**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-QSB**

**Quarterly Report Under Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

**Forthe Six Months Ended June 30, 2007**

**CommissionFile No. 000-51229**

**STRATUM HOLDINGS, INC.**

(Exact Name of SmallBusiness Issuer as specified in its charter)

| **Nevada**                    | ** ** | **51-0482104**          |
|-------------------------------|------------|-------------------------|
| (State or other  jurisdiction |       | (IRS Employer           |
| of  incorporation)            |       | Identification  Number) |

 

| **Three Riverway, Suite 1500** |   | ** ** |
|--------------------------------|--------|------------|
| **Houston,  Texas**            |   | ** ** |
| (Address of  principal         |   | **77056**  |
| executive  offices)            |   | (zip code) |

 

**(713) 479-7000**

(Issuer’s telephonenumber, including area code)

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports); and (2) has been subject to such filing requirements for thepast 90 days.   Yes x   No o

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

The number of shares outstanding of Common Stock, parvalue $.001 per share, as of August 16, 2007 was 25,393,572 shares and theaggregate market value of such shares held by non-affiliates of the registrant(based upon the closing bid price of such shares as listed on the NASD BulletinBoard on August 16, 2007) was approximately $2,734,300.

TransitionalSmall Business Disclosure Format (check one):   Yes o   Nox

 

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**STRATUM HOLDINGS, INC.**

**(formerly, Tradestar Services,Inc.)**

**FORM 10-QSB**

**INDEX**

 
|                                                                                                                | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|
| PART I.  FINANCIAL INFORMATION                                                                                 | ** ** | ** ** |
|                                                                                                           |       |       |
| Item 1.  Financial Statements                                                                                  |       |       |
| Condensed Consolidated Balance Sheets as of June 30,  2007 (Unaudited) and December 31, 2006                   |       | 3          |
| Condensed Consolidated Statements of Operations for  the three months ended June 30, 2007 and 2006 (Unaudited) |       | 4          |
| Condensed Consolidated Statements of Operations for  the six months ended June 30, 2007 and 2006 (Unaudited)   |       | 5          |
| Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2007 and 2006 (Unaudited)   |       | 6          |
|                                                                                                           |       |       |
| Notes  to Condensed Consolidated Financial Statements                                                          |       | 7          |
| Item 2. Management’s Discussion and Analysis or Plan  of Operation                                        |       | 13         |
| Item 3. Controls and Procedures                                                                                |       | 20         |
|                                                                                                           |       |       |
| PART  II.OTHER INFORMATION                                                                                     |       | 21         |
|                                                                                                           |       |       |
| Item  1. Legal Proceedings                                                                                     |       | 21         |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                           |       | 21         |
| Item 3. Defaults Upon Senior Securities                                                                        |       | 21         |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                   |       | 21         |
| Item  5. Other Information                                                                                     |       | 21         |
| Item 6.  Exhibits                                                                                              |       | 21         |
| Signatures                                                                                                     |       | 22         |

 

2

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**STRATUMHOLDINGS, INC.**

**(formerly, Tradestar Services, Inc.)**

**Condensed Consolidated Balance Sheets**

 
| ** **                                                                                                                                     | ** ** | **June 30, 2007  (Unaudited)** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                     | ** ** | ** **                               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                |       |                                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                     |       | $                                        | 42,314     |                        | $          | 261,010 |   |
| Accounts  receivable, less allowances of $393,622 and $352,263, respectively                                                                   |       | 9,111,572                                |       | 8,277,568                   |       |
| Prepaid expenses  and other                                                                                                                    |       | 2,220,413                                |       | 880,230                     |       |
| Total current  assets                                                                                                                          |       | 11,374,299                               |       | 9,418,808                   |       |
|                                                                                                                                           |       |                                     |       |                        |       |
| Property and equipment:                                                                                                                        |       |                                     |       |                        |       |
| Oil and gas  properties (full cost method)                                                                                                     |       | 13,556,893                               |       | 13,433,333                  |       |
| Other property  and equipment                                                                                                                  |       | 1,062,494                                |       | 893,512                     |       |
|                                                                                                                                           |       | 14,619,387                               |       | 14,326,845                  |       |
| Less:  Accumulated depreciation, depletion and amortization                                                                                    |       | (1,154,401                               | )          | (816,871                    | )          |
| Net property and  equipment                                                                                                                    |       | 13,464,986                               |       | 13,509,974                  |       |
|                                                                                                                                           |       |                                     |       |                        |       |
| Other assets:                                                                                                                                  |       |                                     |       |                        |       |
| Goodwill                                                                                                                                       |       | 14,127,858                               |       | 9,089,162                   |       |
| Deferred income  taxes                                                                                                                         |       | 489,100                                  |       | 489,100                     |       |
| Other                                                                                                                                          |       | 271,637                                  |       | 636,821                     |       |
| Total other  assets                                                                                                                            |       | 14,888,595                               |       | 10,215,083                  |       |
|                                                                                                                                           |       |                                     |       |                        |       |
| Total assets                                                                                                                                   |       | $                                        | 39,727,880 |                        | $          | 33,143,865 |   |
|                                                                                                                                           |       |                                     |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                 | ** ** | ** **                               | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                           |       |                                     |       |                        |       |
| Current portion  of long-term debt                                                                                                             |       | $                                        | 15,255,065 |                        | $          | 7,661,885 |   |
| Accounts payable                                                                                                                               |       | 3,588,581                                |       | 2,129,381                   |       |
| Accrued  liabilities                                                                                                                           |       | 1,794,406                                |       | 1,514,856                   |       |
| Total current  liabilities                                                                                                                     |       | 20,638,052                               |       | 11,306,122                  |       |
|                                                                                                                                           |       |                                     |       |                        |       |
| Long-term debt, net of  current portion                                                                                                        |       | 6,494,340                                |       | 10,577,969                  |       |
| Deferred income taxes                                                                                                                          |       | 3,030,025                                |       | 3,378,400                   |       |
| Total  liabilities                                                                                                                             |       | 30,162,417                               |       | 25,262,491                  |       |
|                                                                                                                                           |       |                                     |       |                        |       |
| Stockholders’ equity:                                                                                                                     |       |                                     |       |                        |       |
| Preferred stock,  $.01 par value per share, 1,000,000 shares authorized, None issued                                                           |       | —                                   |       | —                      |       |
| Common stock,  $.001 par value per share, 50,000,000 shares authorized, 25,393,572 and  23,804,286 shares issued and outstanding, respectively |       | 25,394                                   |       | 23,804                      |       |
| Additional paid  in capital                                                                                                                    |       | 11,888,882                               |       | 9,441,664                   |       |
| Accumulated  deficit                                                                                                                           |       | (2,260,350                               | )          | (1,584,094                  | )          |
| Foreign currency  translation                                                                                                                  |       | (88,463                                  | )          | —                      |       |
| Total  stockholders’ equity                                                                                                               |       | 9,565,463                                |       | 7,881,374                   |       |
|                                                                                                                                           |       |                                     |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                               |       | $                                        | 39,727,880 |                        | $          | 33,143,865 |   |

 

See accompanying notesto condensed consolidated financial statements.

3

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**STRATUMHOLDINGS, INC.**

**(formerly, Tradestar Services, Inc.)**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 
| ** **                                      | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Revenues:                                       |       |                                                |       |   |   |
| Staffing services                               |       |                                                |       |   |   |
| Construction                                    |       | $                                                   | 3,396,437  |   | $ | 4,084,128 |   |
| Petroleum engineering                           |       | 9,567,157                                           |       | 1,946,951 |   |
| Oil and gas sales                               |       | 724,162                                             |       | 342,961 |   |
| Other                                           |       | 8,527                                               |       | 61,911 |   |
|                                            |       | 13,696,283                                          |       | 6,435,951 |   |
| Expenses:                                       |       |                                                |       |   |   |
| Cost of staffing services                       |       |                                                |       |   |   |
| Construction                                    |       | 2,645,080                                           |       | 3,401,601 |   |
| Petroleum engineering                           |       | 7,356,836                                           |       | 1,117,131 |   |
| Lease operating expense                         |       | 339,026                                             |       | 151,833 |   |
| Depreciation, depletion and amortization        |       | 240,338                                             |       | 137,155 |   |
| Workover expense                                |       | 263,730                                             |       | 89,360 |   |
| Selling, general and administrative             |       | 3,155,000                                           |       | 1,302,917 |   |
| Interest expense                                |       | 509,214                                             |       | 145,445 |   |
|                                            |       | 14,509,224                                          |       | 6,345,442 |   |
|                                            |       |                                                |       |   |   |
| Income (loss)  before income taxes              |       | (812,941                                            | )          | 90,509 |   |
|                                            |       |                                                |       |   |   |
| Benefit  (provision) for income taxes           |       | 276,400                                             |       | (65,236 | ) |
|                                            |       |                                                |       |   |   |
| Net income (loss)                               |       | $                                                   | (536,541   | ) | $ | 25,273 |   |
|                                            |       |                                                |       |   |   |
| Net income  (loss) per share, basic and diluted |       | $                                                   | (0.02      | ) | $ | 0.00 |   |
|                                            |       |                                                |       |   |   |
| Weighted average  shares outstanding, basic     |       | 25,393,572                                          |       | 16,186,484 |   |
|                                            |       |                                                |       |   |   |
| Weighted average shares  outstanding, diluted   |       | 25,393,572                                          |       | 16,661,217 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**STRATUMHOLDINGS, INC.**

**(formerly, Tradestar Services, Inc.)**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Revenues:                                       |       |                                              |       |   |   |
| Staffing  services                              |       |                                              |       |   |   |
| Construction                                    |       | $                                                 | 7,163,066  |   | $ | 7,428,437 |   |
| Petroleum  engineering                          |       | 18,733,610                                        |       | 1,946,951 |   |
| Oil and gas  sales                              |       | 1,408,867                                         |       | 342,961 |   |
| Other                                           |       | 77,499                                            |       | 61,911 |   |
|                                            |       | 27,383,042                                        |       | 9,780,260 |   |
| Expenses:                                       |       |                                              |       |   |   |
| Cost of staffing  services                      |       |                                              |       |   |   |
| Construction                                    |       | 5,571,842                                         |       | 6,071,405 |   |
| Petroleum  engineering                          |       | 14,564,156                                        |       | 1,117,131 |   |
| Lease operating  expense                        |       | 711,791                                           |       | 151,833 |   |
| Depreciation,  depletion and amortization       |       | 484,478                                           |       | 141,164 |   |
| Workover expense                                |       | 455,006                                           |       | 89,360 |   |
| Selling, general  and administrative            |       | 5,695,209                                         |       | 1,837,332 |   |
| Interest expense                                |       | 925,191                                           |       | 180,228 |   |
|                                            |       | 28,407,673                                        |       | 9,588,453 |   |
|                                            |       |                                              |       |   |   |
| Income (loss) before  income taxes              |       | (1,024,631                                        | )          | 191,807 |   |
|                                            |       |                                              |       |   |   |
| Benefit (provision) for  income taxes           |       | 348,375                                           |       | (65,236 | ) |
|                                            |       |                                              |       |   |   |
| Net income  (loss)                              |       | $                                                 | (676,256   | ) | $ | 126,571 |   |
|                                            |       |                                              |       |   |   |
| Net income (loss) per  share, basic and diluted |       | $                                                 | (0.03      | ) | $ | 0.01 |   |
|                                            |       |                                              |       |   |   |
| Weighted average shares  outstanding, basic     |       | 24,969,815                                        |       | 13,582,707 |   |
|                                            |       |                                              |       |   |   |
| Weighted average shares outstanding, diluted    |       | 24,969,815                                        |       | 14,028,827 |   |

 

See accompanying notesto condensed consolidated financial statements.

5

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**STRATUMHOLDINGS, INC.**

**(formerly, Tradestar Services, Inc.)**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                               | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Cash flows provided (used) in  operating activities:** |       |                                              |       |   |   |
| Net income  (loss)                                       |       | $                                                 | (676,256   | ) | $ | 126,571 |   |
| Adjustments to  reconcile net income                     |       |                                              |       |   |   |
| (loss) to cash  (used in) operations:                    |       |                                              |       |   |   |
| Depreciation,  depletion and amortization                |       | 484,478                                           |       | 141,164 |   |
| Deferred income  taxes                                   |       | (348,375                                          | )          | 65,236 |   |
| Stock based  compensation                                |       | 226,307                                           |       | — |   |
| Services  contributed by officers                        |       | —                                            |       | 25,000 |   |
| Other changes,  net                                      |       | (131,006                                          | )          | (200,218 | ) |
| Changes in  current assets and liabilities:              |       |                                              |       |   |   |
| Accounts  receivable                                     |       | 2,339,853                                         |       | (829,422 | ) |
| Other current  assets                                    |       | (1,294,372                                        | )          | 88,777 |   |
| Accounts payable                                         |       | (1,241,409                                        | )          | (779,907 | ) |
| Accrued  liabilities                                     |       | 279,550                                           |       | 3,859 |   |
| Net cash  provided (used) in operating activities        |       | (361,230                                          | )          | (1,358,940 | ) |
|                                                     |       |                                              |       |   |   |
| **Cash flows (used) in investing  activities:**          |       |                                              |       |   |   |
| Net cash used in  acquisition of subsidiary              |       | (151,841                                          | )          | (27,601 | ) |
| Purchase of  property and equipment                      |       | (279,668                                          | )          | (122,635 | ) |
| Proceeds from  sale of property and equipment            |       | —                                            |       | — |   |
| Net cash (used)  in investing activities                 |       | (431,509                                          | )          | (150,236 | ) |
|                                                     |       |                                              |       |   |   |
| **Cash flows provided (used) in  financing activities:** |       |                                              |       |   |   |
| Net proceeds of  stockholder advances                    |       | 650,297                                           |       | 933,097 |   |
| Proceeds from  long term debt                            |       | 2,507,593                                         |       | 1,020,942 |   |
| Payments of long  term debt                              |       | (3,356,347                                        | )          | — |   |
| Proceeds from  issuance of common stock                  |       | 675,000                                           |       | — |   |
| Proceeds from  exercise of warrants                      |       | 75,000                                            |       | — |   |
| Proceeds from  exercise of options                       |       | 22,500                                            |       | — |   |
| Net cash provided  (used) in financing activities        |       | 574,043                                           |       | 1,954,039 |   |
|                                                     |       |                                              |       |   |   |
| Net increase in cash  and cash equivalents               |       | (218,696                                          | )          | 444,863 |   |
| Cash and equivalents at  beginning of period             |       | 261,010                                           |       | 282,248 |   |
|                                                     |       |                                              |       |   |   |
| Cash and equivalents at end of period                    |       | $                                                 | 42,314     |   | $ | 727,111 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

6

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**STRATUM HOLDINGS, INC.**

**(formerly, Tradestar Services,Inc.)**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

**(1)           Basis of Presentation**

Theaccompanying condensed consolidated financial statements have been prepared bythe Company without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission and in accordance with accounting principlesfor interim financial information. In the opinion of management, thesecondensed consolidated financial statements contain all adjustments (consistingonly of normal recurring adjustments) necessary to fairly state the financialposition of the Company as of June 30, 2007, the results of its operations forthe three and six month period ended June 30, 2007 and cash flows for the sixmonth period ended June 30, 2007 and 2006. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omitted.Interim results of operations are not necessarily indicative of results forsubsequent interim periods or the remainder of the full year. These financialstatements should be read in conjunction with our Annual Report on Form 10-KSBfor the year ended December 31, 2006.

TheCompany has reported a net loss of $676,256 for the six months ended June 30,2007 and has a working capital deficit of $9,263,753 at June 30, 2007.  As indicated in Note 3, the Company currentlyhas no unutilized borrowing capacity available under its creditagreements.  In order to address itsliquidity needs, the Company’s Board of Directors recently authorizedManagement to pursue a range of alternative actions including debtrestructurings and the possible sales of one or more of the Company’s operatingassets or businesses as a means of addressing its financial obligations.  The accompanying financial statements do notreflect any adjustments that might be necessary should the Company ultimatelybe unable to meet its financial obligations as presently structured.  As further discussed in Note 8, the Companyentered into a non-binding letter of intent in August 2007 for the sale of itsconstruction staffing business on terms that would enhance its liquidity upon theprojected completion of the sale in the third quarter of 2007.

**(2)           Corporate Acquisitions**

OnMay 23, 2006, the Company acquired the outstanding common stock of The CYMRICorporation (“CYMRI”) for total consideration of $12.7 million paid in acombination of cash, notes payable and 12,540,000 shares of Common Stock, alongwith Warrants to purchase 1,136,043 shares of Common Stock at $1.87 pershare.  CYMRI and its subsidiariesperform petroleum engineering services largely for customers in the United Statesand are engaged in the exploration and production of oil and natural gas fromproperties located in Texas and Louisiana. The Company has accounted for the acquisition of CYMRI as a purchasewith Stratum treated as the acquirer. The following is a condensed balance sheet showing the fair values ofthe assets acquired and liabilities assumed from CYMRI as of the date of theacquisition (including transaction costs of $250,000):

| Current assets                       |   | $          | 4,850,647  |   |
|--------------------------------------|--------|------------|------------|--------|
| Property and equipment               |   | 13,774,229 |       |
| Goodwill arising in the  acquisition |   | 9,224,162  |       |
| Other assets                         |   | 77,453     |       |
| Current liabilities                  |   | (3,208,571 | )          |
| Long-term debt (see  Note 3)         |   | (8,666,639 | )          |
| Deferred income taxes                |   | (3,318,081 | )          |
|                                 |   | $          | 12,733,200 |   |

 

7

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Thedeemed effective date of the CYMRI acquisition for accounting purposes was June1, 2006 and the one year period for making purchase accounting adjustmentsexpired on May 31, 2007.  The effect ofincluding CYMRI’s results of operations in the Company’s consolidated financialstatements was to increase revenues for the five months ended May 31, 2007 by$13,320,000 and to decrease net loss, after giving effect to the purchaseaccounting adjustments, by approximately $300,000 ($0.01 per share).

OnMarch 2, 2007, the Company acquired the outstanding capital stock of DeccaConsulting, Ltd. (“Decca”) for total consideration of $5.1 million (plusworking capital) paid in a combination of cash, notes payable and 828,572shares of Common Stock, along with Warrants to purchase 200,000 shares ofCommon Stock at $2.10 per share.  Decca providesconsulting services for the Canadian energy industry.  The Company has accounted for the acquisitionof Decca as a purchase with Stratum treated as the acquirer.  The following is a condensed balance sheetshowing the fair values of the assets acquired and liabilities assumed fromDecca as of the date of the acquisition (including transaction costs of$300,000):

| Current assets                       |   | $          | 3,280,427 |   |
|--------------------------------------|--------|------------|-----------|--------|
| Property and equipment               |   | 9,675      |      |
| Goodwill arising in the  acquisition |   | 4,903,696  |      |
| Current liabilities                  |   | (2,409,398 | )         |
|                                 |   | $          | 5,784,400 |   |

 

Thedeemed effective date of the Decca acquisition for accounting purposes wasMarch 1, 2007 and the one year period for making any subsequent purchaseaccounting adjustments expires on February 28, 2008.  The effect of including Decca’s results ofoperations in the Company’s consolidated financial statements was to increaserevenues for six months ended June 30, 2007 by $4,529,000 and to decrease netloss, after giving effect to the purchase accounting adjustments, by $114,000($0.00 per share).

8

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**(3)           Long Term Debt**

Asof June 30, 2007 and December 31, 2006, the Company had the following long-termdebt obligations, including amounts assumed or incurred in the CYMRI and Deccaacquisitions (see Note 2):
| ** **                                                                                                                                                                                                                                                                    | ** ** | **Balance at**     | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                                                                                    | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| $20,000,000  line of credit with a bank, principal payable $115,000 per month through  maturity in November 2007, interest at 1.0% above prime payable monthly,  secured by first lien on CYMRI’s oil and gas properties and deposits held by  stockholders              |       | $                       | 5,445,000  |   | $ | 6,035,000 |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| $7,000,000  line of credit with a bank, interest at 1.0% above prime payable monthly  through maturity in May 2010, secured by accounts receivable of domestic  petroleum and construction services businesses                                                                |       | 3,720,811               |       | 3,805,861 |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| Notes  payable to former CYMRI shareholders, bearing interest at 10%, payable in  total monthly installments of $65,335 beginning in June 2006 through maturity  at May 2008, and secured by substantially all assets, subject to liens on oil  and gas properties            |       | 2,532,158               |       | 2,789,986 |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| Notes  payable to 8 individuals, incurred in acquisition of CYMRI, bearing interest  at 10%, interest only payable monthly beginning in July 2006 through maturity  at May 2008, unsecured                                                                                    |       | 2,250,000               |       | 2,250,000 |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| $4,000,000  (Cdn) line of credit with a bank, interest at 2.5% above Canadian prime  payable monthly through maturity in May 2010, secured by accounts receivable  of Canadian petroleum services business                                                                    |       | 620,782                 |       | — |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| $1,500,000  term loan from a bank, interest at 4.0% above prime payable monthly through  maturity in March 2009, secured by accounts receivable of petroleum and  construction staffing services businesses                                                                   |       | 1,204,776               |       | — |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| Notes  payable to 3 individuals, incurred by CYMRI in acquisition of a subsidiary,  bearing interest at 8%, payable in total monthly installments of $54,219  beginning in March 2005 through maturity at February 2010, secured by  subsidiary’s oil and gas properties |       | 1,513,982               |       | 1,772,676 |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| Notes  payable to 2 individuals, incurred in acquisition of Decca, bearing interest  at 9%, payable in monthly installments of $30,099 (Cdn) from April 1, 2007  through March 31, 2012, unsecured                                                                            |       | 1,151,022               |       | — |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| Advances  from stockholders, bearing interest at 10%, interest only payable monthly  through various maturities, unsecured                                                                                                                                                    |       | 1,162,039               |       | 973,294 |   |
|                                                                                                                                                                                                                                                                          |       |                    |       |   |   |
| Other  short term notes for liability insurance and accrued payables, interest rates  at 7% to 9%                                                                                                                                                                             |       | 2,148,835               |       | 613,037 |   |
|                                                                                                                                                                                                                                                                          |       | 21,749,405              |       | 18,239,854 |   |
| Current  portion of long term debt                                                                                                                                                                                                                                            |       | (15,255,065             | )          | (7,661,885 | ) |
|                                                                                                                                                                                                                                                                          |       | $                       | 6,494,340  |   | $ | 10,577,969 |   |

 

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Borrowingsunder the bank credit agreement secured by CYMRI’s oil and gas properties aresubject to a borrowing base, which is periodically redetermined, and amountedto $6,035,000 as of December 31, 2006, the latest redetermination date.  The terms of the bank credit agreement, asamended, require CYMRI to maintain certain financial covenants regarding workingcapital ratio, interest coverage level, the ratio of loan balance to loanbalance plus stockholders’ equity, and the non-payment of dividends.  As of June 30, 2007, the Company had nounutilized borrowing capacity available under the credit agreement.  Due to operational circumstances, the Companywas not in compliance with the defined interest coverage and debt ratiocovenants as of June 30, 2007.  The bankis aware of these covenant violations, however, it has not requested, nor doesthe Company expect it to request, accelerated payment of the loan as a result thereof.  The Company’s periodic payment obligationsunder the bank credit facility are dependent upon a semi-annual evaluation ofCYMRI’s producing oil and gas properties for which the next scheduledevaluation is in October 2007.  Aspresently structured, borrowings outstanding under the bank credit facility aredue in November 2007 and the bank has indicated that it is not willing toextend the maturity beyond that date. The Company is considering various alternatives for the refinancing ofthis debt, including a possible disposition of the oil and gas propertiessecuring such debt (see Note 8).

Theterms of the bank credit agreement secured by domestic accounts receivable ofthe petroleum and construction staffing services businesses provide for aborrowing base of 85% of qualifying accounts receivable up to $7,000,000 andrequire the Company’s petroleum and construction staffing subsidiaries tomaintain certain financial covenants with regard to minimum net worth and otherequity amounts.  As of June 30, 2007, theCompany had no unutilized borrowing capacity available under the creditagreement.   Further, the Company was notin compliance with the minimum net worth covenant of its construction staffingsubsidiary and certain other equity related covenants as of June 30, 2007,however, the Company has obtained a waiver from the bank with respect to suchcovenants.  As a condition for grantingthe waiver, the bank is requiring: (a) Payment of a $50,000 waiver fee, effectivewith signing of a waiver letter in the third quarter of 2007; (b) 2% increasein the interest rate charged on borrowings made under the credit agreement,effective July 1, 2007; (c) The appointment of a bank approved consultant toapprove the Company’s weekly cash flow budgets and borrowing requests made tothe bank; and (d) The bank’s approval of any intercompany cash transfers.  In conjunction with the acquisition of Decca(see Note 2), the bank agreed to amend the credit facility to increase the maximumborrowings from $5,000,000 to $7,000,000 and to provide for a second line ofcredit, with essentially the same terms, secured by Decca’s Canadian accountsreceivable in an amount not to exceed $4,000,000 (Cdn).  The maturity of the amended credit facilitywas also extended by one year to May 2010. Additionally, the bank provided a two year amortizing term loan in theamount of $1,500,000 in conjunction with the Decca acquisition.

**(4)           Net Income (Loss) Per Share**

Basicincome (loss) per common share is computed by dividing the net income or lossby the weighted average number of shares of common stock outstanding during theperiod, including the issuance of 385,714 shares in a private placement at$1.75 per share for gross proceeds of $675,000 in the six months ended June 30,2007.  Diluted income (loss) per commonshare is computed by dividing net income or loss by the weighted average numberof shares of common stock outstanding during the period and potentially dilutivecommon share equivalents, consisting of stock options and warrants, under theTreasury Stock Method. The effects of potential common stock equivalents arenot included in computations when their effect is anti-dilutive.  Because of the net loss for the three and sixmonths ended June 30, 2007, the basic and diluted average outstanding sharesare considered the same, since including the shares would have an antidilutiveeffect on the net loss per share calculation.

**(5)           Stock-Based Compensation**

TheCompany has a stock-based compensation plan which was approved by thestockholders in October 2005 and amended in October 2006.  Under the plan, as amended, a maximum of2,400,000 shares may be awarded to directors and employees in the form of stockoptions, restricted stock or stock appreciation rights (to date, only stockoptions have been issued under the plan). The exercise price, terms and other conditions applicable to each stockoption grant are generally determined by the Board of Directors.  The exercise price of stock options is set onthe grant date and may not be less than the fair market value of the Company’sCommon Stock on that date.  The stockoptions generally become exercisable over a three year period and expire afterfive years.

EffectiveJanuary 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “*Share-Based Paymen*t” (“SFAS 123R”)requiring that compensation expense related to share-based payment transactionswith employees be recognized in the financial statements.   The cost is measured at the grant date,based on the calculated fair value of the award, and is recognized as anexpense over the employee’s requisite service period (generally, the vestingperiod of the award).   Prior to January1, 2006, the Company accounted for share-based compensation to employees inaccordance with APB Opinion No. 25, “*Accounting for StockIssued to Employees”* (“APB 25”) and related interpretations.  The Company adopted SFAS 123R using themodified prospective method, accordingly, financial statements for priorperiods were not restated.

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Therewere no employee options granted under the plan until the fourth quarter of2005.  Option activity with directors andemployees since January 1, 2006 were as follows (including options granted todirectors outside of the plan):

|                                   | ** ** | **Number** | ** ** | **Wtd.** Avg. | ** ** | **Wtd.** Avg.   | ** ** | **Aggregate** | ** ** |
|-----------------------------------|------------|------------|------------|--------------------|------------|----------------------|------------|---------------|------------|
| ** **                        | ** ** | **of**     | ** ** | **Exercise**       | ** ** | **Remaining**        | ** ** | **Intrinsic** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**          | ** ** | **Term (Yrs.)** | ** ** | **Value**     | ** ** |
| Outstanding at January  1, 2006   |       | 550,000    |       | $                  | 0.25       |                 |       |          |       |   |
| Options granted                   |       | 1,144,100  |       | 1.87               |       |                 |       |          |       |
| Outstanding at December  31, 2006 |       | 1,694,100  |       | 1.34               |       |                 |       |          |       |
| Options granted                   |       | 400,000    |       | 2.10               |       |                 |       |          |       |
| Options exercised                 |       | (125,000   | )          | (0.18              | )          |                 |       |          |       |
| Options forfeited                 |       | (83,000    | )          | (2.10              | )          |                 |       |          |       |
| Outstanding at June 30,  2007     |       | 1,886,100  |       | $                  | 1.55       |                 | 4.2        |          | $          | 379,950 |   |
| Exercisable at June 30, 2007      |       | 525,000    |       | $                  | 0.96       |                 | 4.1        |          | $          | 288,000 |   |

 

Stock-basedcompensation expense for the six months ended June 30, 2007 in the amount of$226,307 has been recognized as a current period expense in the accompanyingConsolidated Financial Statements.  As ofJune 30, 2007, total unrecognized compensation cost of $1,314,196 related tostock options is expected to be recognized over a weighted average period ofapproximately 4.7 years.  The estimatedfair value of the options granted to employees under the plan was calculatedusing a Black Scholes option pricing model. The following schedule reflects theassumptions included in this model as it relates to the valuation of suchoptions: (a) Expected volatility — 95%; (b) Expected risk free interest rate —6%; (c) Expected dividend yield — zero; and (d) Expected option term — 3 years.

Theaggregate intrinsic value in the table above represents the total pre-taxintrinsic value (the difference between the Company’s closing stock price onthe last trading day of the second quarter of 2007 and the exercise price,multiplied by the number of in-the-money options) that would have been receivedby the option holders had all option holders exercised their options on June30, 2007. The amount of aggregate intrinsic value will change based on the fairmarket value of the Company’s stock.

**(6)           Stockholder Advances and RelatedMatters**

TheCompany received net stockholder advances in the amounts of $650,000 and$933,000 in the six months ended June 30, 2007 and 2006, respectively.  Stockholder advances, excluding amountsadvanced to finance the cash portion of the CYMRI purchase price (see Note 2),are reflected as unsecured long term debt obligations and accrue interest at arate of 10% per annum.

TheCompany’s former President was not paid any salary for full-time servicesrendered prior to his resignation in July 2006. The Company estimated the value of the forgone salary at $12,500 perquarter through the second quarter of 2006, and recorded such amounts as an expenseand as a contribution to capital in the respective periods.

**(7)           Contingencies**

Two of CYMRI’ssubsidiaries are defendants in certain lawsuits involving professionalliability arising in the normal course of business.  In the second quarter of 2007, a CYMRIsubsidiary settled a long-standing lawsuit for an amount in excess of the$100,000 insurance deductible.  TheCompany recorded the deductible payment and the associated settlement costs ofapproximately $35,000 as an adjustment to the purchase price paid for CYMRI(see Note 2).  With respect to thesubsidiaries’ other lawsuits, it is not practical at the present time todetermine the amount or likelihood of an unfavorable outcome to the Company’sconsolidated financial position or results of operations.  However, management believes that CYMRI’ssubsidiaries have meritorious defenses in each case and are vigorouslydefending these matters.

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**(8)           Subsequent Events**

InAugust 2007, the Company entered into a non-binding letter of intent to sellits construction staffing business to a private construction staffingcompany.  The letter of intent providesfor a cash sales price of $4,200,000, subject to certain closing adjustmentsand conditions.  If the sale is completedon those terms, the Company expects to report a substantial pre-tax gain uponthe projected completion of the sale in the third quarter of 2007.  The Company expects to apply the salesproceeds primarily to the repayment of debt and other accrued obligations.

The Company has also undertaken efforts tosell its oil and gas properties in conjunction with the anticipated maturity ofthe November 2007 loan secured by the properties (see Note 3).  As of June 30, 2007, the oil and gasproperties had a net book value of approximately $10 million (net of relateddeferred taxes).  The Company performedan SEC mandated “full cost ceiling test” as of that same date, which indicatedthat no write-down of the properties was required.  However, the sale of oil and gas propertiesis subject to a wide range of valuation factors, including assumptionsregarding future commodity prices, production and development costs, andreserve volumes.  Accordingly, it is notfeasible for the Company to accurately predict the sales price of its oil andgas properties.  It is possible that theCompany may ultimately sell its oil and gas properties in the third or fourthquarter of 2007 in an amount that would result in recognizing a substantialnon-cash loss.

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**ITEM 2.**                    MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of our financialcondition and results of operations should be read in conjunction with, and isqualified in its entirety by, the condensed consolidated financial statementsand notes thereto included in Item 1 in this Quarterly Report on Form 10-QSB.This item contains forward-looking statements that involve risks anduncertainties. Actual results may differ materially from those indicated insuch forward-looking statements.

**Forward-Looking Statements**

This Quarterly Report on Form 10-QSB and thedocuments incorporated herein by reference contain forward-looking statementsthat have been made pursuant to the provisions of the Private SecuritiesLitigation Reform Act of 1995. Such forward-looking statements are based oncurrent expectations, estimates, and projections about our industry, managementbeliefs, and certain assumptions made by our management. Words such as“anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”variations of such words, and similar expressions are intended to identify suchforward-looking statements. These statements are not guarantees of futureperformance and are subject to certain risks, uncertainties, and assumptionsthat are difficult to predict; therefore, actual results may differ materiallyfrom those expressed or forecasted in any such forward-looking statements.Unless required by law, we undertake no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents, or otherwise. However, readers should carefully review the risk factorsset forth in other reports and documents that we file from time to time withthe Securities and Exchange Commission, particularly the Quarterly Reports onForm 10-QSB, and future Annual Reports on Form 10-KSB and any Current Reportson Form 8-K.

**Overview and History**

Stratum Holdings, Inc. (formerly, TradestarServices, Inc.) was incorporated in the State of Nevada on September 3, 2003under the name Frontier Staffing, Inc. We were formed to acquire TradestarConstruction Services, Inc., a New Mexico corporation, which is a wholly-ownedsubsidiary operating as an employment staffing service specializing in theplacement of both long-term and short-term skilled and unskilled constructionlabor to the New Mexico construction market. In January 2004, we acquiredTradestar Construction Services, Inc. in a stock-for-stock exchange. We issueda total of 6,400,000 shares of Common Stock in connection with thistransaction.

In the construction services business, wedevelop, own, and operate employment service centers in specific regional areasspecializing in the placement of skilled construction labor. We provide bothskilled commercial craftsmen and general unskilled labor to major, non-unionconstruction contractors in several of the fast-growing markets in theSouthwestern U.S.

On July 7, 2004, we filed a registrationstatement under cover of Form SB-2 with the SEC. This registration statementwas declared effective by the SEC on February 10, 2005.  On March 30, 2005, we closed this publicoffering.  We raised a total of $600,000and sold a total of 2,000,000 shares of Common Stock.  In October 2005, we changed our name toTradestar Services, Inc.

On May 23, 2006, we acquired the outstandingcommon stock of The CYMRI Corporation (“CYMRI”) for total consideration of$12.7 million paid in a combination of cash, notes payable and CommonStock.  CYMRI and its subsidiariesperform petroleum engineering services largely for customers in the UnitedStates and are engaged in the exploration and production of oil and natural gasfrom properties located in Texas and Louisiana. The deemed effective date of the CYMRI acquisition for accountingpurposes was June 1, 2006.  The effect ofincluding CYMRI’s results of operations in the Company’s consolidated financialstatements was to increase revenues for the five months ended May 31, 2007 by$13,320,000 and to decrease net loss, after giving effect to the purchaseaccounting adjustments, by approximately $300,000 ($0.01 per share).

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On March 2, 2007, we acquired the outstandingcapital stock of Decca Consulting, Ltd. (“Decca”) for total consideration of $5.1 million paid in a combinationof cash, notes payable and Common Stock. Decca provides consulting services for the Canadian energyindustry.  The deemed effective date ofthe Decca acquisition for accounting purposes was March 1, 2007.  The effect of including Decca’s results ofoperations in the Company’s consolidated financial statements since March 1,2007 was to increase revenues for the six months ended June 30, 2007 by$4,529,000 and to decrease net loss, after giving effect to the purchaseaccounting adjustments, by $114,000 ($0.00 per share).

Asa result of the CYMRI and Decca acquisitions, the Company has the followingthree business segments:
|        | · | Petroleum Engineering (service based)                | - Houston, Texas              |
|--------|--------|------------------------------------------------------|-------------------------------|
|   |   |                                                 | - Lafayette,  Louisiana       |
|   |   |                                                 | - Calgary,  Alberta           |
|   |   |                                                 |                          |
|   | · | Construction Staffing (service based)                | - Albuquerque, New Mexico     |
|   |   |                                                 | - Phoenix and  Tempe, Arizona |
|   |   |                                                 | - Las Vegas,  Nevada          |
|   |   |                                                 |                          |
|   | · | Petroleum Exploration & Production (asset based) | - Houston, Texas              |
|   |   |                                                 | - Lafayette, Louisiana        |

 

The Company has reported substantial consolidatedoperating losses and working capital deficits since completing the CYMRI andDecca acquisitions. In order to address its liquidity needs, the Company’sBoard of Directors recently authorized Management to pursue a range ofalternative actions including debt restructurings and the possible sales of oneor more of the Company’s operating assets or businesses as a means ofaddressing its financial obligations.  Asfurther described in “Subsequent Events” below, the Company entered into anon-binding letter of intent in August 2007 for the sale of its constructionstaffing business on terms that would enhance its liquidity upon the projectedcompletion of the sale in the third quarter of 2007.

**Results of Operations**

The acquisitions of CYMRI and Decca havesubstantially changed the Company’s operating profile and shifted its focusfrom one of solely a construction services company to one of a company having amore diversified staffing segment with highly developed petroleum engineeringservices businesses in the U.S. and Canada and a still developing constructionservices business.  The acquiredpetroleum engineering services businesses are established operations withstaffs who have performed a wide variety of long term and short term projectsfor customers throughout North and South America over a lengthy history.  These projects tend to be of a morespecialized, technical nature than the work performed in the traditionalconstruction services business. Additionally, the CYMRI acquisition has given the Company a non-core,capital-intensive petroleum exploration and production segment which is subjectto the operational risks of oil and gas exploration as well as the financialrisks of a commodity pricing environment.

In its traditional construction servicesbusiness, the Company has a limited operating history and experienced earlyperiod operating losses, similar to many startup ventures.  However, the Company achieved its initialprofitable operations in the construction services business in the year endedDecember 31, 2006.  In the constructionservices business, our results of operations have been and may continue to besubject to variations. The results for a particular period may vary as a resultof a number of factors including the overall state of the construction staffingsegment of the economy, the demand for our services and products, economicconditions in our markets, and product enhancements by us or our competitors aswell as other competitive conditions.

*Three months ended June 30, 2007versus three months ended June 30, 2006*— Total revenues for the three months endedJune 30, 2007 were $13,696,000 compared to $6,436,000 in the three months endedJune 30, 2006.

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Revenuesfrom construction staffing services for the three months ended June 30, 2007were $3,396,000 compared to $4,084,000 for the three months ended June 30,2006.  This decrease is due primarily tothe decline in revenues in the construction branch in Las Vegas, Nevada, due tothe Company’s recent decision to reduce its level of operations in that market.

Revenuesfrom petroleum engineering services for the three months ended June 30, 2007were $9,567,000 compared to $1,947,000 for the three months ended June 30,2006.  Included in the 2007 period werethree months of revenues from CYMRI’s petroleum engineering business, acquiredeffective June 1, 2006, plus three months of revenues from Decca, acquiredeffective March 1, 2007, whereas the 2006 period included only one month ofrevenues from CYMRI’s petroleum engineering business.  Total billings for petroleum engineeringservices in the three months ended June 30, 2007 were approximately 6,815 mandays at an average billing rate of approximately $1,400 per day.

Revenuesfrom oil and gas sales for the three months ended June 30, 2007 were $724,000compared to $343,000 for the three months ended June 30, 2006.  Included in the 2007 period were three monthsof revenues from CYMRI’s oil and gas production operations, acquired effectiveJune 1, 2006, whereas the 2006 period included only one month of revenues fromCYMRI’s oil and gas production operations. Revenues from oil production in the three months ended June 30, 2007were $553,000, reflecting volumes of 9,527 barrels at an average price of $58.08per barrel, while gas revenues were $171,000, reflecting volumes of 23,781 Mcfat an average price of $7.18 per Mcf.

Costsof construction staffing services for the three months ended June 30, 2007 was$2,645,000 versus $3,402,000 for the three months ended June 30, 2006.  Cost of construction staffing servicesincludes wages for temporary employees, federal and state payroll taxes,workers compensation and other direct costs.  Costs of construction services are generally consistent, except forpayroll taxes where the maximum contribution has been met and for workerscompensation, which vary with each job site. Costs of construction services decreased as a percentage of revenues toapproximately 78% for the three months ended June 30, 2007, compared to approximately83% for the three months ended June 30, 2006, due to an increase in billingrates.

Costsof petroleum engineering services for the three months ended June 30, 2007 were$7,357,000 versus $1,117,000 for the three months ended June 30, 2006.  Included in the 2007 period were three monthsof costs from CYMRI’s petroleum engineering business, acquired effective June1, 2006, plus three months of costs from Decca, acquired effective March 1,2007, whereas the 2006 period included only one month of costs from CYMRI’spetroleum engineering business.  Costs ofpetroleum engineering services for the three months ended June 30, 2007represented approximately 77% of revenues, consistent with the blendedhistorical percentages experienced by CYMRI’s staffing services subsidiary,PEI, and Decca.

Leaseoperating expenses (“LOE”), including production taxes, were $339,000 for thethree months ended June 30, 2007 versus $152,000 for the three months endedJune 30, 2006, representing LOE of CYMRI’s oil and gas production operations,acquired effective June 1, 2006, for a total of three months in the 2007 periodand one month in the 2006 period.

Depreciation,depletion and amortization (“DD&A”) expense for the three months ended June30, 2007 was $240,000 versus $137,000 for the three months ended June 30, 2006,representing DD&A of CYMRI’s oil and gas production operations, acquiredeffective June 1, 2006, for a total of three months in the 2007 period and onemonth in the 2006 period.

Workoverexpenses for the three months ended June 30, 2007 were $264,000 versus $89,000for the three months ended June 30, 2006, representing workovers on CYMRI’sSouth Texas oil and gas properties, acquired effective June 1, 2006, for atotal of three months in the 2007 period and one month in the 2006 period.

Selling, general and administrative (“SG&A”)expenses for the three months ended June 30, 2007 were $3,155,000 compared to$1,303,000 for the three months ended June 30, 2006.  This increase reflected SG&A expenses applicableto CYMRI’s petroleum engineering and exploration and production operations,acquired 

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effective June 1, 2006, for a total of threemonths in 2007, plus the SG&A expenses of Decca, acquired effective March1, 2007, for three months, with the remaining SG&A expenses attributable toour traditional construction business. The major components of SG&A expenses include professional fees,administrative salaries and associated payroll costs, rent and telephoneexpenses.

Interestexpense for the three months ended June 30, 2007 was $509,000 versus $145,000for the three months ended June 30, 2006. This substantial increase reflects interest expense on CYMRI’s long termdebt applicable to CYMRI’s oil and gas production operations, acquiredeffective June 1, 2006, for a total of three months in the 2007 period and onemonth in the 2006 period.

Income taxes were a benefit of $276,000 for thethree months ended June 30, 2007 versus a provision of $65,000 for the threemonths ended June 30, 2006, and reflect a benefit rate of 34% on a pre-tax netloss of $813,000 in the three months ended June 30, 2007.

*Six months ended June 30, 2007versus six months ended June 30, 2006*— Total revenues for the six months ended June 30, 2007 were$27,383,000 compared to $9,780,000 for the six months ended June 30, 2006.

Revenuesfrom construction staffing services for the six months ended June 30, 2007 were$7,163,000 compared to $7,428,000 for the six months ended June 30, 2006.  This decrease is due primarily to the declinein revenues in the construction branch in Las Vegas, Nevada, due to theCompany’s recent decision to reduce its level of operations in that market.

Revenuesfrom petroleum engineering services for the six months ended June 30, 2007 were$18,734,000 compared to $1,947,000 for the six months ended June 30, 2006.   Included in the 2007 period were six monthsof revenues from CYMRI’s petroleum engineering business, acquired effectiveJune 1, 2006, plus four months of revenues from Decca, acquired effective March1, 2007, whereas the 2006 period included only one month of revenues fromCYMRI’s petroleum engineering business. Total billings for petroleum engineering services in the six monthsended June 30, 2007 were approximately 13,925 man days at an average billingrate of approximately $1,345 per day.

Revenuesfrom oil and gas sales for the six months ended June 30, 2007 were $1,409,000compared to $343,000 for the six months ended June 30, 2006.  Included in the 2007 period were six monthsof revenues from CYMRI’s oil and gas production operations, acquired effectiveJune 1, 2006, whereas the 2006 period included only one month of revenues fromCYMRI’s oil and gas production operations. Revenues from oil production in the six months ended June 30, 2007 were$1,062,000 reflecting volumes of 18,689 barrels at an average price of $56.82per barrel, while gas revenues were $347,000, reflecting volumes of 48,565 Mcfat an average price of $7.14 per Mcf.

Costsof construction staffing services for the six months ended June 30, 2007 was$5,572,000 versus $6,071,000 for the six months ended June 30, 2006.  Cost of construction staffing servicesincludes wages for temporary employees, federal and state payroll taxes,workers compensation and other direct costs.  Costs of construction services are generally consistent, except forpayroll taxes where the maximum contribution has been met and for workerscompensation, which vary with each job site. Costs of construction services decreased as a percentage of revenues toapproximately 78% for the six months ended June 30, 2007, compared toapproximately 82% for the six months ended June 30, 2006, due to an increase inbilling rates.

Costsof petroleum engineering services for the six months ended June 30, 2007 were$14,564,000 versus $1,117,000 for the six months ended June 30, 2006.  Included in the 2007 period were six monthsof costs from CYMRI’s petroleum engineering business, acquired effective June1, 2006, plus four months of costs from Decca, acquired effective March 1,2007, whereas the 2006 period included only one month of costs from CYMRI’spetroleum engineering business.  Costs ofpetroleum engineering services for the six months ended June 30, 2007represented approximately 78% of revenues, consistent with the blended historicalpercentages experienced by CYMRI’s staffing services subsidiary, PEI, andDecca.

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Leaseoperating expenses (“LOE”), including production taxes, were $712,000 for thesix months ended June 30, 2007 versus $152,000 for the six months ended June30, 2006, representing LOE of CYMRI’s oil and gas production operations,acquired effective June 1, 2006, for a total of six months in the 2007 periodand one month in the 2006 period.

Depreciation,depletion and amortization (“DD&A”) expense for the six months ended June30, 2007 was $484,000 versus $141,000 for the six months ended June 30, 2006,representing DD&A of CYMRI’s oil and gas production operations, acquiredeffective June 1, 2006, for a total of six months in the 2007 period and onemonth in the 2006 period.

Workoverexpenses for the six months ended June 30, 2007 were $455,000 versus $89,000for the six months ended June 30, 2006, representing workovers on CYMRI’s SouthTexas oil and gas properties, acquired effective June 1, 2006, for a total ofsix months in the 2007 period and one month in the 2006 period.

Selling, general and administrative (“SG&A”)expenses for the six months ended June 30, 2007 were $5,695,000 compared to$1,837,000 for the six months ended June 30, 2006.  This increase reflected SG&A expensesapplicable to CYMRI’s petroleum engineering and exploration and productionoperations, acquired effective June 1, 2006, for a total of six months in 2007,plus the SG&A expenses of Decca, acquired effective March 1, 2007, for fourmonths, with the remaining SG&A expenses attributable to our traditionalconstruction business.  The majorcomponents of SG&A expenses include professional fees, administrativesalaries and associated payroll costs, rent and telephone expenses.

Interestexpense for the six months ended June 30, 2007 was $925,000 versus $180,000 forthe six months ended June 30, 2006.  Thissubstantial increase reflects interest expense on CYMRI’s long term debtapplicable to CYMRI’s oil and gas production operations, acquired effectiveJune 1, 2006, for a total of six months in the 2007 period and one month in the2006 period.

Income taxes were a benefit of $348,000 for thesix months ended June 30, 2007 versus a provision of $65,000 for the six monthsended June 30, 2006, and reflect a benefit rate of 34% on a pre-tax net loss of$1,025,000 in the six months ended June 30, 2007.

**Liquidity and Capital Resources**

*Operating**activities.*  Cash flowfrom operating activities for the six months ended June 30, 2007 reflectedrevenues, less operating expenses, resulting from the acquisitions of CYMRI andDecca for six and four months, respectively, whereas only one month of cashflow from CYMRI’s acquired operations was reflected in cash flow from operatingactivities for the six months ended June 30, 2006.  Cash flow from operating activities was alsoimpacted by changes in working capital. Net cash flow used in operating activities for the six months ended June30, 2007 was $361,000 versus $1,359,000 for the six months ended June 30, 2006.  These operating cash flow amounts were net ofchanges in working capital, which resulted in a net cash increase amounting to$84,000 and a net cash decrease amounting to $1,516,000 in the six months endedJune 30, 2007 and 2006, respectively, due to changes in timing between theaccrual and payment of accounts receivable and accounts payable.

*Investing**activities. *Net cash used in investingactivities for the six months ended June 30, 2007 was $432,000 compared to$150,000 for the six months ended June 2006. The 2007 amount reflected cash expended for: (a) The cash portion of theDecca purchase price in the amount of $152,000; and (b) Capital expenditures inthe amount of $280,000, primarily for drilling and equipment costs incurred onCYMRI’s oil and gas properties.  CYMRI’scapital expenditures were relatively low in the six months ended June 30, 2007,however, it is possible that CYMRI’s near term capital expenditures couldsubstantially increase if it elects to participate in the drilling of anon-operated exploratory well in South Louisiana in which it has a 50% workinginterest.  The well was originallyspudded in 2006 and encountered mechanical problems and was suspended.  The operator is expected to propose the drillingof a new well later in 2007 in which CYMRI will have the option to participate.

 

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*Financing activities.*Netcash provided by financing activities for the six months ended June 30, 2007was $574,000 compared to $1,954,000 for the six months ended June 30,2006.  In the six months ended June 30,2007, net proceeds of long term debt borrowings and stockholder advancesprovided cash in the amount of $3,158,000, payments of long term debt used cashof $3,356,000, and private stock issuances plus warrant/option exercisesprovided cash in the amount of $772,000. In the six months ended June 30, 2006, net proceeds of stockholderadvances and long term debt borrowings provided cash in the amount of$1,954,000.

The Company’s capital expenditure profile haschanged significantly since the CYMRI acquisition.  In our construction services business, capitalexpenditure requirements are relatively low, except for the periodic opening ofnew construction services centers. Likewise, capital expenditure requirements of CYMRI’s staffing servicessubsidiary, Petroleum Engineers, Inc. (“PEI”) are relatively low.  However, CYMRI’s exploration and productionbusiness is highly capital intensive.  Inthis business, expenditures for the drilling and equipping of oil and gas wellsare typically required to maintain or increase existing production levels andproduction often declines in a relatively short period of time if maintenancecapital is not invested timely.  Further,acquisitions of additional lease acreage are often needed to drill new oil andgas wells.  As is the case with mostcompanies with oil and gas producing operations, the Company expects to financeits capital expenditure requirements through a combination of cash flow fromoperations, secured bank borrowings and other sources.

The CYMRI and Decca acquisitions have substantially increased the Company’slong term debt obligations (see Note 3, “Long Term Debt”).  A substantial portion of our long term debtis in the form of a bank credit facility secured by our producing oil and gasproperties.  Borrowings under the bankcredit agreement are subject to a borrowing base, which is periodicallyredetermined, and amounted to $6,035,000 as of December 31, 2006.   The terms of the bank credit agreement, asamended, require CYMRI to maintain certain financial covenants regardingworking capital ratio, interest coverage level, the ratio of loan balance toloan balance plus stockholders’ equity, and the non-payment of dividends. As ofJune 30, 2007, the Company had no unutilized borrowing capacity available underthe credit agreement.  Due to operationalcircumstances, the Company was not in compliance with the defined interestcoverage and debt ratio covenants as of June 30, 2007.  The bank is aware of these covenantviolations, however, it has not requested, nor does the Company expect it torequest,  accelerated payment of the loanas a result thereof.  The Company’speriodic payment obligations under the bank credit facility are dependent upona semi-annual evaluation of CYMRI’s producing oil and gas properties for whichthe next scheduled evaluation is in October 2007.  As presently structured, borrowingsoutstanding under the bank credit facility in the amount of $5,445,000 are duein November 2007.  The Company isconsidering various alternatives for the refinancing of this debt, including apossible disposition of the oil and gas properties securing such debt.

Theterms of a second bank credit agreement, secured by domestic accountsreceivable of the petroleum and construction staffing services businesses,provide for a borrowing base of 85% of qualifying accounts receivable up to$7,000,000 and require the Company’s petroleum and construction staffingsubsidiaries to maintain certain financial covenants with regard to minimum networth and other equity amounts.  As ofJune 30, 2007, the Company had no unutilized borrowing capacity available underthe credit agreement.  Further, theCompany was not in compliance with the minimum net worth of its constructionstaffing subsidiary and certain other equity related covenants as of June 30,2007, however, the Company has obtained a waiver from the bank with respect tosuch covenants.  As a condition forgranting the waiver, the bank is requiring: (a) Payment of a $50,000 waiverfee, effective with signing of a waiver letter in the third quarter of 2007;(b) 2% increase in the interest rate charged on borrowings made under thecredit agreement, effective July 1, 2007; (c) The appointment of a bankapproved consultant to approve the Company’s weekly cash flow budgets andborrowing requests made to the bank; and (d) The bank’s approval of anyintercompany cash transfers.  Inconjunction with the acquisition of Decca (see Note 2, “CorporateAcquisitions”), the bank agreed to amend the credit facility to increase themaximum borrowings from $5,000,000 to $7,000,000 and to provide for a secondline of credit, with essentially the same terms, secured by Decca’s Canadianaccounts receivable in an amount not to exceed $4,000,000 (Cdn).  The maturity of the amended credit facilitywas also extended by one year to May 2010. Additionally, the bank provided a two year amortizing term loan in theamount of $1,500,000 in conjunction with the Decca acquisition.

To meet short term liquidity needs, the Company commenced a privateoffering of shares of Common Stock and Warrants to a group of AccreditedInvestors in October 2006.  In the fourthquarter of 2006, we sold a total of 314,286 shares of Common Stock toAccredited Investors at $1.75 per share for gross proceeds of $550,000 and 

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issued one year Warrants to such Investors to purchase an additional314,286 shares of our Common Stock at $2.50 per share.   In the first quarter of 2007, we sold atotal of 385,714 shares of Common Stock to Accredited Investors at $1.75 pershare for gross proceeds of $675,000 and issued one year Warrants to suchInvestors to purchase an additional 385,714 shares of our Common Stock at $2.50per share.

**Subsequent Events**

In August 2007, the Company entered into anon-binding letter of intent to sell its construction staffing business to aprivate construction staffing company. The letter of intent provides for a cash sales price of $4,200,000,subject to certain closing adjustments and conditions.  If the sale is completed on those terms, theCompany expects to report a substantial pre-tax gain upon the projectedcompletion of the sale in the third quarter of 2007.  The Company expects to apply the salesproceeds primarily to repayment of debt and other accrued obligations.

TheCompany has also undertaken efforts to sell its oil and gas properties inconjunction with the anticipated maturity of the November 2007 loan secured bythe properties (see Note 3).  As of June30, 2007, the oil and gas properties had a net book value of approximately $10million (net of related deferred taxes). The Company performed an SEC mandated “full cost ceiling test” as ofthat same date, which indicated that no write-down of the properties wasrequired.  However, the sale of oil andgas properties is subject to a wide range of valuation factors, includingassumptions regarding future commodity prices, production and developmentcosts, and reserve volumes.  Accordingly,it is not feasible for the Company to accurately predict the sales price of itsoil and gas properties.  It is possiblethat the Company may ultimately sell its oil and gas properties in the third orfourth quarter of 2007 in an amount that would result in recognizing asubstantial non-cash loss.

**Recently Issued AccountingPronouncements**

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 159 “**The Fair ValueOption for Financial Assets and Financial Liabilities—Including an amendment ofFASB Statement No. 115** “ (“SFAS 159”), which allowsmeasurement at fair value of eligible financial assets and liabilities that arenot otherwise measured at fair value. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. We do not expect the adoption of SFAS 159 to have a material impact onour consolidated financial statements.

InSeptember 2006, the FASB issued Statement No. 158 “*Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans, an amendment of FASB Statements No. 87, 88,106, and 132(R)*” (“SFAS 158”), which requires companies to recognizethe funded status of a defined benefit postretirement plan as an asset orliability in its balance sheet.  SFAS 158 is effective for fiscal yearsending after December 15, 2006. We do not expect the adoption of SFAS 158 tohave an impact on us since we have no defined benefit plans.

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*” (“SFAS 157”),which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. This Statement applies underother accounting pronouncements that require or permit fair value measurements,the FASB having previously concluded in those accounting pronouncements thatfair value is the relevant measurement attribute. SFAS 157 is effective forfiscal years beginning after December 15, 2007.   We do not expect the adoption of SFAS 157 tohave a material impact on our consolidated financial statements.

InJuly 2006, the FASB issued Financial Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109*” (“FIN 48”), toclarify certain aspects of accounting for uncertain tax positions, includingissues related to the recognition and measurement of those tax positions. Thisinterpretation is effective for fiscal years beginning after December 15,2006. We are in the process of evaluating the impact of the adoption of thisinterpretation on our consolidated financial position, results of operations orcash flows.

InMarch 2006, the FASB issued SFAS No.156, “*Accountingfor Servicing of Financial Assets*” (“SFAS 156”), which requires allseparately recognized servicing assets and servicing liabilities be initiallymeasured at fair 

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value.SFAS 156 permits, but does not require, the subsequent measurement of servicingassets and servicing liabilities at fair value. Adoption is required as of thebeginning of the first fiscal year that begins after September 15, 2006.Early adoption is permitted. The adoption of SFAS 156 is not expected to have amaterial effect on our consolidated financial position, results of operationsor cash flows.

InFebruary 2006, the FASB issued SFAS No. 155, “*Accountingfor Certain Hybrid Financial Instruments, an amendment of FASB Statements No.133 and 140*” (“SFAS 155”). SFAS 155 clarifies certain issuesrelating to embedded derivatives and beneficial interests in securitizedfinancial assets. The provisions of SFAS 155 are effective for all financialinstruments acquired or issued after fiscal years beginning after September 15,2006. We do not expect that the adoption of SFAS 155 will have a materialimpact on our consolidated financial position, results of operations or cashflows.

**Critical Accounting Policies andEstimates**

Our discussion and analysis of our financialcondition and results of operations are based on consolidated financialstatements which have been prepared in accordance with generally acceptedaccounting principles in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses. We believe that certainaccounting policies affect our more significant judgments and estimates used inthe preparation of our consolidated financial statements as indicated below.  See our Annual Report on Form 10-KSB for theyear ended December 31, 2006 for a further description of our criticalaccounting policies and estimates.

**ITEM 3.**                 CONTROLS ANDPROCEDURES

As of the date of this report, our ChiefExecutive Officer and our Chief Financial Officer evaluated the effectivenessof the design and operation of our disclosure controls and procedures pursuantto Rule 13a-15b under the Securities Exchange Act of 1934. Based on theirreview of our disclosure controls and procedures, they have concluded that our disclosurecontrols and procedures are effective in timely alerting each of them tomaterial information relating to us that is required to be included in ourperiodic SEC filings. Further, there were no significant changes in theinternal controls or in other factors that could significantly affect thesedisclosure controls after the evaluation date and the date of this report. Norwere there any significant deficiencies or material weaknesses in suchdisclosure controls and procedures requiring corrective actions. As a result,no corrective actions were taken.

Except for the impact of the Decca acquisitiondescribed in Note 2 of the Condensed Consolidated Financial Statements, theCompany has made no changes in its disclosure controls and procedures in themost recent quarterly reporting period. As a result of the Decca acquisition on March 2, 2007, the Company iscurrently evaluating its disclosure controls and procedures on a consolidatedcompany basis.  Upon completion of thatevaluation, the Company expects that certain key controls underlying itsdisclosure controls and procedures will be enhanced or modified due toadministrative efficiencies achieved in certain support operations.

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**PART II.**               OTHER INFORMATION

**ITEM 1.**                    LEGALPROCEEDINGS

SeeNote 7 to Condensed Consolidated Financial Statements.

**ITEM 2.**                    UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

**ITEM 3.**                 DEFAULTS UPONSENIOR SECURITIES

None.

**ITEM 4.**                 SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

None.

**ITEM 5.**                 OTHER INFORMATION

None.

**ITEM 6.**                 EXHIBITS
| 31.1 | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)/15(d)-14(a)                                                                    |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15(d)-14(a)                                                                    |
| 32.1 | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|        | STRATUM HOLDINGS, INC.         |
|--------|--------------------------------|
|   |                           |
|   | /s/ Richard A. Piske, III |
|   | Richard A.  Piske, III         |
|   | Chief Executive  Officer       |
|   |                           |
|   | /s/ D. Hughes Watler, Jr. |
|   | D. Hughes  Watler, Jr.         |
|   | Chief Financial  Officer       |

 

August 17, 2007

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