issued an order requiring MGP to ratablyprocess, take, 

 

9

----

Tableof Contents

 

transportor purchase natural gas produced by Crimson into the Madisonville Gas TreatmentPlant.  Since Crimson now has the rightto have its natural gas treated at the Plant, our ability to treat our ownnatural gas will be reduced to the extent of Crimson’s usage.  Crimson is currently utilizing approximately3% of the Plant’s capacity, which does not materially impact our operations;however, Crimson’s usage could increase in the future.

 

Substantiallyall of our revenues have been generated from natural gas sales derived from wellsin the Madisonville Field, and 100% of our natural gas generated from theMadisonville  Field wells is treated atthe Madisonville Midstream Gas Treatment Plant, which is 100% indirectly ownedby the Company.  If our ability to treatnatural gas at the Madisonville Midstream Gas Treatment Plant is limited forany reason, including but not limited to increased demands by third parties,our revenues may be adversely affected.

 

***Substantiallyall  of our current revenues aregenerated by our interest in the Madisonville Project. Delays or interruptionsof the Madisonville Project natural gas drilling and production operationsincluding, but not limited to, events beyond our control or the failure ofthird parties on which we rely to provide key services, could negatively impactour revenues.***

** **

Substantially all of our oil and natural gas revenues for the yearsended December 31, 2008 and 2007 were derived from the MadisonvilleProject. In connection with that project, we have contracted with GatewayProcessing Company, (“Gateway”) which operates a sales pipeline for naturalgas.

 

The failure of Gateway to perform its contractual obligations to uscould impose delays or interruptions in our production operations and preventus from generating revenues. In addition, events which are beyond our control,or that of Gateway, could affect our production operations. Such eventsinclude, but are not limited to:

 

·       eventsreferred to as force majeure, such as an act of God, act of a public enemy,war, blockade, public riot, lightning, fire, storm, flood, explosion and anyother causes whether of the kind enumerated or otherwise not reasonably withinthe control of Gateway.

 

·       theinability to secure raw materials or equipment,

 

·       transportationaccidents, and

 

·       labordisputes and equipment failures.

 

***We do not own all of the land on which our pipelines and facilities arelocated, and we are therefore subject to the possibility of not being able toretain necessary land use and associated increased costs.***

 

Wehave the right to operate our pipelines on land owned by third parties forspecified periods of time.   Our loss ofthese rights, through our inability to renew rights-of-way contracts, leases orotherwise, could result in the suspension of our operations, or increased costsrelated to continuing operations elsewhere, which would have a material adverseeffect on our business, results of operations and financial condition.

 

***If third-party pipelines and other facilities interconnected to ournatural gas pipelines and processing facilities become partially or fullyunavailable to transport natural gas, our revenues could be adversely affected.***

 

Wedepend upon third party pipelines and other facilities to provide deliveryoptions from the Madisonville Midstream Gas Treatment Plant to ourcustomers.  If any of these third partypipelines become unavailable to transport the natural gas produced at theMadisonville Gas Treatment Plant, or if the gas quality specifications forthese pipelines or facilities change, we would be required to find alternatemeans to transport our natural gas out of the Madisonville Gas Treatment Plant,which could increase our costs, reduce the revenues we might obtain from thesale of our natural gas or reduce our ability to process natural gas at thePlant.

 

***In excess of 90% of our revenues to date have been derived from salesby MGP to two customers. The loss of one or both these customers could have amaterial adverse impact on our oil and gas revenues.***

 

Approximately99% of our oil and natural gas revenues for the years ended December 31,2008 and 2007 were derived from the Madisonville Project. During 2008 and 2007,approximately 99% of our revenues have been derived from sales by MGP to twocustomers, Luminant Energy Company, LLC, and ETC Katy Pipeline, Ltd. Theloss of, or material nonpayment 

 

10

----

Tableof Contents

 

by one of these customers couldimpact the price we receive for our gas sold due to lessened competition. Theloss of, or material nonpayment by, both customers could result in a  loss of our revenue.  Our customers may be subject to their ownoperating risks which could increase the risk that they could default on theirobligation to us.

 

***Unless we replaceour oil and natural gas reserves, our reserves and production will decline.***

*** ***

The volume of production from oil and natural gas properties generallydeclines as reserves are depleted, with the rate of decline depending onreservoir characteristics. Our proved reserves will decline as reserves areproduced from our properties unless we are able to acquire or develop newreserves. The business of exploring for, developing or acquiring reserves iscapital intensive. For example, as of December 31, 2008 we havecapitalized costs totaling $59 million as evaluated and unevaluated oil and gasproperties. To the extent cash flow from operations is reduced and externalsources of capital become limited or unavailable, our ability to make thenecessary capital investment to maintain or expand our asset base of oil andnatural gas reserves will be impaired. Even if we are able to raise capital todevelop or acquire additional properties, no assurance can be given that ourfuture exploitation and development drilling activities will result in thediscovery of any reserves.

 

***Our exploration anddevelopment drilling activities may not be commercially successful. Thedrilling of exploratory oil and natural gas wells is expensive, highlyspeculative and often unproductive.***

 

Exploration for oil and natural gas on unproven prospects is expensive,highly speculative and involves a high degree of risk, including the risk thatno commercially productive oil or natural gas reservoirs will be encountered.Reserves are dependent on our ability to successfully complete drillingactivity on proven prospects.

 

The cost of drilling, completing and operating wells is oftenuncertain, and drilling operations may be curtailed, delayed or cancelled as aresult of a variety of factors, including:

 

·  unexpecteddrilling conditions, pressure or irregularities in formations;

 

·  subsurfaceconditions or formations encountered during the drilling of wells, whethernatural or mechanical, including but not limited to blowout, igneous rock,salt, saltwater flow, loss of circulation, loss of hole, abnormal pressures, orany other impenetrable substance or adverse condition, which renders furtherdrilling of a well impossible or impractical.

 

·  equipmentfailures or accidents, adverse weather conditions;

 

·  compliancewith governmental requirements; and

 

·  shortagesor delays in the availability of drilling rigs, the delivery of equipment, andavailability of qualified manpower.

 

***Our evaluations of the oil and gas prospects of ourproperties may be wrong.***

** **

With the exception of the Madisonville Project, the properties in whichwe have an interest are prospects in which the presence of oil and natural gasreserves in commercial quantities has not been established. Any decision toengage in exploratory drilling or other activities on any of these propertieswill be dependent in part on the evaluation of data compiled by petroleumengineers and geologists and obtained through geophysical testing andgeological analysis.

 

Reservoir engineering, geophysics and geology are not exact sciencesand the results of studies and tests used to make such evaluations aresometimes inconclusive or subject to varying interpretations. As such, there isno certain way to know in advance whether any of our prospects will yield oiland natural gas in commercial quantities. Further, it is possible that we willparticipate in the drilling of more dry holes than productive wells or that allor substantially all of the wells drilled will be dry holes. The drilling ofdry holes on prospects in which we have an interest could adversely affecttheir values and our decision to undertake further exploration and developmentdrilling of such prospects. It is not certain or predictable whether, and noassurance can be made that, the wells drilled on the properties in which wehave an interest will be productive or, if productive, that we will recover allor any part of our investment in the properties. In sum, our participation infuture drilling activities may not be successful and, if unsuccessful, suchfailure will negatively impact our revenues and have a material adverse effecton our results of operations and financial condition. Our oil and natural gasrevenues were $6,152,542 and $6,890,777 for the years ended December 31,2008 and 2007, respectively. Future revenues could decline from those levels ifour future drilling efforts are not successful. Furthermore, as of December 31,2008 we have capitalized costs totaling $59 million as evaluated andunevaluated oil and gas properties. Should our future drilling activities beunsuccessful, we may 

 

11

----

Tableof Contents

 

then be required to record animpairment charge equal to a portion of, or all, of the capitalized costsresulting in an immediate adverse impact on our results of operations andfinancial position.

 

***Our business maybe harmed by failures of third party operators on which we rely.***

*** ***

Our ability to manage and mitigate the various risks associated withcertain of our exploration and operations in Alberta, Canada, and Indonesia islimited since we rely on third parties to operate our projects. We are anon-operating interest owner in our Canadian and Indonesian properties. Withrespect to our interests in Canada and Indonesia, we have entered intoagreements with third party operators for the conduct and supervision ofdrilling, completion and production operations. In the event that commercialquantities of oil and natural gas are discovered on one of our properties, thesuccess of the oil and natural gas operations on that property depends in largemeasure on whether the operator of the property properly performs itsobligations. The failure of such operators and their contractors to performtheir services in a proper manner could result in materially adverseconsequences to the owners of interests in that particular property, includingus.

 

***Our percentage shareof oil and gas revenues from our Indonesian property is diminished by the termsof our production sharing contract in the Bengara Block.***

 

C-G Bengara owns 100% of the underlying rights to explore for andproduce oil and natural gas within the Bengara Block.  We have a 12% interest in C-G Bengara. C-GBengara is subject to a production sharing contract, which means generally thatC-G Bengara is entitled to receive, from production proceeds, 100% of expendituresin the block as “cost recovery.” Once these costs are recovered, C-G Bengara’sproduction share will be reduced to approximately 26.7% of oil produced and62.5% of all natural gas produced. We are entitled to 12% of C-G Bengara’sreduced share of any such production. See the discussion under “Properties-Indonesia — Terms of Participation in the Bengara Block” for more informationconcerning the production sharing contract.

 

***Drilling andcompletion equipment, services, supplies and personnel are scarce and may notbe available when needed, which could significantly disrupt or delay ouroperations.***

*** ***

From time to time, therehas been a general shortage of drilling rigs, equipment, supplies and oilfieldservices in North America and Indonesia. In addition, the costs and delivery times of rigs, equipment andsupplies have risen when short supply of equipment existed in the past. Therecan be no assurance that sufficient drilling and completion equipment, servicesand supplies will be available when needed. Shortages could delay our proposedexploration, development drilling, and sales activities, which could have amaterial adverse effect on our results of operations. Our oil and natural gasrevenues were $6.2 million for the year ended December 31, 2008. Futurerevenues could decline from those levels if we experience delays in ourproposed exploration, development drilling, and sales activities. The demandfor, and wage rates of, qualified rig crews have risen in the drilling industrydue to the increasing number of active rigs in service. If the demand forqualified rig crews continues to rise in the drilling industry, then the oiland gas industry may experience shortages of qualified personnel to operatedrilling rigs. This could delay our drilling operations and adversely affectour financial condition and results of operations.

 

***Our working interestin properties, and our ability to realize any profits from such properties,will be diminished to the extent that we enter into farmout arrangements withunaffiliated third parties.***

 

We have previously entered into, and may in the future enter into,farmout arrangements with third parties willing to drill natural gas and oilwells on leaseholds in which we originally acquired working interests, inexchange for our assignment of part or all of our leasehold interests. As aconsequence of these arrangements, our retained interests in properties whichare subject to farmout arrangements have been or may be diminished.Our opportunity to realize revenues and profits from properties which aresuccessfully developed under farmout arrangements will be diminished to theextent of our reduced interests.

 

***Competition withother oil and natural gas exploration and development drilling companies forviable oil and natural gas properties may limit our success.***

*** ***

It is likely that in seeking future property acquisitions, we willcompete with companies which have substantially greater financial andmanagement resources. Our competition comes primarily from three sources:

 

(a)                                  thosecompetitors that are seeking oil and gas fields for expansion, furtherdrilling, or increased production through improved engineering techniques;

 

12

----

Tableof Contents

 

(b)                                 income-seekingentities purchasing a predictable stream of earnings based upon historicproduction from fields being acquired; and

 

(c)                                  juniorcompanies seeking exploration opportunities in unknown, unproven territories.

 

Our competitors may be able to pay more for productive oil and naturalgas properties and may be able to define, evaluate, bid for and purchase agreater number of properties and prospects than we can. Our ability to acquireadditional properties in the future will depend upon our ability to conductefficient operations, evaluate and select suitable properties, implementadvanced technologies and consummate transactions in a highly competitiveenvironment.

 

***Estimates of oil andnatural gas reserves are inherently imprecise. Any material inaccuracies inthese reserve estimates or underlying assumptions will affect materially thequantities and present value of our reserves.***

 

Estimates of proved oil and natural gas reserves and the future netcash flows attributable to those reserves are prepared by independent petroleumengineers and geologists. There are numerous uncertainties inherent inestimating quantities of proved oil and natural gas reserves and cash flowsattributable to such reserves, including factors beyond our control and that ofour engineers. Reserve engineering is a subjective process of estimatingunderground accumulations of oil and natural gas that cannot be measured in anexact manner. Different reserve engineers may make different estimates ofreserves and cash flows based on the same available data. The accuracy of anestimate of quantities of reserves, or of cash flows attributable to suchreserves, is a function of the available data, assumptions regarding future oiland natural gas prices and expenditures for future development drilling andexploration activities, and of engineering and geological interpretation andjudgment. Additionally, reserves and future cash flows may be subject tomaterial downward or upward revisions, based upon production history, developmentdrilling and exploration activities and prices of oil and natural gas. Actualfuture production, revenue, taxes, development drilling expenditures, operatingexpenses, underlying information, quantities of recoverable reserves and thevalue of cash flows from such reserves may vary significantly from theassumptions and underlying information set forth herein.

 

***Competitivepressures may force us to implement new technologies at substantial cost andour limited financial resources may limit our ability to implement suchtechnologies at the same rate as our competitors.***

 

The oil and gas industry is characterized by rapid and significanttechnological advancements and introductions of new products and servicesutilizing new technologies. Other oil and gas companies may have greaterfinancial, technical and personnel resources that allow them to enjoytechnological advantages and may in the future allow them to implement newtechnologies before we do. There can be no assurance that we will be able torespond to such competitive pressures and implement such technologies on atimely basis or at all. One or more of the technologies currently utilized byus or implemented in the future may become obsolete.

 

***We will requireadditional capital to fund our future activities. Our ability to pursue ourbusiness plan may be restricted by our access to additional financing.***

 

Until such time as the properties in which we own interests aregenerating sufficient cash flow to fund planned capital expenditures, we willbe required to raise additional capital through the issuance of additionalsecurities or otherwise sell or farmout interests in our oil and natural gasproperties to third parties. If and when the properties in which we owninterests become productive and have adequate reserves, we may borrow funds tofinance our future oil and natural gas operations and exploratory anddevelopment drilling activities. We may not be able to raise additional fundsin the future from any source or, if such additional funds are made availableto us, we may not be able to obtain such additional financing on termsacceptable to us. To the extent such funds are not available from any of thosesources, our operations and activities will be limited to those operations andactivities we can afford with the funds then available to us. Our largercompetitors, by reason of their size and relative financial strength, may bemore easily able to access capital markets than us.

 

***The volatility incrude oil and natural gas prices could adversely affect our financial resultsand ability to raise additional capital.***

 

Our revenues, cash flows and profitability are substantially dependenton prevailing prices for both oil and natural gas. Decreases in natural gasprices will decrease revenues and cash flows from the Madisonville Project andour other producing properties, if any, and decreases in oil and natural gasprices could deter potential investors from investing in our company andgenerally impede our ability to raise additional financing to fund ourexploration and development drilling activities. Historically, oil and naturalgas prices and markets have been volatile, and they are likely to continue tobe volatile in the future. Prices for oil and natural gas are subject to widefluctuations in response to relatively minor changes in the supply of, 

 

13

----

Tableof Contents

 

and demand for, oil and naturalgas, market uncertainty and a variety of additional factors that are beyond ourcontrol. These factors include, but are not limited to, political conditions inthe Middle East and other regions, internal and political decisions of OPEC andother oil and natural gas producing nations to decrease or increase productionof crude oil, domestic and foreign supplies of oil and natural gas, consumerdemand, weather conditions, domestic and foreign government regulations andtaxation, transportation costs, the price and availability of alternativefuels, the impact of energy conservation efforts and overall economicconditions.

 

***Risks associated with recent economic trends could adversely affect ourfinancial performance.***

 

Aswidely reported, the global financial markets have been experiencing extremedisruption in recent months, including severely diminished liquidity and creditavailability. Concurrently, economic weakness has begun to accelerate globally.We believe these conditions have not materially impacted our financial positionas of December 31, 2008 or liquidity for the twelve months ended December 31,2008. However, our financial condition and performance could be negativelyimpacted if either of these conditions exists for a sustained period of time,or if there is further deterioration in financial markets and major economies.We are unable to predict the likely duration and severity of the currentdisruption in financial markets and adverse economic conditions in the U.S. andthe world.

 

***We are subject to anumber of operational risks beyond our control against which we may not have,or be able to obtain insurance.***

 

Our operations are subject to the many risks and hazards incident toexploring and drilling for, and producing and transporting, oil and naturalgas, including among other risks:

 

·       blowouts,fires, craterings, pollution and equipment failures that may result in damageto or destruction of wells, pipelines, producing formations, productionfacilities and equipment;

 

·  damage to pipelines, facilities and properties caused byhurricanes, tornados, floods and other natural disasters

 

·       personalinjuries or death due to accidents, human error or acts of God;

 

·       unavailabilityof materials and equipment to drill and complete or re-complete wells;unfavorable weather conditions; engineering and construction delays;

 

·       fluctuationsin product markets and prices; proximity and capacity of pipeline, and truckingor termination facilities to our oil and natural gas reserves; hazardsresulting from unusual or unexpected geological or environmental conditions;environmental regulations and requirements;

 

·       accidentalleakage of toxic or hazardous materials, such as petroleum liquids or drillingfluids into the environment, remediation and clean-up costs; and

 

·       politicalinstability and civil unrest, insurrections or disruptions in foreign countriesin which some of our interests are located.

 

If one or more of these events occurs, wecould incur substantial liabilities to third parties or governmental entities,the payment of which could have a material adverse effect on our financialcondition and results of operations, or we could lose properties in which wehave invested significant sums (totaling $59 million) which are capitalized asevaluated and unevaluated oil and gas properties as of December 31, 2008.

 

***Aloss not covered by insurance could result in substantial expenses to us.***

 

We do not insure fully against all business risks either because suchinsurance is not available or because premium costs are prohibitive.  We are not insured against all environmentalaccidents that might occur which may include toxic tort claims. If asignificant accident or event occurs that is not fully insured, if we fail torecover all anticipated insurance proceeds for significant accidents or eventsfor which we are insured, or if we fail to rebuild facilities damaged by suchaccidents or events, our operations and financial condition could be adverselyaffected. In addition, we may not be able to maintain or obtain insurance ofthe type and amount we desire at reasonable rates. As a result of marketconditions, premiums and deductibles for certain of our insurance policies haveincreased substantially, and could escalate further. For example, followingHurricanes Katrina and Rita, insurance premiums, deductibles and co-insurancerequirements increased substantially, and terms generally are less favorablethan terms that could be obtained prior to such hurricanes.  In some 

 

14

----

Tableof Contents

 

instances, certain insurancecould become unavailable or available only for reduced amounts ofcoverage.  A loss not fully covered byinsurance could result in expenses to us and could have a material adverseeffect on our financial position and results of operations. Uninsured losses inexcess of $1.0 million would be materially adverse to our financial positionand results of operations.

 

***We are subject toextensive government regulations that can change from time to time, compliancewith which are costly and could negatively impact our production, operationsand financial results.***

 

The oil and gas industry is subject to extensive government regulationsin the countries in which we operate. Matters subject to regulation includedischarge permits for drilling operations, drilling bonds, reports concerningoperations, unitization and pooling of properties and taxation. Historically,our costs of complying with these regulations have not exceeded $100,000 peryear. From time to time, regulatory agencies have imposed price controls andlimitations on production by restricting the rate of flow of oil and naturalgas wells below actual production capacity in order to conserve supplies of oiland natural gas. We are also subject to changing and extensive tax laws, theeffects of which cannot be predicted. Legal requirements are frequently changedand subject to interpretation, and we are unable to predict the ultimate costof compliance with these requirements or their effects on our operations.Future laws, or existing laws or regulations, as currently interpreted orreinterpreted or changed in the future, could result in increased operatingcosts, fines and liabilities, in amounts which are unknown at this time, any ofwhich could materially adversely affect our results of operations and financialcondition.

 

***Our industry issubject to extensive environmental regulation that may limit our operations andnegatively impact our production.***

 

Extensive national, state, provincial and localenvironmental laws and regulations in the United States and foreignjurisdictions affect nearly all of our operations.  Environmental laws to which we are subject inthe U.S. include, but are not limited to, (1) the Clean Air Act andcomparable state laws that impose obligations related to air emissions, (2) theResource Conservation and Recovery Act of 1976 (RCRA), and comparable statelaws that impose requirements for the handling, storage, treatment or disposalof solid and hazardous waste from our facilities, (3) the ComprehensiveEnvironmental Response, Compensation and Liability Act (CERCLA) and comparablestate laws that regulate the cleanup of hazardous substances that may have beenreleased at properties currently or previously owned or operated by us or atlocations to which our hazardous substances have been transported for disposal,and (4) the Clean Water Act, and comparable state laws that regulatedischarges of wastewater from our facilities to state and federal waters.Failure to comply with these laws and regulations or newly adopted laws orregulations may trigger a variety of administrative, civil and criminalenforcement measures, including the assessment of monetary penalties, theimposition of remedial requirements, and the issuance of orders enjoiningfuture operations or imposing additional compliance requirements on suchoperations. Certain environmental laws, including CERCLA and analogous statelaws, impose strict, joint and several liability for costs required to clean upand restore sites where hazardous substances or hydrocarbons have been disposedor otherwise released.  Moreover, it isnot uncommon for neighboring landowners and other third parties to file claimsfor personal injury and property damage allegedly caused by the release ofhazardous substances, hydrocarbons or other waste products into theenvironment.

 

Environmental legislation may require that we:

 

·       acquirepermits before commencing drilling;

 

·       restrictspills, releases or emissions of various substances produced in associationwith our operations;

 

·       limitor prohibit drilling activities on protected areas such as wetlands orwilderness areas;

 

·       takereclamation measures to prevent pollution from former operations;

 

·       takeremedial measures to mitigate pollution from former operations, such asplugging abandoned wells and remedying contaminated soil and groundwater;

 

·       takeremedial measures with respect to property designated as a contaminated site.

 

There is inherent risk of incurring environmental costs and liabilitiesin connection with our operations due to our handling of natural gas and otherpetroleum products, air emissions and water discharges related to ouroperations, and 

 

15

----

Tableof Contents

 

historical industry operationsand waste disposal practices.  The costsof any of these liabilities are presently unknown but could besignificant.  We may not be able torecover all or any of these costs from insurance.

 

We are not presently aware of any environmental liabilities or able topredict the ultimate cost of liabilities not yet recognized.  We have not established a separate reservefund for the purpose of funding any possible future environmentalliability.  As a result, we may not beable to satisfy these obligations, if they occur.  Any such costs incurred will be funded out ofour cash flow from operations.  If we areunable to fully fund the cost of remedying an environmental obligation, wemight be required to suspend operations or enter into interim compliancemeasures pending satisfaction of the liability, which could have an adverseaffect on our financial condition and results of operations.  We have recorded an asset requirementobligation in connection with the estimated future costs to plug certain wells atour Madisonville Project in Texas upon abandonment totaling approximately $59,099as of December 31, 2008.  See “Business— Regulation.”

 

***The effects offuture environmental legislation on our business is unknown but could besubstantial.***

 

Environmental legislation is evolving in a manner expected to result instricter standards and enforcement, larger fines and liability and potentiallyincreased capital expenditures and operating costs. Changes in, or enforcementof, environmental laws may result in a curtailment of our productionactivities, or a material increase in the costs of production, developmentdrilling or exploration, any of which could have a material adverse effect onour financial condition and results of operations or prospects. In addition,many countries, as well as several states in the United States have agreed toregulate emissions of “greenhouse gases.” Methane, a primary component of natural gas, and carbon dioxide, abyproduct of burning natural gas, are greenhouse gases.  Regulation of greenhouse gases couldadversely impact some of our operations and demand for products in thefuture.  See “Business — Regulations.”

 

***Should we fail tocomply with all applicable FERC administered statutes, rules, regulations andorders, we could be subject to substantial penalties and fines.***

 

Under the Energy Policy Act of 2005, the Federal Energy RegulatoryCommission, or FERC, has authority to impose penalties for violations of theNatural Gas Act, up to $1 million per day for each violation and disgorgementof profits associated with any violation. FERC has recently proposed and adopted regulations that may subject ourfacilities to reporting and posting requirements.  Additional rules and legislationpertaining to these and other matters may be considered or adopted by FERC fromtime to time.  Failure to comply withFERC regulations could subject us to civil penalties.

 

***We may incursignificant costs and liabilities as a result of pipeline integrity managementprogram testing and any related pipeline repair or preventative or remedialmeasures.***

 

The United States Department of Transportation, or DOT, has adoptedregulations requiring pipeline operators to develop integrity managementprograms for transportation pipelines located where a leak or rupture could dothe most harm in “high consequence areas.” The regulations require operators to:

 

·                  Performongoing assessments of pipeline integrity;

 

·                  Indentifyand characterize applicable threats to pipeline segments that could impact ahigh consequence area;

 

·                  Improvedata collection, integration and analysis;

 

·                  Repairand remediate the pipeline as necessary; and

 

·                  Implement preventive and mitigating actions.

 

***Political and/oreconomic conditions in Indonesia, Canada or the United States could changein manners that negatively affect our operations and prospects in thosecountries.***

 

Our business activities in Indonesia, Canada and the United Statesare subject to political and economic risks, including: loss of revenue,property and equipment as a result of unforeseen events like expropriation,nationalization, war, terrorist 

 

16

----

Tableof Contents

 

attacks and insurrection;increases in import, export and transportation regulations and tariffs, taxesand governmental royalties; renegotiation of contracts with governmentalentities; changes in laws and policies governing operations of foreign-basedcompanies; exchange controls, currency fluctuations and other uncertaintiesarising out of foreign government sovereignty over international operations;laws and policies affecting foreign trade, taxation and investment; and thepossibility of being subject to the exclusive jurisdiction of foreign courts inconnection with legal disputes and the possible inability to subject foreignpersons to the jurisdiction of courts in the United States.

 

***Terroristattacks could have an adverse effect on our oil and natural gas operations,especially overseas.***

 

To date, our operations have not been disrupted by terrorist activity.It is uncertain how terrorist activity will affect us in the future, or whatsteps, if any, the Indonesian, Canadian or American government may take inresponse to terrorist activities. The attack on the New York World TradeCenter in 2001 and the subsequent wars in Afghanistan and Iraq have increasedthe likelihood that U.S. citizens and U.S. owned interests may betargeted by terrorist groups operating both in the United States and inforeign countries, especially in Indonesia.

 

***We could lose ourentire Production Sharing Contract (“PSC”), if BP Migas ascertains we have notdiscovered commercially producible hydrocarbons.***

 

It is possible that BP Migas could terminate our entire ProductionSharing Contract (“PSC”) if it is determined that the hydrocarbons we havediscovered are not in commercially producible quantities.  Our Indonesian PSC requires us and ourpartners to submit to and receive approval from BP Migas for a “Plan ofDevelopment”  by specified dates in orderto maintain our oil and natural gas rights. See “Properties—Description of theProperties—Indonesia.” If we do not establish commerciality and receive anapproved Plan of Development for the PSC, or successfully renegotiate theterms, all or part of our contract may be terminated. If this contract isterminated, we would also lose all of our investment in that overseas prospect.If we forfeit our interest in the contract area, it will be necessary to recordan impairment write-down equal to the net capitalized costs recorded for thearea forfeited. This could have a material adverse impact on our financialcondition and results of future operations in future periods. If approval of aPlan of Development is not obtained and if further deferrals of suchobligations are not secured, we will need to record an impairment charge equalto the amount of costs capitalized which were approximately $584,000  as of December 31, 2008, and we may loseall of our rights in the Bengara Block.

 

***We may not be ableto sell our natural gas production in Indonesia, limiting our ability to obtaina return on our investment there.***

 

Our Indonesian operations lack a local market for natural gas, and ifwe produce natural gas in Indonesia, it will most likely have to be transportedto an area where there is a demand. If no market for natural gas developslocally, we may incur costs for transportation. If we are not able to sell ournatural gas production at a commercially acceptable price or at all, we may notbe able to obtain a return on our investment in our Indonesian property.

 

***Wecould lose our ownership interests in our properties due to a title defect ofwhich we are not presently aware.***

 

As is customary in the oil and gas industry, only a perfunctory titleexamination, if any, is conducted at the time properties believed to besuitable for drilling operations are first acquired. Before starting drillingoperations, a more thorough title examination is usually conducted and curativework is performed on known significant title defects. We typically depend upontitle opinions prepared at the request of the operator of the property to bedrilled. The existence of a title defect on one or more of the properties inwhich we have an interest could render it worthless and could result in a largeexpense to our business. Industry standard forms of operating agreementsusually provide that the operator of an oil and natural gas property is not tobe monetarily liable for loss or impairment of title. The operating agreementsto which we are a party provide that, in the event of a monetary loss arisingfrom title failure, the loss shall be borne by all parties in proportion totheir interest owned.

 

***Our acquisitionactivities are subject to uncertainties and may not be successful nor  provide a return to us on our investments.***

 

We have grown primarily through acquisitions and intend to continueacquiring undeveloped oil and gas properties. Although we perform a review ofthe properties proposed to be acquired, such reviews are subject touncertainties. It generally is not feasible to review in detail everyindividual property involved in an acquisition. Ordinarily, management reviewefforts are focused on the higher-valued properties; however, even a detailedreview of all properties and records may not reveal existing or potentialproblems; nor will it permit us to become sufficiently familiar with theproperties to assess fully their deficiencies and capabilities. Inspections arenot always performed on every well, and potential problems, such as mechanicalintegrity of equipment and environmental conditions that may requiresignificant remedial expenditures, are not necessarily observable even when aninspection is undertaken.

 

17

----

Tableof Contents

 

***We are dependent upon our key officers andemployees and our inability to retain and attract key personnel couldsignificantly hinder our growth strategy and cause our business to fail.***

 

While no assurances can be given that our current management resourceswill enable us to succeed as planned, a loss of one or more of our currentdirectors, officers or key employees could severely and negatively impact ouroperations and delay or preclude us from achieving our business objectives.Stuart Doshi and David Creel,  twomembers of our senior management team, have a combined experience ofapproximately 75 years in the oil and gas industry. Although we have enteredinto employment agreements with Messrs. Doshi and Creel, we could sufferthe loss of key individuals for one reason or another at any time in thefuture. There is no guarantee that we could attract or locate other individualswith similar skills or experience to carry out our business objectives. Wemaintain “key man” insurance with respect to our Chief Executive Officer,Stuart Doshi.

 

***Some of ourdirectors may become subject to conflicts of interest which could impair theirabilities to act in our best interest.***

 

Nick DeMare, one of our directors, is a director, officer and/orsignificant shareholder of other natural resource companies andDavid Anderson, another one of our directors, is a director and officer ofDundee Securities Corporation, an investment banking firm that was the leadunderwriter of our public offering of common stock in Canada and concurrentprevious private placement of common shares with qualified institutional buyersin the U.S. Their association with these other companies in the oil and gasbusiness may give rise to conflicts of interest from time to time. For example,they could be presented with business opportunities in their capacities as ourdirectors, which they could, in turn, offer to the other companies for whomthey also serve as directors, rather than to us, whose interests might becompetitive with ours. Our directors are required by law to act honestly and ingood faith with a view to our best interests and to disclose any interest whichthey may have in any project or opportunity to us; however, their interests inthe other companies may affect their judgment and cause such directors to actin a manner that is not necessarily in our best interests.

 

***Our directors andofficers hold significant positions in our shares and their interests may notalways be aligned with those of our other shareholders.***

 

As of December 31, 2008 our directors and officers beneficiallyown approximately 27% of our outstanding common stock. This shareholding levelwill allow the directors, officers and certain beneficial owners to have asignificant degree of influence on matters that are required to be approved byshareholders, including the election of directors and the approval ofsignificant transactions. The short-term interests of our directors, officersand certain beneficial owners may not always be aligned with the long-terminterests of our public shareholders, and vice versa. Because our directors,officers and certain beneficial owners have a significant degree of influenceon matters that are required to be approved by our shareholders, they couldinfluence the approval of transactions.

 

***Our failure tomanage internal or acquisition-based growth may cause operational difficultiesand negatively affect our financial performance.***

 

We expect to experience internal and/or acquisition-based growth, whichmay bring many challenges. Growth in the number of employees, sales andoperations will place additional pressure on already limited resources andinfrastructure. No assurances can be given that we will be able to effectivelymanage this or future growth. Our growth may place a significant strain on ourmanagerial, operational, financial and other resources. Our success will dependupon our ability to manage our growth effectively which will require that wecontinue to implement and improve our operational, administrative and financialand accounting systems and controls and continue to expand, train and manageour employee base. Our systems, procedures and controls may not be adequate tosupport our operations and our management may not be able to achieve the rapidexecution necessary to exploit the market for our business model. If we areunable to manage internal and/or acquisition-based growth effectively, ourbusiness, results of operations and financial condition will be materiallyadversely affected.

 

***Risks associatedwith recent economic trends could adversely affect our financial performance.***

 

In 2009 we will need to raise capital. Due to the tight credit markets and recent downturn in the stock market,funds may not be available, or may be available only on unfavorable terms. Dueto the recent decrease in our stock price, we may need to sell more shares toraise the same amount of money than we would have in the past, resulting ingreater dilution to existing shareholders than would be the case if our stockprice was higher and this trend could continue.  We have scheduled 

 

18

----

Table of Contents

 

exploratory and development well drilling during 2009 and futureperiods on our undeveloped properties. It is anticipated that these explorationactivities together with others that we may undertake will impose financialrequirements which will exceed our existing working capital. We may raiseadditional equity and/or debt capital, and we may farmout certain of ourprojects to finance our continued participation in planned activities; however,if additional financing is not available, we may be compelled to reduce thescope of our business activities. If we are unable to fund plannedexpenditures, it may be necessary to:

 

·                                          farm-out our interest in proposed wells;

 

·                                          sell a portion of our interest in prospectsand use the sale proceeds to fund our participation for a lesser interest;

 

·                                          forfeit our interest in wells that we proposeto drill; and

 

·                                          reduce general and administrative expenses.

 

**Risks Related to OurCommon Stock**

 

***The shareholdingposition of holders of our common stock could be diluted by future issuancesand conversions of other securities.***

 

If our options and warrants are exercised for common shares, holders ofour common stock will experience immediate and, depending on the magnitude ofthe exercises, substantial dilution. As of March 23, 2009, 34,284,646shares of our common stock are outstanding, 1,249,857 shares of our commonstock are issuable upon exercise of warrants and 2,740,000 shares of our commonstock are issuable upon exercise of options.

 

Investors may be subject to further dilution if we sell additionalcommon shares or issue additional common shares in connection with futurefinancings. If a significant number of our common shares are sold in the publicmarket, the market price of our common shares could be depressed. This couldhamper our ability to raise capital by issuing additional equity securities.

 

***Ourresults may be affected by fluctuations in currency exchange rates.***

 

Our financial statements are reported in U.S. dollars and all ofour revenue, and most of our operating costs, are currently denominated inU.S. dollars; however, we have operations outside the United Statesand we plan to expend money in Indonesia and Canada, where our operating costswill be denominated in local currencies. Fluctuations in exchange rates mayincrease our relative cost of operating in these countries, and may thereforehave a negative effect on our financial results.

 

***Non- U.S. holders ofour common shares may be subject to U.S. federal income tax on the sale of ourcommon shares and purchasers may have IRS withholding requirements***

 

Since we believe that we are a United States real property holdingcorporation, gain recognized by a non-U.S. holder on the sale of our commonshares will be subject to U.S. federal income tax at normal graduated rates,and a purchaser will be required to withhold for the benefit of the IRS 10% ofthe purchase price, unless certain trading requirements are met. There is anexemption from U.S. federal income tax for non-U.S. holders of 5% or less ofour common shares (and therefore no tax withholding requirements) if our commonshares are “regularly traded on an established securities market.”  In theevent that 100 or fewer persons own 50% or more of our common shares (which hadbeen, may now be and may continue to be, the case), temporary TreasuryRegulations provide that our common shares will be “regularly traded on anestablished securities market” for a calendar quarter if the establishedsecurities market is located in the United States and our common shares areregularly quoted by more than one broker or dealer making a market in ourcommon shares; our common shares are currently listed on the NYSE Alternext US(which constitutes an established United States securities market for thispurpose) and are being regularly quoted. There can be no assurance, however,that our common shares will continue to be regularly traded on an establishedsecurities market for this purpose in any particular calendar quarter so as toavoid U.S. federal income tax on the sale of our common shares by non-U.S.holders of 5% or less of our common shares and the withholding requirement onthe purchaser.

 

19

----

Table of Contents

 

At such time that it is no longer the case that 100 or fewer personsown 50% or more of our common shares, under temporary Treasury Regulations, ourcommon shares would also be “regularly traded” on an established securitiesmarket for a calendar quarter if:  (a) our common shares trade, otherthan in de minimis quantities, on at least 15 days during the calendar quarter;(b) the aggregate number of our common shares traded during the calendarquarter is at least 7.5% of the average number of our common shares outstandingduring such calendar quarter (reduced to 2.5% if there are 2,500 or more recordshareholders); and (c) in the event that our common shares are traded onan established securities market located outside the United States, the commonshares are registered under Sec. 12 of the Securities Exchange Act of 1934(which is presently the case). See “Material Income Tax Consequences —Dispositions of Common Shares” for a more detailed discussion.

 

***There is a limitedpublic market for our common shares, and the ability of our shareholders todispose of their common shares may be limited.***

 

Our common shares have been trading on the NYSE Alternext US (formerlythe American Stock Exchange) since February 15, 2007. We cannot foreseethe degree of liquidity that will be associated with our common shares. Aholder of our common shares may not be able to liquidate his, her or itsinvestment in a short time period or at the market prices that currently existat the time the holder decides to sell. The purchase and sale of relativelysmall common share positions may result in disproportionately large increasesor decreases in the price of our common shares. A trade involving a largenumber of common shares could have an exaggerated effect on the reported marketprice of our common shares.

 

***Our stock price mayfluctuate significantly.***

 

The stock market in general and the market for natural gas and oilexploration companies have experienced price and volume fluctuations that areoften unrelated or disproportionate to the operating results or asset values ofcompanies. These broad market and industry factors may seriously impact themarket price and trading volume of our common shares regardless of our actualoperating performance. The market price of our common stock could alsofluctuate significantly as a result of:

 

·       actualor anticipated quarterly variations in our operating results and our reserveestimates;

 

·       changesin expectations as to our future financial performance or changes in financialestimates, if any, of public market analysts;

 

·       announcementsrelating to our business or the business of our competitors;

 

·       conditionsgenerally affecting the oil and natural gas industry, including changes in oiland natural gas prices;

 

·       speculationin the press or investment community;

 

·       generalmarket and economic conditions;

 

·       thesuccess of our operating strategy; and

 

·       theoperating and stock price performance of other comparable companies.

 

***The sale of largenumbers of our common stock may depress the market price of our common stock.***

 

The sale of a substantial number of shares of our common stock in thepublic market, or the perception that substantial sales may occur, could causethe market price of our common stock to decrease. Substantially all of theshares of our common stock are freely transferable or will be transferable incompliance with restrictions under the Securities Act of 1933, as amended.  In 2009, we will need to raise additionalworking capital and investors may be subject to further dilution if we selladditional common shares or issue additional common shares in connection withfuture financings. If a significant number of our common shares are sold in thepublic market, the market price of our common shares could be depressed. Thiscould hamper our ability to raise capital by issuing additional equitysecurities.

 

20

----

Table of Contents

 

***We will continue toincur significant expenses as a result of being a public company, which maynegatively impact our financial performance.***

 

We have incurred and will continue to incur significant legal,accounting, insurance and other expenses as a result of being a public company.The Sarbanes-Oxley Act of 2002, as well as related rules implemented bythe Securities and Exchange Commission, or SEC, and the NYSE Alternext US, haverequired changes in corporate governance practices of public companies.Compliance with these laws, rules and regulations has increased ourexpenses, including our legal and accounting costs, and made some activities moretime-consuming and costly. As a result, it may be more difficult for us toattract and retain qualified persons to serve on our board of directors or asofficers. Furthermore, any additional increases in legal, accounting, insuranceand certain other expenses that we may experience in the future couldnegatively impact our financial performance and have a material adverse effecton our results of operations and financial condition***.***

 

**Item 1B. *Unresolved Staff Comments***

 

None.

 

**Item 2. *Properties***

 

Our principal executiveoffice consists of 2,956 square feet and is located at One Maritime Plaza, Suite 700,San Francisco, CA 94111.

 

**Descriptionof the Properties**

** **

Our current oil andnatural gas exploration, appraisal and development drilling activities are focusedin four distinct project areas as follows:

 

·       **United States—Texas**(onshore South and East Texas regions), **Alaska** (onshore Cook Inlet area) and **California** (onshore San Joaquin basin);

 

·       **Canada—Alberta** (central Alberta basin);

 

·       **Indonesia**—onshore East Kalimantan Province; and

 

·       **Australia**—onshorein two permit areas located in the South Perth basin.

 

We do not fully insureagainst all business risks either because such insurance is not available orbecause premium costs are prohibitive. This is a common practice in the oil andgas industry. We believe our property is adequately insured in view of thenature of our operations and industry practices in this regard.

 

***Texas***

*** ***

*MadisonvilleProject, Madison County, East Texas*

* *

We own and operate theinterest in the Madisonville Project in Madison County, Texas. We own workinginterests in approximately 4,716 gross and net acres of leases in the RodessaFormation interval, as well as approximately 4,348 gross and net acres ofleases as to depths below the Rodessa Formation interval. We also own a licenseas to 12.5 square miles of 3-D seismic data over theMadisonville Field.

 

The Madisonville Field,located approximately 100 miles north of Houston, has produced oil and naturalgas from four different horizons above the Rodessa Formation for over50 years. The field was discovered in 1945 with the Boring No. 1well, which was drilled to the Rodessa Formation. The well blew out at anuncontrolled rate for three days during a test; however, due to hydrogensulphide, carbon dioxide and nitrogen in the Rodessa Formation natural gas, thegas reserves were never developed. Over 125 wells were drilled in theMadisonville Field to shallower intervals above the Rodessa Formation. In 1994,nearly 50 years after the initial discovery, United Meridian Corporation (“**UMC**”) drilled the Magness Well as the firstfollow-up well into the Rodessa Formation to the Boring No. 1 well. TheMagness Well had 139 feet of net pay but the natural gas was found tocontain 28% impurities.

 

UMC previously productiontested the Magness Well in 1994 through perforations in the lower most ten feetof the indicated Rodessa Formation pay interval. The well tested at a rate of12 MMcf/d from this limited interval on a 22/64ths inch choke withflowing wellhead pressures increasing from 3,915 to 3,919 pounds per squareinch. In 2001, we re-entered and recompleted the Magness Well. A total of139 feet of interval has been perforated in the Rodessa Formation atapproximately 12,000 feet of depth for this well. The well was productiontested over a 12-day period in 2001 on various choke sizes with flowing ratesranging up to approximately 20.8 MMcf/d. We own a 100% working interest(75.1333% net revenue interest) in the Magness Well located in the surroundingproduction unit consisting of 684 gross and 629 net acres. The Magness Wellcommenced production in May of 2003.

 

21

----

Table of Contents

 

The first developmentwell, the Fannin Well, was drilled and completed in 2004. We own a 100% workinginterest (69.9162% net revenue interest) in the Fannin Well located in thesurrounding production unit consisting of 704 gross and net acres. A total of146 feet of indicated pay was perforated in the well and a flow test ofthe well was completed in December 2004 from the Rodessa Formation atrates of up to 25.7 MMcf/d. We commenced production from the Fannin Wellin early 2006.

 

The Madisonville Field isa geologic feature encompassing approximately 5,800 acres at the Rodessalimestone at about 11,800 feet of depth. A 3-D seismic program shot inearly 1998 confirmed the size of the structure and slightly increased its sizeover earlier interpretations.

 

Our working interestcovers the Rodessa Formation at approximately 12,000 feet of depth. TheRodessa reserves are being developed through the recompletion of the MagnessWell and the drilling of additional proved and probable undeveloped locations.Production began in May 2003 and stabilized at a rate of 18 MMcf/d ofraw gas from the Magness Well. In 2006, we drilled the Wilson and Mitchellwells. We own a 100% working interest (70% net revenue interest) in the Wilsonand Mitchell wells.  The Magness, Fanninand Mitchell wells are currently producing at a combined restricted rateof approximately 7 MMcf/d while the Wilson well is shut-in. Currentnet sales production is approximately 4 MMcf/d. In addition, we own aworking interest in certain leases and farmout rights which cover depths belowthe Rodessa Formation.

 

The hydrogen sulphide,carbon dioxide and nitrogen combined comprise about 28% of the gas content. Theuntreated natural gas is delivered to the Madisonville Midstream Gas TreatmentPlant where all the natural gas impurities are removed before delivery to thesales pipeline. As a result of the costs to treat the natural gas, we receive anet price that is substantially lower than we would otherwise receive if thegas did not contain the 28% of impurities. In addition, the high concentrationsof hydrogen sulphide and carbon dioxide result in higher capital and operatingcosts for our wells. For example, the hydrogen sulphide and carbon dioxide arecorrosive to the wellbores. This means we have to utilize higher gradespecification well tubing and casing which is more expensive than what we wouldutilize absent the impurities. In addition, we continuously treat the wellboreswith chemicals designed to inhibit the corrosive effects of the impurities. Wealso maintain field personnel at or near the wellsites who monitor the wells ona twenty four hour basis and equip the wellsites with extensive safetyequipment systems due to the toxic properties of the hydrogen sulphide andcarbon dioxide. These factors and others result in higher capital and operatingcosts for our wells in the Madisonville Project.

 

*The Madisonville Midstream Gas Treatment Plant andGathering Facilities*

* *

In order to produce theproved gas reserves from the Rodessa Formation, we developed an onsite plan totreat and remove impurities from the Madisonville Project natural gas in orderto meet pipeline-quality specifications. On June 15, 2001, we, through oursubsidiary Redwood LP, entered into an agreement, which agreement wassubsequently amended and restated, together with certain related agreements(collectively, the “**Hanover Agreement**”),with Hanover Compression Limited Partnership pursuant to which Hanovercommitted to fund, construct and operate a dedicated natural gas treatmentplant to process our Rodessa Formation natural gas.  The Hanover Agreement also provided for theinstallation by Gateway of field gathering pipelines and an approximatelynine-mile sales pipeline with an estimated capacity of approximately70 MMcf/d to transport the Madisonville Field natural gas to a majorpipeline.  By April of 2003, theconstruction and installation of Hanover’s natural gas treatment plant andGateway’s associated pipeline and gathering facilities were completed. Gasproduction from the Magness Well commenced in May 2003. We received the firstrevenues from the sale of natural gas from the Madisonville Project in July 2003.

 

On July 25, 2005,MGP purchased the natural gas treatment plant from Hanover and purchased thegathering pipelines upstream of the gas treatment plant from Gateway. Concurrentwith MGP’s purchase of the gas treatment plant and gathering pipelines, we,through our subsidiary Redwood LP, Gateway and MGP terminated the HanoverAgreement and entered into a new agreement, (the “**MGP Agreement**”), to treat and transport our gas productionfrom the Madisonville Project. As a result of the MGP Agreement, MGP committedto install and make operational additional treating facilities capable oftreating 50 MMcf/d, which combined with the capacity of the currentin-service treating facilities would represent a total treating capacity of68 MMcf/d for the Madisonville treatment plant. The MGP Agreement providedthat the newly installed gas treatment facilities would be electrically driven.Currently, the existing in-service treatment plant utilizes some of the naturalgas produced and delivered from our well(s). The conversion to electricity onthe expanded portion of the treatment plant is expected to reduce shrinkage ofour natural gas that occurs in the treating process.

 

22

----

Table of Contents

 

Originally, the MGP Agreement required MGP to complete the additionaltreating facilities by March 1, 2006. However, due to events of force majeure, construction of the additionaltreating facilities was delayed.  Inearly November 2007, MGP began testing the additional treatment facilitiesby accepting 20 MMcf/d at the inlet.   Subsequently in December 2007, MGPtemporarily suspended the operations of the additional treatmentfacilities in order to makemodifications to more effectively deal with the presence of diamondoids in thegas stream produced from the Rodessa Formation. A diamondoid is a rare,naturally occurring compound that can segregate out of the gas stream upon adecrease in temperature and pressure and as such, could cause operationalproblems for the nitrogen rejection portion of the additional treatingfacilities.  MGP obtained a detailed laboratorycomposition analysis of the diamondoids which indicated that removal ofthe diamondoids will require flowing the natural gas stream through a dieselcontactor after the gas stream has had the hydrogen sulfide and carbon dioxideremoved.  Through this contactor process,the diesel will absorb the diamondoids from the gas stream prior to entry intothe nitrogen removal tower.

 

During 2008, MGP analyzedvarious options for removing the diamondoids; however, they did not complete the necessary plant system modifications.  On December 31, 2008, wepurchased the gas treatment plant and related gathering pipelines from MGP inexchange for the assumption of secured bank debt, payment of certainoutstanding payables of MGP and shares of GeoPetro’s common stock.  The secured bank debt we incurred aspart of the Plant acquisition totaled $6.7 million and is in the form of a 3year loan with the lender, Bank of Oklahoma, National Association (“BOK”).  The loan agreement provides for minimumquarterly principal payments of $150,000 and supplemental principal amountspayable upon GeoPetro achieving certain cash flow thresholds.  The Company has pledged its Madisonvillenatural gas reserves as well as the Plant assets as collateral for the loan.  There is a loan fee of $60,000 payableannually for any yearly period during which any principal remains outstandingunder the loan.  There is no prepaymentpenalty.  GeoPetro and its wholly ownedsubsidiary Redwood Energy Production, LP (“Redwood”) are guarantors of theloan.

 

The effective date of the acquisition was December 31, 2008 andthe new owner of the Plant is GeoPetro’s wholly-owned, indirect subsidiary,Madisonville Midstream LLC (“MM”).  We expect to complete installation of thesystem modifications required in the new plant in 2009.  In the meantime, the existing, in serviceportion of the plant continues to operate with a capacity of approximately 18million cubic feet per day of inlet gas.

 

Our natural gas deliveries to our gas treatment plant may be affectedby third party demands for access to the plant. On August 9, 2006, theTexas Railroad Commission issued an order requiring the Plant to ratablyprocess, take, transport or purchase natural gas produced by Crimson Exploration,Inc. (“Crimson”) into the Madisonville gas treatment plant. There is noguarantee that we will be able to maintain full access to treatment capacity ofup to 68 MMcf/d at the Madisonville Plant at all times because, forexample, Crimson now has the right to have its natural gas treated at the plant,which may reduce the plant’s ability to treat all of our natural gas, unlessthe plant’s capacity is further expanded.

 

To date, Crimson has permitted four wells to be drilled to the RodessaFormation. The drilling of two of these wells has been completed to a depth ofapproximately 12,635 feet. Crimson has also drilled an injection well fordisposal of waste products resulting from the treatment of their naturalgas.  Crimson is presently deliveringapproximately 0.3 MMcf/d of natural gas to the treatment plant.

 

*OtherInterests in the Madisonville Project*

 

Our working interest in the Madisonville Project is subject to a netprofits interest in favor of the third party that sold us our working interestsin the Madisonville Project. The net profits interest is 12.5% (proportionatelyreduced to our interest) of the net operating profits until payout is achieved.After payout, the net profits interest increases to 30% (proportionatelyreduced to our interest). “Payout”, for purposes of the net profits interest,is defined and achieved at such time as we have recouped from net operatingcash flows our total net investment in the Madisonville Project plus a 33% cashon cash return.

 

23

----

Table of Contents

 

*South DryHollow Project, Lavaca County, South Texas*

 

We own a 15% non-operated working interest in approximately 1,605 grossand 241 net acres of leases in Lavaca County, South Texas.  A test well, the Willstar Eichhorn No. 1well (the “Willstar well”), has been drilled to a total depth of 16,650 feetand is currently being evaluated.  Theprimary objective of this well was to test the Rochelle sands in the LowerWilcox formation.  Secondary objectivesinclude the “10,500”, Peck, Dagg, Lampley and Massive sandstone formations inthe Wilcox formation.  The Willstar wellis a vertical well located approximately 800 feet south of the Eichhorn GasUnit No. 1 well drilled by Newfield Exploration Company (the “Newfieldwell”) in 2002.  The Newfield well wascompleted in 2002 in the Lampley member of the Wilcox formation at an initialrate of 3.8 MMcf/d and has produced approximately 0.9 Bcf of natural gas.  The Newfield well also encountered naturalgas shows in the Rochelle, “10,500”, Peck, Dagg, and Massive members of theWilcox formation which were not tested. The Newfield Eichhorn well has subsequently been re-entered andcompleted in the “10,500” zone.  Thiswell may need to be fraced to increase production.

 

***Alaska***

 

*The CookInlet Alaska Project*

 

We entered into anagreement with Pioneer Oil Company, Inc. (“**Pioneer**”)dated April 20, 2005, wherein we secured the Cook Inlet Option to acquirea 100% working interest, 81% net revenue interest, in approximately116,806 acres onshore in Cook Inlet, Alaska. We have since acquired 5,368additional acres. We believe this acreage to be prospective for bothconventional gas production and coal bed methane production.

 

The 122,174 acrelease position consists of two separate target areas that have been selectedfor exploration. These areas are called the Point MacKenzie and Trading BayProspects, respectively.

 

The Point MacKenzieProspect is located twelve miles northwest of Anchorage. The Trading BayProspect is located 50 miles west of Anchorage across the Cook Inlet. TheCook Inlet basin contains a thick section of terrestrial Tertiary rocks whichincludes shales, sandstones, and coals. The coals occur in seams which arecommonly 20 feet thick and can be as thick as 70 feet. Accessibleonshore areas have 200 to 300 feet of coal shallower than5,000 feet. Gas content for these coals ranges from 80 to250 standard cubic feet per ton, but testing is restricted to a verysmall number of bore holes and is almost completely unknown for most of theinlet.

 

Markets for natural gasin the Cook Inlet area include power generation, heating, fertilizer productionand liquefied natural gas exports. An extensive pipeline system supplies thesefacilities and crosses the Point MacKenzie Prospect and Trading Bay Prospectlease blocks. These pipelines are only partially filled with gas and couldaccommodate additional production.

 

In addition to coal bedmethane reserve potential, preliminary log analysis indicates the PointMacKenzie Prospect and Trading Bay Prospect lease blocks may also containconventional accumulations of natural gas reserves in Tertiary sandstones.

 

The terms of the CookInlet Option provide for us to pay total consideration of $20 per acre, orapproximately $2.3 million, for the leases. The Cook Inlet Option providesthat we will pay the total lease consideration in two installments. We paid thefirst installment totaling $1,168,063 on August 17, 2005 and we havereceived assignment of the 100% working interest in the leases. Within threeyears from the date of receipt of assignment of the 100% working interest inthe leases, we have the option to conduct a $2.5 million work program onthe leases over a three-year period, and, after completion of the work programand an evaluation of the results, to remit the final additional acreageconsideration of $10 per acre for the leases. The Cook Inlet Option providesthat if we fail to pay the lease consideration when due, fail to perform thework program or otherwise default under the Cook Inlet Option, we shall forfeitour interest and reassign the leases to Pioneer, and we will have no furtherliability to Pioneer.

 

On July 31,2008, we entered into a third amendment with Pioneer.  Per the terms of the amendment, the Companypaid Pioneer the sum of $1,168,093 on August 7, 2008, which represents thesecond and final payment for leases comprising 116,806 acres onshore inCook Inlet, Alaska.  The amendmentfurther provided that the work program requiring $2.5 million in expendituresby GeoPetro has been eliminated.

 

Approximately one to twomiles of pipeline will be required to tie in any wells drilled at a currentlypreferred location at the Point MacKenzie Prospect, and approximately four tofive miles of the pipeline will be required to tie in any wells drilled at acurrently preferred location at the Trading Bay Prospect. We have not yetprepared an estimate of the cost to tie these wells in.

 

24

----

Table of Contents

 

We are aware of two majorpipelines which transverse the acreage blocks, the Enstar 20” line and theUnoCal-Marathon 16” line. We estimate the UnoCal-Marathon 16” linepresently has available unused capacity of approximately 40 MMcf/d. Inaddition, we estimate the Enstar 20” line has available unused capacity ofapproximately 100 MMcf/d.

 

Significantoperational progress has been made in our Cook Inlet Project within the pastyear and continues in preparation for drilling the Frontier Spirit #1 well.After reprocessing 50 miles 2-D seismic data which the Company acquired fromAMOCO on our Point MacKenzie block, GeoPetro has identified a sizeable initialreserve target. The prospect covers eighteen sections (11,500 acres) underclosure and will target conventional gas reserves in the Middle and LowerTyonek Formations reaching to a depth of approximately 8,000 feet. The HemlockFormation, a known oil and gas producer in the Cook Inlet, will be thesecondary objective for the Frontier Spirit #1 well. GeoPetro has constructed adrill pad and access road at the Frontier Spirit #1 location. This work, aswell as the installation of the water supply well which will supportexploration drilling operations in May 2009, was completed in October 2008.Coordination of the drilling rig and necessary drilling equipment is alsounderway. The GeoPetro Frontier Spirit #1 well will be located less than twomiles from the Enstar 20” natural gas pipeline which has abundant sparecapacity. This well is expected to be drilled in 2010.

 

***California***

 

*LokernProject*

 

We have 100% working interestsin 1,280 lease acreage in the Lokern Project, located in the southern SanJoaquin basin, near Bakersfield, California. The primary exploration objectiveis the Miocene Stevens formation. The secondary objectives include the MioceneReef Ridge and Pliocene Etchegoin sands. The Stevens formation is Upper Mioceneage.

 

The Lokern Project isbeing developed in part as a result of positive results from the Machii-RossAckerman show well drilled in 1979 on acreage currently controlled by us. Basedon log analysis, we believe this well had approximately 240 feet of potentialnet oil pay and an additional 150 feet of potential pay in the Stevenszone. The Machii-Ross Ackerman well was drilled to a depth of 15,078 feet byMachii-Ross Petroleum Company and was plugged and abandoned as a dry hole. Webelieve, based on our log analysis, that the well may have been a bypassedproducer.

 

We expect that a wellwill be drilled, either by us or through a farmout arrangement with a thirdparty, to a depth of 15,000 feet in 2010.

 

Based on our review oftitle information from public authorities and other publicly available sources,we believe that we have a 100% working interest in the Lokern Project. As iscustomary in the U.S. oil and gas industry, we will not conduct a thoroughtitle review with respect to our interest in the Lokern Project until we havemade a definitive decision to drill in a particular lease area.

 

***Alberta***

*** ***

*SwanHills Project*

* *

The Swan Hills Project is located in the Central Alberta Basin,Alberta, Canada. The primary exploration objective is the Swan Hills Formationat approximately 9,000 feet. Secondary objectives will include the shallowerGilwood, Nordegg and Falher formations.

 

We, through our wholly-owned subsidiary, GeoPetro Canada, have reviewed3-D seismic data over the prospect and plan to participate in the drilling of atest well. We have a 33% non-working interest in approximately 4,480 grossleased acres (1,493 net acres).

 

***Indonesia***

*** ***

C-G Bengara owns 100% ofthe underlying rights to explore for and produce oil and natural gas within thecontract area designated as the Bengara II Block, which rights have beengranted under a production sharing contract dated December 4, 1997 (the “**Bengara II PSC**”) with Pertamina. Previouslywe owned 40% of CG Bengara and Continental Energy Corporation (“**Continental**”) owned the remaining 60% and, through it, therights to the Bengara II PSC. On September 29, 2006, we executed adefinitive agreement to sell 70% of our interest in C-G Bengara to CNPCHK(Indonesia) Limited (“**CNPC**”). We haveretained a 12% stake in C-G Bengara and the Bengara II PSC. Continental haslikewise sold its interest and retained an 18% interest in C-G Bengara and theBengara II PSC.

 

25

----

Table of Contents

 

The Bengara Block is located in the Tarakan Basin, mostly onshore butpartially offshore astride the Bulungan River Delta in the Indonesian provinceof East Kalimantan. It originally covered a single contiguous area ofapproximately 1.2 million gross acres, of which 300,000 gross acreswere relinquished in 2001 and an additional 300,000 gross acres wererelinquished in 2007 by C-G Bengara in accordance with the terms of theBengara II PSC. C-G Bengara has tendered an additional relinquishment suchthat the remaining acreage within the Bengara II PSC total approximately240,000 acres, or 970 square kilometers as discussed below.

 

*TheMakapan Gas Field*

* *

Since 1938, only twowells have been drilled in the Bengara Block prior to 2008, one of whichresulted in the discovery of the Makapan Gas Field. The Muara Makapan No. 1well was drilled in 1988 by P.T. Deminex Indonesia from a swamp bargepositioned on one of the Bulungan River Delta mouth channel distributaries. Thewell was drilled to a total depth of 10,800 feet and tested 19.5 MMcf/dtogether with 600 bbls of 54 degree API condensate per day from a33 feet thick sandstone section near 6,000 feet. The well was pluggedand abandoned as a natural gas discovery. Several other gas zones indicated onlogs were not tested. The well was not produced nor were any confirmation wellsdrilled due to the lack of a local natural gas market at the time the well wasdrilled. The Makapan Gas Field gas is a “Wet’ gas with a high LPG fractionwhich may be commercial to extract at the wellhead for a third revenue sourcein addition to the gas and condensate. The Makapan Gas Field lies mostlyoffshore in very shallow water, less than 10 feet, amidst numerous islandsof the Bulungan River Delta.

 

*Explorationin the Bengara Block*

* *

We believe that the keyto successful prospecting in the Bengara Block will be the identification oftraps and understanding sand distribution.

 

Nearly 2,200 linekilometers of 2-D seismic data available within the Bengara Block appear to beadequate for both detailed and reconnaissance interpretation purposes. Somelocalized areas may benefit from reprocessing. New seismic data is required inplaces where insufficient data exists and for prospect confirmation in otherlocations.

 

Several separate andunique geologic plays within the Bengara Block, as well as a number ofprospects and leads, have been identified. Some well-defined prospects presentimmediate drilling targets. Exploration within the Bengara Block is in itsformative stages and it is premature to make meaningful resource or reserve estimates.However, the existing exploration work to date indicates that there may bepotential petroleum accumulations in the Bengara Block. Analysis of sourcerocks indicates a propensity for both oil and natural gas.

 

*Terms of Participation in the Bengara Block*

 

The Bengara II PSCis a “standard terms” PSC employed by BP Migas for all oil and natural gasconcessions in Indonesia. Generally, the joint venture participants areentitled to receive, from production proceeds, 100% of expenditures in theblock as “cost recovery”. Once these costs are recovered, C-G Bengara isentitled to a production share of approximately 26.7% of oil produced and 62.5%of all natural gas produced. We will be entitled to 12% of C-G Bengara’s shareof any such production. Sharing terms for certain categories of oil varyslightly as defined in the Bengara II PSC. The term of the contractis thirty years from December 1997 or a shorter period if C-G Bengaraelects to terminate its obligations under the contract or if no commercial hydrocarbonsare discovered within the contract area. At the end of six years, unlessmutually extended by C-G Bengara and BP Migas, the contract expires ifno commercially producible hydrocarbons have been discovered in thecontract area. C-G Bengara and BP Migas have mutually extended the earlytermination provisions until December 3, 2009. C-G Bengara may terminatethe contract at any time by relinquishing all of its rights and obligationsunder the contract area. C-G Bengara is required to relinquish 25% of thecontract area within the first three years of the contract, a further 25% ofthe contract area within six years from the commencement of the contract and anadditional area within the first ten years so that the area retained thereaftershall not be in excess of 970 square kilometers, or 20% of the originaltotal contract area, whichever is less. C-G Bengara may designate which areasare to be relinquished subject to approval by BP Migas. C-G Bengara’sobligation to relinquish parts of the original contract area under theseprovisions does not apply to the surface area of any field in whichpetroleum has been discovered. To date, 600,000 gross acres have beenrelinquished by C-G Bengara in accordance with the terms of theBengara II PSC. In 2007, C-G Bengara tendered an additional relinquishmentsuch that the remaining acreage within the Bengara II PSC shall totalapproximately 240,000 acres, or 970 square kilometers.  The remaining 240,000 acres is considered byC-G Bengara to be the most prospective portion of the original 1.2 million acreblock.

 

26

----

Table of Contents

 

C-G Bengara is requiredto pay to BP Migas specified amounts based on achieving certain cumulativeproduction quantities of crude oil from the contract area when and ifcommercial production is established. These production bonuses are as follows:

 
| **Cumulative Production** | ** ** | **Cash Bonus Due** | ** ** |
|--------------------------------|------------|------------------------------|------------|
| 25,000,000 boe                 |       | $                            | 500,000    |   |
| 60,000,000 boe                 |       | $                            | 1,500,000  |   |
| 100,000,000 boe                |       | $                            | 2,500,000  |   |

 

Inorder to maintain the Bengara II PSC in effect, C-G Bengara was required tocomplete the following work programs and expenditures during the first tenyears of the contract, unless the requirement is extended or waived byBP Migas.  C-G Bengara has fulfilledthe minimum work and cash expenditure requirements described below.

** **
| **Contract Year** | ** ** | **Work Program**             | ** ** | **Amount** | ** ** | **Our 12% Share** | ** ** |
|------------------------|------------|-----------------------------------|------------|------------|------------|-----------------------------|------------|
| 1998                   |       | Geologic and  geophysical studies |       | $          | 500,000    |                        | $          | 60,000 |   |
| 1999                   |       | Seismic  reprocessing             |       | 500,000    |       | 60,000                      |       |
| 2000                   |       | Drill two  wells                  |       | 6,000,000  |       | 720,000                     |       |
| 2001                   |       | Geologic and  geophysical studies |       | 1,000,000  |       | 120,000                     |       |
| 2002                   |       | Drill one  well                   |       | 5,000,000  |       | 600,000                     |       |
| 2003                   |       | Acquire  seismic                  |       | 3,750,000  |       | 450,000                     |       |
| 2004                   |       | Drill one  well                   |       | 5,250,000  |       | 630,000                     |       |
| 2005                   |       | Evaluate  well results            |       | 1,000,000  |       | 120,000                     |       |
| 2006                   |       | Geologic and  geophysical studies |       | 1,000,000  |       | 120,000                     |       |
| 2007                   |       | Geologic and  geophysical studies |       | 1,000,000  |       | 120,000                     |       |
|                   |       | TOTAL                             |       | $          | 25,000,000 |                        | $          | 3,000,000 |   |

 

Upon establishingcommercial production, if ever, C-G Bengara and BP Migas shall shareratably in the first 20% of oil and natural gas produced in the contract areawithin a given year according to the percentages specified below. After thefirst 20% of production, C-G Bengara is entitled to receive 100% of productionuntil cost recovery has been achieved. Cost recovery generally includes 100% ofthe operating and drilling costs and depreciation of fixed assets applicable tooil and natural gas operations within the contract area. After C-G Bengara hasreceived oil and natural gas production with a value sufficient to achieve costrecovery in a given year, C-G Bengara and BP Migas shall then shareratably in the production according to the percentages specified below:

 
| **Description** | ** ** | **BP Migas** | ** ** | **C-G Bengara** | ** ** | **Our net share** | ** ** |
|-----------------|------------|-------------------|------------|----------------------|------------|-----------------------------|------------|
| Oil production  |       | 73.2143           | %          | 26.7857              | %          | 3.2143                      | %          |
| Gas production  |       | 37.5              | %          | 62.5                 | %          | 7.5                         | %          |

 

Upon the completion of five years after commercial productioncommences, C-G Bengara is further subject to a domestic market obligation.This obligation requires C-G Bengara to sell and deliver to BP Migas, tomeet Indonesia’s domestic crude oil needs, a specified quantity of crude oil ata price which is only 15% of the market price of the oil. However, for newfields, for a period of five years starting on the month of the first deliveryof crude oil produced from a new field, the fee per barrel for such crude oilsupplied to the Indonesian domestic market shall be the market price, with thecondition that the excess over the 15% of market price shall preferably be usedto assist financing of continued exploration efforts in the contract area.

 

Upon the first commercial discovery of oil or natural gas in thecontract area, BP Migas has the right to demand that 10% of C-G Bengara’sundivided interest in the total rights and obligations under theBengara II PSC be offered to itself or an entity owned by Indonesiannationals. The 10% interest shall be offered at a dollar amount equal to 10% ofC-G Bengara’s cumulative costs incurred in the contract area.

 

27

----

Tableof Contents

 

*Current and Planned Activities in the BengaraBlock*

 

In accordance with the terms of our agreement dated September 29,2006 which sold 70% of our interest in C-G Bengara to CNPC, CNPC:

 

1.                                       Purchased14,000 and 21,000 shares of C-G Bengara from us and Continental, respectively,at a cost of $1 per share. As a result of the transaction, we and Continentalown 6,000 and 9,000 C-G Bengara shares, respectively, retaining a 12% and18% interest in C-G Bengara, respectively.

 

2.                                       Paidthe sum of $18.7 million (the “**EarningObligation**”) into a special joint venture account at a Hong Konginternational bank. The funds are under joint signature control of CNPC,ourselves and Continental, and are being expended exclusively to pay for 2006and 2008 exploration and/or appraisal drilling in the Bengara II PSC area.

 

3.                                       Agreedto provide development loans to pay 100%, and thereby “carry” our share andContinental’s share of all C-G Bengara’s exploitation, drilling, anddevelopment expenditures attributable to the Bengara II PSC, after the EarningObligation funds are expended and a Plan of Development has been approved by BPMigas, until an additional amount of U.S. $41.3 million over and above theEarning Obligation funds has been expended.

 

4.                                       Agreedto pay a cash bonus totaling $5,000,000, in the proportions of $2,000,000 to usand $3,000,000 to Continental, respectively, contingent upon and withinfourteen business days of the receipt by C-G Bengara of the written approvalfrom governmental authorities approving the development of the first commercialoil or gas discovery within the Bengara II PSC contract area.

 

During 2007, C-G Bengaradrilled a total of four wells on the Bengara II PSC: the Seberaba-1, theSeberaba-3, the Seberaba-4, and the Punga-1. The technical information providedby drilling and testing results to date confirm the presence of an oilaccumulation. However the data is not yet adequate to conclusively demonstratethe extent of the oil accumulation or that it has sufficient size of oilreserves to economically justify a full commercial development. Furthertechnical information is required prior to commencing development.  C-G Bengara has prepared a preliminary planof development for the Seberaba discovery based upon drilling and testingresults from the Seberaba-1 and 3 wells. In addition to these well testresults, C-G Bengara feels additional technical information is needed prior tofinalizing the formal plan of development and submitting it for approval toIndonesian oil and gas authorities. Approval of the formal plan of developmentwill automatically invoke the final 20-year production period of the Bengara-IIPSC through December 4, 2027.

* *

In December of 2008,C-G Bengara received approval of the Indonesian government for an extension oftime under the Bengara-II PSC to appraise, assess, and justify the economicfeasibility of commercial development of the apparent oil discovery made on theSeberaba prospects during exploratory drilling in 2007 as noted above.  The approval is granted for an additionalyear to the Bengara-II PSC contract anniversary on 4th December 2009 and may be extended forsubsequent years subject to further approval based on an annual review ofprogress and results of appraisal work.

 

*CGXploration*

* *

In November 2005, we and Continental formed CG Xploration topursue new venture oil and gas exploration and production projects and obtainnew exploration concessions in Indonesia. CG Xploration Inc. isincorporated in Delaware and is owned 50% by us and 50% by Continental.CG Xploration Inc. will actively pursue and may acquire new ventureopportunities on behalf of ourselves and Continental. To date,CG Xploration has made no acquisitions.

 

***Australia***

 

On June 20, 2007, theCompany agreed to sell and transfer all of its remaining property interests inAustralia to an unrelated party for cash consideration and a Petroleum SalesRoyalty Payment equal to 25% of the future annual earnings before interest,taxes, depreciation and amortization from the property interests. Specifically,the agreement provides that the Company will be paid consideration for the saleand transfer of its property interests as follows:

 

1.      Initial cash consideration of $175,000 was received on November19, 2007;

 

2.      a second cash payment of $175,000 upon a successful flow testof petroleum from a well located on the property interests. A successful flowtest is defined for purposes of this agreement to be a test of at least 7million standard cubic feet of natural gas for a continuous and uninterrupted24 hour period (or an equivalent oil/condensate rate based on a conversionratio of 6000 cubic feet of gas to a barrel of oil or condensate); and,

 

3.      a Petroleum Sales Royalty Payment equal to 25% of the futureannual earnings before interest, taxes, depreciation and amortization from theproperty interests up to a total amount of $2,200,000.

 

**NaturalGas Reserves**

** **

Our estimated total net proved reserves of natural gas and oil as of December 31,2008, 2007 and 2006, and the present values of estimated future net revenuesattributable to those reserves as of those dates, are presented in thefollowing tables.

 

**“Proveddeveloped oil and gas reserves”**means reserves that can be expected to be recovered through existing wells withexisting equipment and operating methods. Additional oil and gas expected to beobtained through the application of fluid injection or other improved recoverytechniques for supplementing the natural forces and mechanisms of primaryrecovery should be included as “proved developed reserves” only after testingby a pilot project or after the operation of an installed program has confirmedthrough production response that increased recovery will be achieved.

** **

**“Proveddeveloped nonproducing reserves”** means reserves expected to be recovered from zones behind casing inexisting wells.

** **

**“Provedoil and gas reserves”** meansestimated quantities of crude oil, natural gas, and natural gas liquids whichgeological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs under existing economic andoperating conditions, i.e., prices and costs as of the date the estimate ismade. Prices include consideration of changes in existing prices provided onlyby contractual arrangements, but not on escalations based upon futureconditions.

** **

(i)                                     Reservoirsare considered proved if economic producibility is supported by either actualproduction or conclusive formation test. The area of a reservoir consideredproved includes (A) that portion delineated by drilling and defined bygas-oil and/or oil-water contacts, if any; and (B) the immediatelyadjoining portions not 

 

28

----

Table of Contents

 

yet drilled, but which can be reasonably judged as economicallyproductive on the basis of available geological and engineering data. In theabsence of information on fluid contacts, the lowest known structuraloccurrence of hydrocarbons controls the lower proved limit of the reservoir.

 

(ii)                                 Reserveswhich can be produced economically through application of improved recoverytechniques (such as fluid injection) are included in the “proved”classification when successful testing by a pilot project, or the operation ofan installed program in the reservoir, provides support for the engineeringanalysis on which the project or program was based.

 

(iii)                               Estimatesof proved reserves do not include the following:

 

(A)          oilthat may become available from known reservoirs but is classified separately as“indicated additional reserves”;

 

(B)           crudeoil, natural gas, and natural gas liquids, the recovery of which is subject toreasonable doubt because of uncertainty as to geology, reservoircharacteristics, or economic factors;

 

(C)           crudeoil, natural gas, and natural gas liquids, that may occur in undrilledprospects; and

 

(D)          crudeoil, natural gas, and natural gas liquids that may be recovered from oilshales, coal, gilsonite and other such sources.

 

**“Proved undeveloped reserves”**meansreserves that are expected to be recovered from new wells on undrilled acreage,or from existing wells where a relatively major expenditure is required forrecompletion. Reserves on undrilled acreage shall be limited to those drillingunits offsetting productive units that are reasonably certain of productionwhen drilled. Proved reserves for other undrilled units can be claimed onlywhere it can be demonstrated with certainty that there is continuity ofproduction from the existing productive formation. Under no circumstancesshould estimate for proved undeveloped reserves be attributable to any acreagefor which an application of fluid injection or other improved recoverytechnique is contemplated, unless such techniques have been proved effective byactual tests in the area and in the same reservoir.

 

The 2008, 2007 and 2006 estimates were prepared by MHA PetroleumConsultants, independent reservoir engineers, and are part of their reservereports on our natural gas and oil properties. MHA Petroleum Consultants’estimates were based on a review of geologic, economic, ownership andengineering data that we provided. In estimating the reserve quantities thatare economically recoverable, MHA Petroleum Consultants used end-of-periodnatural gas and oil prices. In accordance with U.S. Securities and ExchangeCommission regulations, no price or cost escalation or reduction wasconsidered. All of our proved reserves are attributable to our MadisonvilleProject in Madison County, Texas.

 
| ** **                     | ** ** | **AS OF DECEMBER 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(MMcf)**                            | ** ** | **(MMcf)** | ** ** | **(MMcf)** | ** ** |
| Proved developed               |       | 17,300                                |       | 10,495 |   | 12,335 |   |
| Proved developed non-producing |       | 3,170                                 |       | 12,644 |   | 12,365 |   |
| Proved undeveloped             |       | —                                |       | — |   | — |   |
|                           |       |                                  |       |   |   |   |   |
| Total                          |       | 20,470                                |       | 23,139 |   | 24,600 |   |

 

In accordance withSecurities and Exchange Commission regulations, estimates of our provedreserves and future net revenues are made using sales prices estimated to be ineffect as of the date of such reserve estimates and are held constantthroughout the life of the properties, except to the extent a contractspecifically provides for escalation. Estimated quantities of proved reservesand future net revenues are affected by natural gas and oil prices, which havefluctuated significantly in recent years. We filed reports with theAlberta Securities Commission in March 2008 that included total provedreserves inclusive of royalties and net profits interests as of December 31,2007 totaling 43,517 MMcf. The total net proved reserves, excluding royaltiesand net profits interests, as of December 31, 2007 was 23,139 MMcf. Thedifference between the two numbers represents proved reserves attributable toroyalties and net profits interests.

 

29

----

Table of Contents

 

***Standardized Measure ofDiscounted Future Net Cash Flows***

 

For purposes of thefollowing disclosures, estimates were made of quantities of proved reserves andthe periods during which they are expected to be produced. Future cash flowswere computed by applying year-end prices to estimated annual future productionfrom proved gas reserves. The average year-end prices for gas were as indicatedbelow. Future development drilling and production costs were computed byapplying year-end costs to be incurred in producing and further developing theproved reserves. Future income tax expenses were computed by applying,generally, year-end statutory tax rates (adjusted for permanent differences,tax credits and allowances) to the estimated net future pre-tax cash flows. Thediscount was computed by application of a 10% discount factor. The calculationsassume the continuation of existing economic, operating and contractualconditions. However, such arbitrary assumptions have not proven to be the casein the past. Other assumptions of equal validity could give rise tosubstantially different results.

 
| ** **                                                | ** ** | **YEAR ENDED DECEMBER 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                    | ** ** |
| Future cash inflows                                       |       | $                                          | 107,063    |   | $ | 135,264 |   | $ | 101,867 |   |
| Future production costs                                   |       | (34,414                                    | )          | (45,649 | ) | (37,783 | ) |
| Future development costs                                  |       | (5,075                                     | )          | (1,075 | ) | (1,075 | ) |
| Future income taxes                                       |       | (7,977                                     | )          | (13,762 | ) | (8,128 | ) |
| Future net cash flows                                     |       | 59,597                                     |       | 74,778 |   | 54,882 |   |
| 10% annual discount                                       |       | (12,282                                    | )          | (14,570 | ) | (8,341 | ) |
| Standardized measure of discounted future  net cash flows |       | $                                          | 47,315     |   | $ | 60,208 |   | $ | 46,541 |   |

 

30

----

Table of Contents

 

***Pricing Assumptions***

*** ***

**SEC regulations require that thegas and oil prices used in the MHA Petroleum Consultants reserve reportsincluded herewith are the period-end prices for natural gas at December 31,2008, 2007 and 2006, respectively. These prices are projected without inflationfor the life of the wells included in the reserve reports. The pricingassumptions are listed below and represent the weighted average price fornatural gas at December 31**st delivered atthe Houston Ship Channel before any reductions for transportation and processingfees.

 
| ** **             | ** ** | **YEAR-END PRICE** | ** ** | ** **             | ** ** |
|------------------------|------------|-------------------------|------------|------------------------|------------|
| **2008 REPORT**   | ** ** | **2007 REPORT**    | ** ** | **2006 REPORT**   | ** ** |
| **Gas ($/MMBtu)** | ** ** | **Gas ($/MMBtu)**  | ** ** | **Gas ($/MMBtu)** | ** ** |
|                   |       |                    |       |                   |       |
| $                      | 5.25       |                    | $          | 6.81                   |       | $ | 5.40 |   |
|                        |            |                         |            |                        |            |  |  |  |

 

**DrillingActivities**

** **

**The following indicates the numberof natural gas and oil wells drilled during the periods indicated.**

 
| ** **                        | ** ** | **Productive** | ** ** | **Dry** | ** ** | **Total Wells** | ** ** |
|-----------------------------------|------------|----------------|------------|---------|------------|----------------------|------------|
| ** **                        | ** ** | **Gross**      | ** ** | **Net** | ** ** | **Gross**            | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Year ended December 31, 2008 |       |           |       |    |       |                 |       |   |   |   |   |   |   |
| Exploratory                       |       | 0              |       | 0       |       | 3                    |       | 1.15 |   | 3 |   | 1.15 |   |
| Development                       |       | 0              |       | 0       |       | 0                    |       | 0 |   | 0 |   | 0 |   |
|                              |       |           |       |    |       |                 |       |   |   |   |   |   |   |
| Year ended December 31, 2007 |       |           |       |    |       |                 |       |   |   |   |   |   |   |
| Exploratory                       |       | 0              |       | 0       |       | 2                    |       | 1 |   | 2 |   | 1 |   |
| Development                       |       | 0              |       | 0       |       | 0                    |       | 0 |   | 0 |   | 0 |   |
|                              |       |           |       |    |       |                 |       |   |   |   |   |   |   |
| Year ended December 31, 2006 |       |           |       |    |       |                 |       |   |   |   |   |   |   |
| Exploratory                       |       | 0              |       | 0       |       | 0                    |       | 0 |   | 0 |   | 0 |   |
| Development                       |       | 2              |       | 2       |       | 0                    |       | 0 |   | 2 |   | 2 |   |

 

**Acreageand Productive Wells**

** **

The following table sets forth our ownership interest in undevelopedacreage, developed acreage and productive wells in the areas indicated where weown a working interest as of December 31, 2008. Gross represents the totalnumber of acres or wells in which we own a working interest. Net represents ourproportionate working interest resulting from our ownership in gross acres orwells. Productive wells are wells in which we have a working interest and thatare capable of producing natural gas or oil. Wells that are completed in morethan one producing horizon are counted as one well.

 
| ** ** | ** ** | **Undeveloped Acreage** | ** ** | **Developed Acreage** | ** ** | **Producing Wells** | ** ** | **Non-Producing Wells** | ** ** |
|------------|------------|------------------------------|------------|----------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** ** | ** ** | **Gross**                    | ** ** | **Net**                    | ** ** | **Gross**                | ** ** | **Net**                      | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
|       |       |                         |       |                       |       |                     |       |                         |       |   |   |   |   |   |   |   |   |
| Indonesia  |       | 239,692                      |       | 28,763                     |       | —                   |       | —                       |       | — |   | — |   | — |   | — |   |
| Canada     |       | 10,080                       |       | 3,997                      |       | —                   |       | —                       |       | — |   | — |   | — |   | — |   |
| Texas      |       | 4,294                        |       | 2,930                      |       | 2,027                    |       | 2,027                        |       | 4 |   | 3.15 |   | 1 |   | 1 |   |
| California |       | 1,280                        |       | 1,280                      |       | —                   |       | —                       |       | — |   | — |   | — |   | — |   |
| Alaska     |       | 122,174                      |       | 122,174                    |       | —                   |       | —                       |       | — |   | — |   | — |   | — |   |
|       |       |                         |       |                       |       |                     |       |                         |       |   |   |   |   |   |   |   |   |
| Total      |       | 377,520                      |       | 159,144                    |       | 2,027                    |       | 2,027                        |       | 4 |   | 3.15 |   | 1 |   | 1 |   |

 

31

----

Table of Contents

 

The following table sets forth as of December 31, 2008, theexpiration periods of the gross and net undeveloped acreage:

 
| ** **                            | ** ** | **Undeveloped Acreage** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **United States**       | ** ** | **Indonesia** | ** ** | **Canada** | ** ** |
| ** **                            | ** ** | **Gross**                    | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Twelve months ended                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009                |       | 1,335                        |       | 1,335 |   | 239,692 |   | 28,763 |   | 1,920 |   | 1,080 |   |
| December 31, 2010                |       | 1,354                        |       | 1,354 |   | — |   | — |   | — |   | — |   |
| December 31, 2011                |       | 1,280                        |       | 1,280 |   | — |   | — |   | — |   | — |   |
| December 31, 2012                |       | 122,174                      |       | 122,174 |   | — |   | — |   | — |   | — |   |
| December 31, 2013 and thereafter |       | 1,605                        |       | 241 |   | — |   | — |   | 8,160 |   | 2,917 |   |
|                                  |       | 127,748                      |       | 126,384 |   | 239,692 |   | 28,763 |   | 10,080 |   | 3,997 |   |

 

**Volumes,Prices and Production Costs**

** **

Substantially all of ourproduction is derived from our Madisonville Project in Madison County, Texas.The following table sets forth information with respect to our productionvolumes, average prices received and average production costs for the periodsindicated:

 
| ** **               | ** ** | **YEAR ENDED DECEMBER 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Production:              |       |                                       |       |   |   |   |   |
| Natural gas (MMcf)       |       | 1,275                                      |       | 2,005 |   | 2,229 |   |
| Natural gas (MMcf/d)     |       | 3.49                                       |       | 5.49 |   | 6.11 |   |
|                     |       |                                       |       |   |   |   |   |
| Average Sales Prices (1) |       |                                       |       |   |   |   |   |
| Natural gas ($per Mcf)   |       | $                                          | 4.82       |   | $ | 3.44 |   | $ | 3.01 |   |
|                     |       |                                       |       |   |   |   |   |
| Lease Operating Expense  |       |                                       |       |   |   |   |   |
| ($per Mcf)               |       | $                                          | 1.16       |   | $ | 0.78 |   | $ | 0.72 |   |

 

----

(1)             Representssales price realized net of treatment, gathering and transportation costs.

 

**Business Risks** and Other SpecialConsiderations

** **

Refer to “Risk Factors”in this report for a discussion of business risks and other specialconsiderations.

 

**Item 3. *LegalProceedings***

 

From time to time, we are party to litigation or other legal andadministrative proceedings that we consider to be a part of the ordinary courseof our business. Currently, we are not involved in any legal proceedings norare we party to any pending or threatened claims that could, individually or inthe aggregate, reasonably be expected to have a material adverse effect on ourfinancial condition, cash flow or results of operations.

 

**Item 4. *Submissionof Matters to a Vote of Security Holders***

 

Not applicable.

 

32

----

Table of Contents

 

**PART II**

 

**Item 5.**          ***Market for the Registrant’s CommonEquity, RelatedShareholder Matters and Issuer Purchases of Equity Securities***

 

Our common stock trades on the NYSE Alternext US under the symbol“GPR”.   On March 19, 2009, the lastreported sale prices for our common stock on the NYSE Alternext US was $0.30. Thefollowing table sets forth the high and low sale prices of our common shares asreported on the NYSE Alternext US and bid prices as quoted in the United Statesin the “pink sheets” over-the-counter market for the periods presented. Priorto the first quarter of 2006, there was no trading market for our commonshares.

 
| ** **                                | ** ** | **NYSE Alternext US  (1)** | ** ** | **U.S. Pink Sheets** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **High**                             | ** ** | **Low**                        | ** ** | **High** | ** ** | **Low** | ** ** |
| **2009**                                  | ** ** | ** **                           | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter through March 19, 2009 |       | $                                    | 1.27       |                           | $          | 0.21 |   | N/A |   | N/A |   |
| **2008**                                  |       |                                 |       |                           |       | N/A |   | N/A |   |
| Fourth Quarter                            |       | $                                    | 2.28       |                           | $          | 0.48 |   | N/A |   | N/A |   |
| Third Quarter                             |       | $                                    | 4.12       |                           | $          | 1.90 |   | N/A |   | N/A |   |
| Second Quarter                            |       | $                                    | 4.29       |                           | $          | 2.25 |   | N/A |   | N/A |   |
| First Quarter                             |       | $                                    | 3.58       |                           | $          | 2.49 |   | N/A |   | N/A |   |
| **2007**                                  | ** ** | ** **                           | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter                            |       | $                                    | 4.20       |                           | $          | 2.79 |   | N/A |   | N/A |   |
| Third Quarter                             |       | $                                    | 4.05       |                           | $          | 3.55 |   | N/A |   | N/A |   |
| Second Quarter                            |       | $                                    | 4.75       |                           | $          | 3.50 |   | N/A |   | N/A |   |
| First Quarter                             |       | $                                    | 6.25       |                           | $          | 2.66 |   | $ | 4.10 |   | $ | 2.66 |   |
|                                           |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

----

| (1)    | Our common stock  commenced trading on the American Stock Exchange on February 15, 2007.  On December 1, 2008, the American Stock Exchange was merged with the  NYSE Exchange. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                     |
| (2)    | As of March 19,  2009, there were 314 holders of record of our common shares.                                                                                                       |

 

Over-the-counter market quotations reflect inter-dealer prices, withoutretail mark-up, mark-down or commission, and may not necessarily representactual transactions.

 

**IncentiveStock Plan and Stock Option Plan**

 

Effective as of September 10,2001, the board of directors approved an incentive stock plan, providing forawards under the terms and provisions of such plan of incentive stock options,stock appreciation rights and restricted stock awards to officers, directorsand employees of GeoPetro and its consultants (the “Stock Incentive Plan”). Theplan provides, among other provisions, the following:

 

The maximum number ofCommon Shares which may be awarded, optioned and sold under the plan is5,000,000 (subject to adjustment for stock splits, stock dividends and certainother adjustments to GeoPetro’s common stock); and the per share exercise pricefor Common Shares to be issued pursuant to the exercise of an option shall beno less than the fair market value of GeoPetro’s Common Shares as of the dateof grant.

 

The Stock Incentive Planprovides for the granting to employees incentive stock options within themeaning of Section 422 of the United States Internal Revenue Code of1986, as amended, and for the granting of non-statutory stock options to directorswho are not employees and consultants. In the case of employees who receiveincentive stock options which are first exercisable in a particular calendaryear and the aggregate fair market value of which exceeds $100,000, the excessof the $100,000 limitation shall be treated as a nonstatutory stock optionunder the Stock Incentive Plan.

 

The Stock Incentive Planis being administered by the Board of Directors. The Board of Directorsdetermines the terms of the options granted, including the number of CommonShares subject to each option, the exercisability and vesting requirements ofeach option, and the form of consideration payable upon the exercise of suchoption (i.e., whether cash or exchange of existing Common Shares in acashless transaction or a combination thereof). The Stock Incentive Plan willcontinue in effect for 10 years from September 10, 2001(i.e., the date first adopted by the Board), unless sooner terminated bythe board of directors.

 

In 2004, we implemented anew 2004 Stock Option and Appreciation Rights Plan (the “Stock Option Plan”)providing for awards of incentive stock options, non-qualified stock optionsand stock appreciation rights. The Stock Option Plan replaced the StockIncentive Plan as to new award grants effective in 2004 or thereafter to ourdirectors, officers, employees and consultants. Outstanding awards issued underthe Stock Incentive Plan will continue to be outstanding in accordance withtheir terms and the terms of the Stock Incentive Plan, but will count towardthe limits in the number of shares of common stock available to be issued underthe Stock Option Plan, which is 5,000,000. The exercise price of stock optionsgranted under the Stock Option Plan may not be less than 110% of the fairmarket value of our common stock on the date of grant.

 

33

----

Table of Contents

 

**Dividends**

 

The holders of our commonstock shall be entitled to receive ratably such lawful dividends as may bedeclared by the Board of Directors. We have never paid any dividends, whethercash or property, on our common stock. For the foreseeable future it isanticipated that any earnings which may be generated from our operations willbe used to finance our growth and that dividends will not be paid to commonstockholders.

 

**Useof Proceeds**

 

On our registration statement on Form S-1 (Reg. No. 333-135485)we registered up to 16,499,991 shares of our common stock, no par value pershare, including 5,943,105 shares of common stock issuable upon exercise ofwarrants and options, for resale by selling shareholders. The registrationstatement was declared effective by the Securities and Exchange Commission in February 2007.The offering commenced on in February 2007 and has not terminated. On ourregistration statement on Form S-1 (Reg. No. 333-146557) weregistered up to 2,002,599 shares of outstanding common stock and the resale ofup to 780,857 shares of common stock issuable upon exercise of warrants, forresale by selling shareholders. The registration statement was declaredeffective by the Securities and Exchange Commission in October 2007. Theoffering commenced in October 2007 and has not terminated. We will notreceive any proceeds from the sale of our common stock by the sellingshareholders under the registration statements; however, if all warrants andoptions to acquire our common stock being registered thereunder are exercised,we will realize cash proceeds of approximately $12,743,456, which we expect touse for general working capital purposes and the drilling of wells in ourTexas, Alaska, California and Indonesian prospects.

 

If less than the $12,743,456 proceeds are realized from the exercise ofsuch warrants and options, the proceeds will be spent in the following order ofpriority:

 

1.   Madisonville Project, Madison County, Texas. —Approximately $6.1 million may be expended in the Madisonville Field area asfollows: $3 million for capital maintenance and repair on new gas treatmentplant; $2 million toward the fracture stimulation and hook up costs of theWilson Well; $500,000 for the Mitchell well workover; $300,000 for lower linepressure; and $300,000 for lease acquisitions.

 

2.   Cook Inlet, Alaska. — Approximately $1.0 million tobe utilized for land delay rentals, geologic and geophysical costs, wellsitepreparation, permitting, and logistics.

 

3.   California and Indonesia — Approximately $0.4million to be utilized for land, geologic, and geophysical costs.

 

We do not know if, or how many, of the warrants or options will beexercised. This is our best estimate of our use of proceeds generated from thepossible exercise of warrants or options based on the current state of ourbusiness operations, our current plans and current economic and industryconditions. Any changes in the projected use of proceeds will be made at thesole discretion of our board of directors.

 

**UnregisteredSales of Securities**

 

On April 25, 2008, we issued 750,000 shares of common stock to anofficer and director, an accredited investor, pursuant to an exercise of stockoptions at $0.50 per share for proceeds of $375,000.  These shares wereissued pursuant to Rule 701 promulgated under the Securities Act, in thatthey were offered and sold pursuant to a written contract relating tocompensation.

 

On July 2, 2008, we issued 83,676 shares of common stock pursuantto a cashless exercise of 175,125 common stock warrants.****These shares were issued pursuant to anexemption from the registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act and Rule 506 of Regulation D without payment ofunderwriting discounts or commissions to any person.

 

On December 31, 2008, we issued 1.5 million shares of common stockpursuant to an asset purchase agreement related to the acquisition of theMadisonville natural gas treatment plant and related gas gathering pipelinesand related facilities from Madisonville Gas Processing, LP.  These shares were issued pursuant to anexemption from the registration 

 

34

----

Table of Contents

 

requirementsof the Securities Act pursuant to Section 4(2) of the Securities Actand Rule 506 of Regulation D without payment of underwriting discounts orcommissions to any person.

 

DuringDecember 2008, GeoPetro raised $1,050,000 (before fees) by issuingpromissory notes to accredited investors, each having the following terms:  (i) 8% annual simple interest payablequarterly in arrears, (ii) principal and any unpaid outstanding interestshall be payable at the end of three years, (iii) subordinated to the BOKloan and (iv) be unsecured.  Eachnote purchaser also received warrants to purchase one share of GeoPetro commonstock for $1.00 per share, exercisable for three years.  One warrant was received for each $10 in faceamount of notes purchased (a total of 105,000 warrants exercisable to purchase105,000 shares of common stock).  Inconnection with this promissory note financing, GeoPetro (i) paid loanorigination fees totaling $6,000 in cash, (ii) issued 150,000 warrants asa finder’s fee (each warrant for the purchase one share of GeoPetro commonstock at $1.00 per share), exercisable for three years and (iii) reissued15,000 warrants at $1.00 per share.  Theissuance of the promissory notes and warrants was not registered under theSecurities Act of 1933, in reliance on Section 4(2) of the Act and Rule 506of Regulation D thereunder.  Each of thepersons acquiring notes and warrants was an accredited investor, as defined in Rule 501(a) ofRegulation D.  The issuance of thepromissory notes and warrants involved no public offering.  GeoPetro did not engage in generalsolicitation or advertising in connection with the issuance and sale of thepromissory notes and warrants, and did not engage an underwriter.

 

**Performance Graph**

 

Thefollowing graph shows a comparison from February 15, 2007 (the date our commonstock began trading on the American Stock Exchange, which has currently mergedinto the NYSE) through February 2, 2009 of cumulative stockholders total returnfor our common stock, companies we deem to be in our industry peer group andthe Russell Microcap Index (IWC).  Thecomparable companies are Kodiak Oil and Gas Corporation (KOG), Petro ResourcesCorporation (PRC), and **American Oil & Gas Incorporated (AEZ).**

 

**All of these cumulative returns are computed assuming the value of theinvestment in GeoPetro common stock and each stock as $100.00 on**February 15, 2007**, and the reinvestment ofdividends at the frequency with which dividends were paid during the applicablemonths.  The months compared are February15, 2007 through February 2, 2009. We have not declared any dividends to be paid to our common stockholdersand do not have any present plans to declare dividends.**

 

**COMPARISON OF CUMULATIVE RETURN AMONG GEOPETRO RESOURCES COMPANY,RUSSELL MICROCAP INDEX (“IWC”) AND SELECTED PEER GROUP ISSUERS**

 

 

**ENLARGED GRAPH SHOWING COMPARISON OF CUMULATIVE RETURN AMONG GEOPETROAND SELECTED PEER GROUP ISSUERS**

 

 

**Item 6. *SelectedConsolidated Financial Data***

 

Thefollowing selected consolidated financial data should be read in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and our consolidated financial statements and the related notesto those 

 

35

----

Table of Contents

 

statements included elsewherein this report. The consolidated statements of operations data for the yearsended December 31, 2006, 2007 and 2008 and the balance sheet data as of December 31,2007 and 2008 are derived from our audited consolidated financial statementsincluded elsewhere in this report. The consolidated statements of operationsdata for the years ended December 31, 2004 and 2005 and the balance sheetdata as of December 31, 2004, 2005, and 2006 are derived from our auditedconsolidated financial statements not included in this report.   Historical results are not necessarilyindicative of the results to be expected in the future, and the results for theyears presented should not be considered indicative of our future results ofoperations.

 
| ** **                                                 | ** ** | **For The Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Consolidated Statement of Operations:**                  | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                               |       | $                                                             | 6,152,542  |   | $ | 6,890,777 |   | $ | 6,716,360 |   | $ | 7,975,990 |   | $ | 5,825,072 |   |
| **Lease operating expense**                                |       | 1,484,267                                                     |       | 1,558,900 |   | 1,602,932 |   | 878,176 |   | 780,237 |   |
| **General and administrative**                             |       | 2,717,121                                                     |       | 2,807,091 |   | 2,347,447 |   | 1,551,747 |   | 1,963,649 |   |
| **Net profits expense**                                    |       | 579,941                                                       |       | 679,337 |   | 632,708 |   | 856,837 |   | 579,590 |   |
| **Impairment expense**                                     |       | 69,856                                                        |       | 1,111,151 |   | 38,849 |   | — |   | 2,038,422 |   |
| **Depreciation and depletion expense**                     |       | 1,553,418                                                     |       | 2,269,995 |   | 2,406,612 |   | 1,832,693 |   | 2,077,004 |   |
| **Earnings (loss) from operations**                        |       | (252,061                                                      | )          | (1,535,697 | ) | (312,188 | ) | 2,856,537 |   | (1,613,830 | ) |
| **Net income (loss)**                                      |       | (174,825                                                      | )          | (1,616,804 | ) | (482,406 | ) | 2,640,471 |   | (2,077,615 | ) |
| **Net income (loss) attributable to common  shareholders** |       | $                                                             | (174,825   | ) | $ | (1,616,804 | ) | $ | (1,011,806 | ) | $ | 2,111,074 |   | $ | (2,606,978 | ) |
|                                                       |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Earnings (Loss) per Share:**                             | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                                  |       | $                                                             | (0.01      | ) | $ | (0.05 | ) | $ | (0.04 | ) | $ | 0.10 |   | $ | (0.14 | ) |
| **Diluted**                                                |       | $                                                             | (0.01      | ) | $ | (0.05 | ) | $ | (0.04 | ) | $ | 0.09 |   | $ | (0.14 | ) |
|                                                       |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Weighted Average Number of Common Shares Outstanding:**  | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                                  |       | 32,511,251                                                    |       | 29,830,447 |   | 25,990,868 |   | 20,890,841 |   | 18,901,607 |   |
| **Diluted**                                                |       | 32,511,251                                                    |       | 29,830,447 |   | 25,990,868 |   | 24,001,888 |   | 18,901,607 |   |
|                                                       |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Production Data:**                                       | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Natural gas (Mcf)**                                      |       | 1,275,445                                                     |       | 2,005,359 |   | 2,229,059 |   | 1,991,105 |   | 2,316,895 |   |
| **Natural gas (Mcf/d)**                                    |       | 3,494                                                         |       | 5,494 |   | 6,107 |   | 5,455 |   | 6,348 |   |
|                                                       |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Production Data reduced by net profits  interests:**     |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Natural gas (Mcf)**                                      |       | 1,116,014                                                     |       | 1,754,689 |   | 1,950,427 |   | 1,742,217 |   | 2,027,283 |   |
| **Natural gas (Mcf/d)**                                    |       | 3,058                                                         |       | 4,807 |   | 5,344 |   | 4,773 |   | 5,554 |   |
|                                                       |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Average Sales Prices:**                                  | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Natural gas (per Mcf)**                                  |       | $                                                             | 4.82       |   | $ | 3.44 |   | $ | 3.01 |   | $ | 4.01 |   | $ | 2.51 |   |

 
| ** **                                | ** ** | **For the Years Ended December 31,** | ** **  |
|-------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                | ** ** | **2008**                                                      | ** **  | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Balance Sheet Information:**            | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets                            |       | $                                                             | 1,023,090   |   | $ | 5,723,680 |   | $ | 2,366,081 |   | $ | 1,718,893 |   | $ | 1,579,388 |   |
| Total assets                              |       | 54,076,005                                                    |        | 44,116,606 |   | 39,061,478 |   | 25,014,826 |   | 22,771,411 |   |
| Current liabilities                       |       | 3,174,742                                                     |        | 2,361,827 |   | 3,604,342 |   | 3,574,466 |   | 7,582,377 |   |
| Current portion of Long-term liabilities  |       | 600,000                                                       |        | — |   | — |   | — |   | — |   |
| Long-term liabilities                     |       | 7,078,548                                                     |        | 53,726 |   | 48,842 |   | 26,641 |   | 24,705 |   |
| Redeemable Series AA Preferred Stock |       | —                                                        |        | — |   | 5,924,068 |   | 5,924,068 |   | 5,924,068 |   |
| Accumulated Deficit                       |       | $                                                             | (12,185,614 | ) | $ | (12,010,789 | ) | $ | (10,393,985 | ) | $ | (9,382,179 | ) | $ | (11,493,253 | ) |

 

Notes toSelected Financial Data:

 

(a)          Foreach of the years presented the Company has not paid dividends to any of itscommon stockholders.

 

(b)         SeeItem 2. “Properties —Texas- Madisonville Midstream Gas Treatment Plant andGathering Facilities” for discussion of the acquisition of the MGP GasTreatment Plant.

 

36

----

Table of Contents

 

**Item 7.*Management’s Discussion and Analysis ofFinancial Condition and Results of Operations***

 

*The following discussion and analysis should beread in conjunction with accompanying financial statements and related notesincluded elsewhere in this report. It contains forward looking statements thatreflect our future plans, estimates, beliefs and expected performance. Theforward looking statements are dependent upon events, risks and uncertaintiesthat may be outside our control. Our actual results could differ materiallyfrom those discussed in these forward looking statements.*

 

*Factors that could cause or contribute to suchdifferences include, but are not limited to, market prices for natural gas andoil, economic and competitive conditions, regulatory changes, estimates ofproved reserves, potential failure to achieve production from developmentdrilling projects, capital expenditures and other uncertainties, as well asthose factors discussed below and elsewhere in this report, particularly in “RiskFactors” and “Cautionary Notes Regarding Forward Looking Statements”, all ofwhich are difficult to predict and which expressly qualify all subsequent oraland written forward-looking statements attributable to us or persons acting onour behalf. In light of these risks, uncertainties and assumptions, the forwardlooking events discussed may not occur. We do not have any intention orobligation to update forward-looking statements included in this report afterthe date of this report, except as required by law.*

 

**Overview**

 

We are an oil and gas company in the business of exploring anddeveloping oil and natural gas reserves on a worldwide basis. Since inception,we have conducted leasehold acquisition, exploration and drilling activities onour North American, Australian and Indonesian prospects. These projectscurrently encompass approximately 379,547 gross (161,171 net) acres, consistingof mineral leases, production sharing contracts and exploration permits thatgive us the right to explore for, develop and produce oil and natural gas. Mostof these properties are in the exploration, appraisal or development drillingphase and have not begun to produce revenue from the sale of oil and naturalgas. Excluding minor interest and dividend income, our only significant cashinflows until 2003 were the recovery of capital invested in projects throughsale or other divestiture of interests in oil and gas prospects to industry partners.

 

Since 2003, substantially all of our revenue has been generated fromnatural gas sales derived from the Magness #1, the Fannin #1, and the Mitchell#1 wells in the Madisonville Field in East Texas under spot gas purchasecontracts at market prices. Natural gas sales from the Madisonville Field areexpected to account for substantially all of our revenues for 2009. We expectthe majority of our capital expenditures in 2009 will be for the MadisonvilleProject.

 
| ** **                                        | ** ** | **For The Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Consolidated Statement of Operations:**         | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                      |       | $                                                             | 6,152,542  |   | $ | 6,890,777 |   | $ | 6,716,360 |   |
| **Lease operating expense**                       |       | 1,484,267                                                     |       | 1,558,900 |   | 1,602,932 |   |
| **General and administrative**                    |       | 2,717,121                                                     |       | 2,807,091 |   | 2,347,447 |   |
| **Net profits expense**                           |       | 579,941                                                       |       | 679,337 |   | 632,708 |   |
| **Impairment expense**                            |       | 69,856                                                        |       | 1,111,151 |   | 38,849 |   |
| **Depreciation and depletion expense**            |       | 1,553,418                                                     |       | 2,269,995 |   | 2,406,612 |   |
| **Loss from operations**                          |       | (252,061                                                      | )          | (1,535,697 | ) | (312,188 | ) |
| **Net loss**                                      |       | (174,825                                                      | )          | (1,616,804 | ) | (482,406 | ) |
| **Net loss attributable to common  shareholders** |       | $                                                             | (174,825   | ) | $ | (1,616,804 | ) | $ | (1,011,806 | ) |

 

**Revenue and Operating Trends in 2009**

 

As discussed in the “Properties — Texas — Madisonville Project” sectionof this annual report, in order to produce the gas reserves from the RodessaFormation, we developed an onsite plan to treat and remove impurities from theMadisonville Project natural gas in order to meet pipeline-qualityspecifications. In 2003, a third party completed the construction and installationof a natural gas treatment plant with a designed capacity of 18 million cubicfeet of gas per day (“MMcf/d”) and associated pipeline and gatheringfacilities.

 

In 2005 we secured a commitment from MGP to install and makeoperational additional treating facilities capable of treating 50 MMcf/d, whichcombined with the capacity of the current in-service treating facilities willrepresent a total designed treating capacity of 68 MMcf/d for the Madisonvilletreatment plant.   In early November 2007,MGP began testing the additional treatment facilities by accepting 20 MMcf/d atthe inlet.   Subsequently in December 2007, MGP temporarily suspended the operationsof the additional treatment facilities in order to make modifications to more effectively deal with the presenceof diamondoids in the gas stream produced from the Rodessa Formation.

 

37

----

Table of Contents

 

During 2008, MGP analyzedvarious options for removing the diamondoids; however, they did notcomplete the necessary plantsystem modifications.  On December 31, 2008, we purchased thegas treatment plant and related gathering pipeline from MGP in exchange forassumption of secured debt, payment of certain outstanding payables of MGP andshares of GeoPetro’s common stock.  Theeffective date of the acquisition was December 31, 2008 and the new owner ofthe Plant is GeoPetro’s wholly-owned, indirect subsidiary, MadisonvilleMidstream LLC (“MM”).  We expect to complete installation of thesystem modifications required in the new plant in 2009.  In the meantime, the existing, in serviceportion of the plant continues to operate with a capacity of approximately 18 MMcf/dof inlet gas.

 

While there can be no assurance, with the recent acquisition of the gastreatment plant, our goal is to make the necessary upgrades to the plant andincrease the production rates from our wells which may result in higher netproduction and increased revenue during 2009 as compared to 2008 and priorperiods. To accomplish the plant upgrades, we will need to raise capital in2009. Due to the tight credit markets and recent down turn in the stock market,funds may not be available, or may not be available on favorable terms.

 

**IndustryOverview for the year ended December 31, 2008**

 

During2008 we realized higher natural gas prices at the beginning of the year, thenweaker prices by the end of the year. The Houston Ship Channel price, the indexprice prevailing in the locale of our Madisonville Project in Madison County,Texas, as quoted in Gas Daily as of December 31, 2008, was $5.25 per Mcf versus$6.81 per Mcf as of December 28, 2007. Natural gas prices have been veryvolatile during 2008 due to supply concerns earlier in the year, and morerecently due to recession concerns arising from the current global financialcrisis.

 

**CompanyOverview in 2008**

 

Our net loss after taxes for the year ended December 31, 2008 was$174,825. From our inception, through mid-2003, we only received nominalrevenues from our oil and natural gas activities, while incurring substantialacquisition and exploration costs and overhead expenses which have resulted inan accumulated deficit through December 31, 2008 of $12,185,614. Commencing in May2003, we placed our Madisonville Project into production. Substantially all ofour oil and natural gas sales for the year ended December 31, 2008 were derivedfrom our Madisonville Project, from three producing wells, the UMC Ruby Magness#1 well (the “Magness Well”), the Angela Farris Fannin #1 well (the “FanninWell”), and the Mitchell #1 well (the “Mitchell Well”).

 

**Comparisonof Results of Operations for the year ended December 31, 2008 and 2007**

 

Duringthe twelve months ended December 31, 2008, we had oil and natural gas revenuesof $6,152,542, and our net production was 1,275,445 Mcf of natural gas at anaverage price of $4.82 per Mcf. During the twelve months ended December 31,2007, we had oil and natural gas revenues of $6,890,777 and our net productionwas 2,005,359 Mcf at an average price of $3.44 per Mcf. Revenues decreased inthe twelve months ended December 30, 2008 as compared to the prior year perioddue to lower production volumes. The 36% lower production volumes for thetwelve months ended December 31, 2008 as compared to the same period of 2007was due to (i) disruption due to Hurricane Ike in 2008, (ii) higher shrinkagerates in the plant, and (iii) restricted production rates due to high inletpressures into the plant. Average natural gas prices were approximately 40%higher for the twelve months ended December 31, 2008 versus the same period in2007.

 

Duringthe twelve months ended December 31, 2008, we incurred lease operating expenseof $1,484,267. Our average lifting cost for the 2008 period was $1.16 per Mcf.During the twelve months ended December 31, 2007, we incurred lease operatingexpense of $1,558,900. Our average lifting cost for the 2007 period was $0.78per Mcf. The average lifting cost per Mcf in 2008 was higher due to a majorworkover performed on the Magness well during 2008 and lower net production.

 

Duringthe twelve months ended December 31, 2008, we incurred net profits interestexpense of $579,941 associated with the Magness, the Fannin, and the Mitchellwells as compared to $679,337 during the twelve months ended December 31, 2007.The 15% decrease resulted from lower gas income in the twelve months ended December31, 2008 versus 2007. The net profit interest is 12.5% of the net operatingprofit from our Magness, Fannin, and Mitchell wells.

 

Generaland administrative (“**G&A**”)expenses for the twelve months ended December 31, 2008 were $2,717,121 comparedto $2,807,091 for the twelve months ended December 31, 2007. This represents a$89,970 or 3% decrease over the prior year period. The higher G&A expenseincurred in 2007 was due primarily to costs associated with our initial SECregistration and NYSE Alternext US listing, with no such expenses incurred in2008.

 

38

----

Table of Contents

 

Forthe year ended December 31, 2008, impairment expense was $69,856 versus$1,111,151 for the same period of 2007. The 2008 and 2007 impairment write-downs were due to dry holes drilledon our Canadian oil and gas properties, which resulted in ceiling test writedowns.

 

Depreciationand depletion expense for the twelve months ended December 31, 2008 was$1,553,418 as compared to $2,269,995 in the same period of 2007, which amountsprimarily represent depletion of the oil and gas properties for the twelvemonths ended December 31, 2008 and 2007, respectively. The 32% decrease was dueto lower net production in the twelve months period of 2008 as previouslydiscussed.

 

Lossfrom operations totaled $252,061 for the twelve months ended December 31, 2008as compared to loss from operations of $1,535,697 for the twelve months ended December30, 2007. The decrease in the loss from operations was due primarily to lowerimpairment, depreciation and depletion expenses.

 

Otherincome for the twelve months ended December 31, 2008 and 2007 consisted ofinterest income in the amount of $91,867 and $174,560, respectively. The higherinterest income in 2007 was due primarily to interest received on a notereceivable, which was repaid on June 29, 2007.

 

Duringthe twelve months ended December 31, 2008 and 2007, we incurred interestexpense of $1,846 and $306,340, respectively. We incurred new debt in late December2008 associated with the plant acquisition and working capital requirements.Prior year loans were repaid in full in October 2007.

 

Netloss before taxes for the twelve months ended December 31, 2008 was $162,040 ascompared to $1,667,477 for the twelve months ended December 31, 2007. Thedecrease in net loss during the twelve months ended December 31, 2008 wasprimarily due to lower impairment, depletion and depreciation expenses.

 

Incometax expense for the twelve months ended December 31, 2008 was $12,785 comparedto income tax refund of $50,673 in the same period of 2007. The increasedincome tax expense was due to Texas Margin taxes in 2008 while the income taxbenefit in 2007 was due to a refund of prior year alternative minimum tax paid.

 

**IndustryOverview for the year ended December 31, 2007**

 

The twelve months ended December 31, 2007 saw strengthening natural gasprices. The Houston Ship Channel price, the index price prevailing in thelocale of our Madisonville Project in Madison County, Texas, as quoted in GasDaily as of December 28, 2007, was $6.81 per Mcf versus $5.40 per Mcf as of December29, 2006. Natural gas prices improved during the year due to higher demandinduced by cold temperatures experienced in many parts of the United States,among other factors.

 

**CompanyOverview in 2007**

 

Our net loss after taxes for the year ended December 31, 2007 was$1,616,804. From our inception, through mid-2003, we only received nominalrevenues from our oil and natural gas activities, while incurring substantialacquisition and exploration costs and overhead expenses which have resulted inan accumulated deficit through December 31, 2007 of $12,010,789. Commencing in May2003, we placed our Madisonville Project into production. Substantially all ofour oil and natural gas sales for the year ended December 31, 2007 were derivedfrom our Madisonville Project, from three producing wells, the UMC Ruby Magness#1 well (the “Magness Well”), the Angela Farris Fannin #1 well (the “FanninWell”), and the Mitchell #1 well (the “Mitchell Well”).

 

**Comparisonof Results of Operations for the year ended December 31, 2007 and 2006**

 

During the twelve months ended December 31, 2007, we had oil andnatural gas revenues of $6,890,777. Our net production was 2,005,359 Mcf ofnatural gas at an average price of $3.44 per Mcf. During the twelve monthsended December 31, 2006, we had oil and natural gas revenues of $6,716,360. Ournet production for the twelve months ended December 31, 2006 was 2,229,059 Mcfat an average price of $3.01 per Mcf. Revenues increased in the twelve monthsended December 31, 2007 as compared to the prior year period due to higher gasprices but 10% lower production volumes. Prices were approximately 14% higherfor the twelve months ended December 31, 2007 versus the same period in 2006.

 

During the twelve months ended December 31, 2007, we incurred leaseoperating expense of $1,558,900. Our average lifting cost for the 2007 periodwas $0.78 per Mcf. During the twelve months ended December 31, 2006, weincurred lease 

 

39

----

Table of Contents

 

operating expense of$1,602,932. Our average lifting cost for the 2006 period was $0.72 per Mcf. Theaverage lifting cost per Mcf in 2006 was lower due to higher production volumein 2006.

 

During the twelve months ended December 31, 2007, we incurred netprofits interest expense of $679,337 associated with the Magness, the Fannin,and the Mitchell wells as compared to $632,708 during the twelve months ended December31, 2006. The 7% increase resulted from higher gas prices in the twelve monthsended December 31, 2007 versus 2006. The net profit interest is 12.5% of thenet operating profit from our Magness, Fannin, and Mitchell wells.

 

General and administrative (“**G&A**”)expenses for the twelve months ended December 31, 2007 were $2,807,091 comparedto $2,347,447 for the twelve months ended December 31, 2006. This represents a$459,644 increase over the prior year period due primarily to U.S. and Canadapublic company filing fees, costs associated with our SEC registrationstatement, and ongoing filing requirements. The $459,644 increase over the prior year period due to primarily to:

 

1.               $128,232in filing fees related to our SEC registration,

 

2.               $331,412public company filing fees in U.S. and Canada, ongoing filing requirements andcosts associated with SEC compliance.

 

For the year ended December 31, 2007, impairment expense was incurredin amount of $1,111,151 as compared to $38,849 in the same period of 2006.  The 2007 and 2006 impairment write-downs weredue to dry holes drilled on our Canadian oil and gas properties, which resultedin ceiling test write downs.

 

Depreciation and depletion expense for the twelve months ended December31, 2007 was $2,269,995 as compared to $2,406,612 in the same period of 2006,which amounts primarily represent amortization of the oil and gas propertiesfor the twelve months ended December 31, 2007 and 2006, respectively. The decreasewas due to lower net production in the twelve months period of 2007 and anincrease in the amount of capitalized cost in the U.S. oil and gas properties.

 

Loss from operations totaled $1,535,697 for the twelve months ended December31, 2007 as compared to $312,188 for the twelve months ended December 31, 2006.The increase in the loss from operations was due primarily to higher G&Acost and impairment expense associated with the Canadian oil and gas propertiesin the twelve months ended December 31, 2007 versus 2006.

 

Other income for the twelve months ended December 31, 2007 and 2006consisted of interest income in the amount of $174,560 and $198,050,respectively. The reason for the decreased interest income was lower averagecash and cash equivalent balances during the 2007 period as compared to 2006period.

 

During the twelve months ended December 31, 2007 and 2006, we incurredinterest expense of $306,340 and $306,682, respectively. The interest expensecomparisons between the year ended 2007 and 2006 were relatively consistent.

 

Net loss before taxes for the twelve months ended December 31, 2007 was$1,667,477 as compared to $420,820 for the twelve months ended December 31,2006. The increase in net loss during the twelve months ended December 31, 2007was primarily due to higher G&A cost and Canadian impairment write-off inthe twelve months ended December 31, 2007 versus 2006.

 

Income tax refund for the twelve months ended December 31, 2007 was$50,673 compared to income tax expense of $61,586 in the same period of 2006.Income tax benefit in 2007 was due to a refund of prior year alternativeminimum tax paid offset by a current year state tax payable.

 

**Recent Developments**

 

On December 31, 2008, wepurchased the gas treatment plant and related gathering pipeline from MGP inexchange for assumption of secured debt, payment of certain outstandingpayables of MGP and shares of GeoPetro’s common stock. The effective date ofthe acquisition was December 31, 2008 and the new owner of the Plant is GeoPetro’swholly owned, indirect subsidiary, Madisonville Midstream LLC (“MM”).

 

On July 31, 2008, weentered into a third amendment with Pioneer Oil Company (“Pioneer”).  Per the terms of the amendment, the Companypaid Pioneer the sum of $1,168,093 on August 7, 2008, which represents thesecond and final payment for leases comprising 116,806 acres onshore in CookInlet, Alaska.  The amendment furtherprovided that the work program requiring $2.5 million in expenditures byGeoPetro has been eliminated in its entirety.

 

On October 14, 2008, weamended the lease for our principal executive office located at One MaritimePlaza, Suite 700, San Francisco, CA 94111, to extend the term of the subleasefor an additional one (1) year and two (2) months and the new expiration day isApril 30, 2010.

 

40

----

Tableof Contents

 

**Liquidity and Capital Resources**

 

Our cash balance at December 31, 2008 was $770,779 compared to a cashbalance of $4,294,565 at December 31, 2007. The change in our cash balance issummarized as follows:

 
| Cash balance at December 31, 2007        |   | $          | 4,294,565 |   |
|-----------------------------------------------|--------|------------|-----------|--------|
| Sources of cash:                              |   |       |      |
| Cash provided by operating activities         |   | 3,111,073  |      |
| Cash provided by financing activities         |   | 1,419,000  |      |
|                                          |   |       |      |
| Total sources of cash including cash on  hand |   | 8,824,638  |      |
|                                          |   |       |      |
| Uses of cash:                                 |   |       |      |
| Cash used in investing activities:            |   |       |      |
| Oil and natural gas property expenditures     |   | (5,569,417 | )         |
| Gas treatment plant                           |   | (2,480,135 | )         |
| Furniture, fixtures and equipment             |   | (4,307     | )         |
| Total uses of cash                            |   | (8,053,859 | )         |
|                                          |   |       |      |
| Cash balance at December 31, 2008        |   | $          | 770,779   |   |

 

We had a working capital deficit of $2,227,950 versus a working capitalsurplus of $3,361,853 at December 31, 2008 and December 31, 2007, respectively.Our working capital decreased during year ended December 31, 2008 due primarilyto the acquisition of the MGP natural gas treatment plant, our participation inthe drilling of a well in South Texas, and the final payment to Pioneer tosecure the leases in Cook Inlet, Alaska.

 

We have historically financed our business activities through December 31,2008 principally through issuances of common shares, promissory notes andcommon share purchase warrants in private placements and an initial publicoffering. These financings are summarized as follows:

 
| ** **                                                      | ** ** | **Years Ended**            | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| Proceeds from sale of common shares and  warrant exercises, net |       | $                               | 375,000    |   | $ | 8,036,266 |   | $ | 16,717,604 |   |
| Payment on preferred dividends                                  |       | —                          |       | — |   | (529,400 | ) |
| Repayments of promissory notes                                  |       | —                          |       | (1,900,000 | ) | (900,000 | ) |
| Proceeds from promissory notes                                  |       | 1,050,000                       |       | 1,000,000 |   | 1,900,000 |   |
| Payment of loan fee                                             |       | (6,000                          | )          | (57,000 | ) | (30,000 | ) |
| Repayment of related party note                                 |       | —                          |       | (100,000 | ) | — |   |
| Deferred offering costs                                         |       | —                          |       | — |   | (1,213,789 | ) |
| Net option exercise                                             |       | —                          |       | (386,600 | ) | — |   |
|                                                            |       |                            |       |   |   |   |   |
| Net cash provided by financing activities                       |       | $                               | 1,419,000  |   | $ | 6,592,666 |   | $ | 15,944,415 |   |

 

The net proceeds of our equity and note financings have been primarilyinvested in oil and natural gas properties totaling $5,569,417, $5,214,421, and$16,721,944 for the years ended December 31, 2008, 2007 and 2006, respectively.On December 31, 2008, we acquired the gas treatment plant from MGP for$10,707,982 in combination of cash, debt and common stock.

 

On October 31, 2007, we repaid $1,900,000 plus accrued interest of$12,910 on the short-term notes we borrowed during 2007 and 2006.

 

On August 13, 2007 we completed a private placement consisting of2,002,599 units of the Company at a subscription price of $3.85 per Unit fortotal proceeds of $7,710,006. Each unit consisted of one share of common stockof the Company and three-tenths common share purchase warrant of the Company. Eachone whole warrant entitles the holder to acquire one share of common stock at aprice of $4.50 per share for a period of five years from the closing date. Theunits were purchased by a group of private investors. The proceeds of the saleof common shares will be used to fund the Company’s exploration and developmentprogram and for general working capital purposes.

 

On December 31, 2008, the Company assumed $7,697,847 of MadisonvilleGas Processing LP’s (“MGP”) bank debt related to the Company’s acquisition ofthe Madisonville Gas Treatment Plant (the “Plant”) via a (i) $1 million cashpayment applied directly towards debt principal reduction, and (ii) arefinancing by GeoPetro of the $6,697,847 remaining balance in 

 

41

----

Tableof Contents

 

the form of a3 year Amended and Restated Term Loan Agreement with the lender, Bank Oklahoma(“BOK”).  The terms of the three yearloan provide for minimum quarterly principal payments of $150,000 and interestpayable quarterly in arrears at prime plus 4% or,  Libor plus 5.5%, at the option of theCompany.  Additional principal will bepayable upon GeoPetro meeting certain net operating cash flow thresholds duringthe three year term of the loan.  Theloan is secured by a first lien on the Madisonville Midstream Plant and all ofthe Company’s proved natural gas reserves located at the MadisonvilleProject.  In addition, GeoPetro hasagreed to a pay, at the time the loan is repaid in full, a loan origination feeof (i) $60,000 for any period during the three year term during which the loanprincipal remains outstanding.  There isno prepayment penalty.  The Amended andRestated Term Loan Agreement contains customary affirmative and negativecovenants including restrictions on incurring additional debt and requiringthat the Company maintain a minimum tangible net worth of at least $35,000,000at December 31, 2008. The Company was in compliance with all loan covenants.

 

On December 31, 2008, weissued 1.5 million shares of common stock pursuant to an asset purchaseagreement related to the acquisition of the Madisonville Midstream GasTreatment Plant and related gas gathering pipelines and related facilities fromMadisonville Gas Processing, LP.

 

DuringDecember 2008, GeoPetro raised $1,050,000 by issuing promissory notes toaccredited investors, each having the following terms:  (i) 8% annual simple interest payablequarterly in arrears, (ii) principal and any unpaid outstanding interest shallbe payable at the end of three years, (iii) subordinated to the BOK loan and (iv)be unsecured.  Each note purchaser alsoreceived warrants to purchase one share of GeoPetro common stock for $1.00 pershare, exercisable for three years.  Onewarrant was received for each $10 in face amount of notes purchased (a total of105,000 warrants exercisable to purchase 105,000 shares of common stock).  GeoPetro also reissued 15,000 warrants at$1.00 per share to be exercised for three years.

 

Our current cash and cash equivalents and anticipated cash flow fromoperations may not be sufficient to meet our working capital, capitalexpenditures and growth strategy requirements for the foreseeable future. See “Outlookfor 2009” for a description of our expected capital expenditures for 2009. Ifwe are unable to generate revenues necessary to finance our operations over thelong-term, we may have to seek additional capital through the sale of ourequity or borrowing. As noted in “Recent Developments,” we periodically borrowfunds pursuant to promissory notes to finance our activities.

 

As discussed in the “Outlook for 2009”, we are forecasting capitalexpenditures of $7.5 million during 2009. We will need to obtain adequatesources of cash to fund our anticipated capital expenditures through the end of2009 and to follow through with plans for continued investments in oil and gasproperties. Our success, in part, depends on our ability to generate additionalfinancing and farmout certain of our projects. Additionally, as a result of the 2008 economic downturn, the Company mayhave difficulty raising sufficient funds to meet our projected fundingrequirements.  See Item 1A.- “RiskFactors — Risks Related to Our Business”.

 

Since our inception, wehave participated as a working interest owner in the acquisition of undevelopedleases, seismic options, lease options and foreign concessions and haveparticipated in seismic surveys and the drilling of test wells on ourundeveloped properties. Further leasehold acquisitions, drilling and seismicoperations are planned for 2008 and future periods. In addition, exploratoryand development drilling is scheduled during 2009 and future periods on ourundeveloped properties. It is anticipated that these exploration activitiestogether with others that may be entered into will impose financialrequirements which will exceed our existing working capital. We may raiseadditional equity and/or debt capital, and we may farm-out certain of ourprojects to finance our continued participation in planned activities. However,if additional financing is not available, we may be compelled to reduce thescope of our business activities. If we are unable to fund plannedexpenditures, it may be necessary to:

 

1.                  farmoutour interest in proposed wells;

 

2.                  sella portion of our interest in prospects and use the sale proceeds to fund ourparticipation for a lesser interest;

 

3.                  reducegeneral and administrative expenses;

 

4.                  forfeitour interest in wells that are proposed to be drilled .

 

42

----

Table of Contents

 

**Contractual Obligations**

 

A summary of our contractual obligations asof December 31, 2008 is provided in the following table:

 
| ** **                      | ** ** | **Payments due by period (4)** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|
| ** **                      | ** ** | ** **                                         | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                      | ** ** | **Total**                                          | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **5 years** | ** ** |
| Operating lease obligations (1) |       | 121,689                                            |       | 90,651 |   | 31,038 |   | — |   | — |   |
| Promissory notes (2)            |       | 1,050,000                                          |       | — |   | 1,050,000 |   |   |   |   |   |
| Bank loan (3)                   |       | 6,697,847                                          |       | — |   | 6,697,847 |   |   |   |   |   |
|                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Total                           |       | $                                                  | 7,869,536  |   | $ | 90,651 |   | $ | 7,778,885 |   | $ | — |   | $ | — |   |
|                                 |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   EffectiveMarch 1, 2004, GeoPetro is committed under an office sublease which providesfor a sixty month term. The sublease is cancelable by either party afterthirty-six months. On October 14, 2008, we amended to extend the term of thesublease for an additional one (1) year and two (2) months and the newexpiration date is April 30, 2010.

 

(2)   DuringDecember 2008, GeoPetro raised $1,050,000 by issuing promissory notes withterms of three years at 8% annual interest payable quarterly in arrears.

 

(3)   OnDecember 31, 2008, GeoPetro financed $6,697,847 in the form of a 3 year Amendedand Restated Term Loan Agreement with Bank of Oklahoma. The terms of the threeyear loan provide for minimum quarterly principal payments of $150,000 andinterest payable quarterly in arrears at prime plus 4% or,  Libor plus 5.5% at  the option of the Company.

 

(4)   Thistable does not include the liability for dismantlement, abandonment andrestoration costs of oil and gas properties. Nor does this table includecontractual obligation under certain employment agreements. See Note 2 and Note10 of the Notes to Consolidated Financial Statements for further discussion.

 

Other than the above commitments, the timing of most of our capitalexpenditures is discretionary. We have no other material long-term commitmentsassociated with our capital expenditure plans or operating agreements. Consequently,we have a significant degree of flexibility to adjust the level of suchexpenditures as circumstances warrant. The level of capital expenditures willvary in future periods depending on the success we experience on plannedexploratory and appraisal drilling activities, natural gas and oil priceconditions and other related economic and political factors. Accordingly, wehave not yet prepared an estimate of capital expenditures for periods beyond2009.

 

**Income Taxes**

 

Asof December 31, 2008, GeoPetro had net operating loss (NOL) carryforwards ofapproximately $25,126,000 for federal income tax purposes which begin to expirein 2017.  If the Company were toexperience a change in ownership under Section 382, the Company may be limitedin its ability to fully utilize its net operating losses.

 

However,in accordance with SFAS 123(R), a deferred tax asset has not been recognizedfor the portion of the net operating loss carryforwards that is attributable toexcess tax deductions associated with the exercise of stock options in 2008which do not reduce income taxes payable. Accordingly, $3,488,000 of GeoPetro’sfederal NOL has not been benefited for financial statement purposes as itrelates to excess tax deductions that have not reduced income taxes payable.The benefit of these excess tax deductions will not be recognized for financialstatement purposes until the related deductions reduce income taxes payable.

 

TheCompany also has $8,605,000 of California net operating losses and $445,000 ofAlaska net operating losses which begin to expire in 2010 and 2026,respectively. In accordance with SFAS 123(R), a portion of the state NOLs hassimilarly not been benefited for financial statement purposes as it relates toexcess tax deductions which have not resulted in the reduction of income taxespayable. The benefit of such excess tax deductions will not be recognized forfinancial statement purposes until the related deductions reduce state incometaxes payable.

 

Inaddition, the Company has $334,000 of carryforward credits in Texas, a portionof which may be utilized each year against Texas Margin Tax liability through2027.

 

43

----

Tableof Contents

 

A significant change in our ownership may limit our ability to usethese NOL carryforwards. Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*, requires thatthe tax benefit of such net operating loss be recorded as an asset. At December31, 2008, we had net deferred tax assets of approximately $3,316,000 millionrelated to the NOL and other temporary differences. We have recorded a fullvaluation allowance of $3,316,000 million at December 31, 2008 due touncertainties surrounding the realizability of the deferred tax asset.

 

Effective January 1, 2007, we adopted the provisions of FASBinterpretation No. 48, Accounting for Uncertainty in Income Taxes, the detailof which is included in Note 5 to the Financial Statements.

 

**Off Balance Sheet Arrangements**

 

Fromtime to time, we may enter into off-balance sheet arrangements and transactionsthat can give rise to off-balance sheet obligations. As of December 31, 2008,our off-balance sheet arrangements and transactions include operating leaseagreements and gas transportation commitments. We do not believe that thesearrangements are reasonably likely to materially affect our liquidity oravailability of, or requirements for, capital resources.

 

**Financial Instruments**

 

We currently have no natural gas price financial instruments or hedgesin place. Similarly, we have no financial derivatives. Our natural gasmarketing contracts use “spot” market prices. Given the uncertainty of thetiming and volumes of our natural gas production this year, we do not currentlyplan to enter into any long term fixed-price natural gas contracts, swap orhedge positions, other gas financial instruments or financial derivatives in2009.

 

44

----

Table ofContents

 

**Outlook for 2009 Capital**

 

Dependingon capital availability, we are forecasting capital spending of up toapproximately $7.5 million during the year 2009, allocated as follows:

 

1.                       MadisonvilleProject, Madison County, Texas — Approximately $6.1 million may be expended inthe Madisonville Field area as follows: $3 million for capital maintenance andrepair on new gas treatment plant; $2 million toward the fracture stimulationand hook up costs of the Wilson Well; $500,000 for the Mitchell well workover;$300,000 for lowering the line pressure; and $300,000 for lease acquisitions.

 

2.                       Cook Inlet,Alaska — Approximately $1.0 million to be utilized for land delay rentals,geologic and geophysical costs, wellsite preparation, permitting, andlogistics.

 

3.                       California andIndonesia — Approximately $0.4 million to be utilized for land, geologic andgeophysical costs.

 

Wemay, in our discretion, decide to allocate resources towards other projects inaddition to or in lieu of, those listed above should other opportunities ariseand as circumstances warrant. We currently do not have sufficient workingcapital to fund all of the capital expenditures listed above. The MadisonvilleProject forecasted capital expenditures will play an important part in the Companyachieving our 2009 cash flow projections. See “Liquidity and Capital Resources.”

 

Weexpect commodity prices to be volatile, reflecting the current supply anddemand fundamentals for North American natural gas and world crude oil.Political and economic events around the world, which are difficult to predict,will continue to influence both oil and gas prices. Significant price changesfor oil and gas often lead to changes in the levels of drilling activity whichin turn lead to changes in costs to explore, develop and acquire oil and gasreserves. Significant change in costs could affect the returns on our capitalexpenditures. Higher crude prices could also help keep natural gas prices highby keeping alternative fuels, such as heating oil and residual fuel, expensive.

 

**Impact of Inflation & Changing Prices**

 

As the following tableillustrates, average sales prices of natural gas have changed in the past threeyears. This has led to changes in revenues and earnings from operations:

 
| ** **                     | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                     | ** ** | **2008 (1)**                                            | ** ** | **2007 (2)** | ** ** | **2006(3)** | ** ** |
| Average Sales Prices per Mcf   |       | $                                                            | 4.82       |   | $ | 3.44 |   | $ | 3.01 |   |
| Net Production Volume Mcf      |       | 1,275,445                                                    |       | 2,005,359 |   | 2,229,059 |   |
| Revenues                       |       | $                                                            | 6,152,542  |   | $ | 6,890,777 |   | $ | 6,716,360 |   |
| Earnings (loss) from Operation |       | $                                                            | (252,061   | ) | $ | (1,535,697 | ) | $ | (312,188 | ) |

 

----

(1) Includes$69,856 impairment expense

 

(2) Includes$1,111,151 impairment expense

 

(3) Includes$38,849 impairment expense

 

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

 

Changingprices have had a significant impact on costs of drilling and completing wells,particularly in the Madisonville Field area where we are currently the mostactive. The estimated cost of drilling and completing a Rodessa formation wellat approximately 12,300 feet of depth has increased from $3.0 million in 2001to $7.5 million in 2009 due to higher costs associated with tubular goods, wellequipment, and day rates for drilling contracts, among other factors. Thesehigher costs have impacted and will continue to impact our income fromoperations in the form of higher depletion expense.

 

45

----

Table ofContents

 

**Critical Accounting Estimates**

 

Ourconsolidated financial statements have been prepared by management inaccordance with U.S. GAAP.

 

Thepreparation of consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions thataffect the amounts reported in the consolidated financial statements andaccompanying notes. Actual results could differ from those estimates.

 

Managementbelieves the most critical accounting policies that may have an impact on ourfinancial results relate to the accounting for oil and gas properties.Amortization, abandonment costs and full cost ceiling limitation write-downsare all based on numerous estimates, many of which are beyond management’scontrol. Reserves valuation is central to much of the accounting for an oil andgas company as described below.

 

Significantaccounting policies are contained in Note 2 to the consolidatedfinancial statements. A summary of unaudited supplementary oil and gasreserve information is contained in Note 12 to the consolidatedfinancial statements.

 

Thefollowing discusses the accounting estimates that are critical in determiningthe reported financial results:

 

*Oil and Gas Properties—*We**follow the full cost method of accountingfor oil and gas producing activities as prescribed by U.S. GAAP and,accordingly, capitalize all costs incurred in the acquisition, exploration, anddevelopment drilling of proved oil and gas properties, including the costs ofabandoned properties, dry holes, geophysical costs, and lease rentals. Allgeneral corporate costs are expensed as incurred. In general, sales or otherdispositions of oil and gas properties are accounted for as adjustments tocapitalized costs, with no gain or loss recorded. Amortization of evaluated oiland gas properties is computed on the units of production method based on allproved reserves on a country by country basis. Unevaluated oil and gasproperties are assessed for impairment either individually or on an aggregatebasis. The net capitalized costs of evaluated oil and gas properties (full costceiling limitation) are not to exceed their related estimated future netrevenues discounted at 10%, and the lower of cost or estimated fair value ofunproved properties, net of tax considerations.

 

*Reserves—*We**engage independent petroleum engineering consultants toevaluate our reserves. Reserves, future production profiles, and net revenuesare estimated by independent professional reservoir engineering firms. While weengage qualified reservoir engineering firms, their estimates are inherentlyuncertain, involve numerous assumptions that may not be realized, and predictasset values that may not be indicative of the true market value of the assetsevaluated. As a result of the inherent uncertainties and changing technical andeconomic assumptions, reserve estimates are subject to revisions that canmaterially impact our results.

 

*Asset Retirement Obligation—*We**provide for the estimated siterestoration and abandonment costs of tangible long-lived assets using a fairvalue method, which approximates the cost a third party would incur inperforming the tasks necessary to retire such assets. The reported liability isa discounted amount. The amount of the liability is affected by factors such asthe number of wells, the timing of the expected expenditures and the discountfactor. These estimates will change and the revisions could impact theamortization rates.

 

*Stock Based Compensation—*The**Company has a stock- based compensationplan that allows employees to purchase common shares of the Company. Optionexercise prices approximate the market price for the common shares on the datethe options were issued. Options granted under the plan are generally fullyexercisable after five years and expire five to ten years after the grantdate. We measure and record stock-based awards to directors, employees andconsultants based on the grant-date fair value, determined using the Black-Scholesoption pricing model with assumptions for: risk free interest rates, expecteddividend yield, expected life of the option, and the expected volatility.  We record the compensation expense ratablyover the requisite service period defined in the award.  The Company recorded $268,723, $121,421, and$201,335 of stock-based employee compensation for the twelve months ended December 31,2008, 2007 and 2006, respectively.

 

46

----

Table ofContents

 

**Recently Issued Accounting Pronouncements**

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities,” which permits an entity to measurecertain financial assets and financial liabilities at fair value. The objectiveof SFAS No. 159 is to improve financial reporting by allowing entities tomitigate volatility in reported earnings caused by the measurement of relatedassets and liabilities using different attributes, without having to applycomplex hedge accounting provisions. Under SFAS No. 159, entities thatelect the fair value option (by instrument) will report unrealized gains andlosses in earnings at each subsequent reporting date. The fair value optionelection is irrevocable, unless a new election date occurs. SFAS No. 159establishes presentation and disclosure requirements to help financialstatement users understand the effect of the entity’s election on its earnings,but does not eliminate disclosure requirements of other accounting standards.Assets and liabilities that are measured at fair value must be displayed on theface of the balance sheet. We do not expect the adoption of this pronouncementto have a material impact on our financial position or results of operations.

 

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

 

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

 

In March 2008,the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*, an amendment ofFASB Statement No. 133.  SFAS 161 amends and expands thedisclosure requirements of FASB Statement No. 133 with the intent toprovide users of financial statement with an enhanced understanding of (i) howand why an entity uses derivative instruments, (ii) how derivativeinstruments and the related hedged items are accounted for under FASB StatementNo. 133 and its related interpretations, and (iii) how derivativeinstruments and related hedged items affect and entity’s financial position,financial performance and cash flows. SFAS No. 161 is effective forfinancial statements issued for years and interim periods beginning after November 15,2008. We do not expect the adoption of SFAS No. 161 to have a significanteffect on our reported financial position or results of operations.

 

In June 2008,the FASB ratified the consensus reached on Emerging Issues Task Force (“EITF”)Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature)Is Indexed to an Entity’s Own Stock (“EITF No. 07-05”). EITF No. 07-05clarifies the determination of whether an instrument (or an embedded feature)is indexed to an entity’s own stock, which would qualify as a scope exceptionunder SFAS No. 133, Accounting for Derivative Instruments and HedgingActivities. EITF No. 07-05 is effective for financial statements issuedfor fiscal years beginning after December 15, 2008. Early adoption for anexisting instrument is not permitted. The Company is currently evaluating theimpact of the pending adoption of EITF No. 07-05 but does not expectadoption to have a material effect on its consolidated financial statementssince we have not and do not intend to issue equity instruments containingembedded derivatives.

 

**Modernizationof Oil & Gas Reporting Requirements Announced by the SEC**

 

In December 2008,the SEC issued the final rule on the Modernization of Oil and GasReporting.  This SEC ruling revises itsoil and gas reserves reporting requirements effective for fiscal years endingon or after December 31, 2009, with early adoption prohibited.  These revisions by the SEC are intended toprovide investors with a more meaningful and comprehensive understanding of oiland gas reserves.  These changes include:

 

·                  Modifying prices used to estimatereserves for SEC disclosure purposes to a 12-month average price instead of asingle-day, period-end price.

·                  Requiring certain additional disclosuresaround proved undeveloped reserves, internal controls used to ensureobjectivity of the estimation process, and qualifications of those preparingand/or auditing the reserves.

·                  Expanding the definition of oil and gasreserves and providing clarification of certain concepts and technologies usedin the reserve estimation process.

·                  Allowing optional disclosure of probableand possible reserves and permitting optional disclosure of price sensitivityanalysis.

 

Historically, thereserves calculated based on the SEC’s reporting requirements were also used tocalculate depletion on our producing properties, as required by SFAS 69,“Disclosures about Oil and Gas Producing Activities” (SFAS 69). However, thechange in the SEC reporting requirements has not yet been adopted by the FASB.The SEC has announced its intent to discuss potential amendments to SFAS 69with the FASB so that the reserves disclosed remain consistent with thereserves used to calculate depletion on our producing properties. Any suchchange would impact our future financial results. The SEC has indicated that itmay delay the effective date of the revised reporting requirements if the FASBdoes not make conforming amendments by December 31, 2009.

 

**Risksand Uncertainties**

 

There are a number of risks that face participants in the U.S.,Canadian and international oil and natural gas industry, including a number ofrisks that face us in particular. Accordingly, there are risks involved in anownership of our securities. See “Risk Factors” for a description of theprincipal risks faced by us.

 

47

----

Tableof Contents

 

**Item 7A. *Quantitativeand Qualitative Disclosures About Market Risk***

 

We are exposed to market risks arising fromfluctuating prices of crude oil, natural gas and interest rates as discussedbelow.

 

*Commodity Risk.*  Our majorcommodity price risk exposure is to the prices received for our natural gasproduction. Realized commodity prices received for our production are the spotprices applicable to natural gas in the East Texas region. Prices received fornatural gas are volatile and unpredictable and are beyond our control. For theyear ended December 31, 2008, a 10% change in the prices received fornatural gas production would have had an approximate $615,000 impact on ourrevenues.

 

*Currency Translation Risk.  *Because ourrevenues and expenses are primarily in U.S. dollars, we have littleexposure to currency translation risk, and, therefore, we have no plans in theforeseeable future to implement hedges or financial instruments to manageinternational currency changes.

 

*Hedging.* We didnot enter into any hedging transactions during the years ended December 312008, 2007 and 2006.

 

**Item 8. *FinancialStatements and Supplementary Data***

 

Thereports of our independent registered public accounting firms and ourconsolidated financial statements and supplemental information required to befiled under Item 8 of Form 10-K are presented beginning on Page F-1of this Form 10-K.

 

**Item 9. *Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure***

 

None.

 

**Item 9A. *Controls and Procedures***

 

**Evaluationof Disclosure Controls and Procedures**

 

Our management, with the participation of our President, ChiefExecutive Officer and Chairman and our Interim Chief Financial Officer, hasevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December31, 2008.  Based on this evaluation, wehave concluded that, as of December 31, 2008, our disclosure controls andprocedures were effective, in that they ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act is(1) recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and (2) accumulated and communicated toour management, including our President and Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Internalcontrol over financial reporting**

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we haveincluded a report of management’s assessment of the design and effectiveness ofour internal controls as part of this annual report on Form 10-K for the fiscalyear ended December 31, 2008.  Hein &Associates LLP, or Hein, our independent registered public accounting firm,also attested to, and reported on the effectiveness of internal control overfinancial reporting.  Management’s reportand Hein’s attestation report as referenced on page F-1 under the captions“Management’s Report on Internal Control over Financial Reporting” and “Reportof Independent Registered Public Accounting Firm — Internal Control overFinancial Reporting” and are incorporated herein by reference.

 

No changes to our internal control over financial reporting occurredduring the year ended December 31, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

 

**Item 9B. *Other Information***

 

None.

 

48

----

Tableof Contents

 

**PART III**

 

**Item 10. *Directors, Executive Officers and Corporate Governance***

 

The information required by this item is incorporated by reference fromour definitive proxy statement relating to our 2009 Annual Meeting ofShareholders, to be filed on or before April 30, 2009, the 2009 proxystatement.

 

**Item 11. *Executive Compensation***

 

The information required by this item is incorporated by reference fromour 2009 proxy statement.

 

**Item 12. *Security Ownership of Certain Beneficial Owners and Management andRelated Shareholder Matters***

 

The information required by this item is incorporated by reference fromour 2009 proxy statement.

 

**Item 13. *CertainRelationships and Related Transactions and Director Independence***

 

The information required by this item is incorporated by reference fromour 2009 proxy statement.

 

**Item 14. *PrincipalAccountant Fees and Services***

 

The information required by this item is incorporated by reference from2009 proxy statement.

 

49

----

Table of Contents

 

**PART IV**

 

**Item 15. *Exhibits andFinancial Statement Schedules***

 
|   | ***(a)  The following documents are  filed as part of this report*** |
|--------|---------------------------------------------------------------------------|
|   |                                                                      |   |
|   | 1.                                                                        | Management’s Report on Internal Control  Over Financial Reporting | F-2 |
|   |                                                                      |   |   |
|   |                                                                      | Report of Independent Registered Public  Accounting Firm—Internal Control | F-3 |
|   |                                                                      |   |   |
|   |                                                                      | Report of  Independent Registered Public Accounting Firm—Financial Statements | F-4 |
|   |                                                                      |   |   |
|   |                                                                      | Consolidated  Balance Sheets as of December 31, 2008 and 2007 | F-5 |
|   |                                                                      |   |   |
|   |                                                                      | Consolidated  Statements of Operations for the years ended December 31, 2008, 2007 and  2006 | F-6 |
|   |                                                                      |   |   |
|   |                                                                      | Consolidated  Statements of Shareholders’ Equity for the years ended December 31,  2008, 2007 and 2006 | F-7 |
|   |                                                                      |   |   |
|   |                                                                      | Consolidated  Statements of Cash Flows for the years ended December 31, 2008, 2007 and  2006 | F-8 |
|   |                                                                      |   |   |
|   |                                                                      | Notes to  Consolidated Financial Statements | F-9 |
|   |                                                                      |   |   |
|   | 2.                                                                        | All other schedules are omitted because they are not applicable, not  required or the required information is included in the consolidated  financial statements or related notes. |   |
|   |                                                                      |   |   |
|   | 3.                                                                        | A list of exhibits filed or furnished with this report on  Form 10-K (or-incorporated by reference to exhibits previously filed or  furnished by GeoPetro) is provided in the Exhibit Index immediately  following the financial statements in this report. |   |
|        |                                                                           |  |  |  |

 

50

----

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on March 23, 2009.

 
| ** ** | **GEOPETRO RESOURCES COMPANY** |
|------------|--------------------------------|
| ** ** | ** **                     |
|       | By:                            | /s/ Stuart J. Doshi |
|       |                           | Stuart J. Doshi |
|       |                           | Chairman of the Board of Directors, President and  Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities indicated on March 23, 2009.

 
| **Signature**            | ** ** | **Title**                                | ** ** | **Date**             |
|--------------------------|------------|------------------------------------------|------------|----------------------|
|                     |       |                                     |       |                 |
| /s/ Stuart J. Doshi      |       | Chairman of the Board, President         |       | March 23, 2009  |
| Stuart J. Doshi          |       | and Chief Executive Officer              |       |                 |
|                     |       |                                     |       |                 |
| /s/ David V. Creel       |       | Vice President of Exploration and        |       | March  23, 2009 |
| David V. Creel           |       | Director                                 |       |                 |
|                     |       |                                     |       |                 |
| /s/ Peter J. Craven      |       | Interim Chief Financial Officer          |       | March 23, 2009  |
| Peter J. Craven          |       | and Interim Principal Accounting Officer |       |                 |
|                     |       |                                     |       |                 |
| /s/ J. Chris Steinhauser |       | Director                                 |       | March 23, 2009  |
| J. Chris Steinhauser     |       |                                     |       |                 |
|                     |       |                                     |       |                 |
| /s/ Jeffrey Friedman     |       | Director                                 |       | March 23, 2009  |
| Jeffrey Friedman         |       |                                     |       |                 |
|                     |       |                                     |       |                 |
| /s/ Thomas D. Cunningham |       | Director                                 |       | March 23, 2009  |
| Thomas D. Cunningham     |       |                                     |       |                 |
|                     |       |                                     |       |                 |
| /s/ David G. Anderson    |       | Director                                 |       | March 23, 2009  |
| David G. Anderson        |       |                                     |       |                 |
|                     |       |                                     |       |                 |
| /s/ Nick DeMare          |       | Director                                 |       | March 23, 2009  |
| Nick DeMare              |       |                                     |       |                 |

** **

**51**

----

**Table of Contents**

** **

**GLOSSARYOF OIL AND NATURAL GAS TERMS**

 

In this report, unless the context otherwise requires, the followingterms shall have the indicated meanings. A reference to an agreement means theagreement as it may be amended, supplemented or restated from time to time.

 

“**1933 Act**” means theUnited States *Securities Act*of 1933, as amended.

 

“**BOK**” means the Bank of Oklahoma N.A.

 

“**Bengara II PSC**” means thePSC dated December 4, 1997 between C-G Bengara and Pertamina.

 

“**Bengara Block**” means thecontract area in the Indonesian province of East Kalimantan designated as theBengara (II) PSC Block.

 

“**BP Migas**” means BadanPelaksana Minyak Dan Gas Muni, a new executive board established by thegovernment of Indonesia in 2002 for oil and gas upstream operations and animplementing body created to assume the role of Pertamina’s regulatoryfunctions and responsibilities in managing oil and gas contractors.

 

“**CBM**” means coal bed methane, which ismethane found in coal seams. It is produced by non-traditional means, andtherefore, while it is sold and used the same as traditional natural gas, itsproduction is different. CBM is generated either from a biological process as aresult of microbial action or from a thermal process as a result of increasingheat with depth of the coal. Often a coal seam is saturated with water, withmethane held in the coal by water pressure.

 

“**C-G Bengara**” means Continental-GeoPetro(Bengara II) Ltd., a British Virgin Islands corporation owned 12% byGeoPetro.

 

“**CG Xploration**” means CG Xploration Inc., aDelaware corporation owned 50% by GeoPetro.

 

“**C-G Yapen**” means Continental-GeoPetro(Yapen) Ltd., a British Virgin Islands corporation formerly owned 40% byGeoPetro.

 

“**CNPC**” means CNPCHK (Indonesia) Limited.CNPC is a wholly owned subsidiary of CNPC (Hong Kong) Limited, apublicly held company based in Hong Kong where its shares trade on the HongKong Stock Exchange under the listing number 0135.HK.

 

52

----

Tableof Contents

 

“**Company**” or “**GeoPetro**” means GeoPetro Resources Company, a corporationincorporated under the laws of the State of California and its wholly-ownedsubsidiaries.

 

“**Condensate**” means a low-density, high-APIgravity liquid hydrocarbon product that is generally produced in associationwith natural gas. Condensate is mainly composed of propane, butane, pentane andheavier hydrocarbon fractions.

 

“**Continental**” means Continental EnergyCorporation.

 

“**Cook Inlet Option**” means the option grantedto GeoPetro by Pioneer to acquire a 100% working interest (81% net revenueinterest) in approximately 122,000 acres in Cook Inlet, near Anchorage,Alaska.

 

“**CRA**” means the Canada Revenue Agency.

 

“**Earning Obligation**” means $18.7 millionpaid by CNPC into a special joint venture account at a Hong Kong internationalbank, which funds are under joint signature control of CNPC ourselves andContinental, and has been expended to pay for 2007 exploration drilling in theBengara II PSC area.

 

“**EIA**” means the United States EnergyInformation Administration.

 

“**EP 408**” means the approximately 201,000gross (52,675 net) acre permit area including the Whicher Range gasfield in the South Perth basin of Western Australia designated as ExplorationPermit 408 which we transferred to an unrelated party in June 2007.

 

“**Evaluated Properties**”****means those properties that are producingoil or gas or on which, based on known geological and engineering data, oil andgas reserves are reasonably certain to exist.

 

“**Fannin Well**” means the Angela Farris FanninNo. 1 well located at the Madisonville Field.

 

“**Farmout**” means an agreement whereby a thirdparty agrees to pay for the drilling of a well on one or more of GeoPetro’sproperties in order to earn an interest therein with GeoPetro retaining aresidual interest in such properties.

 

“**Flow-Through Share**” means a share of commonstock issued as a “flow-through share” within the meaning of Canadian tax law.

 

“**Gateway**” means Gateway Processing Company,a Texas corporation that has constructed pipeline facilities at theMadisonville Field.

 

“**GeoPetro Alaska**” means GeoPetroAlaska LLC, an Alaska limited liability company, which is a wholly-ownedsubsidiary of GeoPetro.

 

“**GeoPetro Canada**” means GeoPetroCanada Ltd., an Alberta corporation, which is a wholly-owned subsidiary ofGeoPetro.

 

“**Hanover**” means Hanover Compression LimitedPartnership, a Delaware limited partnership that has constructed and previouslyoperated treatment facilities at the Madisonville Field.

 

“**Hanover Agreement**” means, collectively, theFirst Amended and Restated Master Agreement, dated as of September 12,2002 among Redwood, Hanover and Gateway, as amended, providing for theprocessing of natural gas from the Madisonville Field, and the agreementsrelated thereto, which agreements were in effect prior to August 2005.

 

“**LPG**” means liquefied petroleum gas.

 

“**Madisonville Field**” means the Madisonville(Rodessa) field in Madison County, Texas.

 

“**Madisonville Midstream LLC**” meansMadisonville Midstream LLC, a Texas limited liability company, which is awholly-owned subsidiary of Redwood Energy Production, and which is 100% owned,directly or indirectly, by GeoPetro.

 

“**Madisonville Project**” means the oil and naturalgas exploration, development and production project at the Madisonville Field.

 

53

----

Tableof Contents

 

“**Magness Well**” means the UMC Ruby Magness No. 1well located at the Madisonville Field.

 

“**Makapan Gas Field**” means the Makapan gasfield in East Kalimantan, Indonesia.

 

“**MGP**” means Madisonville GasProcessing, LP, a Colorado Limited Partnership that has purchased fromHanover and currently operates the treatment facilities at the MadisonvilleField, and is jointly owned by JPMorgan Partners and Bear CubInvestments LLC.

 

“**MGP Agreement**” means, collectively, theTermination and Release Agreement, Madisonville Field Development Agreement,Gas Purchase Contract between Redwood LP as Seller, and MGP as Buyer,Escrow Agreement and Dedication Agreement, all effective as of August 1,2005 among Redwood LP, MGP, Gateway and Gateway Pipeline Company,providing for the termination of the Hanover Agreement, the expansion of thetreatment facilities and the provision of the gathering, processing,transportation and sale of natural gas from the Madisonville Field.

 

“**Mitchell Well**” means the Mitchell No. 1well located at the Madisonville Field.

 

“**Pertamina**” means Perusahaan PertambanganMinyak Dan Gas Bumi Negara, the previous Indonesian state-owned oil and naturalgas company established in 1971 which had exclusive authority to explore, drillfor, and produce oil and natural gas minerals in Indonesia. In accordance withthe new Indonesian Oil and Gas Law, its corporate form has been changed tobecome a state-owned limited liability company established under IndonesianCompany Law, and all rights and obligations of Pertamina under existing PSCs shallpass to BP Migas.

 

“**Pioneer**” means Pioneer Oil Company, Inc.

 

**“Proveddeveloped oil and gas reserves”** means reserves that can beexpected to be recovered through existing wells with existing equipment andoperating methods. Additional oil and gas expected to be obtained through theapplication of fluid injection or other improved recovery techniques forsupplementing the natural forces and mechanisms of primary recovery should beincluded as “proved developed reserves” only after testing by a pilot projector after the operation of an installed program has confirmed through productionresponse that increased recovery will be achieved.

 

**“Proveddeveloped nonproducing reserves”**means reserves expected tobe recovered from zones behind casing in existing wells.

 

**“Provedoil and gas reserves”** means estimated quantities of crudeoil, natural gas, and natural gas liquids which geological and engineering datademonstrate with reasonable certainty to be recoverable in future years fromknown reservoirs under existing economic and operating conditions, i.e., pricesand costs as of the date the estimate is made. Prices include consideration ofchanges in existing prices provided only by contractual arrangements, but noton escalations based upon future conditions.

 

(i)               Reservoirs areconsidered proved if economic producibility is supported by either actualproduction or a conclusive formation test. The area of a reservoir consideredproved includes (A) that portion delineated by drilling and defined bygas-oil and/or oil-water contacts, if any; and (B) the immediatelyadjoining portions not yet drilled, but which can be reasonably judged aseconomically productive on the basis of available geological and engineeringdata. In the absence of information on fluid contacts, the lowest knownstructural occurrence of hydrocarbons controls the lower proved limit of thereservoir.

 

(ii)            Reserves which can beproduced economically through application of improved recovery techniques (suchas fluid injection) are included in the “proved” classification when successfultesting by a pilot project, or the operation of an installed program in thereservoir, provides support for the engineering analysis on which the projector program was based.

 

(iii)         Estimates of provedreserves do not include the following:

 

(A)         oil that may becomeavailable from known reservoirs but is classified separately as “indicatedadditional reserves”;

 

(B)           crude oil, natural gas,and natural gas liquids, the recovery of which is subject to reasonable doubtbecause of uncertainty as to geology, reservoir characteristics, or economicfactors;

 

54

----

Tableof Contents

 

(C)           crude oil, natural gas,and natural gas liquids, that may occur in undrilled prospects; and

 

(D)          crude oil, natural gas,and natural gas liquids that may be recovered from oil shales, coal, gilsoniteand other such sources.

 

**“Provedundeveloped reserves”** means reserves that are expected to berecovered from new wells on undrilled acreage, or from existing wells where arelatively major expenditure is required for recompletion. Reserves onundrilled acreage shall be limited to those drilling units offsettingproductive units that are reasonably certain of production when drilled. Provedreserves for other undrilled units can be claimed only where it can bedemonstrated with certainty that there is continuity of production from theexisting productive formation. Under no circumstances should estimates, forproved undeveloped reserves be attributable to any acreage for which anapplication of fluid injection or other improved recovery technique iscontemplated, unless such techniques have been proved effective by actual testsin the area and in the same reservoir.

 

“**PSC**” means a production sharing contract,being a contract with Pertamina whereby Pertamina contracts with a petroleumcompany to explore for, develop and extract petroleum substances from aparticular license area, on Pertamina’s behalf, at the risk and expense of thepetroleum company, in exchange for a share of the production.

 

“**Redwood**” means Redwood Energy Company, aTexas corporation, which is a wholly-owned subsidiary of GeoPetro and which isthe general partner of, and holds a 5% interest in, Redwood LP.

 

“**Redwood LP**” means Redwood EnergyProduction, L.P., a Texas limited partnership, the sole limited partner ofwhich is GeoPetro and which is 100% owned, directly or indirectly, by GeoPetro.

 

“**Rodessa Formation**” means the geologicalformation at the Madisonville Field existing at a depth of approximately12,000 feet.

 

“**Seismic**” means data collected that usesreflected seismic waves to produce images of the Earth’s subsurface. The methodrequires a controlled seismic source of energy, such as dynamite or aspecialized air gun. By noting the time it takes for a reflection to arrive ata receiver, it is possible to estimate the depth of the feature that generatedthe reflection.

 

“**Series A Stock**” means the preferredstock of GeoPetro designated as Series A preferred stock, all of whichconverted to GeoPetro’s common stock on March 30, 2006.

 

“**Series AA Stock**” means the preferredstock of GeoPetro designated as Series AA preferred stock, as describedunder “Description of Share Capital”.

 

“**South TexasGeoPetro**” means South Texas GeoPetro, LLC., a Texas limitedliability company, the sole limited partner of which is GeoPetro and which is100% owned, directly or indirectly, by GeoPetro.

 

“**Tertiary Sandstones**” means sandstones whichwere deposited during a geologic time period ranging from 2 to 63 millionyears ago.

 

“**TSX**” means the Toronto Stock Exchange.

 

“**Unevaluated Properties**” means propertiesnot yet evaluated through exploration and drilling as to whether or not theyhave proved reserves.

 

“**U.S. GAAP**” means the accounting principlesgenerally accepted in the United States.

 

“**Wilson Well**”means the Wilson No. 1 well located at the Madisonville Field.

 

“**Working interest**” means thepercentage of undivided interest held by a party in the oil and/or natural gasor mineral lease granted by the mineral owner, which interest gives the holderthe right to “work” the property (lease) to explore for, develop, produce andmarket the leased substances.

 

55

----

Tableof Contents

 

**ABBREVIATIONS AND CONVERSIONS**

** **

In this report, thefollowing abbreviations have the meanings set forth below:

 
| API          | American  Petroleum Institute                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| bbl and bbls | barrel and  barrels, each barrel representing 34.972 Imperial gallons or 42  U.S. gallons                                                                                                                                                                                                                                                                                                                                                                             |
| bbls/d       | barrels per day                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| bcf          | billion cubic  feet                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| boe          | barrels of oil  equivalent converting 6 mcf of natural gas to one barrel of oil  equivalent and one barrel of natural gas liquids to one barrel of oil  equivalent. Measures of boes may be misleading, particularly if used in  isolation. This conversion ratio is based on an energy equivalency conversion  method primarily applicable at the burner tip and does not represent a value  equivalency at the wellhead, but is a commonly used industry benchmark. |
| boe/d        | barrels of oil  equivalent per day                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| degree API   | an indication of  the specific gravity of crude oil measured on the API gravity scale. Liquid  petroleum with a specified gravity of 28 degree API or higher is generally  referred to as light crude oil.                                                                                                                                                                                                                                                                 |
| LPG          | liquefied  petroleum gas                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| mbbls        | one thousand  barrels                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| mboe         | one thousand  barrels of oil equivalent                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| mcf          | one thousand  cubic feet                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| mcf/d        | one thousand  cubic feet per day                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| mmbbls       | one million  barrels                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| MMBTU        | one million  British Thermal Units                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| MMcf         | one million  cubic feet                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| MMcf/d       | one million  cubic feet per day                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| NGLs         | natural gas  liquids                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Psig         | Pounds per  square inch gauge                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| TCF          | trillion  cubic feet                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

56

----

Table of Contents

 

**GEOPETRO RESOURCES COMPANY**

 

**INDEX TO FINANCIAL STATEMENTS**

 
| ** **                                                                                                       | **Page** |
|------------------------------------------------------------------------------------------------------------------|----------|
| CONSOLIDATED FINANCIAL STATEMENTS FOR THE  FISCAL YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006              |     |
|                                                                                                             |     |
| Management’s  Report on Internal Control Over Financial Reporting                                           | F-2      |
|                                                                                                             |     |
| Report of  Independent Registered Public Accounting Firm—Internal Control                                   | F-3      |
|                                                                                                             |     |
| Report of  Independent Registered Public Accounting Firm—Financial Statements                               | F-4      |
|                                                                                                             |     |
| Consolidated  Balance Sheets as of December 31, 2008 and 2007                                               | F-5      |
|                                                                                                             |     |
| Consolidated  Statements of Operations for the years ended December 31, 2008, 2007 and  2006                | F-6      |
|                                                                                                             |     |
| Consolidated  Statements of Shareholders’ Equity for the years ended December 31,  2008, 2007 and 2006 | F-7      |
|                                                                                                             |     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2008, 2007 and  2006                | F-8      |
|                                                                                                             |     |
| Notes to  Consolidated Financial Statements                                                                      | F-9      |

 

F-1

----

Table of Contents

 

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVERFINANCIAL REPORTING**

 

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) under theSecurities Exchange Act of 1934). Our internal control over financial reportingis designed to provide reasonable assurance to management and our board ofdirectors regarding the preparation and fair presentation of publishedfinancial statements. Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Therefore,even those systems determined to be effective can provide only reasonable assurancewith respect to financial statement preparation and presentation. Managementassessed the effectiveness of our internal control over financial reporting asof December 31, 2008.  In making this assessment, management used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in *Internal Control -Integrated Framework.* Based on our assessment, we believe that as ofDecember 31, 2008, our internal control over financial reporting waseffective based on those criteria.

 
|   |                                            |   |   |                            |
|--------|-------------------------------------------------|--------|--------|---------------------------------|
| By:    | /s/ Stuart J. Doshi                             |   | By:    | /s/ Peter J. Craven             |
|   | Stuart J. Doshi                                 |   |   | Peter J. Craven                 |
|   | President, Chief Executive Officer and Chairman |   |   | Interim Chief Financial Officer |

 

 

F-2

----

 

Table of Contents

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Boardof Directors and Stockholders

GeoPetro ResourcesCompany

San Francisco,California

 

We haveaudited GeoPetro Resources Company and subsidiaries’ (collectively the“Company”) internal control over financial reporting as of December 31,2008, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying Management’s Report on Internal Control overFinancial Reporting.  Our responsibilityis to express an opinion on the Company’s internal control over financialreporting based on our audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk.  Our audit alsoincluded performing such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2008, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of GeoPetroResources Company and subsidiaries as of December 31, 2008 and 2007, andthe related consolidated statements of operations, changes in stockholders’equity and cash flows for each of the three years in the period ended December 31,2008 and our report dated March 23, 2009 expressed an unqualified opinion.

 

*/s/**HEIN** &ASSOCIATES LLP*

Dallas, Texas

March 23,2009

 

F-3

----

Table of Contents

** **

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Boardof Directors and Stockholders

GeoPetroResources Company

San Francisco,California

 

We haveaudited the consolidated balance sheets of GeoPetro Resources Company andsubsidiaries (collectively, the “Company”) as of December 31, 2008 and2007, and the related consolidated statements of operations, changes instockholders’ equity and cash flows for each of the three years in the periodended December 31, 2008.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of GeoPetro ResourcesCompany and subsidiaries as of December 31, 2008 and 2007, and the resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2008, in conformity with U.S. generally acceptedaccounting principles.

 

We have alsoaudited, in accordance with standards of the Public Company AccountingOversight Board (United States), the Company’s internal control over financialreporting as of December 31, 2008, based on criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 23,2009 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 

 

***/****s**/****HEIN** &ASSOCIATES LLP*

Dallas, Texas

March 23,2009

 

F-4

----

Tableof Contents

 

**GEOPETRO RESOURCES COMPANY**

 

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                                    |       |                  |       |   |   |
| **Current assets:**                                                                                                                                                                           |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                     |       | $                     | 770,779    |   | $ | 4,294,565 |   |
| Trade accounts receivable—oil and gas sales                                                                                                                                              |       | 4,266                 |       | 965,188 |   |
| Accounts receivable—other                                                                                                                                                                |       | 35,107                |       | 345,862 |   |
| Prepaid expenses                                                                                                                                                                              |       | 212,938               |       | 118,065 |   |
| Total current assets                                                                                                                                                                          |       | 1,023,090             |       | 5,723,680 |   |
|                                                                                                                                                                                          |       |                  |       |   |   |
| **Oil and gas properties, at cost (full cost  method):**                                                                                                                                      |       |                  |       |   |   |
| Unevaluated properties                                                                                                                                                                        |       | 10,500,498            |       | 5,848,195 |   |
| Evaluated properties                                                                                                                                                                          |       | 48,346,939            |       | 47,428,750 |   |
| Gas processing plant                                                                                                                                                                          |       | 10,707,982            |       | — |   |
| Less—accumulated depletion, depreciation  and impairment                                                                                                                                 |       | (16,522,304           | )          | (14,917,700 | ) |
| Net oil and gas properties                                                                                                                                                                    |       | 53,033,115            |       | 38,359,245 |   |
| ** **                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Furniture, fixtures and equipment, at cost,  net of depreciation**                                                                                                                          |       | 12,364                |       | 26,727 |   |
| **Other assets—deposits and other noncurrent  assets**                                                                                                                                   |       | 7,436                 |       | 6,954 |   |
| **Total Assets**                                                                                                                                                                              |       | $                     | 54,076,005 |   | $ | 44,116,606 |   |
| ** **                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                |       |                  |       |   |   |
| ** **                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Current Liabilities:**                                                                                                                                                                      |       |                  |       |   |   |
| Trade payables                                                                                                                                                                                |       | $                     | 1,137,432  |   | $ | 666,293 |   |
| Current portion of long term notes payable                                                                                                                                                    |       | 600,000               |       | — |   |
| Interest payable                                                                                                                                                                              |       | 1,479                 |       | — |   |
| Production taxes payable                                                                                                                                                                      |       | 311,168               |       | 407,246 |   |
| Other taxes payable                                                                                                                                                                           |       | 20,833                |       | 161,032 |   |
| Royalty owners payable                                                                                                                                                                        |       | 1,103,830             |       | 979,743 |   |
| Net profits interest payable                                                                                                                                                                  |       | —                |       | 147,513 |   |
| Total current liabilities                                                                                                                                                                     |       | 3,174,742             |       | 2,361,827 |   |
|                                                                                                                                                                                          |       |                  |       |   |   |
| **Long Term Notes Payable**                                                                                                                                                                   |       | 7,019,449             |       | — |   |
| **Asset Retirement Obligations**                                                                                                                                                              |       | 59,099                |       | 53,726 |   |
| **Total Liabilities**                                                                                                                                                                         |       | 10,253,290            |       | 2,415,553 |   |
| ** **                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Commitments and Contingencies (Notes 1, 4,  and 10)**                                                                                                                                       |       | —                |       | — |   |
| ** **                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Shareholders’ Equity:**                                                                                                                                                                |       |                  |       |   |   |
| Common stock, no par value; 100,000,000  shares authorized; 34,284,646 and 31,950,970 shares issued and  outstanding at December 31, 2008 and December 31, 2007,  respectively |       | 53,397,733            |       | 51,492,733 |   |
| Additional paid-in-capital                                                                                                                                                                    |       | 2,610,596             |       | 2,219,109 |   |
| Accumulated deficit                                                                                                                                                                           |       | (12,185,614           | )          | (12,010,789 | ) |
| Total shareholders’ equity                                                                                                                                                               |       | 43,822,715            |       | 41,701,053 |   |
|                                                                                                                                                                                          |       |                  |       |   |   |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                           |       | $                     | 54,076,005 |   | $ | 44,116,606 |   |
|                                                                                                                                                                                               |            |                       |            |  |  |  |  |  |  |

 

***See accompanying notesto these consolidated financial statements.***

 

F-5

----

Tableof Contents

 

**GEOPETRO RESOURCES COMPANY**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                 | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                       |       |                                                          |       |   |   |   |   |
| **Revenues:**                                              |       |                                                          |       |   |   |   |   |
| Oil and gas sales                                          |       | $                                                             | 6,152,542  |   | $ | 6,890,777 |   | $ | 6,716,360 |   |
|                                                       |       |                                                          |       |   |   |   |   |
| **Costs and expenses:**                                    |       |                                                          |       |   |   |   |   |
| Lease operating expense                                    |       | 1,484,267                                                     |       | 1,558,900 |   | 1,602,932 |   |
| General and administrative                                 |       | 2,717,121                                                     |       | 2,807,091 |   | 2,347,447 |   |
| Net profits interest                                       |       | 579,941                                                       |       | 679,337 |   | 632,708 |   |
| Impairment expense                                         |       | 69,856                                                        |       | 1,111,151 |   | 38,849 |   |
| Depreciation and depletion expense                         |       | 1,553,418                                                     |       | 2,269,995 |   | 2,406,612 |   |
| Total costs and expenses                                   |       | 6,404,603                                                     |       | 8,426,474 |   | 7,028,548 |   |
|                                                       |       |                                                          |       |   |   |   |   |
| **Loss from operations**                                   |       | (252,061                                                      | )          | (1,535,697 | ) | (312,188 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| **Other Income and (Expense):**                            |       |                                                          |       |   |   |   |   |
|                                                       |       |                                                          |       |   |   |   |   |
| Interest expense                                           |       | (1,846                                                        | )          | (306,340 | ) | (306,682 | ) |
| Interest income                                            |       | 91,867                                                        |       | 174,560 |   | 198,050 |   |
| Total other expense                                        |       | 90,021                                                        |       | (131,780 | ) | (108,632 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| **Loss Before Taxes**                                      |       | (162,040                                                      | )          | (1,667,477 | ) | (420,820 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| Income tax (expense) benefit                               |       | (12,785                                                       | )          | 50,673 |   | (61,586 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| **Net Loss After Taxes**                                   |       | (174,825                                                      | )          | (1,616,804 | ) | (482,406 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| Preferred stock dividend                                   |       | —                                                        |       | — |   | (529,400 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| **Net Loss Available to Common Shareholders**              |       | $                                                             | (174,825   | ) | $ | (1,616,804 | ) | $ | (1,011,806 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| **Loss per Share:**                                        |       |                                                          |       |   |   |   |   |
| Basic                                                      |       | $                                                             | (0.01      | ) | $ | (0.05 | ) | $ | (0.04 | ) |
| Diluted                                                    |       | $                                                             | (0.01      | ) | $ | (0.05 | ) | $ | (0.04 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| **Weighted Average Number of Common Shares  Outstanding:** | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                      |       | 32,511,251                                                    |       | 29,830,447 |   | 25,990,868 |   |
| Diluted                                                    |       | 32,511,251                                                    |       | 29,830,447 |   | 25,990,868 |   |

 

***See accompanyingnotes to these consolidated financial statements.***

 

F-6

----

Tableof Contents

 

**GEOPETRO RESOURCES COMPANY**

 

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

 

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

 
| ** **                                            | ** ** | **Preferred Stock  Series A** | ** ** | **Preferred Stock  Series AA** | ** ** | **Common stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Total  Shareholders’** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **Shares**                              | ** ** | **Amount**                               | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Shares**      | ** ** | **Amount**                    | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Balances, December 31,  2005                     |       | 1,000,000                               |       | $                                        | 674,425    |                  | 1,890,710  |                    | $          | 5,924,068       |       | 21,171,923                    |       | $ | 23,662,749 |   | $ | 534,656 |   | $ | (9,382,179 | ) | $ | 21,413,719 |   |
| Issuance of  common stock for cash                    |       | —                                  |       | —                                   |       | —                |       | —                  |       | 5,251,835       |       | 14,622,656                    |       | — |   | — |   | 14,622,656 |   |
| Series A preferred  stock conversion             |       | (1,000,000                              | )          | (674,425                                 | )          | —                |       | —                  |       | 1,000,000       |       | 674,425                       |       | — |   | — |   | — |   |
| Fair value of  warrants issued with notes payable     |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | 182,390 |   | — |   | 182,390 |   |
| Stock Option  Compensation                            |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | 201,335 |   | — |   | 201,335 |   |
| Net Income                                            |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | — |   | (482,406 | ) | (482,406 | ) |
| Dividends on  Series AA Preferred                |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | — |   | (529,400 | ) | (529,400 | ) |
| Balances,  December 31, 2006                     |       | —                                  |       | —                                   |       | 1,890,710             |       | 5,924,068               |       | 27,423,758      |       | 38,959,830                    |       | 918,381 |   | (10,393,985 | ) | 35,408,294 |   |
| Issuance of  common stock for private placement       |       | —                                  |       | —                                   |       | —                |       | —                  |       | 2,002,599       |       | 7,152,622                     |       | — |   | — |   | 7,152,622 |   |
| Issuance of  common stock from options/warrants       |       | —                                  |       | —                                   |       | —                |       | —                  |       | 383,940         |       | 883,644                       |       | — |   | — |   | 883,644 |   |
| Net option exercise                                   |       | —                                  |       | —                                   |       | —                |       | —                  |       | 249,963         |       | (386,600                      | )          |   |   |   |   | (386,600 | ) |
| Series AA  preferred stock conversion            |       | —                                  |       | —                                   |       | (1,890,710            | )          | (5,924,068              | )          | 1,890,710       |       | 5,924,068                     |       | — |   | — |   | — |   |
| Fair value of  warrants issued with notes payable     |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | 138,476 |   | — |   | 138,476 |   |
| Fair value of  warrants issued with private placement |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | (1,040,831                    | )          | 1,040,831 |   | — |   | — |   |
| Fair value of  warrants issued with private placement |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | 121,421 |   | — |   | 121,421 |   |
| Net loss                                              |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | — |   | (1,616,804 | ) | (1,616,804 | ) |
| Balances,  December 31, 2007                     |       | —                                  |       | —                                   |       | —                |       | —                  |       | 31,950,970      |       | 51,492,733                    |       | 2,219,109 |   | (12,010,789 | ) | 41,701,053 |   |
| Issuance of  common stock from options/warrants       |       | —                                  |       | —                                   |       | —                |       | —                  |       | 750,000         |       | 375,000                       |       | — |   | — |   | 375,000 |   |
| Issuance of  common stock from gas plant acquisition  |       | —                                  |       | —                                   |       | —                |       | —                  |       | 1,500,000       |       | 1,530,000                     |       | — |   | — |   | 1,530,000 |   |
| Net warrant  exercise                                 |       | —                                  |       | —                                   |       | —                |       | —                  |       | 83,676          |       | —                        |       | — |   | — |   | — |   |
| Fair value of  warrants issued with notes payable     |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | 122,764 |   | — |   | 122,764 |   |
| Stock option  compensation                            |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | 268,723 |   | — |   | 268,723 |   |
| Net loss                                              |       | —                                  |       | —                                   |       | —                |       | —                  |       | —          |       | —                        |       | — |   | (174,825 | ) | (174,825 | ) |
|                                                  |       |                                    |       |                                     |       |                  |       |                    |       |            |       |                          |       |   |   |   |   |   |   |
| Balances,  December 31, 2008                     |       | —                                  |       | $                                        | —     |                  | —     |                    | $          | —          |       | 34,284,646                    |       | $ | 53,397,733 |   | $ | 2,610,596 |   | $ | (12,185,614 | ) | $ | 43,822,715 |   |

 

***See accompanying notes to theseconsolidated financial statements.***

 

F-7

----

Table of Contents

 

**GEOPETRO RESOURCES COMPANY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                       | ** ** | **For the Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows From Operating Activities:**                                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                             | (174,825   | ) | $ | (1,616,804 | ) | $ | (482,406 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                                          |       |   |   |   |   |
| Depreciation and depletion                                                       |       | 1,553,418                                                     |       | 2,269,995 |   | 2,406,612 |   |
| Stock compensation expense                                                       |       | 268,723                                                       |       | 121,421 |   | 201,335 |   |
| Non-cash interest expense                                                        |       | 366                                                           |       | 180,641 |   | 194,691 |   |
| Impairment expense                                                               |       | 69,856                                                        |       | 1,111,151 |   | 38,849 |   |
| Accretion of asset retirement obligations                                        |       | 4,298                                                         |       | 3,430 |   | 2,664 |   |
| Changes in operating assets and liabilities:                                     |       |                                                          |       |   |   |   |   |
| Accounts receivable                                                              |       | 960,922                                                       |       | (570,851 | ) | 297,226 |   |
| Other assets                                                                     |       | 215,400                                                       |       | (227,579 | ) | (124,214 | ) |
| Other liabilities                                                                |       | 212,915                                                       |       | (258,764 | ) | (932,888 | ) |
| Net cash provided by operating activities                                        |       | 3,111,073                                                     |       | 1,012,640 |   | 1,601,869 |   |
|                                                                             |       |                                                          |       |   |   |   |   |
| **Cash Flows from Investing Activities:**                                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil and gas property expenditures                                                |       | (5,569,417                                                    | )          | (5,214,421 | ) | (16,721,944 | ) |
| Proceeds from sale of oil and gas interest                                       |       | —                                                        |       | 175,000 |   | — |   |
| Gas treatment plant                                                              |       | (2,480,135                                                    | )          | — |   | — |   |
| Acquisition of furniture,  fixtures & equipment                         |       | (4,307                                                        | )          | (5,881 | ) | (4,605 | ) |
| (Increase) decrease in related party notes  receivable                           |       | —                                                        |       | 1,000,000 |   | (1,000,000 | ) |
| Net cash used in investing activities                                            |       | (8,053,859                                                    | )          | (4,045,302 | ) | (17,726,549 | ) |
|                                                                             |       |                                                          |       |   |   |   |   |
| **Cash Flows from Financing Activities:**                                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                             |       |                                                          |       |   |   |   |   |
| Proceeds from sale of common shares, option  and warrant exercises, net          |       | 375,000                                                       |       | 8,036,266 |   | 16,717,604 |   |
| Payments of preferred dividends                                                  |       | —                                                        |       | — |   | (529,400 | ) |
| Proceeds from promissory notes, net                                              |       | 1,050,000                                                     |       | 1,000,000 |   | 1,900,000 |   |
| Payments of loan fee                                                             |       | (6,000                                                        | )          | (57,000 | ) | (30,000 | ) |
| Repayments of promissory notes                                                   |       | —                                                        |       | (1,900,000 | ) | (900,000 | ) |
| Repayments of related party notes                                                |       | —                                                        |       | (100,000 | ) | — |   |
| Deferred offering costs                                                          |       | —                                                        |       | — |   | (1,213,789 | ) |
| Net option exercise                                                              |       | —                                                        |       | (386,600 | ) | — |   |
| Net cash provided by financing activities                                        |       | 1,419,000                                                     |       | 6,592,666 |   | 15,944,415 |   |
|                                                                             |       |                                                          |       |   |   |   |   |
| **Net Increase (Decrease) in Cash and Cash  Equivalents:**                       |       | (3,523,786                                                    | )          | 3,560,004 |   | (180,265 | ) |
| ** **                                                                       |       |                                                          |       |   |   |   |   |
| **Cash and Cash Equivalents:**                                                   | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning of period                                                              |       | 4,294,565                                                     |       | 734,561 |   | 914,826 |   |
| End of period                                                                    |       | $                                                             | 770,779    |   | $ | 4,294,565 |   | $ | 734,561 |   |
| ** **                                                                       | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Supplemental Disclosure of Cash Flow  Information:**                           | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid for interest                                                           |       | $                                                             | 1,528      |   | $ | 125,699 |   | $ | 38,682 |   |
|                                                                             |       |                                                          |       |   |   |   |   |
| Cash (refund) paid for income taxes                                              |       | $                                                             | 12,785     |   | $ | (50,673 | ) | $ | 61,586 |   |
|                                                                             |       |                                                          |       |   |   |   |   |
| **Non-Cash Transactions :**                                                      |       |                                                          |       |   |   |   |   |
| Assumption of long-term debt for  acquisition of gas treatment plant             |       | $                                                             | 6,697,847  |   | $ | — |   | $ | — |   |
|                                                                             |       |                                                          |       |   |   |   |   |
| Issuance of common stock for acquisition of  gas treatment plant                 |       | $                                                             | 1,530,000  |   | $ | — |   | $ | — |   |
|                                                                             |       |                                                          |       |   |   |   |   |   |   |   |
| Issuance of warrants in connection with promissory  notes and private placements |       | $                                                             | 122,764    |   | $ | 1,300,728 |   | $ | 182,390 |   |

 

 

***The accompanyingnotes are an integral part of these consolidated financial statements.***

 

F-8

----

Tableof Contents

 

**GEOPETRO RESOURCES COMPANY**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Information subsequent to December 31,2008 is unaudited)**

 

**1**.                 **ORGANIZATION AND NATURE OF OPERATIONS*:***

 

*GeoPetro*—GeoPetroResources Company (“GeoPetro” or the “Company”) was originally incorporated asGeoPetro Company under the laws of the State of Wyoming in 1994 to participatein the oil and gas acquisition, exploration, development and productionbusiness in the United States and internationally. GeoPetro Company wassubsequently merged into GeoPetro Resources Subsidiary Company, a Californiacorporation, on June 28, 1996. GeoPetro’s name was then changed toGeoPetro Resources Company. GeoPetro’s corporate offices are in San Francisco,California. The accompanying consolidated financial statements include theaccounts of GeoPetro and its wholly-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated in consolidation.

 

*Operations and Liquidity*—AlthoughGeoPetro is not a development stage enterprise, the Company has a limitedoperating history upon which an evaluation of its business prospects can bebased. The risks, expense, and difficulties encountered by early stagecompanies must be considered when evaluating GeoPetro’s business prospects.GeoPetro recorded a net loss of $174,825, $1,616,804, and $1,011,806 in 2008,2007 and 2006 respectively, and had an accumulated deficit at December 31,2008 of $12,185,614. GeoPetro expects to make significant capital expendituresin the foreseeable future. Management believes that GeoPetro will be successfulin obtaining adequate sources of cash to fund its anticipated capitalexpenditures and operating expense through the end of 2009 and to followthrough with plans for continued investments in oil and gas properties.GeoPetro’s success, in part, depends on its ability to generate additional financing,farmout certain of its projects and manage its relations with the companiesthat provide exploration and development services. GeoPetro’s success alsodepends on its ability to effectively manage growth and develop provedreserves. Additionally, GeoPetro’s operations are subject to all of theenvironmental and operational risks normally associated with the oil and gasindustry.

 

Since its inception, GeoPetro has participated as aworking interest owner in the acquisition of undeveloped leases, seismicoptions, lease options and foreign concessions and has participated in seismicsurveys and the drilling of test wells on its undeveloped properties. Morerecently, we acquired a natural gas treatment plant in East Texas.  Further leasehold acquisitions and seismicoperations are planned for 2009 and future periods. In addition, exploratoryand development drilling is scheduled during 2009 and future periods onGeoPetro’s undeveloped properties and capital improvements are planned on thenatural gas treatment plant. It is anticipated that the planned capitalimprovements at the natural gas treatment plant and the exploration activitiestogether with others that may be entered into may impose financial requirementswhich may exceed the existing working capital of GeoPetro. Management will needto raise additional equity and/or debt capital, to finance its continuedactivities. However, if additional financing is not available, GeoPetro may becompelled to reduce the scope of its business activities. If GeoPetro is unableto fund planned expenditures, it may be necessary to:

 

1.                  farm-outits interest in proposed wells;

 

2.                  sella portion of its interest in prospects and use the sale proceeds to fund itsparticipation for a lesser interest;

 

3.                  forfeit its interestin wells that are proposed to be drilled and;

 

4.                  reducegeneral and administrative expenses.

 

**2.****                 SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES:**

 

*U.S.GAAP—*The Company’s financial statements have beenprepared in accordance with accounting principles generally accepted within theUnited States of America (“U.S. GAAP”).

 

F-9

----

Tableof Contents

 

*Use ofEstimates and Significant Estimates—*Certain amounts inGeoPetro’s financial statements are based upon significant estimates, includingoil and gas reserve quantities which form the basis for the calculation ofdepreciation, depletion, amortization and impairment of oil and gas properties,the carrying values of unproved properties, asset retirement obligations,accounting for business combinations and share-based payments. Actual resultscould materially differ from those estimates.

 

*Oil andGas Properties*—GeoPetro follows the full cost method ofaccounting for oil and gas producing activities and, accordingly, capitalizesall costs incurred in the acquisition,  exploration, and development ofproved oil and gas properties, including the costs of abandoned properties, dryholes, geophysical costs, and annual lease rentals. All general corporate costsare expensed as incurred. In general, sales or other dispositions of oil andgas properties are accounted for as adjustments to capitalized costs, with nogain or loss recorded. Amortization of evaluated oil and gas properties iscomputed on the units of production method based on all proved reserves on acountry by country basis. Unevaluated oil and gas properties are assessed forimpairment either individually or on an aggregate basis. The net capitalizedcosts of evaluated oil and gas properties (full cost ceiling limitation) arenot to exceed their related estimated future net revenues discounted at 10%,and the lower of cost or estimated fair value of unproved properties, net oftax considerations.

 

 *Asset Impairment*—Underfull cost accounting, a ceiling test is performed to ensure that unamortizedcapitalized costs in each cost center (country) do not exceed their fairvalue.  Impairment is recognized when thecarrying value is greater than the discounted future cash flows.  In the event of impairment, the amount bywhich the carrying value exceeds the estimated fair value of the long-livedasset is charged to earnings. The present value of estimated future netrevenues is computed by applying current oil and gas prices to estimated futureproduction of proved oil and gas reserves as of period-end, less estimatedfuture expenditures to be incurred in developing and producing the provedreserves assuming the continuation of existing economic conditions.  There was no impairment of evaluatedproperties indicated at December 31, 2008 or 2007.

 

For the unproved properties, the Company evaluatesthe possibility of potential impairment on a quarterly basis. During the twelvemonths ended December 31, 2008, approximately $69,856 of unproved propertycosts related to Goodwin and Wildwood projects were reclassified to provedproperty and ceiling test impairment was recorded in the Canadian full costpool due to dry holes drilled.

 

*JointVentures*—Some exploration and production activities areconducted jointly with others and, accordingly, the accounts reflect onlyGeoPetro’s proportionate interest in such activities.

 

*RevenueRecognition*—Prior to December 31, 2008, revenue wasrecognized upon delivery of oil and gas production and was shown net ofapplicable royalty payments, processing and transportation fees. The Companyrecognized revenue from the Madisonville Field net of applicable fees togather, treat and transport the Company’s natural gas production. Theapplicable fees were paid to unrelated third parties.  On December 31, 2008, the Companycompleted the acquisition of a natural gas treatment plant (the “Plant”) fromMadisonville Gas Processing, LP (“MGP”). Going forward, revenue will berecognized without the netting of applicable processing and the transportationfees since the Company has acquired the Plant. Revenue from the MadisonvilleField is recognized when the price for gas delivered became fixed anddeterminable. See Note 3.

 

*AssetRetirement Obligation*—In accordance with Statement ofFinancial Accounting Standards No. 143, *Accountingfor Asset Retirement Obligations* (“SFAS 143”), the fair valueof an asset retirement cost, and corresponding liability, should be recorded aspart of the cost of the related long-lived asset and subsequently allocated toexpense using a systematic and rational method. GeoPetro recorded an assetretirement obligation to reflect GeoPetro’s legal obligations related to futureplugging and abandonment of its oil and gas wells. GeoPetro estimated theexpected cash flow associated with the obligation and discounted the amountusing a credit-adjusted, risk-free interest rate. At least annually, GeoPetroreassesses the obligation to determine whether a change in the estimatedobligation is necessary. GeoPetro evaluates whether there are indicators thatsuggest the estimated cash flows underlying the obligation have materiallychanged. Should those indicators suggest the estimated obligation hasmaterially changed, GeoPetro will accordingly update its assessment.

 

F-10

----

Tableof Contents

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Asset retirement obligations, beginning of  period |       | $                     | 53,726     |   | $ | 48,842 |   | $ | 26,641 |   |
| Liabilities incurred                               |       | 1,075                 |       | 1,454 |   | 19,537 |   |
| Accretion expense                                  |       | 4,298                 |       | 3,430 |   | 2,664 |   |
| Asset retirement obligations, end of period        |       | $                     | 59,099     |   | $ | 53,726 |   | $ | 48,842 |   |

 

*Furniture,Fixtures and Equipment—*Furniture, fixtures and equipmentare stated at cost. Depreciation is provided on furniture, fixtures andequipment using the straight-line method over an estimated service life ofthree to seven years.

 

*IncomeTaxes*—GeoPetro accounts for income taxes using the assetand liability method wherein deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in which thetemporary differences are expected to be recovered or settled. Becausemanagement has determined that realization of deferred tax assets is not morelikely than not, the net deferred tax assets are fully reserved.

 

*Concentrationsof Credit Risk*—Credit risk represents the accounting lossthat would be recognized at the reporting date if counterparties failedcompletely to perform as contracted. Concentrations of credit risk (whether onor off balance sheet) that arise from financial instruments exist for groups ofcustomers or counterparties when they have similar economic characteristicsthat would cause their ability to meet contractual obligations to be similarlyaffected by changes in economic or other conditions described below. The creditrisk amounts for cash and accounts receivable do not take into account thevalue of any collateral or security.

 

GeoPetro maintains several cash accounts with threefinancial institutions. Accounts at each institution are insured by the FederalDeposit Insurance Corporation up to $250,000. As of December 31, 2008,the uninsured bank balance was $161,988. GeoPetro has not experienced anylosses in such accounts and believes it is not exposed to any significantcredit risk.

 

During the years ended December 31, 2008, 2007and 2006, the Company had sales to customers exceeding 10% of total sales asfollows:

 
| ** **                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Luminant Energy Company, LLC |       | 98       | %          | 89       | %          | 79       | %          |
| ETC Katy Pipeline, Ltd.      |       | 2        | %          | 11       | %          | 21       | %          |

 

At December 31, 2008, and 2007, the Company hadaccounts receivable balances from Luminant Energy Company, LLC of $ 4,266 or11%, and $965,188 or 74% of total accounts receivable respectively.

 

*Allowancefor Doubtful Accounts*—Trade accounts receivable arerecorded at net realizable value. If the financial condition of GeoPetro’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. Delinquent trade accountsreceivable are charged against the allowance for doubtful accounts onceuncollectibility has been determined. The allowance is determined through ananalysis of the past-due status of accounts receivable and assessments of riskthat are based on historical trends and an evaluation of the impact of currentand projected economic conditions. There was no allowance for doubtful accountsneeded as of the years ended December 31, 2008 or 2007.

 

*FairValue of Financial Instruments*—The estimated fair valuesfor financial instruments are determined at discrete points in time based onrelevant market information. These estimates involve uncertainties and cannotbe determined with precision. For certain of GeoPetro’s financial instruments,including cash, accounts receivable, accounts payable and current portion ofnotes payable, the carrying amounts approximate fair value due to theirmaturities.

 

*Share-Based Payments*—The**Company has a stock- based compensationplan that allows employees to purchase common shares of the Company. Optionexercise prices approximate the market price for the common shares on the datethe options were issued. Options granted under the plan are generally fullyexercisable after five years and expire five to ten years after the grantdate.

 

F-11

----

Tableof Contents

 

The Company measures and records stock-based awards to directors,employees and consultants based on the grant-date fair value, determined usingthe Black-Scholes option pricing model with assumptions for: risk free interestrates, expected dividend yield, expected life of the option, and the expectedvolatility. The compensation expense was recorded ratably over the requisiteservice period defined in the award.  TheCompany recorded $268,723, $121,421, and $201,335 of stock-based employeecompensation for the twelve months ended December 31, 2008, 2007 and 2006,respectively. See Note 8.

 

*Net Loss per Common Share****—***Basic net loss per common share is computed bydividing the net loss attributable to common shareholders by the weightedaverage number of shares of common stock outstanding during the period.

 

Dilutednet loss per common share is computed in the same manner, but also considersthe effect of common stock shares underlying the following:

 

| ** **             | ** ** | **Years Ended December 31,** | ** ** |
|------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **2008**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock options (Note 8) |       | 2,740,000                    |       | 2,670,000 |   | 4,005,250 |   |
| Warrants (Note 9)      |       | 1,249,857                    |       | 2,441,688 |   | 1,937,855 |   |

 

All of the common shares underlying the stock optionsand warrants above were excluded from diluted weighted average sharesoutstanding for each of the three years in the period ended December 31, 2008because their effects were antidilutive.

 

*SegmentReporting*—GeoPetro has oil and gas exploration,development and production operations in the United States, Canada,Australia and Indonesia. All revenues and related costs are associated with operationsin the United States. A summary of assets and capital expenditures bygeographical segment is included in Note 3.

 

*Cashand Cash Equivalents—*Cash and cash equivalents includecash on hand, amounts held in banks and highly liquid investments purchasedwith an original maturity of three months or less.

 

*RecentlyIssued Accounting Pronouncements—*On January 1, 2008,the Company adopted the SFAS No. 157, “Fair Value Measurements,”issued by the FASB and provides a definition of fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements for future transactions. The adoption of this standard did nothave a material impact on our financial position, results of operations ordisclosures since we do not have any significant fair value measurements.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities,” whichpermits an entity to measure certain financial assets and financial liabilitiesat fair value. The objective of SFAS No. 159 is to improve financialreporting by allowing entities to mitigate volatility in reported earningscaused by the measurement of related assets and liabilities using differentattributes, without having to apply complex hedge accounting provisions. UnderSFAS No. 159, entities that elect the fair value option (byinstrument) will report unrealized gains and losses in earnings at eachsubsequent reporting date. The fair value option election is irrevocable,unless a new election date occurs. SFAS No. 159 establishes presentationand disclosure requirements to help financial statement users understand theeffect of the entity’s election on its earnings, but does not eliminatedisclosure requirements of other accounting standards. Assets and liabilitiesthat are measured at fair value must be displayed on the face of the balancesheet. The Company adopted this pronouncement resulting in no material impacton its financial position or results of operations.

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), *Business Combinations*(“SFASNo. 141R”). SFAS No. 141R, which among other things, establishesprinciples and requirements for how the acquirer in a business combination (i) recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase, and (iii) determines what information to disclose toenable 

 

F-12

----

Tableof Contents

 

users of the financial statements to evaluate the natureand financial effects of the business combination. SFAS No. 141R iseffective for fiscal years beginning on or after December 15, 2008, withearly adoption prohibited. This standard will change our accounting treatmentfor business combinations on a prospective basis.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements, an Amendment of ARB No. 51* (“SFAS No. 160”).SFAS No. 160 establishes accounting and reporting standards fornoncontrolling interests in a subsidiary and for the deconsolidation of asubsidiary. Minority interests will be recharacterized as noncontrollinginterests and classified as a component of equity. It also establishes a singlemethod of accounting for changes in a parent’s ownership interest in asubsidiary and requires expanded disclosures. This statement is effective forfiscal years beginning on or after December 15, 2008, with early adoptionprohibited. We do not expect the adoption of SFASB No. 160 will have amaterial impact on our financial position or results of operations. The Companydoes not expect the adoption of this pronouncement to have a material impact onits financial position or results of operations.

 

In March 2008, theFASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*, an amendment ofFASB Statement No. 133.  SFAS 161 amends and expands thedisclosure requirements of FASB Statement No. 133 with the intent toprovide users of financial statement with an enhanced understanding of (i) howand why an entity uses derivative instruments, (ii) how derivativeinstruments and the related hedged items are accounted for under FASB StatementNo. 133 and its related interpretations, and (iii) how derivativeinstruments and related hedged items affect and entity’s financial position,financial performance and cash flows. SFAS No. 161 is effective forfinancial statements issued for years and interim periods beginning after November 15,2008. We do not expect the adoption of SFAS No. 161 to have a materialimpact on our reported financial position or results of operations.

 

In June 2008, theFASB ratified the consensus reached on Emerging Issues Task Force (“EITF”)Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature)Is Indexed to an Entity’s Own Stock (“EITF No. 07-05”). EITF No. 07-05clarifies the determination of whether an instrument (or an embedded feature)is indexed to an entity’s own stock, which would qualify as a scope exceptionunder SFAS No. 133, Accounting for Derivative Instruments and HedgingActivities. EITF No. 07-05 is effective for financial statements issuedfor fiscal years beginning after December 15, 2008. Early adoption for anexisting instrument is not permitted. The Company is currently evaluating theimpact of the pending adoption of EITF No. 07-05 but does not expectadoption to have a material effect on its consolidated financial statementssince we have not and do not intend to issue equity instruments containingembedded derivatives.

 

In December 2008, the SECissued the final rule on the Modernization of Oil and Gas Reporting.  This SEC ruling revises its oil and gasreserves reporting requirements effective for fiscal years ending on or afterDecember 31, 2009, with early adoption prohibited.  These revisions by the SEC are intended toprovide investors with a more meaningful and comprehensive understanding of oiland gas reserves.  These changes include:

 

·      Modifyingprices used to estimate reserves for SEC disclosure purposes to a 12-monthaverage price instead of a single-day, period-end price. 

·      Requiringcertain additional disclosures around proved undeveloped reserves, internalcontrols used to ensure objectivity of the estimation process, andqualifications of those preparing and/or auditing the reserves. 

·      Expandingthe definition of oil and gas reserves and providing clarification of certainconcepts and technologies used in the reserve estimation process. 

·      Allowingoptional disclosure of probable and possible reserves and permitting optionaldisclosure of price sensitivity analysis. 

 

Historically, thereserves calculated based on the SEC's reporting requirements were also used tocalculate depletion on our producing properties, as required by SFAS 69,"Disclosures about Oil and Gas Producing Activities" (SFAS 69).However, the change in the SEC reporting requirements has not yet been adoptedby the FASB. The SEC has announced its intent to discuss potential amendmentsto SFAS 69 with the FASB so that the reserves disclosed remain consistent withthe reserves used to calculate depletion on our producing properties. Any suchchange would impact our future financial results. The SEC has indicated that itmay delay the effective date of the revised reporting requirements if the FASBdoes not make conforming amendments by December 31, 2009. 

 

**3.****                 SUMMARY OF OIL AND GAS OPERATIONS*:***

 

Capitalized costs at year end and costs incurredrelating to GeoPetro’s oil and gas properties are summarized as follows:

 

Capitalized costs as of December 31, 2008 are asfollows:

 
| ** **                                     | ** ** | **United States** | ** ** | **Australia** | ** ** | **Indonesia** | ** ** | **Canada** | ** ** | **Totals**  | ** ** |
|------------------------------------------------|------------|------------------------|------------|---------------|------------|---------------|------------|------------|------------|-------------|------------|
| Evaluated properties                           |       | $                      | 44,299,854 |          | $          | 2,388,051     |       | $          | —     |        | $          | 1 ,659,034 |   | $ | 48,346,939 |   |
| Unevaluated properties                         |       | 6,211,761              |       | 1,522,718     |       | 1,400,338     |       | 1,365,681  |       | 10,500,498  |       |
| Gas processing plant                           |       | 10,707,982             |       | —        |       | —        |       | —     |       | 10,707,982  |       |
| Less—accumulated depletion and impairment |       | (12,475,219            | )          | (2,388,051    | )          | —        |       | (1,659,034 | )          | (16,522,304 | )          |
| Net capitalized costs                          |       | $                      | 48,744,378 |          | $          | 1,522,718     |       | $          | 1,400,338  |        | $          | 1,365,681 |   | $ | 53,033,115 |   |

 

Costs incurred for the year ended December 31,2008 are as follows:

 
| Gas processing plant acquisition |   | $         | 10,707,982 |   | $      | —  |   | $       | —  |      | $      | —  |   | $ | 10,707,982 |   |
|----------------------------------|--------|-----------|------------|--------|--------|---------|--------|---------|---------|-----------|--------|---------|--------|---|------------|--------|
| Exploration                      |   | 3,854,688 |       | — |   | 376,498 |   | 490,973 |    | 4,722,159 |   |
| Development                      |   | 848,332   |       | — |   | —  |   | —  |    | 848,332   |   |
| Total costs incurred             |   | $         | 15,411,002 |   | $      | —  |   | $       | 376,498 |      | $      | 490,973 |   | $ | 16,278,473 |   |

 

Capitalized costs as of December 31, 2007 are asfollows:

 
| ** **                                     | ** ** | **United States** | ** ** | **Australia** | ** ** | **Indonesia** | ** ** | **Canada** | ** ** | **Totals**  | ** ** |
|------------------------------------------------|------------|------------------------|------------|---------------|------------|---------------|------------|------------|------------|-------------|------------|
| Evaluated properties                           |       | $                      | 43,451,522 |          | $          | 2,388,050     |       | $          | —     |        | $          | 1,589,178 |   | $ | 47,428,750 |   |
| Unevaluated properties                         |       | 2,357,072              |       | 1,522,718     |       | 1,023,841     |       | 944,564    |       | 5,848,195   |       |
| Less—accumulated depletion and impairment |       | (10,940,471            | )          | (2,388,051    | )          | —        |       | (1,589,178 | )          | (14,917,700 | )          |
| Net capitalized costs                          |       | $                      | 34,868,123 |          | $          | 1,522,717     |       | $          | 1,023,841  |        | $          | 944,564 |   | $ | 38,359,245 |   |

 

F-13

----

Table of Contents

 

Costs incurred for the year ended December 31, 2007 are as follows:

 
| Property acquisition |   | $         | —    |     | $      | —   |   | $         | —  |      | $      | 296,189   |   | $ | 296,189   |   |
|----------------------|--------|-----------|-----------|----------|--------|----------|--------|-----------|---------|-----------|--------|-----------|--------|---|-----------|--------|
| Exploration          |   | 401,821   |      | (175,000 | )      | 263,956  |   | 1,668,899 |    | 2,159,676 |   |
| Development          |   | 2,616,090 |      | —   |   | —   |   | —    |    | 2,616,090 |   |
| Total costs incurred |   | $         | 3,017,911 |     | $      | (175,000 | )      | $         | 263,956 |      | $      | 1,965,088 |   | $ | 5,071,955 |   |

 

Generally, sales or dispositions of oil and gasproperties, including sales of partial interests in prospects, are treated asadjustments to capitalized costs, with no gain or loss recorded.

 

*EvaluatedOil and Gas Properties—*In periods prior to 2006 it wasdetermined that the total net costs in the U.S. and Australian evaluated costpool exceeded their net realizable value. Accordingly, impairment write-downsof $4,503,797 were recorded in the prior periods. During 2008 and 2007, theCompany recorded impairment write-downs associated with the Canadian evaluatedcost pool due to dry holes of $69,856, and $1,111,151, respectively.

 

*UnevaluatedOil and Gas Properties—United States—*As GeoPetro’sproperties are evaluated through exploration, they will be included in theamortization base. Costs of unevaluated properties in the United States at December31, 2008, 2007 and 2006 represent exploration costs in connection with GeoPetro’sCalifornia and Alaska prospects. The prospects and their related costs inunevaluated properties have been assessed individually and no impairmentcharges were considered necessary for the United States properties for any ofthe periods presented. The current status of these prospects is that seismicdata is being interpreted on an on-going basis on the subject lands within theprospects. Drilling in the California and Alaska prospects is expected tocommence in 2009 and 2010, and will continue in future periods. 

 

*UnevaluatedOil and Gas Properties—Australia—*Unevaluated costsincurred in Australia represent costs in connection with the exploration of twoexploration permit areas in Australia. The prospects and their related costs inunevaluated properties have been assessed individually and no impairmentcharges were considered necessary for the Australian properties for any of theperiods presented. On June 20, 2007, the Company entered into a contract tosell its Australian Properties to an unaffiliated third party. These costsremaining in unevaluated properties represent our retained interest. See Note10.

 

*UnevaluatedOil and Gas Properties—Indonesia—*Unevaluated costsincurred in Indonesia represent costs in connection with one production sharingcontract area and the exploration efforts in Indonesia. The prospect and itsrelated costs in the unevaluated properties have been assessed individually andno impairment charges were considered necessary for the Indonesian property forany of the periods presented. The current status of this prospect is thatseismic data is being interpreted on an on-going basis to identify drillinglocations on the subject lands within the prospect. Drilling was commenced onthe prospect in early 2007 and is expected to continue in future periods.

 

The Company retains a carried 12% stake in the Bengara(II) Block PSC through its subsidiary, Continental-GeoPetro (Bengara-II) Ltd. (“CGB2”),the operator company of the project with offices in Jakarta, Indonesia.GeoPetro’s partner, Continental Energy Corporation likewise retains an 18%interest in the Bengara (II) Block. CNPCHK (Indonesia) Limited owns theremaining 70% in the Bengara (II) Block and has paid 100% of the cost ofdrilling certain exploratory and appraisal wells.

 

In the event that the Company does not establishcommerciality and provided that no extensions are granted for establishingcommerciality, the Company would be required to forfeit its interest in theproduction sharing contract. If the Company forfeits its interest, it will benecessary to record an impairment write-down equal to the capitalized costsrecorded for the area forfeited.

 

In December of 2008, C-G Bengara received anadditional year extension to the Bengara-II PSC contract anniversary on 4thDecember 2009 and may be extended for subsequent years subject to furtherapproval based on an annual review of progress and results of appraisal work.

 

F-14

----

Tableof Contents

 

*Breakdownof Unevaluated Oil and Gas Properties—*The following tablesets forth a summary of oil and gas property costs not being amortized at December31, 2008, by the period in which the costs were incurred:

 
| ** **                    | ** ** | **Totals** | ** ** | **Year Ended  December 31,  2008** | ** ** | **Year Ended  December 31,  2007** | ** ** | **Year Ended  December 31,  2006** | ** ** | **2005 and Prior  Years** | ** ** |
|-------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------|------------|
| Unproved property acquisition |       | $          | 2,150,134  |                                         | $          | —                                       |       | $                                            | 296,189    |                                | $          | 351,803 |   | $ | 1,502,142 |   |
| Exploration                   |       | 8,350,364  |       | 4,652,303                                    |       | 1,048,525                                    |       | 515,173                                      |       | 2,134,363                           |       |
| Total                         |       | $          | 10,500,498 |                                         | $          | 4,652,303                                    |       | $                                            | 1,344,714  |                                | $          | 866,976 |   | $ | 3,636,505 |   |

 

Management expects that planned activities for theyear 2009 will enable the evaluation of approximately 5% of the costs as of December31, 2008. Evaluation of 30% of the remaining costs is expected to occur in 2010with the remaining 65% in 2011 and beyond.

 

*GAS  PROCESSING PLANT*

 

OnDecember 31, 2008, the Company completed the acquisition of a natural gastreatment plant (the “Plant”) from Madisonville Gas Processing, LP (“MGP”), inexchange for shares of GeoPetro’s common stock, assumption of debt and a cashpayment (“the Acquisition”).  The Plantis located in Madison County, Texas and the new owner of the Plant is GeoPetro’swholly-owned indirect subsidiary, Madisonville Midstream LLC (“MM”).

 

GeoPetro paid total consideration of $10,707,982 forthe plant, summarized as follows:

 
| Cash                                                                                                                                                                                                                                    |   | $         | 2,094,000  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|--------|
| Assumption of note payable to Bank of  Oklahoma, N.A.                                                                                                                                                                                   |   | 6,697,847 |       |
| 1,500,000 common shares of GeoPetro valued  at $1.02 per share, based on the weighted average trading value of GeoPetro’s  common shares during the five days before and after the terms of the sale were  announced to the public |   |      | 1,530,000  |   |
| Direct costs incurred                                                                                                                                                                                                                   |   | 386,135   |       |
| Total consideration                                                                                                                                                                                                                     |   | $         | 10,707,982 |   |
|                                                                                                                                                                                                                                         |        |           |            |        |  |

 

There are asset retirement obligations associated with the Plant.However, components of the Plant can be used for extended and indeterminate periodsof time as long as they are properly maintained and/or upgraded. GeoPetro’sintent is to maintain the Plant assets and continue making improvements tothose assets based on technological advances. As a result, GeoPetro’smanagement believes that the Plant has an indeterminate life for purposes ofestimating asset retirement obligations because dates or ranges of dates uponwhich GeoPetro would retire the Plant cannot reasonably be estimated.

 

Our results of operationsfor the years ended December 31, 2008 and 2007 do not include theoperating results of the natural gas treatment plant because such acquisitionclosed on December 31, 2008.  The following condensed pro formainformation gives effect to the acquisition as if it had occurred on January 1,2007.  The pro forma information has been included in the notes asrequired by generally accepted accounting principles and is provided forcomparison purposes only.  The pro forma financial information is notnecessarily indicative of the financial results that would have occurred hadthe acquisition been effective on the dates indicated and should not be viewedas indicative of operations in the future.

 
| ** **                                   | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **2008**                           | ** ** | **2007** | ** ** |
| Operating revenues                           |       | $                                  | 15,066,915 |   | $ | 19,132,635 |   |
| Total operating expenses                     |       | $                                  | 15,954,201 |   | $ | 18,308,241 |   |
| Earnings (loss) applicable to common stock   |       | $                                  | (1,239,749 | ) | $ | 262,929 |   |
| Net earnings (loss) per share — basic   |       | $                                  | (0.04      | ) | $ | 0.01 |   |
| Net earnings (loss) per share — diluted |       | $                                  | (0.04      | ) | $ | 0.01 |   |

 

ThePlant consists of the original facilities (currently in service) installed andmade operational by Hanover Compression Limited Partnership (“Hanover”) in 2003and the expanded facilities which were installed by MGP in 2007, but which havenot yet been placed into operation.  ThePlant’s primary components consist of amine treaters, nitrogen rejection units,compressors and related equipment.  Otherassets acquired in the transaction include land, buildings, gathering lines,fuel lines, acid injection lines and rights of way.  The Plant facilities were installed in orderto treat and remove impurities associated with natural gas produced from theRodessa Formation at the Madisonville Field. The expanded facilities have a designed capacity to treat 50 millioncubic feet of natural gas per day (“MMcf/d”), which combined with the designcapacity of the current in-service facilities of 18 MMcf/d will represent atotal treating capacity of 68 MMcf/d for the Plant.

 

Priorto acquisition of the Plant, GeoPetro and MGP had certain agreements wherebyMGP was responsible for the gathering, treating and marketing of GeoPetro’s gasproduction from the Madisonville Project. The agreements provided, among other things, that MGP install and makeoperational the expanded facilities.  Theagreements and related obligations were terminated concurrent with GeoPetro’sacquisition of the Plant effective December 31, 2008.

 

F-15

----

Table of Contents

 

**4.****                 DEBT*:***

 

Debt at December 31, 2008 and December 31, 2007consisted of the following:

 
| ** **                                               | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Promissory notes dated December 23,  2008 (a)       |       | $                           | 1,050,000  |                        | $          | — |   |
| Bank of Oklahoma loan (b)                                |       | 6,697,847                   |       |                        |       |
|                                                     |       | 7,747,847                   |       | —                      |       |
| Less current portion of long term debt                   |       | (600,000                    | )          | —                      |       |
| Less discount on promissory notes relating  to loan fees |       | (128,398                    | )          | —                      |       |
|                                                     |       | $                           | 7,019,449  |                        | $          | — |   |

 

----

(a)          TheCompany issued four promissory notes totaling $1,050,000 during December 2008with maturity dates in December 2011. The notes may be repaid at any timewithout penalty. The notes bear an annual rate of eight percent (8%), with suchinterest payable quarterly in arrears. The principal amount and accrued andunpaid interest are due and payable on December 23, 2011. In connection withthe notes, the Company paid loan origination fees totaling $6,000 and grantedthree-year exercisable warrants to purchase 105,000 Common Shares and reissued15,000 warrants at $1.00 per share. We also issued 150,000 warrants as a finder’sfee. The fair value of the warrants on the dates of issuance, $122,764 and the$6,000 of loan origination fees, was recorded as a debt discount and is beingamortized over the life of the promissory note. As of December 31, 2008, theunamortized debt discount was $128,398.

 

(b)         EffectiveDecember 31, 2008, the Company assumed $7,697,847 of Madisonville GasProcessing LP’s (“MGP”) bank debt related to the Company’s acquisition of theMadisonville Gas Treatment Plant (the “Plant”) via a (i) $1 million cashpayment applied directly towards debt principal reduction, and (ii) arefinancing by GeoPetro of the $6,697,847 remaining balance in the form of a 3year Amended and Restated Term Loan Agreement with the lender, Bank Oklahoma (“BOK”).  The terms of the three year loan provide forminimum quarterly principal payments of $150,000 and interest payable quarterlyin arrears at prime plus 4% or Libor plus 5.5% at the option of the Company. AtDecember 31, 2008, the interest rate was 5.94% (LIBOR + 5.5%).  Additional principal will be payable uponGeoPetro meeting certain net operating cash flow thresholds during the threeyear term of the loan.  The loan issecured by a first lien on the Madisonville Midstream Plant and all of theCompany’s proved natural gas reserves located at the Madisonville Project.  In addition, GeoPetro has agreed to pay, atthe time the loan is repaid in full, a loan origination fee of $60,000 for anyannual period during which the loan principal remains outstanding.  There is no prepayment penalty.  The Amended and Restated Term Loan Agreementcontains customary affirmative and negative covenants including restrictions onincurring additional debt and requiring that the Company maintain a minimumtangible net worth of at least $35,000,000.

 

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

 

TheCompany files income tax returns in the U.S. federal jurisdiction and variousstates.  There are currently no federalor state income tax examinations underway.  Furthermore, the Company is no longer subjectto U.S. federal income tax examinations by the Internal Revenue Service for taxyears before 2005 and for state and local tax authorities for tax years before2004.  The Company does, however, havenet operating losses generated in tax years 1997 and after, which remain openfor examination.

 

TheCompany adopted the provisions of FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes, on January 1, 2007. As December 31, 2008 theCompany had no unrecognized tax benefits. There have been no changes during theyear with respect to unrecognized tax benefits.  The Company does not foresee the total amountsof unrecognized tax benefits significantly increasing within the next 12months.  Furthermore, no correspondinginterest and penalties have been accrued as the Company is in a net operatingloss position.

 

TheCompany provides for income taxes in accordance with Statement of FinancialAccounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS109 requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of temporary differences between the financialstatement carrying amounts and the tax basis of the assets and liabilities.Where it is more likely than not that a tax benefit will not be realized, avaluation allowance is recorded to reduce the deferred tax asset to itsrealizable value.

 

Avaluation allowance has been provided against the Company’s net deferred taxassets as the Company believes that it is more likely than not that the netdeferred tax assets will not be realized.

 

F-16

----

Tableof Contents

 

Theeffective tax rate for the year ended December 31, 2008 is (7.9) percent(expense) and is due largely to a liability for Texas Margin Tax.

 
| ** **                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Current                    |       |     |       |     |       |
| Federal                    |       | $        | —     |     | $          | (70,000 | ) |
| State                      |       | 13,000   |       | 19,000   |       |
| Total                      |       | 13,000   |       | (51,000  | )          |
|                       |       |     |       |     |       |
| Deferred                   |       |     |       |     |       |
| Federal                    |       | —   |       | —   |       |
| State                      |       | —   |       | —   |       |
| Total                      |       | —   |       | —   |       |
| Total Income Tax Provision |       | $        | 13,000     |     | $          | (51,000 | ) |

 

The actual income tax (benefit) expense differs fromthe expected tax (benefit) expense as computed by applying the U.S. Federalcorporate income tax rate of 35% for each period as follows:

 
| ** **                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Amount of expected tax (benefit) expense |       | $        | (57,000    | )        | $          | (584,000 | ) |
| Non-deductible expenses                  |       | 16,000   |       | 99,000   |       |
| Alternative minimum tax                  |       | —   |       | (70,000  | )          |
| State Taxes                              |       | 1,600    |       | 3,000    |       |
| Return to Provision/Utilization of NOL   |       | 33,000   |       | (254,000 | )          |
| Other                                    |       | 2,400    |       | (6,000   | )          |
| Valuation allowance adjustments          |       | 17,000   |       | 761,000  | )          |
|                                     |       | $        | 13,000     |     | $          | (51,000 | ) |

 

Deferred income taxes reflect the net tax effects oftemporary differences between carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.Significant components of the Company’s deferred tax assets (liabilities) areas follows:

 
| ** **                             | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets (liabilities):     |       |       |       |       |       |
| Net operating loss carry forwards      |       | $          | 8,294,000  |       | $          | 8,843,000 |   |
| Oil and gas property basis differences |       | (5,071,000 | )          | (4,311,000 | )          |
| Credit carryforwards                   |       | —     |       | —     |       |
| Stock compensation                     |       | 189,000    |       | 123,000    |       |
| Other                                  |       | (96,000    | )          | (223,000   | )          |
| Total deferred tax assets              |       | 3,316,000  |       | 4,432,000  |       |
| Valuation allowance                    |       | (3,316,000 | )          | (4,432,000 | )          |
| Total net deferred taxes               |       | $          | —     |       | $          | — |   |

 

Asof December 31, 2008, GeoPetro had net operating loss (NOL) carryforwards ofapproximately $25,126,000 for federal income tax purposes which begin to expirein 2017.  If the Company were toexperience a change in ownership under Section 382, the Company may be limitedin its ability to fully utilize its net operating losses.

 

However,in accordance with SFAS 123(R), a deferred tax asset has not been recognizedfor the portion of the net operating loss carryforwards that is attributable toexcess tax deductions associated with the exercise of stock options in 2008which do not reduce income taxes payable. Accordingly, approximately $3,488,000of GeoPetro’s federal NOL has not been benefited for financial statementpurposes as it relates to excess tax deductions that have not reduced incometaxes payable. The benefit of these excess tax deductions will not berecognized for financial statement purposes until the related deductions reduceincome taxes payable.

 

TheCompany also has approximately $8,605,000 of California net operating lossesand approximately $445,000 of Alaska net operating losses which begin to expirein 2010 and 2026, respectively. In accordance with SFAS 123(R), a portion ofthe state NOLs has similarly not been benefited for financial statementpurposes as it relates to excess tax 

 

F-17

----

Tableof Contents

 

deductionswhich have not resulted in the reduction of income taxes payable. The benefitof such excess tax deductions will not be recognized for financial statementpurposes until the related deductions reduce state income taxes payable.

 

Inaddition, the Company has approximately $334,000 of carryforward credits inTexas, a portion of which may be utilized each year against Texas Margin Taxliability through 2027.

 

**6.**                 **RELATED PARTY TRANSACTIONS*:***

 

OnApril 25, 2008, an officer and director exercised options to purchase 750,000shares of common stock at an exercise price of $0.50 per share. The options hadan expiration date of April 30, 2008.

 

On December 29,2007, theBoard of Directors approved the cashless exercise provision of options forofficers, directors and employee such that “Fair Market Value” shall equal thelesser of “Market Price” or $2.92 per share. Cashless exercise is the securityholder’s election to receive that number of shares of the Company’s CommonStock that is equal to the quotient of: i) the Fair Market Value of suchShares, less the Exercise Price then in effect, multiplied by the number ofShares that the security holder would otherwise have been entitled to purchase;over ii) the Fair Market Value of $2.92 per share.   The total common stock issued upon cashlessexercise was 249,963 shares. The Company paid $386,600 in taxes in connectionwith the cashless options exercise.

 

On April 25, 2007, May 9, 2007, and June 13, 2007, anofficer and director, exercised warrants to purchase 80,000, 70,000 and 33,333shares of common stock at an exercise price of $2.00, $2.00 and $4.00 pershare, respectively. The warrants were granted on June 18, 2000 and hadexpiration dates of between June 18 and June 30, 2007. On November 1, 2007, thesame officer and director, exercised options to purchase 50,000 shares ofcommon stock at an exercise price of $2.00 per share. The options were grantedon December 29, 2000 and had an expiration date of December 29, 2007.

 

On February 12, 2007, Stuart J. Doshi, President andCEO, loaned $100,000 to the Company. The note accrued interest at 8% annuallyand was payable on demand. The note and accrued interest was repaid on March 28,2007.

 

On June 7, 2006, the Company loaned $1,000,000 to G.Carter Sedanoui (“Borrower”), a shareholder, evidenced by a short-termpromissory note payable to the Company with a maturity date on March 31, 2007.On March 30, 2007, the Company extended the maturity date of the note to June 30,2007. The note and the accrued interest was paid in full on June 29, 2007.

 

The Company appointed David G. Anderson as a Directoron March 30, 2006. Mr. Anderson is the Senior Vice President and a director ofDundee Securities Corporation, the lead underwriter in connection with a saleof common shares the Company completed on March 30, 2006. The decision todistribute the common shares and the determination of the terms of thedistribution were made through arm’s length negotiations primarily between theCompany and Dundee Securities Corporation as lead underwriter. Mr. Anderson hadsome involvement in such negotiations solely in his capacity as a director andofficer of Dundee Securities Corporation. Dundee Securities Corporationreceived an underwriters’ fee totaling $632,000 in connection with theoffering.

 

**7.**                 **SHAREHOLDERS’ EQUITY*:***

 

GeoPetro’s articles of incorporation allow for theissuance of 100,000,000 shares of common stock, 1,000,000 shares of Series Apreferred stock (“Series A Stock”), 5,000,000 shares of Series AA preferredstock (“Series AA Stock”), and an additional 44,000,000 shares of preferredstock which may be issued from time to time in one or more series.

 

*CommonStock—*The holders of common stock are entitled to onevote per share. Subject to preferences on outstanding preferred stock, theholders of common stock are entitled to receive ratably such dividends as maybe declared by the board of directors. In the event of a liquidation, theholders of common stock and Series A preferred stock are entitled to shareratably in all assets remaining after payment of liabilities, subject to priordistribution rights of preferred stock.

 

*Conversionof Series A Stock—*Upon completion of the Company’sinitial public offering on March 30, 2006, all of the 1,000,000 shares of SeriesA Stock automatically converted into a like number of common shares.

 

F-18

----

Tableof Contents

 

*Conversionof Series AA Preferred Stock—*On March 28, 2007, all1,890,710 of the Company’s outstanding shares of Series AA Stock automaticallyconverted into 1,890,710 shares of our common stock, no par value per share.  Under the Company’s Amended and RestatedArticles of Incorporation, the Series AA stock automatically converts intocommon shares on a one-for-one share basis effective the first trading dayafter the reported high selling price for our common shares is at least $5.25per share for any consecutive ten trading days, which condition was met on March27, 2007.  Dividends accrued on the SeriesAA Stock at a rate of $0.28 per annum, per share, while the Series AA Stock wasoutstanding.  In 2006, dividends paid onthe Series AA Stock totaled $529,400.

 

**8.**                 **COMMON STOCK OPTIONS*:***

 

Effective as of September 10, 2001, the board ofdirectors approved an incentive stock plan, providing for awards under theterms and provisions of such plan of incentive stock options, stockappreciation rights and restricted stock awards to officers, directors andemployees of GeoPetro and its consultants (the “Stock Incentive Plan”). Theplan provides, among other provisions, the following:

 

The maximum number of Common Shares which may beawarded, optioned and sold under the plan is 5,000,000 (subject to adjustmentfor stock splits, stock dividends and certain other adjustments to GeoPetro’scommon stock); and the per share exercise price for Common Shares to be issuedpursuant to the exercise of an option shall be no less than the fair marketvalue of GeoPetro’s Common Shares as of the date of grant.

 

The Stock Incentive Plan provides for the granting toemployees incentive stock options within the meaning of Section 422 of theUnited States Internal Revenue Code of 1986, as amended, and for the grantingof non-statutory stock options to directors who are not employees andconsultants. In the case of employees who receive incentive stock options whichare first exercisable in a particular calendar year and the aggregate fairmarket value of which exceeds $100,000, the excess of the $100,000 limitationshall be treated as a nonstatutory stock option under the Stock Incentive Plan.

 

The Stock Incentive Plan is being administered by theBoard of Directors. The Board of Directors determines the terms of the optionsgranted, including the number of Common Shares subject to each option, theexercisability and vesting requirements of each option, and the form ofconsideration payable upon the exercise of such option (i.e., whether cash orexchange of existing Common Shares in a cashless transaction or a combinationthereof).

 

The Stock Incentive Plan will continue in effect for10 years from September 10, 2001 (i.e., the date first adopted by the Board),unless sooner terminated by the board of directors. In 2004, we implemented anew 2004 Stock Option and Appreciation Rights Plan (the “Stock Option Plan”)providing for awards of incentive stock options, non-qualified stock optionsand stock appreciation rights. The Stock Option Plan replaced the StockIncentive Plan as to new award grants effective in 2004 or thereafter to ourdirectors, officers, employees and consultants. Outstanding awards issued underthe Stock Incentive Plan will continue to be outstanding in accordance withtheir terms and the terms of the Stock Incentive Plan, but will count towardthe limits in the number of shares of common stock available to be issued underthe Stock Option Plan, which is 5,000,000. The exercise price of stock optionsgranted under the Stock Option Plan may not be less than 110% of the fairmarket value of our common stock on the date of grant.

 

During 2008, the Company issued 820,000 of stockoptions to officers, directors and employees. No options were issued in 2007. During 2006, the Company issued 150,000stock options to directors.  Effective January1, 2006, the Company recorded stock compensation expense of $268,723, $121,421,and $201,335 for the twelve months period ended December 31, 2008, 2007, and2006, respectively.

 

A summary of the status of GeoPetro’s stock optionplan is as follows:

 
| ** **                            | ** ** | **Options** | ** ** | **Exercise  Prices** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-------------|------------|----------------------|------------|------------------------------------------------|------------|
| Outstanding at December 31, 2005 |       | 3,875,250   |       | $0.50 to $6.25       |       | $                                              | 1.77       |   |
| Granted                               |       | 150,000     |       | $3.85                |       | 3.85                                           |       |
| Exercised                             |       | —      |       | —               |       | —                                         |       |
| Expired                               |       | (20,000     | )          | $3.00                |       | 3.00                                           |       |
| Outstanding at December 31, 2006 |       | 4,005,250   |       | $0.50 to $6.25       |       | $                                              | 1.84       |   |
| Granted                               |       | —      |       | —               |       | —                                         |       |
| Exercised                             |       | (1,335,250  | )          | $1.25 to $2.00       |       | 1.97                                           |       |
| Expired                               |       | —      |       | —               |       | —                                         |       |
| Outstanding at December 31, 2007 |       | 2,670,000   |       | $0.50 to $6.25       |       | 1.77                                           |       |
| Granted                               |       | 820,000     |       | $4.28                |       | 4.28                                           |       |
| Exercised                             |       | (750,000    | )          | $0.50                |       | 0.50                                           |       |
| Expired                               |       | —      |       | —               |       | —                                         |       |
| Outstanding at December 31, 2008 |       | 2,740,000   |       | $0.50 to $6.25       |       | $                                              | 2.87       |   |

 

F-19

----

Table of Contents

 

The weighted average fair value of options grantedduring the year ended December 31, 2008, as calculated under the Black-Scholespricing model is $2.17 per share and for the weighted average fair value ofoptions granted in 2006, as calculated under the same method was $1.83 pershare.

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing weighted-average assumptions used for grants in 2008 and 2006:risk-free, weighted-average interest rates ranging from 3.5 to 4.9 percentbased on the U.S. Treasury yield curve in effect at the time of grant, expecteddividend yield of 0 percent, expected life of 5 years from the date of grant,and expected volatility of 66 percent and 58 percent.

 

The options outstanding as of December 31, 2008 havethe following contractual lives:

 
| **Number of  Options  Outstanding** | ** ** | **Number of  Options  Exercisable** | ** ** | **Exercise  Prices** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|----------------------|------------|-------------------------------------------------------------|------------|
| 1,750,000                                |       | 1,750,000                                |       | 2.10                 |       | 4.41                                                        |       |
| 150,000                                  |       | 60,000                                   |       | 3.85                 |       | 2.28                                                        |       |
| 10,000                                   |       | 6,000                                    |       | 4.25                 |       | 1.00                                                        |       |
| 820,000                                  |       | —                                   |       | 4.28                 |       | 4.48                                                        |       |
| 10,000                                   |       | 6,000                                    |       | 6.25                 |       | 1.43                                                        |       |
| 2,740,000                                |       | 1,822,000                                |       |                 |       |                                                        |       |

 

The total intrinsic value of options outstanding wasapproximately $0.00 and $4,725,000 at December 31, 2008 and 2007, respectively.The intrinsic value for exercisable options was $0.00 and $4,717,950 at December31, 2008 and 2007, respectively. The total intrinsic value for stock optionsexercised was approximately $172,500 and $1,448,388 for the years ended December31, 2008 and 2007, respectively.

 

As of December 31, 2008, there are 1,822,000 optionswhich are exercisable. The remaining 918,000 options will become exercisableover the next four years. The stock compensation expense related to theunvested awards is $1,726,539.

 

As of December 31, 2008, the available issuableoptions are 2,260,000 shares.

 

**9.**                 **COMMON STOCK WARRANTS:**

 

During 2008, the Company issued three-year exercisablecommon stock warrants to purchase 105,000 Common Shares and reissued 15,000warrants at $1.00 per share in conjunction with the issuance of certainpromissory notes payable. The purchase right under the warrants has expirationdates of December 22, 2011, December 23, 2011, and December 25, 2011 unlessterminated earlier in accordance with the stock warrant purchase agreement. On January9, 2009, the Company issued 150,000 warrants as a finder’s fee related tocertain promissory notes. The fair value of the warrants issued on the dates ofgrant of $122,764 and the origination fees of $6,000 were recorded as discountto notes payable and are being amortized as interest expense over the term ofthe notes.

 

On December 15, 2008, the Company extended the date ofexpiration on 114,000 warrants to December 15, 2010. The warrants were issuedas a finder fee for a 2003 private placement of the Company’s common shares.The fair value of the warrants extension of $17,507 was recorded as finder’sfee and offset additional paid in capital.

 

OnJuly 2, 2008, the Company issued 83,676 shares of common stock pursuant to acashless exercise of 175,125 common stock warrants.

 

F-20

----

Table of Contents

 

The following table summarizes the number of sharesreserved for the exercise of common stock purchase warrants as of December 31,2008:

 
| ** **         | ** ** | ** **     | ** ** | ** **   | ** ** | ** **     | ** ** | ** **    | ** ** | **Warrants** | ** ** | **Warrants**  | ** ** | ** **     | ** ** |
|--------------------|------------|----------------|------------|--------------|------------|----------------|------------|---------------|------------|--------------|------------|---------------|------------|----------------|------------|
| ** **         | ** ** | **Expiration** | ** ** | **Exercise** | ** ** | **12/31/2007** | ** ** | **Warrants**  | ** ** | **Granted/** | ** ** | **(Expired/** | ** ** | **12/31/2008** | ** ** |
| ** **         | ** ** | **Date**       | ** ** | **Price**    | ** ** | **Shares**     | ** ** | **Exercised** | ** ** | **Extended** | ** ** | **Canceled)** | ** ** | **Shares**     | ** ** |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
| Common Stock       |       | 02/28/08       |       | $            | 5.00       |           | 27,000     |          | —     |         | —     |          | (27,000    | )              | —     |   |
| Common Stock       |       | 07/19/08       |       | $            | 5.00       |           | 50,000     |          | —     |         | —     |          | (50,000    | )              | —     |   |
| Common Stock       |       | 09/30/08       |       | $            | 5.00       |           | 14,375     |          | —     |         | —     |          | (14,375    | )              | —     |   |
| Common Stock       |       | 12/15/08       |       | $            | 3.50       |           | 1,100,998  |          | —     |         | —     |          | (1,100,998 | )              | —     |   |
| Common Stock       |       | 01/31/09       |       | $            | 3.50       |           | 150,000    |          | —     |         | —     |          | —     |           | 150,000    |   |
| Common Stock       |       | 02/12/09       |       | $            | 3.50       |           | 20,000     |          | —     |         | —     |          | —     |           | 20,000     |   |
| Common Stock       |       | 02/28/09       |       | $            | 4.51       |           | 5,000      |          | —     |         | —     |          | —     |           | 5,000      |   |
| Common Stock       |       | 03/31/09       |       | $            | 5.25       |           | 100,000    |          | —     |         | —     |          | —     |           | 100,000    |   |
| Common Stock       |       | 12/15/10       |       | $            | 3.50       |           | —     |          | —     |         | 114,000    |          | —     |           | 114,000    |   |
| Common Stock       |       | 01/31/10       |       | $            | 3.50       |           | 95,000     |          | —     |         | —     |          | (15,000    | )              | 80,000     |   |
| Common Stock       |       | 08/13/10       |       | $            | 3.85       |           | 60,078     |          | —     |         | —     |          | —     |           | 60,078     |   |
| Common Stock       |       | 12/22/11       |       | $            | 1.00       |           | —     |          | —     |         | 35,000     |          | —     |           | 35,000     |   |
| Common Stock       |       | 12/23/11       |       | $            | 1.00       |           | —     |          | —     |         | 45,000     |          | —     |           | 45,000     |   |
| Common Stock       |       | 12/25/11       |       | $            | 1.00       |           | —     |          | —     |         | 40,000     |          | —     |           | 40,000     |   |
| Common Stock       |       | 08/13/12       |       | $            | 4.50       |           | 600,779    |          | —     |         | —     |          | —     |           | 600,779    |   |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
| **Related party:** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | ** **    | ** ** | ** **     | ** ** |
| Common Stock       |       | 04/30/08       |       | $            | 3.00       |           | 33,333     |          | —     |         | —     |          | (33,333    | )              | —     |   |
| Common Stock       |       | 12/31/08       |       | $            | 2.00       |           | 185,125    |          | (175,125   | )            | —     |          | (10,000    | )              | —     |   |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
|               |       |           |       |         |       | 2,441,688      |       | (175,125      | )          | 234,000      |       | (1,250,706    | )          | 1,249,857      |       |

 

During 2007, the Company issued a two-year exercisablecommon stock warrant to purchase 25,000 Common Shares at $3.50 and $4.51 pershare to an unaffiliated third party for geophysical services. The purchaseright under the warrant had an expiration date of February 12, 2009 and February28, 2009 in accordance with the stock warrant purchase agreement. The fairvalue of the warrants totaled $32,533 and was capitalized in oil and gasproperties as part of the U.S. cost pool.

 

In conjunction with the issuance of a short-term notepayable during 2007, GeoPetro issued warrants to purchase 95,000 shares ofGeoPetro’s common stock at exercise prices of $3.50 per share. The purchaserights under the warrants have expiration date of January 31, 2010 unlessterminated earlier in accordance with the stock warrant purchase agreement. Thefair value of the warrants issued on the date of the grant of $105,945 andorigination fees of $57,000 were recorded as discount to notes payable and werebeing amortized as interest expense over the term of the note. As of December 31,2007, the unamortized amount was $0.

 

In conjunction with a private placement on August 13,2007, the Company issued warrants to purchase 660,857 shares of GeoPetro’scommon stock at exercise price of $4.50 and $3.50 per share.

 

F-21

----

Table of Contents

 

The following table summarizes the number of sharesreserved for the exercise of common stock purchase warrants as of December 31,2007:

 
| ** **         | ** ** | **Expiration** | ** ** | **Exercise** | ** ** | **12/31/2006** | ** ** | **Warrants**  | ** ** | **Warrants** | ** ** | **Warrants**  | ** ** | **12/31/2007** | ** ** |
|--------------------|------------|----------------|------------|--------------|------------|----------------|------------|---------------|------------|--------------|------------|---------------|------------|----------------|------------|
| ** **         | ** ** | **Date**       | ** ** | **Price**    | ** ** | **Shares**     | ** ** | **Exercised** | ** ** | **Granted**  | ** ** | **(Expired)** | ** ** | **Shares**     | ** ** |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
| Common Stock       |       | 05/01/07       |       | $            | 5.25       |           | 5,000      |          | —     |         | —     |          | (5,000     | )              | —     |   |
| Common Stock       |       | 02/28/08       |       | $            | 5.00       |           | 27,000     |          | —     |         | —     |          | —     |           | 27,000     |   |
| Common Stock       |       | 03/31/08       |       | $            | 3.50       |           | 25,000     |          | (25,000    | )            | —     |          | —     |           | —     |   |
| Common Stock       |       | 07/19/08       |       | $            | 5.00       |           | 50,000     |          | —     |         | —     |          | —     |           | 50,000     |   |
| Common Stock       |       | 09/30/08       |       | $            | 5.00       |           | 14,375     |          | —     |         | —     |          | —     |           | 14,375     |   |
| Common Stock       |       | 12/15/08       |       | $            | 3.50       |           | 1,131,355  |          | (30,357    | )            | —     |          | —     |           | 1,100,998  |   |
| Common Stock       |       | 01/31/09       |       | $            | 3.50       |           | 150,000    |          | —     |         | —     |          | —     |           | 150,000    |   |
| Common Stock       |       | 02/12/09       |       | $            | 3.50       |           | —     |          | —     |         | 20,000     |          | —     |           | 20,000     |   |
| Common Stock       |       | 02/28/09       |       | $            | 4.51       |           | —     |          | —     |         | 5,000      |          | —     |           | 5,000      |   |
| Common Stock       |       | 03/31/09       |       | $            | 5.25       |           | 100,000    |          | —     |         | —     |          | —     |           | 100,000    |   |
| Common Stock       |       | 01/31/10       |       | $            | 3.50       |           | —     |          | —     |         | 95,000     |          | —     |           | 95,000     |   |
| Common Stock       |       | 08/13/10       |       | $            | 3.85       |           | —     |          | —     |         | 60,078     |          | —     |           | 60,078     |   |
| Common Stock       |       | 08/13/12       |       | $            | 4.50       |           | —     |          | —     |         | 600,779    |          | —     |           | 600,779    |   |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
| **Related party:** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | ** **    | ** ** | ** **     | ** ** |
| Common Stock       |       | 06/18/07       |       | $            | 2.00       |           | 150,000    |          | (150,000   | )            | —     |          | —     |           | —     |   |
| Common Stock       |       | 06/18/07       |       | $            | 4.00       |           | 33,333     |          | (33,333    | )            | —     |          | —     |           | —     |   |
| Common Stock       |       | 06/18/07       |       | $            | 5.00       |           | 33,334     |          | —     |         | —     |          | (33,334    | )              | —     |   |
| Common Stock       |       | 04/30/08       |       | $            | 3.00       |           | 33,333     |          | —     |         | —     |          | —     |           | 33,333     |   |
| Common Stock       |       | 12/31/08       |       | $            | 2.00       |           | 185,125    |          | —     |         | —     |          | —     |           | 185,125    |   |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
|               |       |           |       |         |       | 1,937,855      |       | (238,690      | )          | 780,857      |       | (38,334       | )          | 2,441,688      |       |

 

In conjunction with the issuance of a short term notepayable during 2006, GeoPetro issued warrants to purchase 150,000 shares ofGeoPetro’s common stock at exercise prices of $3.50 per share. The purchaserights under the warrants have expiration date of January 31, 2009 unlessterminated earlier in accordance with the stock warrant purchase agreement. Thefair value of the warrants issued on the date of the grant, $182,390, wasrecorded as a discount to notes payable and is being amortized as interestexpense over the term of the note. As of December 31, 2006, theunamortized amount is $17,966.

 

The following table summarizes the number of sharesreserved for the exercise of common stock purchase warrants as of December 31,2006:

 
| ** **         | ** ** | **Expiration** | ** ** | **Exercise** | ** ** | **12/31/2005** | ** ** | **Warrants**  | ** ** | **Warrants** | ** ** | **Warrants**  | ** ** | **12/31/2006** | ** ** |
|--------------------|------------|----------------|------------|--------------|------------|----------------|------------|---------------|------------|--------------|------------|---------------|------------|----------------|------------|
| ** **         | ** ** | **Date**       | ** ** | **Price**    | ** ** | **Shares**     | ** ** | **Exercised** | ** ** | **Granted**  | ** ** | **(Expired)** | ** ** | **Shares**     | ** ** |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
| Common Stock       |       | 06/30/06       |       | $            | 5.00       |           | 10,000     |          | —     |         | —     |          | (10,000    | )              | —     |   |
| Common Stock       |       | 11/01/06       |       | $            | 3.00       |           | 20,000     |          | —     |         | —     |          | (20,000    | )              | —     |   |
| Common Stock       |       | 12/31/06       |       | $            | 4.00       |           | 10,000     |          | —     |         | —     |          | (10,000    | )              | —     |   |
| Common Stock       |       | 12/31/06       |       | $            | 2.00       |           | 75,000     |          | (75,000    | )            | —     |          | —     |           | —     |   |
| Common Stock       |       | 05/01/07       |       | $            | 5.25       |           | 5,000      |          | —     |         | —     |          | —     |           | 5,000      |   |
| Common Stock       |       | 02/28/08       |       | $            | 5.00       |           | 27,000     |          | —     |         | —     |          | —     |           | 27,000     |   |
| Common Stock       |       | 03/31/08       |       | $            | 3.50       |           | 25,000     |          | —     |         | —     |          | —     |           | 25,000     |   |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
| Common Stock       |       | 07/19/08       |       | $            | 5.00       |           | 50,000     |          | —     |         | —     |          | —     |           | 50,000     |   |
| Common Stock       |       | 09/30/08       |       | $            | 5.00       |           | 14,375     |          | —     |         | —     |          | —     |           | 14,375     |   |
| Common Stock       |       | 12/15/08       |       | $            | 3.50       |           | 1,131,355  |          | —     |         | —     |          | —     |           | 1,131,355  |   |
| Common Stock       |       | 03/31/09       |       | $            | 5.25       |           | 100,000    |          | —     |         | —     |          | —     |           | 100,000    |   |
| Common Stock       |       | 01/31/09       |       | $            | 3.50       |           | —     |          | —     |         | 150,000    |          | —     |           | 150,000    |   |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
| **Related party:** |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
| Common Stock       |       | 06/18/07       |       | $            | 2.00       |           | 150,000    |          | —     |         | —     |          | —     |           | 150,000    |   |
| Common Stock       |       | 04/30/08       |       | $            | 3.00       |           | 33,333     |          | —     |         | —     |          | —     |           | 33,333     |   |
| Common Stock       |       | 12/31/06       |       | $            | 4.00       |           | 66,667     |          | —     |         | —     |          | (66,667    | )              | —     |   |
| Common Stock       |       | 06/18/07       |       | $            | 4.00       |           | 33,333     |          | —     |         | —     |          | —     |           | 33,333     |   |
| Common Stock       |       | 06/18/07       |       | $            | 5.00       |           | 33,334     |          | —     |         | —     |          | —     |           | 33,334     |   |
| Common Stock       |       | 12/31/08       |       | $            | 2.00       |           | 185,125    |          | —     |         | —     |          | —     |           | 185,125    |   |
|               |       |           |       |         |       |           |       |          |       |         |       |          |       |           |       |
|               |       |           |       |         |       | 1,969,522      |       | (75,000       | )          | 150,000      |       | (106,667      | )          | 1,937,855      |       |

 

F-22

----

Tableof Contents

 

**10.****          COMMITMENTS AND CONTINGENCIES*:***

 

*EmploymentAgreements*—The Company entered into a contract ofemployment with Stuart J. Doshi, Founder, President, Chief Executive Officerand Chairman of the Board of Directors, dated July 28, 1997 (effective July 1,1997) and amended on January 11, 2001, July 1, 2003, April 20,2004, May 9, 2005, July 28, 2005, January 30, 2006, December 29,2008, and December 31, 2008. The contract, as amended, provides for afive-year term commencing May 1, 2005 which term is automatically extendedfor successive two-year renewal terms unless: (a) the board of directorselects not to renew the contract and the Company provides notice to Mr. Doshiof such non-renewal at least six months prior to the expiry of his employmentterm or any renewal term, or (b) Mr. Doshi attains age 75, inwhich case the term ends upon the completion of the calendar year in which hebecomes 75 years old unless the Company and Mr. Doshi mutually agreeto one-year extensions. The contract of employment currently provides for anannual base salary of $300,000 and further provides that in the event of achange of control of the Company or if Mr. Doshi is terminated withoutcause, he is entitled to receive (a) in exchange for all of his vestedstock options and vested restricted shares, such number of Common Shares havinga market value equal to the difference between (x) the aggregatetotal market value of all vested restricted shares and Common Shares he wouldreceive upon exercise of all vested stock options less (y) theaggregate total exercise price for all of his vested stock options; provided,however, that if the Common Shares to be delivered to Mr. Doshi upon suchchange of control or termination have not been registered so as to permitimmediate public resale, Mr. Doshi shall instead receive a cash paymentequal to the market value on the date of termination of all vested stockoptions and restricted shares without any discount for liquidity or minorityposition against cancellation of such options and restricted shares, (b) acash payment equal to the greater of (i) his compensation for theremainder of his term, including salary and the aggregate amount of his bonusesin respect of the last four fiscal years and (ii) four times hiscompensation in the current year, including his then-current salary and theaverage amount of his bonuses for the last four fiscal years, and (c) anadditional cash payment representing his employment benefits equal to 20% ofthe amount of salary he is entitled to receive under (b)(i) or (b)(ii) above,as applicable. In addition, in the event of a change of control or terminationwithout cause, all unvested options issued by the Company to Mr. Doshiwill vest.

 

GeoPetro has executed an employment contract dated April 28,1998 and amended on June 15, 2000, May 12, 2003, January 1,2005, December 29, 2008, and December 31, 2008 with its VicePresident of Exploration, David V. Creel. The contract provides an annualsalary of $150,000 and may be terminated by GeoPetro without cause upon thepayment to Mr. Creel of cash payments equal to the lesser of three months’base salary or base salary during the remainder of the employment term, and, inthe event of termination without cause, all unvested options issued by GeoPetroto Mr. Creel will vest. On December18, 2006, the independent members ofthe board of directors, acting on the recommendations of Stuart J. Doshi, thePresident and CEO, voted to increase the salary of Mr. Creel, to $163,200annually effective January 1, 2007.

 

*OfficeLease—*Effective March 1, 2004, GeoPetro is committedunder an office sublease which provides for a sixty month term. The sublease iscancelable by either party after thirty-six months. The sublease provides forminimum monthly lease payments of $5,788 during the first thirty-six months ofthe lease term and $6,527 per month from the thirty-seventh month to thesixtieth month. On October 14, 2008, the office lease was extended for anadditional one (1) year and two (2) months. The new expiration day isApril 30, 2010 and the rent shall be increased as of March 1, 2009 to$7,759.50 per month. Minimum annual rentals due under this agreement are asfollows:

 
| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2009     |       | $          | 90,649     |   |
| 2010     |       | 31,038     |       |
|     |       | $          | 121,687    |   |

 

Rent expense for the years ended December 31,2008, 2007 and 2006, was approximately $78,334, $76,856, and $69,466,respectively, and is included in general and administrative expenses in theaccompanying statements of operations.

 

*MadisonvilleNet Profits Interest—*Redwood LP’s 100% working interestis subject to a net profits interest in favor of an unrelated third parties.The net profits interest is 12.5% (proportionately reduced) of the netoperating profits until payout is achieved. After payout, the net profitsinterest increases to 30% (proportionately reduced). Payout, for purposes ofthe net profits interest, is defined and achieved at such time as Redwood LPhas recouped from net operating cash flows its total net investment in the projectplus a 33% cash on cash return.

 

*TheCook Inlet Alaska Project*—The Company entered into anagreement with Pioneer Oil Company, Inc. (“Pioneer”) dated April 20,2005, wherein it acquired a 100% working interest (81% net revenue interest) inapproximately 117,000 acres onshore in Cook Inlet, Alaska. The Company hassubsequently acquired approximately 5,000 acres in 

 

F-23

----

Tableof Contents

 

this project. The terms provide for the Company to paytotal consideration of $20 per acre, or approximately $2.3 million, forthe leases. The Option provides that the Company will pay the total leaseconsideration in two installments. The Company paid the first installmenttotaling $1,068,063 on August 17, 2005 and has received assignment of the100% working interest in the leases. Within three years from the date ofreceipt of legally sufficient assignment of the 100% working interest in the leases,the Company has the option to conduct a $2.5 million work program on theleases over a three-year period, and, after completion of the work program andan evaluation of the results, to remit the final additional acreageconsideration of $10 per acre for the leases. The agreement provides that ifthe Company fails to pay the lease consideration when due, fails to perform thework program or otherwise defaults under the agreement, it shall forfeit itsinterest and reassign the leases to Pioneer with no further liability toGeoPetro.

 

On July 31, 2008, we entered into a thirdamendment with Pioneer.  Per the terms ofthe amendment, the Company paid Pioneer the sum of $1,168,093 on August 7,2008, which represents the second and final payment for leases comprising116,806 acres onshore in Cook Inlet, Alaska.  The amendment further provided that the workprogram requiring $2.5 million in expenditures by GeoPetro has been eliminated.

 

*Sale ofAustralian Interests, EP 381 & EP 408***—**On June 20, 2007, the Company agreedto sell and transfer all of its remaining property interests in Australia to anunrelated party for cash consideration and a Petroleum Sales Royalty Paymentequal to 25% of the future annual earnings before interest, taxes, depreciationand amortization  from the property interests. Specifically, the agreementprovides that the Company will be paid consideration for the sale and transferof its property interests as follows:

 

1.         Initialcash consideration of $175,000 was received on November 19, 2007;

 

2.         asecond cash payment of $175,000 upon a successful flow test of petroleum from awell located on the property interests. A successful flow test is defined forpurposes of this agreement to be a test of at least 7 million standard cubicfeet of natural gas for a continuous and uninterrupted 24 hour period (or anequivalent oil/condensate rate based on a conversion ratio of 6000 cubic feetof gas to a barrel of oil or condensate); and,

 

3.         aPetroleum Sales Royalty Payment equal to 25% of the future annual earningsbefore interest, taxes, depreciation and amortization from the propertyinterests up to a total amount of $2,200,000.

 

**11.****          SUBSEQUENT EVENTS:**

 

On January 30, 2009,the Company issued promissory notes totaling $500,000 with maturity dates in January 2012. The notes may berepaid at any time without penalty. The notes bear an annual interest rate ofeight percent (8%). The notes are convertible into shares of GeoPetro preferredstock in the event that GeoPetro designates and offers such preferred stock.

 

**12.****          UNAUDITED SUPPLEMENTARYOIL AND GAS RESERVE INFORMATION:**

 

The following supplementary information is presentedin compliance with United States Securities and Exchange Commission regulationsand is not covered by the report of GeoPetro’s independent registered publicaccountants. The information required to be disclosed for the years ended 2008,2007 and 2006 in accordance with FASB Statement No. 69, “Disclosures aboutOil and Gas Producing Activities,” is discussed below and is further detailedin the following tables.

 

The reserve quantities and valuations are based uponestimates by MHA Petroleum Consultants. The proved reserves presented hereinare located entirely within the United States. Proved reserves are theestimated quantities of crude oil, natural gas and natural gas liquids whichgeological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs under existing economic andoperating conditions, i.e. prices and costs as of the date the estimate ismade. Prices include consideration of changes in existing prices provided onlyby contractual arrangements, but not on escalations based upon futureconditions. Reservoirs are considered proved if economic productivity is supportedby either actual production or a conclusive formation test. The area of areservoir considered proved includes (A) that portion delineated bydrilling and defined by gas-oil and/or oil-water contacts, if any, and (B) theimmediately adjoining portions not yet drilled, but which can reasonably bejudged as economically productive on the basis of available geological andengineering data. In the absence of information on fluid contacts the lowestknown structural occurrence of hydrocarbons controls the lower proved limit ofthe reservoir.

 

F-24

----

Tableof Contents

 

Proved developed reserves are reserves that can beexpected to be recovered through existing wells with existing equipment andoperating methods. Additional oil and gas reserves expected to be obtainedthrough the application of fluid injection or other improved recoverytechniques for supplementing the natural forces and mechanisms of primaryrecovery should be included as “proved developed reserves” only after testingby a pilot project or after the operation of an installed program has confirmedthrough production response that increased recovery will be achieved.

 

The estimates included in the following tables are bytheir nature inexact and are subject to changing economic, operating andcontractual conditions. At December 31, 2008, all of GeoPetro’s reservesare attributable to three producing wells, one shut-in well and an undevelopedlocation. Other than the producing wells and one shut-in well, there is noother production history as of or subsequent to that date. Reserve estimatesfor these wells are subject to substantial upward or downward revisions afterproduction commences and a production history is obtained.   Accordingly, reserve estimates of future netrevenues from production may be subject to substantial revision from year toyear. Reserve information presented herein is based on reports prepared byindependent petroleum engineers.

 

The assumptions used to compute the standardizedmeasure are those prescribed by the Financial Accounting Standards Board and,as such, do not necessarily reflect GeoPetro’s expectations for actual revenuesto be derived from those reserves nor their present worth. The limitationsinherent in the reserve quantity estimation process, as discussed previously,are equally applicable to the standardized measure computations since these arethe basis for the valuation process.

 

F-25

----

Tableof Contents

 
| ** **                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| **FACTORS**                              | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| ** **                               | ** ** | **(MMcf)**            | ** ** | **(MMcf)**            | ** ** | **(MMcf)**            | ** ** |
| **Beginning of period**                  |       | 23,139                |       | 24,600                |       | 21,428                |       |
| Revisions of previous quantity estimates |       | (1,553                | )          | 293                   |       | 5,122                 |       |
| Production net of Net Profit Interest    |       | (1,116                | )          | (1,755                | )          | (1,950                | )          |
| **Year ended December 31,**         |       | 20,470                |       | 23,139                |       | 24,600                |       |

 

**PROVED RESERVES PRESENTED HEREIN ARELOCATED ENTIRELY WITHIN THE UNITED STATES**

 
| ** **                     | ** ** | **AS OF DECEMBER 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(MMcf)**                            | ** ** | **(MMcf)** | ** ** | **(MMcf)** | ** ** |
| Proved developed               |       | 17,300                                |       | 10,495 |   | 12,235 |   |
| Proved developed non-producing |       | 3,170                                 |       | 12,644 |   | 12,365 |   |
| Proved undeveloped             |       | —                                |       | — |   | — |   |
|                           |       |                                  |       |   |   |   |   |
| Total                          |       | 20,470                                |       | 23,139 |   | 24,600 |   |

 

For purposes of the following disclosures, estimateswere made of quantities of proved reserves and the periods during which theyare expected to be produced. Future cash flows were computed by applyingyear-end prices to estimated annual future production from proved gas reserves.The average year-end prices for gas were as indicated below. Future developmentand production costs were computed by applying year-end costs to be incurred inproducing and further developing the proved reserves. Future income taxexpenses were computed by applying, generally, year-end statutory tax rates(adjusted for permanent differences, tax credits and allowances) to theestimated net future pre-tax cash flows. The discount was computed byapplication of a 10% discount factor. The calculations assume the continuationof existing economic, operating and contractual conditions. However, sucharbitrary assumptions have not proven to be the case in the past. Otherassumptions of equal validity could give rise to substantially differentresults.

 

**STANDARDIZED MEASURE OF DISCOUNTEDFUTURE NET CASH FLOWSRELATING TO PROVED PETROLEUM AND NATURAL GAS RESERVES**
| ** **                                                | ** ** | **YEAR ENDED DECEMBER 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                    | ** ** |
| Future cash inflows                                       |       | $                                          | 107,063    |   | $ | 135,264 |   | $ | 101,867 |   |
| Future production costs                                   |       | (34,414                                    | )          | (45,649 | ) | (37,783 | ) |
| Future development costs                                  |       | (5,075                                     | )          | (1,075 | ) | (1,074 | ) |
| Future income taxes                                       |       | (7,977                                     | )          | (13,762 | ) | (8,128 | ) |
| Future net cash flows                                     |       | 59,597                                     |       | 74,778 |   | 54,882 |   |
| 10% annual discount                                       |       | (12,282                                    | )          | (14,570 | ) | (8,341 | ) |
| Standardized measure of discounted future  net cash flows |       | $                                          | 47,315     |   | $ | 60,208 |   | $ | 46,541 |   |

 

**AVERAGE YEAR-END PRICE (1)**

 

| **2008 REPORT**        | ** ** | **2007 REPORT**   | ** ** | **2006 REPORT**   | ** ** |
|------------------------|------------|------------------------|------------|------------------------|------------|
| **Gas ($/MMBtu)** | ** ** | **Gas ($/MMBtu)** | ** ** | **Gas ($/MMBtu)** | ** ** |
| $                      | 5.25       |                   | $          | 6.81                   |       | $ | 5.40 |   |
|                        |            |                        |            |                        |            |  |  |  |

 

----

(1) Represents Houston Ship Channelindex price before netting the treatment and transportation fees.

 

F-26

----

Tableof Contents

 

The following are the principal sources of changes inthe standardized measure of discounted future net cash flows:

 

**CHANGES IN THE STANDARDIZED MEASUREOF DISCOUNTED FUTURE NET CASHFLOWS FROM PROVED PETROLEUM AND NATURAL GAS RESERVEQUANTITIESPROVED RESERVES ARE LOCATED ENTIRELY WITHIN THE UNITED STATES**

 
| ** **                                                                                    | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                    | ** ** | **(in $ thousands)** | ** ** |
| Standardized measure of discounted future  net cash flows, beginning of period                |       | $                              | 60,208     |     | $          | 46,541   |       | $ | 63,489 |   |
| Sales of Oil and Natural Gas and NGLs  Produced, Net of Production Costs, Taxes and Royalties |       | (4,088                         | )          | (4,653   | )          | (4,480   | )          |
| Net Change in Prices, Production Costs and  Royalties Related to Future Production            |       | (5,664                         | )          | 23,322   |       | (39,067  | )          |
| Changes in Previously Estimated Development  Costs Incurred During the Period                 |       | —                         |       | —   |       | 6,545    |       |
| Changes in Estimated Future Development  Costs                                                |       | (3,547                         | )          | (1       | )          | (1,075   | )          |
| Net Change Resulting from Revisions in  Quantity Estimates                                    |       | (4,376                         | )          | 1        |       | 1,074    |       |
| Extensions                                                                                    |       | —                         |       | —   |       | 6,740    |       |
| Accretion of discount                                                                         |       | 4,823                          |       | 5,291    |       | 8,019    |       |
| Other                                                                                         |       | (4,789                         | )          | (4,659   | )          | (4,656   | )          |
| Net Change in Income Taxes                                                                    |       | 4,748                          |       | (5,634   | )          | 9,952    |       |
| Standardized measure of discounted future  net cash flows, end of period                      |       | $                              | 47,315     |     | $          | 60,208   |       | $ | 46,541 |   |

 

**12.****          UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA:**

 
| **2008**                                   | ** ** | **First**  | ** ** | **Second** | ** ** | **Third**  | ** ** | **Fourth** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                   |       | $          | 2,142,598  |       | $          | 2,650,992  |       | $          | 1,313,308  |   | $ | 45,644 |   |
| Income (loss) from operations              |       | $          | 320,861    |       | $          | 627,404    |       | $          | (41,048    | ) | $ | (1,159,278 | ) |
| Earnings (loss) per share from operations: |       |       |       |       |       |       |       |       |       |
| Basic                                      |       | $          | 0.01       |       | $          | 0.02       |       | $          | (0.00      | ) | $ | (0.04 | ) |
| Diluted                                    |       | $          | 0.01       |       | $          | 0.02       |       | $          | (0.00      | ) | $ | (0.04 | ) |
| Net income (loss)                          |       | $          | 344,126    |       | $          | 636,712    |       | $          | (15,642    | ) | $ | (1,140,021 | ) |
| Earnings (loss) per common share:          |       |       |       |       |       |       |       |       |       |
| Basic                                      |       | $          | 0.01       |       | $          | 0.02       |       | $          | (0.00      | ) | $ | (0.03 | ) |
| Diluted                                    |       | $          | 0.01       |       | $          | 0.02       |       | $          | (0.00      | ) | $ | (0.03 | ) |

 
| **2007**                                   | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|--------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
|                                       |       |      |       |       |       |      |       |       |       |
| Revenues                                   |       | $         | 1,823,342  |       | $          | 2,388,850 |       | $          | 1,231,370  |   | $ | 1,447,215 |   |
| Income (loss) from operations              |       | $         | (124,437   | )          | $          | 305,145   |       | $          | (691,226   | ) | $ | (1,025,179 | ) |
| Earnings (loss) per share from operations: |       |      |       |       |       |      |       |       |       |
| Basic                                      |       | $         | (0.00      | )          | $          | 0.01      |       | $          | (0.02      | ) | $ | (0.03 | ) |
| Diluted                                    |       | $         | (0.00      | )          | $          | 0.01      |       | $          | (0.02      | ) | $ | (0.03 | ) |
| Net income (loss)                          |       | $         | (182,614   | )          | $          | 238,778   |       | $          | (745,691   | ) | $ | (927,277 | ) |
| Earnings (loss) per common share:          |       |      |       |       |       |      |       |       |       |
| Basic                                      |       | $         | (0.01      | )          | $          | 0.01      |       | $          | (0.02      | ) | $ | (0.03 | ) |
| Diluted                                    |       | $         | (0.01      | )          | $          | 0.01      |       | $          | (0.02      | ) | $ | (0.03 | ) |

 
| **2006**                                   | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|--------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
|                                       |       |      |       |       |       |      |       |       |       |
| Revenues                                   |       | $         | 1,498,453  |       | $          | 1,969,064 |       | $          | 1,705,140  |   | $ | 1,543,703 |   |
| Income (loss) from operations              |       | $         | 119,566    |       | $          | (124,231  | )          | $          | (267,975   | ) | $ | (39,548 | ) |
| Earnings (loss) per share from operations: |       |      |       |       |       |      |       |       |       |
| Basic                                      |       | $         | 0.01       |       | $          | (0.00     | )          | $          | (0.01      | ) | $ | (0.00 | ) |
| Diluted                                    |       | $         | 0.00       |       | $          | (0.00     | )          | $          | (0.01      | ) | $ | (0.00 | ) |
| Net income (loss)                          |       | $         | (73,077    | )          | $          | (249,540  | )          | $          | (489,224   | ) | $ | (199,965 | ) |
| Earnings (loss) per common share:          |       |      |       |       |       |      |       |       |       |
| Basic                                      |       | $         | (0.00      | )          | $          | (0.01     | )          | $          | (0.02      | ) | $ | (0.01 | ) |
| Diluted                                    |       | $         | (0.00      | )          | $          | (0.01     | )          | $          | (0.02      | ) | $ | (0.01 | ) |

 

The sum of the individual quarterly net income percommon share amounts may not agree with year-to-date net income per commonshare because each period’s computation is based on the weighted average numberof shares outstanding during that period.

 

F-27

----

Tableof Contents

 

**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1 (2)                   |       | Amended and Restated Articles of Incorporation of GeoPetro Resources  Company                                                                                                                                                                                                                                                                                                                                           |
| 3.2 (4)                   |       | Second Amended and Restated Bylaws of the GeoPetro Resources Company                                                                                                                                                                                                                                                                                                                                                    |
| 4.1 (2)                   |       | Form of Warrant issued by GeoPetro Resources Company to various  investors on various dates.                                                                                                                                                                                                                                                                                                                       |
| 4.2 (3)                   |       | Specimen Common Stock Certificate                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3                       |       | Form of common stock purchase warrant issued to various  investors dated August 13, 2007 (filed as exhibit 4.1 to the Company’s  Report on Form 8-K as filed with the Securities and Exchange Commission  on August 16, 2007, and incorporated herein by reference)                                                                                                                            |
| 4.4                       |       | Registration Rights Agreement between GeoPetro Resources Company and  various investors dated August 13, 2007 (filed as Exhibit B to the  Form of Unit Subscription Agreement dated August 13, 2007 filed as  Exhibit 10.20 to the Company’s Report on Form 8-K as filed with the  Securities and Exchange Commission on August 16, 2007 and incorporated  herein by reference) |
| 4.5 (6)                   |       | Placement Agent Warrant dated August 13, 2007                                                                                                                                                                                                                                                                                                                                                                      |
| 4.6 (7)                   |       | Form of  Common Stock Purchase Warrant dated as of various dates, issued to purchasers  of promissory notes                                                                                                                                                                                                                                                                                                        |
| 10.1 (2)                  |       | Joint Venture Agreement Bengara II, Dated January 1, 2000                                                                                                                                                                                                                                                                                                                                                          |
| 10.2 (2)                  |       | Production Sharing Contract Bengara II, Dated December 4, 1997                                                                                                                                                                                                                                                                                                                                                     |
| 10.4 (2)                  |       | Exploration Permit#408, Dated July 2, 1997                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5 (2)                  |       | Madisonville Field Development Agreement dated August 1, 2005                                                                                                                                                                                                                                                                                                                                                           |
| 10.6 (2)                  |       | Alaska Cook Inlet Option dated April 20, 2005                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7 (2)†            |       | The 2001 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8 (2)†            |       | The 2004 Stock Option and Appreciation Rights Plan                                                                                                                                                                                                                                                                                                                                                                      |
| 10.9 (2)†            |       | Stuart Doshi Employment Agreement, Dated July 28, 1997  (effective July 1, 1997) and amendments dated January 11, 2001, July 1,  2003, April 20, 2004, May 9, 2005, July 28, 2005 and  January 30, 2006                                                                                                                                                                         |
| 10.10 (2)†           |       | David Creel Employment Agreement, Dated April 28, 1998 and  amendments dated June 15, 2000, May 12, 2003 and January 1,  2005                                                                                                                                                                                                                                                                       |
| 10.11 (2)†           |       | J. Steinhauser Employment Agreement dated June 19, 2000 and  amendments dated December 12, 2002, and January 1, 2005                                                                                                                                                                                                                                                                                     |
| 10.12 (2)                 |       | Office Lease Agreement, Dated effective March 1, 2004                                                                                                                                                                                                                                                                                                                                                              |
| 10.13 (4)                 |       | Form of  Subscription Agreement for GeoPetro Resources Company stock executed by  various investors on various dates.                                                                                                                                                                                                                                                                                              |
| 10.19 (5)                 |       | Shares Sale & Purchase Agreement Dated September 29,  2006                                                                                                                                                                                                                                                                                                                                                |
| 10.20 (6)                 |       | Form of Unit Subscription Agreement Dated August 13, 2007                                                                                                                                                                                                                                                                                                                                                     |
| 10.22 (6)                 |       | Promissory Note to Stuart Doshi dated February 12, 2007                                                                                                                                                                                                                                                                                                                                                            |
| 10.23 (1)†           |       | Seventh Amendment to Employment Agreement of Stuart Doshi, dated  December 29, 2008                                                                                                                                                                                                                                                                                                                                |
| 10.24 (1)†           |       | Eighth Amendment to Employee Agreement of Stuart Doshi, dated  December 31, 2008                                                                                                                                                                                                                                                                                                                                   |
| 10.25 (1)†           |       | Fourth Amendment to Employment Agreement of David Creel, dated  December 29, 2008                                                                                                                                                                                                                                                                                                                                  |
| 10.26 (1)†           |       | Fifth Amendment to Employee Agreement of David Creel, dated  December 31, 2008                                                                                                                                                                                                                                                                                                                                     |
| 10.27 (1)†           |       | Fourth Amendment to Employment Agreement of J. Chris Steinhauser,  dated December 29, 2008                                                                                                                                                                                                                                                                                                                         |
| 10.28 (1)†           |       | Fifth Amendment to Employment Agreement of J. Chris Steinhauser,  dated December 31, 2008                                                                                                                                                                                                                                                                                                                          |
| 10.29 (8)                 |       | Purchase and Sale Agreement dated December 31, 2008                                                                                                                                                                                                                                                                                                                                                                |
| 10.30 (9)                 |       | Amended and Restated Term Loan Agreement dated December 31, 2008  with Bank of Oklahoma                                                                                                                                                                                                                                                                                                                            |
| 10.31 (1)                 |       | Security Agreement dated December 31, 2008                                                                                                                                                                                                                                                                                                                                                                         |
| 10.32 (1)                 |       | Form of Promissory Note issued by GeoPetro Resources Company to  various investors dated various dates from December 23, 2008 to December 26,  2008                                                                                                                                                                                                                                                                |
| 10.33 (10)†          |       | Third Amendment to Employment Agreement of J. Chris Steinhauser,  dated December 18, 2007                                                                                                                                                                                                                                                                                                                          |
| 21.1 (1)                  |       | List of subsidiaries of GeoPetro Resources                                                                                                                                                                                                                                                                                                                                                                              |
| 23.1 (1)                  |       | Consent of MHA Petroleum Consultants                                                                                                                                                                                                                                                                                                                                                                                    |
| 23.2 (1)                  |       | Consent of Hein & Associates LLP                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1 (1)                  |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                           |
| 31.2 (1)                  |       | Rule 13a-14(a)/15d-14(a) Certification of Interim Chief  Financial Officer.                                                                                                                                                                                                                                                                                                                                   |
| 32.1 (1)                  |       | Certification of Chief Executive Officer and Interim Chief Financial  Officer of GeoPetro Resources Company pursuant to 18 U.S.C. § 1350.                                                                                                                                                                                                                                                                          |

 

----

(1)                                  Filed herewith.

 

----

Tableof Contents

 
| (2)    | Filed as the identically numbered exhibit to the Registration  Statement on Form S-1, (No. 333-135485), as filed with the  Securities and Exchange Commission on June 30, 2006, and incorporated  herein by reference.    |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                     |
| (3)    | Filed as the identically numbered exhibit to the Registration  Statement on Form S-1, (No. 333-135485), as filed with the  Securities and Exchange Commission on January 31, 2007, and incorporated  herein by reference. |
|   |                                                                                                                                                                                                                                     |
| (4)    | Filed as the Exhibit 3(ii) to the Company’s Report on Form 8-K  as filed with the Securities and Exchange Commission on April 25, 2008,  and incorporated herein by reference.                                            |
|   |                                                                                                                                                                                                                                     |
| (5)    | Filed as the identically numbered exhibit to the Registration  Statement on Form S-1 (No. 333-135485), as filed with the  Securities and Exchange Commission on January 9, 2007, and incorporated  herein by reference.   |
|   |                                                                                                                                                                                                                                     |
| (6)    | Filed as the identically numbered exhibit to the Registration  Statement on Form S-1 (No. 333-146557), as filed with the  Securities and Exchange Commission on October 9, 2007, and incorporated  herein by reference.   |
|   |                                                                                                                                                                                                                                     |
| (7)    | Filed as Exhibit 4.1 to the Company’s Report on Form 8-K,  as filed with the Securities and Exchange Commission on January 7, 2009,  and incorporated herein by reference.                                           |
|   |                                                                                                                                                                                                                                     |
| (8)    | Filed  as Exhibit 10.24 to the Company’s Report on Form 8-K, as filed with  the Securities and Exchange      Commission on January 14, 2009, and  incorporated herein by reference.         |
|   |                                                                                                                                                                                                                                     |
| (9)    | Filed  as Exhibit 10.25 to the Company’s Report on Form 8-K, as filed with  the Securities and Exchange Commission on January 14, 2009, and  incorporated herein by reference.                                       |
|   |                                                                                                                                                                                                                                     |
| (10)   | Filed as Exhibit 10.1 to the Company’s Report on Form 8-K,  as filed with the Securities and Exchange Commission on December 21,  2007, and incorporated herein by reference.                                        |
|   |                                                                                                                                                                                                                                     |
| † | Indicates a management or compensatory plan or arrangement.                                                                                                                                                                              |

 

----