UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q



(Mark One)



x
        Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the quarterly period ended June 30, 2007


or



o
        Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934






Commission File Number 1-12396



THE BEARD COMPANY

(Exact name of registrant as specified in its charter)



Oklahoma
        73-0970298


(State or other jurisdiction of
        (I.R.S. Employer


incorporation or organization)
        Identification No.)






Enterprise Plaza, Suite 320


5600 North May Avenue


Oklahoma City, Oklahoma
        73112


(Address of principal executive offices)
        (Zip Code)






Registrant's telephone number, including area code:(405) 842-2333



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            YesxNo o



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.




Large accelerated filer
        [
        ]
        Accelerated filer [
        ]
        Non-accelerated filerx




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o
        Nox




Indicate the number of shares outstanding of each of the issuer's classes of common stock as ofAugust 15, 2007.




Common Stock $.0006665 par value  5,657,715



Page 1 of 29 Pages



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THE BEARD COMPANY



INDEX





PART I. FINANCIAL INFORMATION
        Page




Item 1.
        Financial Statements
        3




Balance Sheets  June 30, 2007 (Unaudited) and December 31, 2006
        3




Statements of Operations - Three Months and Six Months ended June 30, 2007 and 2006 (Unaudited)
        4




Statements of Shareholders Equity (Deficiency) - Year ended December 31, 2006

and Six Months ended June 30, 2007 (Unaudited)
        5




Statements of Cash Flows  Six Months ended June 30, 2007 and 2006 (Unaudited)
        6




Notes to Financial Statements (Unaudited)
        8




Item 2.
        Management's Discussion and Analysis of Financial Condition and Results of Operations
        17




Item 3.
        Quantitative and Qualitative Disclosures About Market Risk
        24




Item 4.
        Controls and Procedures
        24






PART II.  OTHER INFORMATION



Item 1.
        Legal Proceedings
        24




Item 1A.Risk Factors
        27




Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds
        27




Item 3.
        Defaults Upon Senior Securities
        27




Item 4.
        Submission of Matters to a Vote of Security Holders
        27




Item 5.
        Other Information
        27




Item 6.
        Exhibits
        28




Signatures
        29






Page 2 of 29 Pages



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PART I  FINANCIAL INFORMATION.Item 1.  Financial StatementsTHE BEARD COMPANY AND SUBSIDIARIESBalance SheetsJune 30, 2007 (Unaudited) and December 31, 2006June 30,
        
        December 31,Assets
        2007
        
        2006Current assets:Cash and cash equivalents
        $                   3,000
        
        $               270,000Accounts receivable, less allowance for doubtfulreceivables of $80,000 in 2007 and 2006
        277,000
        
        313,000Inventories
        131,000
        
        205,000Prepaid expenses and other assets
        22,000
        
        26,000Current maturities of notes receivable
        -
        
        6,000Assets of discontinued operations held for resale
        20,000
        
        20,000Total current assets
        453,000
        
        840,000Note receivable, less allowance for doubtful receivable of$30,000 in 2006
        -
        
        7,000Restricted certificate of deposit
        50,000
        
        50,000Investments and other assets
        58,000
        
        58,000Property, plant and equipment, at cost
        3,232,000
        
        2,925,000Less accumulated depreciation, depletion and amortization
        1,677,000
        
        1,628,000Net property, plant and equipment
        1,555,000
        
        1,297,000Intangible assets, at cost
        534,000
        
        482,000Less accumulated amortization
        343,000
        
        312,000Net intangible assets
        191,000
        
        170,000$            2,307,000
        
        $            2,422,000Liabilities and Shareholders' Equity (Deficiency)Current liabilities:Trade accounts payable
        $               228,000
        
        $               162,000Accrued expenses
        407,000
        
        438,000Short-term debt - related entities
        -
        
        200,000Current maturities of long-term debt
        191,000
        
        271,000Current maturities of long-term debt - related entities
        475,000
        
        -Liabilities of discontinued operations held for resale
        40,000
        
        40,000Total current liabilities
        1,341,000
        
        1,111,000Long-term debt less current maturities
        2,171,000
        
        1,290,000Long-term debt - related entities
        7,084,000
        
        7,236,000






Page 3 of 29 Pages



---





Other long-term liabilities
        162,000
        
        133,000Shareholders' equity (deficiency):Convertible preferred stock of $100 stated value;5,000,000 shares authorized; 27,838 shares issuedand outstanding
        889,000
        
        889,000Common stock of $.0006665 par value per share; 15,000,000shares authorized; 5,615,345 and 5,591,580 sharesissued and outstanding in 2007 and 2006, respectively
        4,000
        
        4,000Capital in excess of par value
        38,737,000
        
        38,665,000Accumulated deficit
        (48,112,000)
        
        (46,928,000)Accumulated other comprehensive loss
        31,000
        
        22,000Total shareholders' equity (deficiency)
        (8,451,000)
        
        (7,348,000)Commitments and contingencies (note 7)$            2,307,000
        
        $            2,422,000See accompanying notes to financial statements.






THE BEARD COMPANY AND SUBSIDIARIESStatements of Operations(Unaudited)For Three Months Ended
        
        For Six Months EndedJune 30,
        
        June 30,
        
        June 30,
        
        June 30,2007
        
        2006
        
        2007
        
        2006Revenues:Coal reclamation
        $                -
        
        $          7,000
        
        $                 -
        
        $        13,000Carbon dioxide
        310,000
        
        361,000
        
        606,000
        
        696,000China
        87,000
        
        101,000
        
        116,000
        
        181,000e-Commerce
        -
        
        -
        
        5,000
        
        5,000Oil & gas
        20,000
        
        40,000
        
        37,000
        
        96,000417,000
        
        509,000
        
        764,000
        
        991,000Expenses:Coal reclamation
        115,000
        
        294,000
        
        276,000
        
        552,000Carbon dioxide
        87,000
        
        56,000
        
        163,000
        
        92,000China
        338,000
        
        284,000
        
        589,000
        
        594,000e-Commerce
        31,000
        
        23,000
        
        58,000
        
        52,000Oil & gas
        8,000
        
        7,000
        
        13,000
        
        14,000Selling, general and administrative
        172,000
        
        218,000
        
        325,000
        
        436,000Depreciation, depletion & amortization
        50,000
        
        50,000
        
        97,000
        
        96,000801,000
        
        932,000
        
        1,521,000
        
        1,836,000Operating profit (loss):Coal reclamation
        (117,000)
        
        (293,000)
        
        (281,000)
        
        (551,000)Carbon dioxide
        205,000
        
        292,000
        
        412,000
        
        581,000China
        (260,000)
        
        (192,000)
        
        (492,000)
        
        (431,000)e-Commerce
        (30,000)
        
        (23,000)
        
        (52,000)
        
        (47,000)Oil & gas
        8,000
        
        29,000
        
        16,000
        
        74,000Other, primarily corporate
        (190,000)
        
        (236,000)
        
        (360,000)
        
        (471,000)(384,000)
        
        (423,000)
        
        (757,000)
        
        (845,000)Other income (expense):Interest income
        2,000
        
        4,000
        
        5,000
        
        5,000Interest expense
        (229,000)
        
        (258,000)
        
        (453,000)
        
        (497,000)Equity in operations of unconsolidated affiliates
        -
        
        -
        
        -
        
        51,000






Page 4 of 29 Pages



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Gain on sale of assets
        -
        
        7,000
        
        2,000
        
        7,000Minority interest in operations ofconsolidated subsidiary
        -
        
        3,000
        
        -
        
        8,000Other
        1,000
        
        -
        
        21,000
        
        (1,000)Loss from continuing operationsbefore income tax benefit (expense)
        (610,000)
        
        (667,000)
        
        (1,182,000)
        
        (1,272,000)Income tax benefit (expense)
        -
        
        -
        
        -
        
        -Loss from continuing operations
        (610,000)
        
        (667,000)
        
        (1,182,000)
        
        (1,272,000)Earnings (loss) from discontinued operations
        (1,000)
        
        2,000
        
        (2,000)
        
        (26,000)Earnings (loss) from discontinued operations
        (1,000)
        
        2,000
        
        (2,000)
        
        (26,000)Net loss
        $    (611,000)
        
        $    (665,000)
        
        $ (1,184,000)
        
        $ (1,298,000)Net loss per average common share outstanding:Basic and diluted:Loss from continuing operations
        $(0.10)
        
        $(0.12)
        
        $(0.20)
        
        $(0.23)Earnings (loss) from discontinued operations
        (0.00)
        
        0.00
        
        (0.00)
        
        (0.00)Net loss
        $(0.10)
        
        $(0.12)
        
        $(0.20)
        
        $(0.23)Weighted average common shares outstanding:Basic and diluted
        5,862,000
        
        5,638,000
        
        5,839,000
        
        5,619,000See accompanying notes to financial statements.








THE BEARD COMPANY AND SUBSIDIARIESStatements of Shareholders' Equity (Deficiency)Accumu-latedOther
        
        TotalCompre-
        
        CommonCapital in
        
        
        
        hensive
        
        Shareholders'Preferred
        
        Common
        
        Excess of
        
        Accumulated
        
        Income
        
        EquityShares
        Stock
        
        Shares
        Stock
        
        Par Value
        
        Deficit
        
        (loss)
        
        (Deficiency)Balance, December 31, 2005
        27,838
        $889,000
        
        5,472,968
        $4,000
        
        $38,509,000
        
        $(45,374,000)
        
        $(11,000)
        
        $(5,983,000)Net loss
        -
        -
        
        -
        -
        
        -
        
        (1,554,000)
        
        -
        
        (1,554,000)Comprehensive income:Foreign currency translationadjustment
        -
        -
        
        -
        -
        
        -
        
        -
        
        33,000
        
        33,000Total comprehensive loss
        -
        -
        
        -
        -
        
        -
        
        -
        
        -
        
        (1,521,000)Issuance of stock for warrantsexercised
        -
        -
        
        10,000
        -
        
        4,000
        
        -
        
        -
        
        4,000Issuance of stock with debt
        -
        -
        
        10,000
        -
        
        6,000
        
        -
        
        -
        
        6,000Share-based compensation relatedto employee stock compensation
        -
        -
        
        -
        -
        
        1,000
        
        -
        
        -
        
        1,000






Page 5 of 29 Pages



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Reservation of shares pursuant todeferred compensation plan
        -
        -
        
        -
        -
        
        145,000
        
        -
        
        -
        
        145,000Issuance of shares pursuant todeferred compensation plan
        -
        -
        
        98,612
        -
        
        -
        
        -
        
        -
        
        -Balance, December 31, 2006
        27,838
        889,000
        
        5,591,580
        4,000
        
        38,665,000
        
        (46,928,000)
        
        22,000
        
        (7,348,000)Net loss (unaudited)
        -
        -
        
        -
        -
        
        -
        
        (1,184,000)
        
        -
        
        (1,184,000)Comprehensive income (loss)(unaudited):Foreign currency translationadjustment (unaudited)
        -
        -
        
        -
        -
        
        -
        
        -
        
        9,000
        
        9,000Total comprehensive loss (unaudited)
        -
        -
        
        -
        -
        
        -
        
        -
        
        -
        
        (1,175,000)Share-based compensation relatedto employee stock options(unaudited)
        -
        -
        
        -
        -
        
        1,000
        
        -
        
        -
        
        1,000Reservation of shares pursuant todeferred compensation plan(unaudited)
        -
        -
        
        -
        -
        
        71,000
        
        -
        
        -
        
        71,000Issuance of shares pursuant todeferred compensation plan(unaudited)
        -
        -
        
        23,765
        -
        
        -
        
        -
        
        -
        
        -Balance, June 30, 2007 (unaudited)
        27,838
        $889,000
        
        5,615,345
        $4,000
        
        $38,737,000
        
        $(48,112,000)
        
        $31,000
        
        $(8,451,000)See accompanying notes to financial statements.








THE BEARD COMPANY AND SUBSIDIARIESStatements of Cash Flows(Unaudited)For the Six Months EndedJune 30, 2007
        
        June 30, 2006Operating activities:Cash received from customers
        
        $                  792,000
        
        $               1,088,000Cash paid to suppliers and employees
        
        (1,298,000)
        
        (2,361,000)Interest received
        
        5,000
        
        4,000Interest paid
        
        (192,000)
        
        (268,000)Taxes (paid) refunded
        
        -
        
        (28,000)Operating cash flows of discontinued operations
        
        (3,000)
        
        (27,000)Net cash used in operating activities
        
        (696,000)
        
        (1,592,000)Investing activities:Acquisition of property, plant and equipment
        
        (263,000)
        
        (6,580,000)Acquisition of intangibles
        
        (4,000)
        
        -






Page 6 of 29 Pages



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Proceeds from sale of assets
        
        21,000
        
        7,000Proceeds from sale of assets of discontinued operations
        
        -
        
        3,000Proceeds from redemption of investment account
        
        -
        
        107,000Other
        
        (1,000)
        
        42,000Net cash used in investing activities
        
        (247,000)
        
        (6,421,000)Financing activities:Proceeds from term notes
        
        1,285,000
        
        392,000Payments on line of credit and term notes
        
        (463,000)
        
        (29,000)Proceeds from related party debt
        
        130,000
        
        7,615,000Payments on related party debt
        
        (330,000)
        
        (164,000)Capitalized costs associated with issuance of debt
        
        (47,000)
        
        (13,000)Advance from related party for investment in fiftypercent-owned subsidiary in China
        
        78,000
        
        -Advance to related party
        
        (14,000)
        
        -Proceeds from exercise of warrants
        
        -
        
        4,000Payments received on notes receivable
        
        35,000
        
        4,000Other
        
        2,000
        
        13,000Net cash provided by financing activities
        
        676,000
        
        7,822,000Net decrease in cash and cash equivalents
        
        (267,000)
        
        (191,000)Cash and cash equivalents at beginning of period
        
        270,000
        
        363,000Cash and cash equivalents at end of period
        
        $                      3,000
        
        $                 172,000ContinuedTHE BEARD COMPANY AND SUBSIDIARIESStatements of Cash Flows(Unaudited)Reconciliation of Net loss to Net Cash Used in Operating Activities:For the Six Months EndedJune 30, 2007
        
        June 30, 2006Net loss
        
        $              (1,184,000)
        
        $             (1,298,000)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation, depletion and amortization
        
        97,000
        
        96,000Gain on sale of assets
        
        (2,000)
        
        (7,000)Gain on sale of assets of discontinued operations
        
        -
        
        (3,000)Equity in operations of unconsolidated affiliates
        
        -
        
        (51,000)Noncash compensation expense
        
        72,000
        
        72,000Minority interest in consolidated subsidiary
        
        -
        
        (8,000)Other
        
        -
        
        (2,000)Decrease in accounts receivable, prepaid expensesand other current assets
        
        42,000
        
        75,000(Increase) decrease in inventories
        
        74,000
        
        (46,000)






Page 7 of 29 Pages



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Increase (decrease) in accounts payable, accruedexpenses and other liabilities
        
        205,000
        
        (420,000)Net cash used in operating activities
        
        $                (696,000)
        
        $             (1,592,000)See accompanying notes to financial statements.




(1)  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements and notes thereto have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain disclosures normally prepared in accordance with accounting principles generally accepted in the United States have been omitted.  The accompanying financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in The Beard Companys 2006 annual report on Form 10-K.



The accompanying financial statements include the accounts of The Beard Company and its wholly and majority-owned subsidiaries in which The Beard Company has a controlling financial interest (Beard or the Company).  Subsidiaries and investees in which Beard does not exercise control are accounted for using the equity method.  All significant intercompany transactions have been eliminated in the accompanying financial statements.



The financial information included herein is unaudited; however, such information reflects solely normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.



The results of operations for the three and six-month periods ended June 30, 2007, are not necessarily indicative of the results to be expected for the full year.



The Companys current significant operations are within the following segments:  (1) the Coal Reclamation (Coal) Segment, (2) the Carbon Dioxide (CO2) Segment, (3) the China (China) Segment, (4) thee-Commerce (e-Commerce) Segment, and (5) the Oil & Gas (Oil & Gas) Segment.



The Coal Segment is in the business of operating coal fines reclamation facilities in the United States of America and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services.  The CO2 Segment consists of the production of CO2 gas.  The China Segment is in the business of manufacturing fertilizer in China.  Thee-Commerce Segment consists of a 71%-owned subsidiary whose current strategy is to develop business opportunities to leverage starpays intellectual property portfolio of Internet payment methods and security technologies.  The Oil & Gas Segment is in the business of producing oil and gas.



Inventories

Inventories consist of the materials used to manufacture fertilizer to be sold to third parties by a 50%-owned subsidiary in the China Segment and, at June 30, 2007, was made up of raw materials of $53,000, work-in-process of $5,000 and finished goods of $73,000.  Inventories at December 31, 2006 consisted of raw materials of $73,000, work-in-process of $29,000 and finished goods of $103,000.  The inventories are valued at the lower of cost or market on the first-in, first-out method.



Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123R) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors, including employee stock options.  SFAS 123R supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning in 2006.  In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123R.  The Company has utilized the guidance of SAB 107 in its adoption of SFAS 123R.



Page 8 of 29 Pages



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SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the results of operations at their grant-date fair values.  The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Companys 2006 fiscal year.  Under this transition method, compensation cost recognized in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant date value estimated in accordance with the provisions of SFAS 123R.  In accordance
with the modified prospective method of adoption, the Companys results of operations and financial position for prior periods have not been restated.



The Company reserved 175,000 shares of its common stock for issuance to key management, professional employees and directors under The Beard Company 1993 Stock Option Plan (the "1993 Plan") adopted in August 1993.  In April 1998 the Board of Directors voted to increase the number of shares authorized under the 1993 Plan to 275,000, and the shareholders approved the increase in June 1998.  As a result of the 3-for-4 reverse stock split effected in September 2000 and the 2-for-1 stock split effected in August 2004, the number of shares authorized under the 1993 Plan was increased to 412,500.  The 1993 Plan terminated on August 26, 2003.  The remaining 26,250 options outstanding under the 1993 Plan lapsed without exercise in 2006.  At  June 30, 2007, there were no options outstanding under the 1993 Plan.



The Company reserved 100,000 shares of its common stock for issuance to key management, professional employees and directors under The Beard Company 2005 Stock Option Plan (the "2005 Plan") adopted in February 2005.  There were 45,000 options granted under the 2005 Plan in the first quarter of 2005, however, on May 1, 2006, the Company cancelled the 2005 Plan and all the options under the 2005 Plan.  Also, on May 1, 2006, the Company replaced the 2005 Plan with the 2006 Stock Option Plan (the 2006 Plan).  The Company granted 45,000 options under the 2006 Plan in replacement of the options that were cancelled under the 2005 Plan; 15,000 of these options were cancelled effective July 31, 2006 following the resignation of the holder thereof.



Grant-Date Fair Value

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award.  The fair value of the options granted in 2006 was calculated using the following estimated weighted average assumptions:



Expected volatility
        
        264.4%Expected risk term (in years)
        
        5.5Risk-free interest rate
        
        4.84%Expected dividend yield
        
        0%




The expected volatility is based on historical volatility over the two-year period prior to the date of granting of the unvested options.  Beginning in 2006, the Company has adopted the simplified method outlined in SAB 107 to estimate expected lives for options granted during the period.  The risk-free interest rate is based on the yield on zero coupon U. S. Treasury securities for a period that is commensurate with the expected term assumption.  The Company has not historically issued any dividends and does not expect to in the future.



Share-Based Compensation Expense

The Company uses the straight-line attribution method to recognize expense for unvested options.  The amount of share-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest.  SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The Company will re-evaluate the forfeiture rate annually and adjust as necessary.  Share-based compensation expense recognized under SFAS 123R for the six months ended June 30, 2007 was less than $2,000 and was charged to Other Activities.  Prior to January 1, 2006, the Company accounted for its share-based compensation under the recognition and measurement principles of APB No. 25 and related interpretations, the disclosure-only provisions of SFAS No. 123, Accounting
for Stock-Based Compensation and the disclosures required by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.  In accordance with APB No. 25, no share-based compensation was reflected in the Companys net income for grants of stock options to employees because the Company granted stock options with an exercise price equal to the fair market value of the stock on the date of grant.



As of June 30, 2007, there were $44,000 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share based awards, which is expected to be recognized over a weighted average period of nine years.



Page 9 of 29 Pages



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On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123R-3 Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.  The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123R.  The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.  SFAS 123R also requires the benefits of tax
deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under prior accounting rules.  This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption.  Total cash flow remains unchanged from what would have been reported under prior accounting rules.  Since no tax benefit was recorded for share based payment awards in the three or six-month periods ended June 30, 2007 or 2006, the aforementioned provisions of SFAS 123R and the related FASB Staff Position No. FAS 123R-3 had no impact on the consolidated financial statements of the Company.



Option Activity

A summary of the activity under the Companys stock option plans for the six-month periods ended June 30, 2007 is presented below:



Weighted AverageWeighted
        Remaining
        AverageAverage
        Contractual Term
        IntrinsicShares
        Exercise Price
        (Years)
        ValueOptions outstanding at December 31, 2006:
        30,000
        $1.53
        9.33
        -Granted
        -
        -
        -
        -Exercised
        -
        -
        -
        -Canceled
        -
        -
        
        -Options outstanding at June 30, 2007
        30,000
        $1.53
        8.83
        -Options exercisable at June 30, 2007
        -
        -
        -
        -Options vested and options expected to
vest at June 30, 2007
        30,000
        $1.53
        8.83
        -




Reclassifications

Certain 2006 balances have been reclassified to conform to the 2007 presentation.



(2)  Ability to Fund Operations and Continue as a Going Concern

Overview

The accompanying financial statements have been prepared based upon the Companys belief that it will continue as a going concern.  The Companys revenues from continuing operations have increased in each of the last three fiscal years.  The Company has incurred operating losses and negative cash flows from operations during each of the last five fiscal years.  The Company commenced projects in both its Coal and China Segments in 2005.  Although both projects were completed, to date they have failed to generate positive cash flow.  The Coal Segment reflected decreased operating losses in both the three and six-month periods ended June 30, 2007, as a result of the deconsolidation of Beard Pinnacle. The China Segment reflected increased operating losses for the three and six-month periods ended June 30, 2007.   Prices for the segments product were lowered by roughly 20% for
the second quarter of 2007 in an unsuccessful effort to maintain or improve market share.  The China Segment was also charged $15,000 per month by the parent for accounting services and other overhead items provided by the parent.  See Additional Details and Note 8 below.  Although the Company finalized its first licensing arrangement in itse-Commerce Segment in 2003, the arrangement did not make the segment profitable during the last three fiscal years and will not make it profitable in 2007.  In the CO2 Segment where revenues, profit and cash flow were on a sharp upward trend during the last three fiscal years, there was a reversal of this trend in the three and six-month periods ended June 30, 2007. It is believed that such reversal is a temporary aberration.  The Oil & Gas Segment reflected disappointing results for the three and six-month periods ended June 30, 2007, as both production and prices were
 down sharply.



During the three years ended December 31, 2006, the Company took several steps which reduced its negative cash flow to some degree, including salary deferrals by its Chairman and President and deferrals of directors fees into its Deferred



Page 10 of 29 Pages



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Stock Compensation Plans (the DSC Plans) and suspension of the Companys 100% matching contribution (up to a cap of 5% of gross salary) under its 401(k) Plan.  Five private debt placements raised gross proceeds of $5,279,000 during such period and an additional $105,000 in the first quarter of 2007.  In the first half of 2005 the Company borrowed $850,000 from a related party to finance most of the cost of a fertilizer plant in China.  Starting in the fourth quarter of 2005, the Company borrowed $1,100,000 from the pond owner to begin constructing the plant for its coal fines recovery project in West Virginia.  That funding had increased to more than $14,150,000 as of April 30, 2007, including $2,800,000 of equity provided by affiliates of the pond owner.  In addition, the Company secured a $350,000 long-term bank credit facility in March of 2006.  These financings were
supplemented in 2007 by (i) a $150,000 short-term loan from a shareholder of a former affiliate, (ii) $62,000 of short-term loans from the Companys Note holders and (iii) the $105,000 of additional convertible notes discussed above.  These measures enabled the Company to continue operating until the events described below under Additional Details had occurred.



The negative result of the above has been a substantial amount of dilution to the Companys common equity.  From January 1, 2004 through June 30, 2007, a total of 552,240 warrants (as adjusted for the 2-for-1 stock split effected in August of 2004) were issued in connection with the private debt placements, and 857,000 Stock Units (as adjusted for the 2-for-1 stock split effected in August of 2004) were accrued in the participants accounts as a result of salary and fee deferrals into the various DSC Plans.  During such period $4,184,000 of convertible notes were also issued which were convertible into 3,506,000 shares of common stock.  Additional dilution also occurred due to an adjustment to the Preferred Stock conversion ratio resulting from the issuance of the warrants, the convertible notes and the salary deferrals.  Termination of the 2003-2 DSC Plan resulted in the
issuance of 218,000 common shares in November of 2005, 56,000 in January of 2006, 42,000 in June of 2006, 24,000 in June of 2007, and another 42,000 in July of 2007.  In addition, 25,000 options were issued to a financial consultant in 2005 and 30,000 employee stock options were issued in 2006 (both figures net of forfeitures).



Additional Details

The Companys principal business is coal reclamation, and this is where managements operating attention is primarily focused.The Coal Segment had a signed contract to construct and operate a pond fines recovery project in West Virginia (the Pinnacle Project or the Project) and commenced construction on the project in September of 2005.  The Company obtained commitments for (i) $2,800,000 of equity for the Project provided by a group of investors (the Group) who are affiliates of PinnOak Resources, LLC (PinnOak), the pond owner, in exchange for 50% ownership in the Project; and (ii) a $9,000,000 bank loan subject to obtaining a USDA guaranty of 70% of the loan amount.  PinnOak committed to fund or to arrange the funding for the project if the guaranty was not obtained.



Due to cost over-runs of more than $3,000,000, the Group elected, effective October 1, 2006, to exercise their option to assume control of Beard Pinnacle, LLC (BPLLC), the limited liability company which owns the Project, and reduce the Companys interest therein to 25%.  As a result, the Company was precluded from obtaining the USDA-guaranteed financing for the Project and PinnOak became the permanent source of financing.  Despite the fact that PinnOak was providing all of the financing for the Project, the Company was deemed to own 100% of the Project until the Group subscribed to their ownership effective September 30, 2006.  Effective October 1, 2006 the Companys ownership percentage was reduced to 25% and the Group took control of the Project.  At that point BPLLC ceased to be a consolidated entity and all of its assets and liabilities were removed from the
Companys balance sheet.



The Project, which produced its first coal in October of 2006, achieved a low rate of production during the ramp-up period due to initial start-up problems with the plant.  Effective May 11, 2007, the Company and the PinnOak parties agreed to terminate most of the agreements governing the Pinnacle Project.  The Company gave up its remaining 25% interest in the Project while remaining as contract operator.  As part of the agreement, the Company was relieved of the guaranty made by a Company subsidiary of loans made by PinnOak totaling more than $11,350,000 secured by the subsidiarys 25% interest in the Project.  In addition, the Companys ownership percentage in the Project was reduced to zero.



Meanwhile, the Coal Segment is actively pursuing a number other projects which it has under development, and has recently signed a letter of intent for a new project.  The timing of this project and the other projects the Company is actively pursuing is uncertain and their continuing development is subject to obtaining the necessary financing.  No definitive contracts have as yet been signed on the newly-committed project, and there is no assurance that the required financing will be obtained or that it or any of the other projects under development will materialize.



To date the China fertilizer plant has not marketed sufficient product to reach its projected breakeven point.  Several new marketing initiatives have been undertaken, but all were unsuccessful.  The Company has engaged an investment banking



Page 11 of 29 Pages



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firm to explore available alternatives including, but not limited to: sale of the plant, merger of the operation with a competitor, or bringing in a new partner.   It is also exploring the possibility of manufacturing product for a Chinese company which currently produces liquid fertilizer and has announced its intention to expand into the granular fertilizer business.  It is not possible to determine whether additional advances will be required until our exploratory efforts have been concluded.



The Companys working capital position has deteriorated by $617,000 since December 31, 2006 to $(888,000) at June 30, 2007.  On June 8, 2007, however, the Company consummated a $1,500,000 long-term bank revolving reducing line of credit collateralized by a priority position in its interest in the McElmo Dome field.  All of the parents short-term debt and the current maturities of its long-term debt, along with accrued interest, were eliminated, resulting in a $614,000 improvement in its working capital position.  Without the new line of credit and the debt paydown, the Companys working capital position would have worsened by $1,416,000 for the six months ended June 30, 2007 compared to year-end 2006.  The decrease would have been $457,000 smaller except for the fact that a portion of a subsidiarys long-term debt became current during the period.  At June 30, 2007,
$415,000 remained available under the line of credit.  Initially, the Company could borrow up to $1,500,000 under the line but that limit reduces by $50,000 per month starting on July 31, 2007 and is to be fully repaid by December 31, 2008.  The line accrues interest at 1.5% above the Wall Street Journal Prime Rate which is currently 8.25%.  Additionally, the Company paid $30,000, which the Company capitalized,  to another note holder to subordinate his note to the new lender.



The Company expects to generate cash of at least $50,000 from the disposition of the remaining assets from two of its discontinued segments, and is currently negotiating for the sale of certain other assets to generate additional cash, and expects to arrange short-term loans, if necessary, to satisfy our liquidity needs until such sales have been concluded.  The Company  also believes there is a chance of receiving an award in connection with the binding arbitration the Plaintiffs lost in August of 2006.  An appeal concerning the decision reached on the arbitration was filed in November of 2006.  In addition, the Coalition Managers Litigation has now been concluded, and we expect to receive approximately $99,000 from the defense fund prior to September 30, 2007.



(3)  Discontinued Operations

BE/IM Segment

In 1999 the Management Committee of a joint venture 40%-owned by the Company adopted a formal plan to discontinue the business and dispose of its assets.  The joint venture was dissolved in 2000 and the Company took over certain remaining assets and liabilities.  The Company recorded no revenues for this segment for either the three or six-month periods ended June 30, 2007 or June 30, 2006.  The Company recorded $1,000 in losses for this segment for each of the six-month periods ended June 30, 2007 and June 30, 2006.  As of June 30, 2007, the significant assets related to the segments operations consisted primarily of equipment with no estimated net realizable value.  The segment had no significant liabilities at June 30, 2007.  The Company is actively pursuing opportunities to sell the segments few remaining assets and expects the disposition to be completed by December 31, 2007.



WS Segment

In 2001, the Company made the decision to cease pursuing opportunities in Mexico and the WS Segment was discontinued.  The bulk of the segments assets were sold in 2001.  The segment recorded no revenues for either the first six months of 2007 or 2006.  The Company recorded a loss of $28,000 for the first quarter of 2006 as a result of moving certain assets to a location near its headquarters to facilitate their sale.  This loss was partially offset by a gain of $3,000 in the second quarter of 2006, resulting in a loss for the six-month period of $25,000.  The segment recorded a loss of less than $200 for the first quarter of 2007.  An additional loss in the second quarter brought the total loss for the six-month period of 2007 up to $1,000.  The Company is actively pursuing the sale of the remaining assets and expects to have them sold or otherwise disposed of by December 31,
2007.  As of June 30, 2007, the significant assets of the WS Segment were fixed assets totaling $20,000.  The significant liabilities of the segment consisted of trade accounts payable and other accrued expenses totaling $40,000.  The Company anticipates that all of the liabilities of the segment will be paid prior to December 31, 2007.



(4)  Convertible Preferred Stock

Effective January 1, 2003, the Companys preferred stock became convertible into Beard common stock.  Each share of Beard preferred stock was convertible into 10.64163303 shares on June 30, 2007 (total of 296,241 shares). The conversion ratio will be adjusted if additional warrants or convertible notes are issued or if additional shares of stock are credited to the accounts of the Companys Chairman or President in the Companys Deferred Stock



Page 12 of 29 Pages



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Compensation Plan, in each case at an exercise, conversion or grant price below $1.38308329 per share.  Fractional shares will not be issued, and cash will be paid in redemption thereof.



(5)  Loss Per Share

Basic earnings (loss) per share data is computed by dividing earnings (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period.  Included in the weighted average number of common shares outstanding are the shares issuable according to the terms of the 2005 DSC Plan.  The shares in the 2005 DSC Plan are considered common stock equivalents because the covered individuals may resign their positions at will which would also terminate their participation in the DSC Plan resulting in the issuance of the shares.  In the fourth quarter of 2005 four of the five participants in the 2003-2 DSC Plan elected, irrevocably, to receive a portion of their shares in such Plan over periods ranging from two to 10 years.  Those shares were included in the calculation of the common stock equivalents up to the date of those elections in 2005 but are
excluded from the 2006 computation except for 42,370 shares which were distributed in the second quarter of 2006.  In the first half of 2007, the computation includes 23,765 shares which were distributed in June of 2007 and 42,370 shares which were distributed in July of 2007.  As the remaining shares are distributed in future years, they will then be included in the computation of shares outstanding.  415,408 of such shares from the 2003-2 DSC Plan remain to be distributed in the years 2008 through 2014.  Diluted earnings per share reflect the potential dilution that could occur if the Companys outstanding options and warrants were exercised (calculated using the treasury stock method) and if the Companys preferred stock and convertible notes were converted to common stock.



Diluted loss per share from continuing operations in the statements of operations for the three and six-month periods ended June 30, 2007 and 2006 exclude all potential common shares issuable upon conversion of convertible preferred stock, convertible notes or exercise of options and warrants as the effect would be anti-dilutive due to the Companys losses from continuing operations.



For the Three
        Months Ended
        
        For the Six
        Months EndedJune 30,
2007
        June 30,
2006
        
        June 30,
2007
        June 30,
2006Basic and Diluted EPS:Weighted average common
shares outstanding
        5,802,187
        5,585,921
        
        5,776,417
        5,579,370Weighted average shares in
2003-2 deferred stock        compensation plan treated as   common stock equivalents
        59,476
        51,591
        
        62,787
        39,4455,861,663
        5,637,512
        
        5,839,204
        5,618,815




(6)  Income Taxes

In accordance with the provisions of the Statement of Financial Accounting Standard No. 109,  Accounting for Income Taxes ("SFAS No. 109"), the Company's net deferred tax asset is being carried at zero book value, which reflects the uncertainties of the Company's utilization of the future net deductible amounts.  The Company recorded no provisions for income taxes for either of the three or six-month periods ended June 30, 2007 or June 30, 2006.



At June 30, 2007, the Company estimates that it had the following income tax carryforwards available for both income tax and financial reporting purposes (in thousands):



ExpirationDate
        AmountFederal regular tax operating loss carryforwards
        2007-2008
        $   41,100Federal regular tax operating loss carryforwards
        2021-2027
        $     4,200Tax depletion carryforward
        Indefinite
        $     3,000




Effective January 1, 2007, the Company adopted Financial Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.  FIN 48 requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate tax authorities before any tax benefit can be recorded in the financial statements.  It also provides guidance on the recognition, measurement, classification and disclosure in the financial statements for uncertain tax positions taken or expected to be taken in a tax return.  The Company files numerous consolidated and separate returns in the United States federal and state jurisdictions and in China.  The statute of limitations for the tax years 1992-1993 and 2001-2002 are



Page 13 of 29 Pages



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closed except as to the proper amount of net operating loss carryover to open years.  The statute of limitations for the tax years 20032006 remain open to examination by the federal and most state authorities in which the Company has transacted business.  No income tax returns are currently under audit and no extensions of statutes of limitations have been granted.  The Companys historical operating losses raise considerable doubt as to when, if ever, any of the deferred tax assets will be realized.  As a result, management has provided a full valuation allowance for the net deferred tax assets.  In the event it is determined that the Company will realize sufficient future taxable income and a portion or all of the previously recorded valuation allowance is no longer needed, the Company will reduce the valuation allowance by providing an income tax benefit in the period that
such a determination is made.  Based upon its ongoing assessment, management has concluded that the adoption of FIN 48 had no impact on the Companys consolidated financial statements.  The Companys policy is to record interest on tax assessments, if any, as interest expense and penalties, if any, as a component of general and administrative expenses.



(7)  Commitments and Contingencies

In the normal course of business various actions and claims have been brought or asserted against the Company.  Management does not consider them to be material to the Companys financial position, liquidity or results of operations.



(8)  Business Segment Information

The Company manages its business by products and services and by geographic location (by country).  The Company evaluates its operating segments performance based on earnings or loss from operations before income taxes.  The Company had five reportable segments in the first half of 2007 and 2006.  The segments are Coal, Carbon Dioxide, China,e-Commerce and Oil & Gas.



The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services.  The CO2 Segment consists of the production of CO2 gas.  The China Segment manufactures fertilizer in China.  Thee-Commerce Segment consists of a 71%-owned subsidiary whose current strategy is to develop business opportunities to leverage the subsidiarys intellectual property portfolio of Internet payment methods and security technologies.The Oil & Gas Segment consists of the production of oil and gas.



The following is certain financial information regarding the Companys reportable segments (presented in thousands of dollars).



General corporate assets and expenses are not allocated (except for $15,000 per month of "Other" expenses charged to the China Segment beginning in December 2006) to any of the Companys operating segments; therefore, they are included as a reconciling item to consolidated total assets and loss from continuing operations before income taxes reported in the Companys accompanying financial statements.



Page 14 of 29 Pages



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CarbonCoal
        Dioxide
        China
        e-Commerce
        Oil & Gas
        TotalsThree months ended
June 30, 2007Revenues from external  customers
        $               -
        $     310
        $         87
        $             -
        $        20
        $     417Segment profit (loss)
        (117)
        205
        (277)
        (30)
        8
        (211)Three months ended
June 30, 2006Revenues from external  customers
        $              7
        $     361
        $      101
        $             -
        $       40
        $     509Segment profit (loss)
        (293)
        292
        (203)
        (24)
        38
        (190)Six months ended
June 30, 2007Revenues from external  customers
        $               -
        $    606
        $      116
        $            5
        $       37
        $     764Segment profit (loss)
        (279)
        412
        (526)
        (52)
        18
        (427)Segment assets
        232
        840
        609
        18
        323
        2,022Six months ended
June 30, 2006Revenues from external  customers
        $            13
        $    696
        $      181
        $            5
        $       96
        $     991Segment profit (loss)
        (551)
        581
        (451)
        (47)
        83
        (385)Segment assets
        9,510
        529
        638
        18
        356
        11,051






Reconciliation of total reportable segment loss to consolidated earnings (loss) from continuing operations before income taxes is as follows for the three and six-month periods ended June 30, 2007 and 2006 (in thousands):



For the Three Months Ended
        
        
        For the Six Months EndedJune 30,2007
        
        June 30,2006
        
        June 30,2007
        
        June 30,2006Total loss for reportable segments
        $     (211)
        
        $     (190)
        
        $       (427)
        
        $       (385)Net corporate expenses not allocated
to segments
        (399)
        
        (477)
        
        (755)
        
        (887)Total consolidated loss for
continuing operations before income taxes
        $     (610)
        
        $     (667)
        
        $   (1,182)
        
        $    (1,272)






Page 15 of 29 Pages



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THE BEARD COMPANY AND SUBSIDIARIES



DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS



THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR FUTURE FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS.  IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS MAY, WILL, EXPECT, INTEND, PROJECT, ESTIMATE, ANTICIPATE, BELIEVE, OR CONTINUE OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR
TERMINOLOGY.  ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.  IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR EXPECTATIONS (CAUTIONARY STATEMENTS) ARE DISCLOSED UNDER ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND ELSEWHERE IN THIS REPORT.  ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US, OR PERSONS ACTING ON OUR BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.  WE ASSUME NO DUTY TO UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN INTERNAL ESTIMATES OR EXPECTATIONS OR OTHERWISE.



Item 2.
        Management's Discussion and Analysis of Financial Condition
        and Results of Operations




The following discussion focuses on material changes in our financial condition since December 31, 2006 and results of operations for the quarter ended June 30, 2007, compared to the prior year second quarter and the six months ended June 30, 2007 compared to the prior year six months.  Such discussion should be read in conjunction with the Company's financial statements including the related footnotes.



In preparing the discussion and analysis, we have presumed readers have read or have access to the discussion and analysis of the prior year's results of operations, liquidity and capital resources as contained in our 2006 Form 10-K.



Overview



The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services.  The CO2 Segment consists of the production of CO2 gas.  The China Segment is in the business of manufacturing fertilizer in China.  Thee-Commerce Segment is engaged in a strategy to develop business opportunities to leverage the subsidiarys intellectual property portfolio of Internet payment methods and security technologies.  The Oil & Gas Segment consists of the production of oil and gas.



Our revenues from continuing operations have been on an uptrend, increasing in each of the last three fiscal years.  Most of the increase was attributable to the CO2 Segment where the implementation of the McElmo Dome settlement agreement resulted in increased production and better pricing.  There was a reversal of this trend in the first half of 2007, which is believed to be a temporary aberration.  The Oil & Gas Segment reflected disappointing results in the first six months of 2007 as both production and prices were down sharply.  Anticipated production increases from the Pinnacle Plant in the Coal Segment and from our China fertilizer plant failed to materialize due to (i) the
deconsolidation of Beard Pinnacle and (ii) the failure of the China plant to meet its targeted sales and production goals.



Page 16 of 29 Pages



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Material changes in financial condition  June 30, 2007 as compared with December 31, 2006.



The following table reflects changes in the Company's financial condition during the periods indicated:



June 30,
        December 31,
        Increase2007
        2006
        (Decrease)Cash and cash equivalents
        $          3,000
        $         270,000
        $         (267,000)Working capital
        $    (888,000)
        $       (271,000)
        $         (617,000)Current ratio
        0.34 to 1
        0.76 to 1




During the first six months of 2007, we obtained 90-day term loans totaling $212,000 to fund operations.  Our CO2 Segment provided working capital of $412,000.  We used $82,000 to repay debt and accrued interest.  In February of 2007 we sold an additional $105,000 of our 12% Convertible Subordinated Notes due February 15, 2010.  Sale of these notes added $105,000 to working capital.  We used $281,000 of working capital to help fund the operations of the Coal Segment.  We utilized a total of $492,000 in connection with the fertilizer operations in China.  Also, we used $52,000 to fund the activities of thee-Commerce Segment.  We utilized the remainder of the working capital to fund other operations.



Our working capital position has deteriorated by $617,000 since December 31, 2006 to $(888,000) at June 30, 2007.  On June 8, 2007, however, we consummated a $1,500,000 long-term bank revolving reducing line of credit collateralized by a priority position in our interest in the McElmo Dome field.  All of the parents short-term debt and the current maturities of its long-term debt, along with accrued interest, were eliminated, resulting in a $614,000 improvement in our working capital position.  Without the new line of credit and the debt paydown, our working capital position would have worsened by $1,416,000 for the six months ended June 30, 2007 compared to year-end 2006.  The decrease would have been $457,000 smaller except for the fact that a portion of a subsidiarys long-term debt became current during the period.



Although $415,000 remained available at June 30, 2007, under the line of credit, we anticipate that most of this will be utilized by the end of August.   Liquidity continues to be constrained.  In order to bolster our liquidity we are currently negotiating for the sale of certain assets to generate cash, and expect to arrange short-term loans, if necessary, to satisfy our liquidity needs until such sale has been concluded.



Our principal business is coal reclamation, and this is where managements operating attention is primarily focused.  Since the deconsolidation of Beard Pinnacle the Coal Segment has been diligently pursuing new projects and has several in various stages of development.  We have a signed letter of intent on one of the projects; however, no definitive contracts have been signed, and there is no assurance that the required financing will be obtained or that any of the projects will materialize.



As discussed in our 2006 Form 10-K, sales at our fertilizer manufacturing plant in China have developed more slowly than anticipated, and this has necessitated that both we and our 50% partner loan additional funds to support the operations until the plant starts generating positive cash flow.  During the first half of 2007, we and our partner advanced a total of US$131,000 in order to support such operations.  We have engaged an investment banking firm to explore available alternatives including, but not limited to: sale of the plant, merger of the operation with a competitor, or bringing in a new partner.  We are also exploring the possibility of manufacturing product for a Chinese company which currently produces liquid fertilizer and has announced its intention to expand into the granular fertilizer business.  It is not possible to determine whether additional advances will be
required until our exploratory efforts have been concluded.



The Company expects to generate cash of at least $50,000 from the disposition of the remaining assets from two of its discontinued segments.  In addition, now that the Judge has ruled against the Plaintiff in the Coalition Managers Litigation, we expect to receive approximately $99,000 from the defense fund prior to September 30, 2007.  (See PART II.  Item 1.  Legal Proceedings.  Coalition Managers Litigation.).    We also believe there is a chance of receiving an award in connection with the binding arbitration the Plaintiffs in the McElmo Dome Litigation lost in August of 2006.  An appeal concerning the decision reached on the arbitration was filed in November of 2006.    (See PART II.  Item 1. Legal Proceedings.  McElmo Dome Litigation.).



Material changes in results of operations - Quarter ended June 30, 2007 as compared with the Quarter ended June 30, 2006.



Page 17 of 29 Pages



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The net loss for the second quarter of 2007 was $611,000 compared to $665,000 for the 2006 second quarter.  Continuing operations posted a net loss of $610,000 compared to a net loss from continuing operations of $667,000 for the same period in 2006.  In addition, the Companys discontinued operations had losses totaling $1,000 for the second quarter of 2007 compared to income of $2,000 for the second quarter of 2006.



The Coal Segment had revenues of less than $1,000 for the second quarter of 2007 compared to $7,000 in the second quarter of 2006.  The segments operating loss for the second quarter of 2007 was $117,000 compared to $293,000 for the same period in 2006 and was primarily the result of a $179,000 decrease in operating and SG&A expenses.  The operating profit in the CO2 Segment decreased $87,000 to $205,000 compared to $292,000 a year earlier.  The China Segments loss for the second quarter of 2007 totaled $260,000 compared to $192,000 for the same period in 2006.  Thee-Commerce Segment incurred operating losses of $30,000 for the second quarter of 2007 compared to $23,000 in the second quarter of 2006.  The Oil & Gas Segments operating profit decreased $21,000 to $8,000 for the second
quarter of 2007 compared to $29,000 for the same period in 2006.  The operating loss in Other activities for the second quarter of 2007 decreased $46,000 compared to the same period in 2006.  As a result, the operating loss for the current quarter decreased $39,000 to $384,000 versus $423,000 in the corresponding quarter of the prior year.



Operating results of the Companys primary operating Segments are reflected below:



2007
        2006Operating profit (loss):Coal reclamation
        $   (117,000)
        $   (293,000)Carbon dioxide
        205,000
        292,000China
        (260,000)
        (192,000)e-Commerce
        (30,000)
        (23,000)Oil & gas
        8,000
        29,000Subtotal
        (194,000)
        (187,000)Other
        (190,000)
        (236,000)Total
        $   (384,000)
        $   (423,000)




The Other in the above table reflects primarily general and corporate activities, as well as other activities of the Company.



Coal reclamation



The segment recorded revenues of less than $1,000 for the second quarter of 2007 compared to $7,000 for the same period in 2006 as a result of performing fewer consulting and coring jobs in the 2007 period.  Operating costs decreased $179,000 to $115,000 for the second quarter of 2007 compared to $294,000 for the same period in 2006.  The decrease in expenses was the result of the segment no longer having an interest in the Pinnacle Project which accounted for $165,000 in operating and SG&A expenses during the second quarter of 2006.



Carbon dioxide



Second quarter 2007 operations reflected an operating profit of $205,000 compared to $292,000 for the 2006 second quarter.  The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of the Companys carbon dioxide producing unit in Colorado.  Operating revenues in this segment decreased $51,000 to $310,000 for the second quarter of 2007 compared to $361,000 for the same period in 2006.  The decrease in revenue for the current quarter was due primarily to decreased pricing as we received an average of $0.63 per mcf sold in the 2007 quarter versus $0.72 per mcf in the year earlier quarter.  Additionally, lifting costs for the second quarter of 2007 increased to $80,000 compared to $49,000 for the same period in 2006 and was attributable to increased accruals for severance taxes for the current period.



China



The China Segment incurred an operating loss of $260,000 for the second quarter of 2007 compared to $192,000 for the same period in 2006.  The segment recorded revenues of $87,000 for the second quarter of 2007 compared to $101,000 for



Page 18 of 29 Pages



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the same period in 2006.  Operating and SG&A costs, however, increased $54,000 for the same period to a total of $338,000 for the second quarter of 2007 compared to $284,000 for the same period in 2006.



e-Commerce



Thee-Commerce Segment incurred an operating loss of $30,000 for the second quarter of 2007 versus an operating loss of $23,000 in the prior year quarter.  The segment received $5,000 in revenue for each of the second quarters of 2006 and 2007.  Under the segments patent license agreement, the provision for an annual license fee of $25,000 terminated at the end of the first quarter of 2005.  The segment will continue to receive royalty fee income according to the terms of the agreement.  The segment incurred $8,000 more in SG&A costs in the 2007 second quarter than it did in the comparable 2006 quarter.  Because of the snails pace at which the Visa lawsuit has been progressing, we had, in 2006, granted the managing members request to spend a portion of his time assisting his wife in her newly purchased business.
Accordingly, he received only half his normal salary for the period from February through September of 2006 when activity in the lawsuit picked up in the third quarter of 2006.



Oil & Gas



Our newest segment, Oil & Gas, is a familiar one to management.  In recent years we have acquired federal and state oil and gas leases in several states.  Through a farmout arrangement with another entity, eight gas wells were drilled on one of these leases in Colorado and placed in production in the fourth quarter of 2005.  We have a 22.5% working interest in seven of these wells and a 3.6% override until payout and a 22.5% working interest after payout in the other well.  We also have overriding royalty interests in 12 wells located in Wyoming which began production in 2005.  The segment recorded $20,000 in revenues for the second quarter of 2007 compared to $40,000 for the same period in 2006.  Operating costs totaled $8,000 and $7,000 for the second quarter of 2007 and 2006, respectively.  The weighted average price received by the segment for its production decreased by 14% for
the second quarter of 2007 compared to the same period in 2006 and this was accompanied by a 50% decrease in production when comparing the same periods.  As a result, the segment contributed $8,000 of operating profit for the second quarter of 2007 compared to $29,000for the same period in the prior year.



Other corporate activities



Other corporate activities include general and corporate activities, as well as assets unrelated to our operating segments or held for investment.  These activities generated operating losses of $190,000 for the second quarter of 2007 compared to $236,000 for the same period of 2006.  This $46,000 decrease in operating losses was due primarily to the Companys practice, begun in the latter part of 2006, of charging related entities for certain overhead items pertaining to their operations and incurred by the Company.  Such charges amounted to $56,000 in the second quarter of 2007.



Selling, general and administrative expenses



Our selling, general and administrative expenses (SG&A) in the current quarter decreased $46,000 to $172,000 compared to $218,000 for the second quarter of 2006.   The primary reason for the decrease is the practice, which we began in late 2006, of charging related entities for accounting and other overhead type items that the parent provides.  See Other corporate activities above.



Depreciation, depletion and amortization expenses



DD&A expense remained static at $50,000 in the second quarters of 2006 and 2007.



Other income and expenses



The other income and expenses for the second quarter of 2007 netted to a loss of $226,000 compared to a loss of $244,000 for the second quarter of 2006.  Interest income was down $2,000 for the second quarter of 2007 versus the same period in 2006.  Interest expense was $29,000 lower primarily as a result of the elimination of the amortization of the production payment associated with the 12% Debt due November 30, 2006.  The three months ended June 30, 2006 included $59,000 in interest expense related to this debt issue (including $55,000 of such amortization) with no such charges in the 2007 second quarter.  The quarter ended June 30, 2007 included interest expense related to other debt which partially offset



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the elimination of the above amortization.  We realized gains on sale of assets for the three months ended June 30, 2006 totaling $7,000 compared to none for the same period in 2007.  There was a $3,000 reduction in expenses attributable to our operations in China for the second quarter of 2006 as a result of the 50% minority interest held by our investor in the start-up LLC included as a consolidated subsidiary in these financial statements.  There was no such benefit in the second quarter of 2007.



Income taxes



The Company did not record a provision for income taxes in either the second quarter of 2006 or 2007.  We have not recorded any financial benefit attributable to our various tax carryforwards due to uncertainty regarding their utilization and realization.



Discontinued operations



Our financial results for the 2007 and 2006 second quarters reflected a loss of $1,000 for the second quarter of 2007 compared to earnings of $2,000 in the same period of 2006 as a result of activities in two of our four discontinued segments.  The second quarter of 2006 benefited from the disposition of assets which generated gains of $3,000 and was offset by expenses of $1,000.  There were no such sales in the second quarter of 2007 and the expenses were the same at $1,000.   As of June 30, 2007, assets of discontinued operations held for resale totaled $20,000 and liabilities of discontinued operations totaled $43,000.  We believe that all of the assets of the discontinued segments have been written down to their realizable value.  We are actively pursuing opportunities to sell the remaining assets and expect the dispositions to be completed by December 31, 2007.



Material changes in results of operations - Six months ended June 30, 2007 as compared with the Six months ended June 30, 2006.



The Company recorded a loss of $1,184,000 for the first half of 2007 compared to a loss of $1,298,000 for the first six months of 2006.  Continuing operations reflected losses of $1,182,000 for the first six months of 2007 compared to $1,272,000 for the same period in 2006.  In addition, the Company had losses from discontinued operations of $2,000 for the first half of 2007 compared to $26,000 for the same period in 2006.



Operating results of the Companys primary operating segments are reflected below:



2007
        
        2006Operating profit (loss):Coal reclamation
        $    (281,000)
        
        $    (551,000)Carbon dioxide
        412,000
        
        581,000China
        (492,000)
        
        (431,000)e-Commerce
        (52,000)
        
        (47,000)Oil & gas
        16,000
        
        74,000Subtotal
        (397,000)
        
        (374,000)Other
        (360,000)
        
        (471,000)Total
        $    (757,000)
        
        $    (845,000)




The Other in the above table reflects primarily general and corporate activities, as well as our other activities and investments.



Coal reclamation



Revenues were less than $1,000 for the first six months of 2007 compared to $13,000 for the same period in 2006 as the result of fewer consulting and coring jobs in the year 2007.  Operating costs decreased by 50% to $276,000 for the first six months of 2007 compared to $552,000 for the same period in 2006 as a result of decreased labor, expendable supplies, advertising, travel and other costs.   The results of operations for the first six months of 2006 included losses totaling $277,000 associated with the coal project in West Virginia that was disposed of in the fourth quarter of 2006.  The first six months of 2007 included no such costs.  As a result, the operating loss for the first six months of 2007 decreased $270,000 to $281,000 compared to $551,000 in the first six months of 2006.



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Carbon dioxide



Operations for the first six months of 2007 resulted in an operating profit of $412,000 compared to a $581,000 operating profit for the 2006 first half.  The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of our carbon dioxide producing unit in Colorado.  Segment operating revenues decreased $90,000 or 13% to $606,000 for the first six months of 2007 compared to $696,000 for the same period in 2006.  We recorded an additional $71,000 in operating costs associated with our properties in the first half of 2007 compared to the same period in 2006.  The increase in operating costs was attributable primarily to increased severance taxes.  Production volumes for the Companys interest in the McElmo Dome field remained virtually the same for the first six months of 2007 compared to the same period in 2006.  The decrease
in revenue for the current six months was due principally to a decrease in pricing for the product. We received an average of $0.61 per mcf sold in the first six months of 2007 versus $0.70 per mcf in the year earlier period.



China



The China Segment incurred an operating loss of $492,000 for the first half of 2007 compared to $431,000 for the same period in 2006.  Revenues for the segment decreased $65,000 to $116,000 for the first six months of 2007 compared to $181,000 for the same period in 2006.  Operating and SG&A expenses decreased $5,000 to $589,000 for the first half of 2007 compared to $594,000 in 2006.  See Other corporate activities detail below.



e-Commerce



Thee-Commerce Segment incurred an operating loss of $52,000 for the first half of 2007 versus an operating loss of $47,000 in the prior year period.  The segment recorded revenues of $5,000 of royalty fee income in the first half of 2006 and the same amount for the first six months of 2007.  Under the segments patent license agreement, the provision for an annual license fee of $25,000 terminated at the end of the first quarter of 2005.  The segment will continue to receive royalty fee income according to the terms of the agreement.  Because of the snails pace at which the Visa lawsuit has been progressing, we had granted the Segment managers request to spend a portion of his time assisting his wife in her newly purchased business.  Accordingly, he received only half his normal salary from February of 2006 thru September
30, 2006, at which time he was reinstated to his full salary.  A $4,000 decrease in legal fees accounted for the majority of the remaining change as the segment continued its suit against Visa.



Oil & Gas



Our newest segment, Oil & Gas, is a familiar one to management.  In recent years we have acquired federal and state oil and gas leases in several states.  Through a farmout arrangement with another entity, eight gas wells were drilled on one of these leases in Colorado and placed in production in the fourth quarter of 2005.  We have a 22.5% working interest in seven of these wells and a 3.6% override until payout and a 22.5% working interest after payout in the other well.  We also have overriding royalty interests in four wells located in Wyoming which began production in 2005.  The segment recorded $37,000 in revenues for the first half of 2007 compared to $96,000 for the same period in 2006.  Operating costs totaled $13,000 and $14,000 for the first six months of 2007 and 2006, respectively.  The weighted average price received by the segment for its production decreased by 24%
for the first six months of 2007 compared to the same period in 2006 and this was accompanied by a 45% decrease in production when comparing the same periods.  As a result, the segment contributed $16,000 of operating profit for the first half of 2007 compared to $74,000 for the same period in the prior year.



Other corporate activities



Other corporate activities include general and corporate operations, as well as assets unrelated to the Companys operating segments or held for investment.  These activities generated operating losses of $360,000 for the first half of 2007 as compared to $471,000 in the same period of 2006.  The $111,000 decrease in operating losses was due primarily to our practice, begun in the latter part of 2006, of charging related entities for certain overhead items incurred by us that pertain to their operations.  Such charges amounted to $111,000 for the first half of 2007.



Selling, general and administrative expenses



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Our selling, general and administrative expenses (SG&A) in the first half of 2007 decreased $111,000 to $325,000 from $436,000 for the 2006 six months.  The primary reason for the decrease is the practice, which we began in late 2006, of charging related entities for accounting and other overhead type items that the parent provides.  See Other corporate activities above.



Depreciation, depletion and amortization expenses



DD&A expense increased $1,000 from $96,000 for the six months ended June 30, 2006 to $97,000 for the same period in 2007.  The increase was due primarily to additional equipment in the McElmo Dome field in our CO2 Segment and increased amortization expense associated with the capitalized costs of our new debt.



Other income and expense



The other income and expenses for the first six months of 2007 netted to a loss of $425,000 compared to $427,000 for the same period in 2006.  Interest income was $5,000 for both the first six months of 2006 and 2007.  Interest expense for the first six months of 2007 was $453,000 compared to $497,000 for the same period in 2006.  We realized gains on sale of assets for the first six months of 2007 totaling $2,000 compared to $7,000 in the prior year period.  We realized an $8,000 reduction in expenses attributable to our operations in China for the first six months of 2006 compared to none for the same period in 2007 as a result of the 50% minority interest held by our investor in the start-up LLC included as a consolidated subsidiary in these financial statements.



Our equity in earnings of unconsolidated affiliates reflected no earnings or losses for the first half of 2007 compared to $51,000 for the same period in 2006.  We recorded $51,000 in the first half of 2006 as our share of earnings from our investment in Cibola Corporation compared to none in the current year six months.  While we owned 80% of the common stock of Cibola, we did not have financial or operating control of this gas marketing subsidiary.   The majority of the amount received in the first half of 2006 was the result of a negotiated settlement with the minority common shareholders regarding the termination of the ownership agreement effective December 1, 2005.



Income taxes



We recorded no provisions for federal alternative minimum taxes for either of the six-month periods ended June 30, 2006 or 2007.  We have not recorded any financial benefit attributable to our various tax carryforwards due to uncertainty regarding their utilization and realization.



Discontinued operations



Our financial results for the six months ended in 2007 and 2006 were impacted by losses of $2,000 and $26,000, respectively, as a result of activities in two of our four discontinued segments.   The majority of the loss for the first half of 2007 related to rent expense associated with one of our discontinued segments.  The first half of 2006 benefited from the disposition of assets which generated gains of $3,000.  These gains were offset by expenses totaling $29,000 for the six-month period ending June 30, 2006.  As of June 30, 2007, assets of discontinued operations held for resale totaled $20,000 and liabilities of discontinued operations totaled $43,000.  We believe that all of the assets of the discontinued segments have been written down to their realizable value.  We are actively pursuing opportunities to sell the remaining assets and expect the dispositions to be completed by
December 31, 2007.



Item 3.  Quantitative and Qualitative Disclosures About Market Risk.



At June 30, 2007, we had total debt of $9,921,000 which included $531,000 of accrued interest to a related party which was treated as a long-term obligation.  Included in the remaining $9,390,000 of debt was $8,305,000 of long-term debt which had fixed interest rates; therefore, our interest expense and operating results would not be affected by an increase in market interest rates for this portion of the debt.  The remaining $1,085,000 of debt is accruing interest at Wall Street Journal Prime plus 1.5%, or 9.75%, at June 30, 2007.  At June 30, 2007, a 10% increase in market interest rates would have reduced the fair value of our debt by $97,000.



We have no other market risk sensitive instruments.



Item 4.  Controls and Procedures.



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It is the responsibility of our principal executive officer and principal financial officer to ensure that we maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file with the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.  Disclosure controls and procedures include controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer to allow timely decisions regarding required disclosure.  Based on their evaluation of those controls and procedures as of a date within 90 days of
the date of this filing, our CEO and CFO determined that our disclosure controls and procedures currently in place are effective as of the end of the period covered by this report.  There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed their evaluation.



PART II.
        OTHER INFORMATION.




Item 1.
        Legal Proceedings.




McElmo Dome Litigation.In 1996 we joined with other Plaintiffs in filing in U.S. District Court for the District of Colorado a suit against Shell Oil Company, Shell Western E & P, Inc., Mobil Producing Texas and New Mexico, Inc. and Cortez Pipeline Company, a partnership (collectively, the Defendants).  Plaintiffs complaint alleged damages caused by Defendants wrongful determination of the value of CO2 produced from the McElmo Dome Field (the Field---see Carbon Dioxide Operations at pages 9-11 of our Form 10-K) and the corresponding wrongful underpayment to Plaintiffs.



A Settlement Agreement was signed in 2001 (the Settlement).  The Settlement became final in 2003 and we received our share in three installments totaling $4,094,000 in 2003 and 2004.  The Settlement proceeds resulted in net income of $3,976,000, after alternative minimum taxes of $118,000.



Subsequent to the Settlement several issues have arisen concerning implementation of the Settlement Agreement that are currently in dispute which may result in additional money being owed to the Plaintiffs in the litigation.  A mediation held in Denver in March of 2005 was unsuccessful.  In July of 2005, the party who served as the court-appointed fairness expert in the McElmo Dome Litigation rendered his advisory opinion on the merits of several issues currently in dispute concerning implementation of the Settlement Agreement. While this advisory opinion was favorable to the Plaintiffs, it was nonbinding and failed to resolve the matter.  In October 2005 the Plaintiffs initiated formal binding arbitration.  A hearing on the merits was concluded in Albuquerque on June 30, 2006.  By an Arbitration Opinion dated August 7, 2006, the Plaintiffs lost the arbitration.However, the Plaintiffs filed a Motion to Vacate the Opinion on November 6, 2006.  Both the Court appointed Fairness Expert and Plaintiffs counsel believe reasonable grounds exist for vacating the Opinion.  If the Opinion is vacated, another arbitration will occur unless the dispute is settled earlier.



Coalition Managers Litigation.In April of 2002 a suit was filed in the U.S. District Court of Colorado (Harry Ptasynski v. John M. Cogswell, et al---Case No. 02-WM-0830 (OES) against the attorneys and managers (including our Chairman) of the CO2 Claims Coalition, LLC (the Coalition---one of the Plaintiffs in the preceding lawsuit which has now been settled).  We are not a defendant in the suit, which was initially brought by Ptasynski and another party which later dismissed itself from the action.  In this action Ptasynski is seeking to recover a share of the proceeds of the Coalitions settlement against the Defendants in the McElmo Dome lawsuit despite the fact that he opted out of the lawsuit in order to pursue his own claims in a separate lawsuit against the Defendants in
Texas.  Although his case was initially successful in Texas it was later overturned on appeal.



The Coalition held back $1 million of the Settlement proceeds to defend the costs of the Ptasynski suit (and any other suits that might develop) until such time as its outcome has been determined.  Presently approximately $529,000 remains in the defense fund.  Once the case has been resolved, any remaining funds net of costs will be distributed to the Coalition members, including us.  In March of 2004 the Court dismissed the claims against the attorneys and several of the claims against the managers but gave the Plaintiff the opportunity to make additional arguments as to why other claims should not be dismissed.  In April of 2004 Plaintiff asked the Court not to dismiss the remaining claims and moved to file a Second Amended Complaint against the managers and, for the first time, against the Coalition.  In May of 2004 the Defendants asked the Court to dismiss Plaintiffs new Complaint.



On April 25, 2006, Magistrate Hagerty entered an Amended Scheduling Order in the civil action, pursuant to which discovery in this case has recommenced.  Motions for summary judgment were entered by the Defendants on August 31,



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2006.  A five-day trial was concluded in Denver on April 20, 2007.  The jury ruled against the Plaintiff and on May 3, 2007 Judge Miller (i) rendered a judgment in favor of the Defendants and against the Plaintiff on all of the Plaintiffs claims and (ii) ruled that the Defendants could recover their costs upon filing a Bill of Costs within 10 days from the entry of judgment.



Defendants filed a Bill of Costs on May 15, 2007 to recover their costs totaling over $398,000.  However, the Court determined that we could only recover $2,000.  Defendants gave that to the Plaintiff in exchange for his agreement not to pursue any further claims against the Defendants, so the case is now closed.  After the remaining bills of approximately $78,000 have been paid, we estimate that we will have approximately $449,000 remaining in the defense fund.  We will receive approximately 22%, or approximately $99,000, of the remaining funds.



Visa Litigation.In May of 2003 our 71%-owned subsidiary, starpay.com, l.l.c., along with VIMachine, Inc. filed a suit in the U. S. District Court for the Northern District of Texas, Dallas Division against Visa International Service Association and Visa USA, Inc., both d/b/a Visa (Case No. CIV:3-03-CV0976-L).  VIMachine is the holder of U.S. Patent No. 5,903,878 (the VIMachine Patent) that covers, among other things, an improved method of authenticating the cardholder involved in an Internet payment transaction.  In July of 2003, the Plaintiffs filed an Amended Complaint. The suit seeks damages and injunctive relief (i) related to Visas infringement of the VIMachine Patent; (ii) related to Visas breach of certain confidentiality agreements express or implied; (iii) for alleged fraud on the Patent
Office based on Visas pending patent application; and (iv) under Californias common law and statutory doctrines of unfair trade practices, misappropriation and/or theft of starpays intellectual property and/or trade secrets. In addition, Plaintiffs are seeking attorney fees and costs related to the foregoing claims.  If willfulness can be shown, Plaintiffs will seek treble damages.



In August of 2003 the Defendants filed a motion to dismiss the second, third and fourth claims.  Despite objections to such motion by the Plaintiffs, the Judge in February of 2004 granted Defendants motion to dismiss the second and third causes of action, and denied the motion insofar as it sought to dismiss the fourth cause of action. Accordingly, Plaintiffs fourth claim (misappropriation and/or theft of intellectual property and/or trade secrets) will continue to move forward.



In February of 2004 Defendants filed an Answer to Plaintiffs Amended Complaint.  In such filing Visa denied each allegation relevant to claim four.  Visa asked that the VIMachine Patent be declared invalid, and, even if it is found valid, Visa asked that theybe found not to infringe the VIMachine Patent.  Visa asked for other related relief based onthese two allegations.



In April and May 2004, Plaintiffs filed their Patent Infringement Contentions and a supplement thereto detailing Visas alleged infringement of the majority of the patent claims depicted in the VIMachine Patent.  Subsequently, in May 2004, Defendants filed Preliminary Invalidity Contentions requesting the VIMachine Patent be found invalid.



From May through October 2004, the Plaintiffs and Defendants submitted numerous filings related to interpretation of the terms and phrases set out in the VIMachine Patent claims.  A hearing regarding patent claim construction (a Markman hearing) was held in October of 2004, allowing both parties to present oral arguments before the Court regarding the claim construction issues.  On January 4, 2005, Magistrate Judge Sanderson filed a Report and Recommendation of the United States Magistrate Judge addressing his findings and recommendations with respect to the claim constructions to be applied to the VIMachine Patent.  Judge Sanderson found that 24 of the 28 claims asserted by the Plaintiffs were valid.  Both parties have pursued modifications of the Magistrates recommendations in the form of an appeal to District Judge Lindsey and are awaiting the Courts final
ruling on claim construction issues.



In July of 2005 the Federal Circuit Court of Appeals issued anenbancdecision in the patent case ofPhillips v. AWH Corp. (the Phillips Case).  That is, instead of relegating the case to a three-judge panel, it was heard by the entire Federal Circuit bench.  The Federal Circuit attempted to explain how the operative language in patents is to be interpreted.  One key question before the Court was to which sources of information the trial court should refer when construing patent claims.



Subsequent to the Federal Circuits decision in July, Defendants requested and the Court ordered supplemental briefs to the Court addressing Magistrate Judge Sandersons Report and Recommendation respective to the Markman hearing in light of the Federal Circuitsen bancdecision in the Phillips Case.  Both parties filed their supplemental briefs in August 2005.  Oral arguments regarding these issues were held in November of 2005.  On January 19, 2006, Magistrate Judge Sanderson filed his final Report and Recommendation on the Markman issues to District Judge Lindsay who will in turn provide the Courts final ruling on claim construction issues.  In his report Judge Sanderson found no reason to change any portions of his recommendations filed on January 4, 2005, in light of the Federal Circuits decision in the
Phillips Case.  A final Markman ruling is expected to occur at any time. Thereafter, a revised Scheduling Order will be prepared setting out a new trial date.



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During the first quarter of 2000 starpays trade secrets were relayed to Visa orally in face-to-face conferences and telephone calls, as well as in correspondence by post and electronic mail.  After receiving starpays technology and ideas, Visa filed a series of provisional patent applications beginning in April of 2000 using starpays trade secrets.  At the same time, Visa wrongfully incorporated starpays trade secrets in to its Visa Payer Authentication Service (VPAS).  VPAS infringes the VIMachine Patent.  From early 2000 until recently, starpay tried on several occasions to enter into meaningful negotiations with Visa to resolve their intellectual property concerns.  Visa has continually denied their infringement of the VIMachine Patent and starpays assertion that Visa has appropriated starpays trade secrets.



In November of 2000 Visa publicly announced that it was testing VPAS.  In September of 2001 Visa stated that, once rolled out globally, it expected VPAS to reduce Internet payment disputes by at least 50%.  In an October 2004, news release, Visa depicted Verified by Visa as the leading security standard for authentication of Internet transactions.  In this release Visa announced that Verified by Visa had recorded an increase of close to 200% in the number of transactions for the quarter ending in September 2004, and that total Verified by Visa card volume for the first nine months of 2004 was $5.4 billion. In April of 2005 Visa announced that transaction volume during the first quarter of 2005 had increased more than 230% over last year.  Towards the end of 2005 Visa announced that Verified by Visa had $7 billion in volume during the
first half of the year......a 194% year-over-year increase.  Since late 2005, Plaintiffs have not seen or received public information bearing on the transaction volume within the Verified by Visa system.  However, Visas current Verified by Visa Fact Sheet touts that more than 110,000 merchants have adopted Verified by Visa and 10,000 banks have made the service available to over 395 million consumers globally through implementation in more than 65 countries representing 99% of global e-commerce volume.  Other Visa documents state that since Verified by Visa was implemented in 2003, there has been a 75% reduction in chargebacks on Verified by Visa compared with non-Verified by Visa transactions.



Until Judge Lindsey rules regarding pending claim construction issues, there is no scheduling order in place.  Plaintiffs will push for a trial date as quickly as practical following a ruling on claim construction issues by Judge Lindsey.



Item 1A.  Risk Factors.



Only the Risk Factors enumerated below have changed since the Form 10-K:



Our Financial Position.Our net worth became negative as of December 31, 2001, and the deficiency increased to ($5,333,000) at year-end 2003.  Receipt of the second installment of the Settlement reduced the deficiency to ($4,144,000) at year-end 2004.  Such deficiency increased to ($8,451,000) at June 30, 2007, and will continue to increase until we are able to achieve profitability in our Coal and China Segments.  Our business will continue to require substantial expenditures.  Our inability to generate positive cash flow from operations has limited our ability to borrow funds and impacted our ability to achieve profitability.  We must achieve a turnaround in both our China and Coal Segments this year.  If a turnaround is not successful or is only partially successful, we will need to sell some of our assets or pursue additional outside financing which
would likely involve further dilution to our shareholders.  We cannot assure that we will be able to sell such assets or obtain additional financing on terms that we deem acceptable, or at all.



We have substantial indebtedness and may not have enough revenues to pay our debts.As of June 30, 2007, we had $9,921,000 of total debt outstanding, including $531,000 of accrued interest to an affiliate of the Chairman.  While only $3,000 of the total debt is due to be repaid in 2007, another $2,217,000 of the total currently outstanding is due to be repaid by December 31, 2008.  We or our subsidiaries may become further indebted.  This much debt could pose substantial risks to our business.  The indebtedness may require us to use available funds for payment of principal and interest instead of funding our operations.  The debt could also inhibit our ability to raise additional capital.  It is possible that we will not have enough cash flow from our operations to pay the principal and interest on our debt.  This would have a material adverse effect on us.



Limited Liquidity.Our common stock trades on the Over-The-Counter Bulletin Board.  Although we currently have 10 firms making a market in our stock, the volume of trading has been relatively low and fairly sporadic.  At June 30, 2007, 64.9% of our 5,615,345 outstanding shares are held by management and another 8.4% is held by a long-term institutional holder.  In addition, there is substantial potential dilution, with preferred shares convertible into 296,000 shares, presently exercisable warrants and options totaling 672,000 shares, notes convertible into 3,506,000 shares at June 30, 2007 and a total of 701,000 shares at June 30, 2007 in two DSC Plans scheduled for distribution in 2007 and future years.



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.



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Item 3. Default Upon Senior Securities.

Not applicable.



Item 4.  Submission of Matters to a Vote of Security Holders.

Not applicable.



Item 5.  Other Information.

Not applicable.



Item 6.  Exhibits.



(a)
        The following exhibits are filed with this Form 10-Q and are identified by the numbers indicated:




3.1
        Restated Certificate of Incorporation of Registrant as filed with the Secretary of State of Oklahoma on September 20, 2000.  (This Exhibit has been previously filed as Exhibit 3(i) to Registrants Form 10-Q for the period ended September 30, 2000, filed on November 20, 2000, and same is incorporated herein by reference).3.2
        Amended Certificate of Incorporation of Registrant as filed with the Secretary of State of Oklahoma on July 20, 2004, effective on the close of business August 6, 2004.  (This Exhibit has been previously filed as Exhibit 3.2 to Registrants Form 10-K for the period ended December 31, 2005, filed on April 17, 2006.3.3
        Registrants By-Laws as currently in effect.  (This Exhibit has been previously filed as Exhibit 3(ii) to Registrants Form 10-K for the period ended December 31, 1997, filed on March 31, 1998, and same is incorporated herein by reference).4
        Instruments defining the rights of security holders:4.1
        Certificate of Designations, Powers, Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant.  (This Exhibit has been previously filed as Exhibit 3(c) to Amendment No. 2, filed on September 17, 1993 to Registrant's Registration Statement on Form S-4, File No. 33-66598, and same is incorporated herein by reference).10
        Material Contracts10.1*
        Amendment No. Two to The Beard Company 2005 Deferred Stock Compensation Plan as amended effective April 26, 2007.  (This Exhibit has been previously filed as Exhibit A to Registrants Proxy Statement filed on April 30, 2007, and same is incorporated herein by reference).10.2
        Separation Agreement dated May 11, 2007, by and among PinnOak Resources, LLC, Pinnacle Land Company PLC, Pinnacle Mining Company LLC, Beard Pinnacle, LLC and Beard Technologies, Inc.  (This Exhibit has been previously filed as Exhibit 99.1 to Registrants Form 8-K filed on May 18, 2007, and same is incorporated by reference).10.3
        Business Loan Agreement dated June 8, 2007, by and between Registrant and First Fidelity Bank, N.A. (FFB).  (This Exhibit has been previously filed as Exhibit 99.1 to Registrants Form 8-K filed on June 12, 2007, and same is incorporated herein by reference).10.4
        Promissory Note dated June 8, 2007 by and between Registrant and FFB.  (This Exhibit has been previously filed as Exhibit 99.2 to Registrants Form 8-K filed on June 12, 2007, and same is incorporated herein by reference).






Page 26 of 29 Pages



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10.5
        Form of Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of June 8, 2007, by and between Registrant and the Public Trustees of __________ County, Colorado, for the benefit of FFB.  (This Exhibit has been previously filed as Exhibit 99.3 to Registrants Form 8-K filed on June 12, 2007, and same is incorporated herein by reference).10.6
        Subordination Agreement and Release dated June 8, 2007, by and among The William M. Beard and Lu Beard 1988 Charitable Unitrust (the Unitrust), Boatright Family L.L.C. and McElmo Dome Nominee, LLC.  (This Exhibit has been previously filed as Exhibit 99.4 to Registrants Form 8-K filed on June 12, 2007, and same is incorporated herein by reference).10.7
        Restated and Amended Letter Loan Agreement by and between Registrant and the Unitrust dated June 13, 2007.10.8
        Third Replacement Renewal and Extension Promissory Note from Registrant to the Trustees of the Unitrust dated effective February 14, 2005.31
        Rule 13a-14(a)/15d-14(a) Certifications:31.1
        Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2
        Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).32
        Section 1350 Certifications:32.1
        Chief Executive Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.32.2
        Chief Financial Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.


__________________



*  Compensatory plans or arrangements.



The Company will furnish to any shareholder a copy of any of the above exhibits upon the payment of $.25 per page.  Any request should be sent to The Beard Company, Enterprise Plaza, Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112.



Page 27 of 29 Pages



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SIGNATURES



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



(Registrant)
        THE BEARD COMPANY




(Date)
        August 20, 2007
        /s/
        Herb Mee, Jr.


Herb Mee, Jr., President and


Chief Financial Officer






(Date)
        August 20, 2007
        /s/
        Jack A. Martine


Jack A. Martine, Controller and


Chief Accounting Officer




INDEX TO EXHIBITS



ExhibitNo.
        Description
        Method of Filing3.1
        Restated Certificate of Incorporation of Registrant as filed with the Secretary of State of Oklahoma on September 20, 2000.
        Incorporated herein by reference3.2
        Amended Certificate of Incorporation of Registrant as filed with the Secretary of State of Oklahoma on July 20, 2004, effective on the close of business August 6, 2004.
        Incorporated herein by reference3.3
        Registrants By-Laws as currently in effect.
        Incorporated herein by reference4.1
        Certificate of Designations, Powers, Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant.
        Incorporated herein by reference10.1
        Amendment No. Two to The Beard Company 2005 Deferred Stock Compensation Plan as amended effective April 26, 2007.
        Incorporated herein by reference10.2
        Separation Agreement dated May 11, 2007, by and among PinnOak Resources, LLC, Pinnacle Land Company PLC, Pinnacle Mining Company LLC, Beard Pinnacle, LLC and Beard Technologies, Inc.
        Incorporated herein by reference10.3
        Business Loan Agreement dated June 8, 2007, by and between Registrant and First Fidelity Bank, N.A. (FFB).
        Incorporated herein by reference10.4
        Promissory Note dated June 8, 2007 by and between Registrant and FFB.
        Incorporated herein by reference10.5
        Form of Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of June 8, 2007, by and between Registrant and the Public Trustees of __________ County, Colorado, for the benefit of FFB.
        Incorporated herein by reference






Page 28 of 29 Pages



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10.6
        Subordination Agreement and Release dated June 8, 2007, by and among The William M. Beard and Lu Beard 1988 Charitable Unitrust (the Unitrust), Boatright Family L.L.C. and McElmo Dome Nominee, LLC.
        Incorporated herein by reference10.7
        Restated and Amended Letter Loan Agreement by and between Registrant and the Unitrust dated June 13, 2007.
        Filed herewith electronically10.8
        Third Replacement Renewal and Extension Promissory Note from Registrant to the Trustees of the Unitrust dated effective February 14, 2005.
        Filed herewith electronically31.1
        Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
        Filed herewith electronically31.2
        Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
        Filed herewith electronically32.1
        Chief Executive Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
        Filed herewith electronically32.2
        Chief Financial Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
        Filed herewith electronically






Page 29 of 29 Pages