UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
 
 FORM
10-Q
 
 T
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended September 30,
2008
 
 £
              TRANSITION
      REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ________ to  ________
 
 
 Commission
file number:     000-51488
 
 PETROSEARCH
ENERGY CORPORATION
 (Exact
name of small business issuer as specified in its charter)
 
 NEVADA
                  
                  20-2033200(State or other
      jurisdiction of incorporation
      or organization)
                  
                  (IRS
      Employer Identification
No.)
  675
Bering Drive, Suite 200
 Houston,
TX 77057
 (Address
of principal executive offices)
 
 (713)
961-9337
 (Issuer’s
telephone number)
 
 Indicate
by check mark whether the issuer: (i) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (ii)
has been subject to such filing requirements for the past 90 days.
 Yes TNo £
 
 Indicate
by check mark whether the issuer is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer £
                
                Accelerated
      filer £Non-accelerated
      filer   £
                
                Smaller
      reporting Company T
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).      Yes £No T
 
 State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:  42,416,672 shares of $0.001 par value
common stock outstanding as of November 10, 2008
  
 
  PETROSEARCH
ENERGY CORPORATION
 
 FORM
10-Q
 For
The Quarter Ended September 30, 2008
 
 INDEX
 
 
 PART
      I - FINANCIAL INFORMATIONITEM
      1.
                                            
                                            FINANCIAL STATEMENTS
                                            
                                            2ITEM
      2.
                                            
                                            MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATIONS
                                            
                                            15ITEM
      4.
                                            
                                            CONTROLS AND PROCEDURES
                                            
                                            25PART
      II - OTHER INFORMATIONITEM
      2.
                                            
                                            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
                                            
                                            26ITEM
      6.
                                            
                                            EXHIBITS
                                            
                                            27SIGNATURES
                                            
                                            28
  1
 Index
  ITEM1.
              FINANCIAL
      STATEMENTS
 PETROSEARCH
ENERGY CORPORATION
 CONSOLIDATED
BALANCE SHEETS
 September
30, 2008 and December 31, 2007
 
 ASSETS
                                        
                                        September 30,
                                          2008
                                          (Unaudited)
                                        
                                        
                                        December 31, 2007
                                          (See note)Current
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        13,858,274
                                        
                                        
                                        $
                                        8,033,611Short-term
      investments
                                        
                                        
                                        784,000
                                        
                                        
                                        
                                        -Accounts
      receivable:Joint
      owners-billed, net of allowance of $62,179 at September 30, 2008and
      December 31, 2007
                                        
                                        
                                        9,177
                                        
                                        
                                        
                                        203,671Joint
      owners-unbilled
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,568Oil
      and gas production sales
                                        
                                        
                                        21,029
                                        
                                        
                                        
                                        319,926Prepaid
      expenses and other current assets
                                        
                                        
                                        541,164
                                        
                                        
                                        
                                        987,155Total
      current assets
                                        
                                        
                                        15,213,644
                                        
                                        
                                        
                                        9,547,931Property
      and equipment:Oil
      and gas properties, full cost method of accounting:Properties
      subject to amortization
                                        
                                        
                                        23,722,167
                                        
                                        
                                        
                                        33,235,534Properties
      not subject to amortization
                                        
                                        
                                        420,592
                                        
                                        
                                        
                                        7,099,601Other
      property and equipment
                                        
                                        
                                        153,031
                                        
                                        
                                        
                                        153,031Total
                                        
                                        
                                        24,295,790
                                        
                                        
                                        
                                        40,488,166Less
      accumulated depreciation, depletion and amortization
                                        
                                        
                                        (3,396,319
                                        )
                                        
                                        
                                        (3,266,658
                                        )Total
      property and equipment, net
                                        
                                        
                                        20,899,471
                                        
                                        
                                        
                                        37,221,508Prepaid
      oil and gas costs
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,432,906Other
      assets
                                        
                                        
                                        247,851
                                        
                                        
                                        
                                        834,287Total
      assets
                                        
                                        $
                                        36,360,966
                                        
                                        
                                        $
                                        49,036,632LIABILITIESANDSTOCKHOLDERS’
      EQUITYCurrent
      liabilities:Current
      portion of long-term debt
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        2,066,087Accounts
      payable
                                        
                                        
                                        544,077
                                        
                                        
                                        
                                        960,020Accrued
      liabilities for Barnett property costs
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,379,073Accrued
      liabilities
                                        
                                        
                                        273,399
                                        
                                        
                                        
                                        1,582,689Warrant
      liability
                                        
                                        
                                        308,750
                                        
                                        
                                        
                                        321,140Total
      current liabilities
                                        
                                        
                                        1,126,226
                                        
                                        
                                        
                                        7,309,009Long-term
      debt – Kallina
                                        
                                        
                                        -
                                        
                                        
                                        
                                        6,919,890Convertible
      debt
                                        
                                        
                                        -
                                        
                                        
                                        
                                        13,914,013Other
      long-term obligations
                                        
                                        
                                        681,924
                                        
                                        
                                        
                                        699,914Deferred
      tax liability
                                        
                                        
                                        2,407,567
                                        
                                        
                                        
                                        -Total
      liabilities
                                        
                                        
                                        4,215,717
                                        
                                        
                                        
                                        28,842,826Stockholders'
      equity:Preferred
      stock, par value $1.00 per share, 20,000,000 shares
      authorized:Series
      A  8% convertible preferred stock, 1,000,000 shares
      authorized;285,786 and 483,416 shares issued and outstanding at September
      30, 2008and December 31, 2007, respectively
                                        
                                        
                                        285,786
                                        
                                        
                                        
                                        483,416Series
      B convertible preferred stock, 100,000 shares authorized;43,000 shares
      issued and outstanding at September 30, 2008 and December 31,
      2007
                                        
                                        
                                        43,000
                                        
                                        
                                        
                                        43,000Common
      stock, par value $0.001 per share, 100,000,000 shares Authorized;
       42,416,672 and 40,941,841 shares issued and outstanding at September
      30, 2008 and December 31, 2007, respectively
                                        
                                        
                                        42,416
                                        
                                        
                                        
                                        40,941Additional
      paid-in capital
                                        
                                        
                                        34,389,163
                                        
                                        
                                        
                                        33,196,588Un-issued
      common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        288,172Accumulated
      deficit
                                        
                                        
                                        (2,615,116
                                        )
                                        
                                        
                                        (13,858,311
                                        )Total
      stockholders' equity
                                        
                                        
                                        32,145,249
                                        
                                        
                                        
                                        20,193,806Total
      liabilities and stockholders' equity
                                        
                                        $
                                        36,360,966
                                        
                                        
                                        $
                                        49,036,632
  Note:  The
balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
 
 See
accompanying notes to unaudited condensed consolidated financial
statements.
  2
 Index
  PETROSEARCH
ENERGY CORPORATION
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
 for
the three months and  nine months ended September 30, 2008 and
2007
 
 Three
      Months Ended
                  September
      30
                
                
                Nine
      Months Ended
                  September
      302008
                
                
                2007
                
                
                2008
                
                
                2007Oil
      and gas production revenues
                
                $
                257,659
                
                
                $
                426,931
                
                
                $
                1,357,557
                
                
                $
                1,163,451Operating
      costs and expenses:Lease
      operating and production taxes
                
                
                160,162
                
                
                
                146,400
                
                
                
                709,984
                
                
                
                489,291Depreciation,
      depletion and amortization
                
                
                86,736
                
                
                
                222,871
                
                
                
                550,959
                
                
                
                595,660General
      and administrative
                
                
                826,653
                
                
                
                631,925
                
                
                
                2,142,550
                
                
                
                2,072,397Total
      costs and expenses
                
                
                1,073,551
                
                
                
                1,001,196
                
                
                
                3,403,493
                
                
                
                3,157,348Operating
      loss
                
                
                (815,892
                )
                
                
                (574,265
                )
                
                
                (2,045,936
                )
                
                
                (1,993,897
                )Other
      income (expense):Interest
      income
                
                
                36,893
                
                
                
                53,582
                
                
                
                105,785
                
                
                
                211,025Interest
      expense
                
                
                (89,190
                )
                
                
                (492,850
                )
                
                
                (1,347,117
                )
                
                
                (1,391,870
                )Amortization
      of financing costs and debt discount
                
                
                (163,684
                )
                
                
                (507,327
                )
                
                
                (1,444,009
                )
                
                
                (1,374,146
                )Change
      in value of warrant liability
                
                
                (159,600
                )
                
                
                94,812
                
                
                
                12,390
                
                
                
                (109,799
                )Gain
      on sale of Barnett
                
                
                -
                
                
                
                -
                
                
                
                21,814,753
                
                
                
                -Loss
      on extinguishment of debt
                
                
                (4,542,432
                )
                
                
                -
                
                
                
                (3,445,104
                )
                
                
                -Total
      other income (expense)
                
                
                (4,918,013
                )
                
                
                (851,783
                )
                
                
                15,696,698
                
                
                
                (2,664,790
                )Income
      (loss) before provision for income taxes
                
                
                (5,733,905
                )
                
                
                (1,426,048
                )
                
                
                13,650,762
                
                
                
                (4,658,687
                )Deferred
      tax (expense)/benefit
                
                
                522,553
                
                
                
                -
                
                
                
                (2,407,567
                )
                
                
                -Net
      Income (Loss)
                
                $
                (5,211,352
                )
                
                $
                (1,426,048
                )
                
                $
                11,243,195
                
                
                $
                (4,658,687
                )Basic
      and diluted net income (loss) per common share
                
                $
                (0.12
                )
                
                $
                (0.04
                )
                
                $
                0.27
                
                
                $
                (0.12
                )
 
 See
accompanying notes to unaudited condensed
 consolidated
financial statements
  3
 Index
  PETROSEARCH
ENERGY CORPORATION
 UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 For
the nine months ended September 30, 2008
 
 Series
      A
                            
                            
                            Series
      B
                            
                            
                            Additional
                            
                            
                            Unissued
                            
                            
                            
                            
                            
                            Total
      Stock-Common Stock
                            
                            
                            Preferred Stock
                            
                            
                            Preferred Stock
                            
                            
                            Paid-In
                            
                            
                            Common
                            
                            
                            Accumulated
                            
                            
                            HoldersShares
                            
                            
                            Amount
                            
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Stock
                            
                            
                            Deficit
                            
                            
                            EquityBalance
      at December 31, 2007
                            
                            
                            40,941,841
                            
                            
                            $
                            40,941
                            
                            
                            
                            483,416
                            
                            
                            $
                            483,416
                            
                            
                            
                            43,000
                            
                            
                            $
                            43,000
                            
                            
                            $
                            33,196,588
                            
                            
                            $
                            288,172
                            
                            
                            $
                            (13,858,311
                            )
                            
                            $
                            20,193,806Issuance
      of common stock committed
                            
                            
                            297,085
                            
                            
                            
                            298
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            287,874
                            
                            
                            
                            (288,172
                            )
                            
                            
                            
                            
                            
                            
                            -Common
      stock issued for interest expense
                            
                            
                            501,448
                            
                            
                            
                            501
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            401,125
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            401,626Common
      stock issued for employee and  board
compensation
                            
                            
                            645,893
                            
                            
                            
                            646
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            313,104
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            313,750Conversion
      of preferred stock to common stock
                            
                            
                            30,405
                            
                            
                            
                            30
                            
                            
                            
                            (197,630
                            )
                            
                            
                            (197,630
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            197,600
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            -Additional
      costs of raising capital
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (7,128
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (7,128
                            ))Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            11,243,195
                            
                            
                            
                            11,243,195Balance
      at  September 30, 2008
                            
                            
                            42,416,672
                            
                            
                            $
                            42,416
                            
                            
                            
                            285,786
                            
                            
                            $
                            285,786
                            
                            
                            
                            43,000
                            
                            
                            $
                            43,000
                            
                            
                            $
                            34,389,163
                            
                            
                            $
                            -
                            
                            
                            $
                            (2,615,116
                            )
                            
                            $
                            32,145,249
 
 See
accompanying notes to unaudited condensed consolidated financial
statements
  4
 Index
  PETROSEARCH
ENERGY CORPORATION
 UNAUDITED
CONSOLIDATED STATEMENT OF CASH FLOWS
 For
the nine months ended September 30, 2008 and 2007
 
 
 2008
                      
                      
                      2007Cash
      flows from operating activities:Net
      income (loss)
                      
                      $
                      11,243,195
                      
                      
                      $
                      (4,658,687
                      )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depletion,
      depreciation and amortization expense
                      
                      
                      464,223
                      
                      
                      
                      595,660Stock-based
      compensation and interest expense
                      
                      
                      715,376
                      
                      
                      
                      683,279Amortization
      of deferred rent
                      
                      
                      (6,628
                      )
                      
                      
                      (11,711
                      )Amortization
      of debt discount and beneficial conversion feature
                      
                      
                      1,173,497
                      
                      
                      
                      1,141,595Amortization
      of financing costs
                      
                      
                      270,512
                      
                      
                      
                      258,789Accretion
      of asset retirement obligation
                      
                      
                      24,074
                      
                      
                      
                      27,231Change
      in value of warrant liability
                      
                      
                      (12,390
                      )
                      
                      
                      109,799Gain
      on sale of Barnett Shale interest
                      
                      
                      (21,814,753
                      )
                      
                      
                      -Loss
      on extinguishment of debt
                      
                      
                      3,445,104
                      
                      
                      
                      -Deferred
      tax expense
                      
                      
                      2,407,567
                      
                      
                      
                      -Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      496,959
                      
                      
                      
                      86,968Prepaid
      expenses and other assets
                      
                      
                      (112,066
                      )
                      
                      
                      (300,520
                      )Accounts
      payable and accrued liabilities
                      
                      
                      (586,604
                      )
                      
                      
                      (83,601
                      )Trade
      note payable
                      
                      
                      -
                      
                      
                      
                      (367,095
                      )Net
      cash used in operating activities
                      
                      
                      (2,291,934
                      )
                      
                      
                      (2,518,293
                      )Cash
      flows from investing activities:Capital
      expenditures, including purchases and development of
      properties
                      
                      
                      (6,182,275
                      )
                      
                      
                      (6,412,484
                      )Proceeds
      from sale of Barnett Shale interest
                      
                      
                      36,000,000
                      
                      
                      
                      -Purchase
      of available-for-sale investments
                      
                      
                      (784,000
                      )
                      
                      
                      -Net
      cash provided by (used in) investing activities
                      
                      
                      29,033,725
                      
                      
                      
                      (6,412,484
                      )Cash
      flows from financing activities:Additional
      costs of raising capital
                      
                      
                      (7,128
                      )
                      
                      
                      -Proceeds
      from convertible debt
                      
                      
                      -
                      
                      
                      
                      10,000,000Repayment
      of notes payable
                      
                      
                      (20,910,000
                      )
                      
                      
                      (1,597,500
                      )Net
      cash (used in) provided by financing activities
                      
                      
                      (20,917,128
                      )
                      
                      
                      8,402,500Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      5,824,663
                      
                      
                      
                      (528,277
                      )Cash
      and cash equivalents at beginning of period
                      
                      
                      8,033,611
                      
                      
                      
                      3,715,618Cash
      and cash equivalents at end of period
                      
                      $
                      13,858,274
                      
                      
                      $
                      3,187,341Supplemental
      disclosures of cash flow information:Interest
      paid
                      
                      $
                      549,319
                      
                      
                      $
                      323,996Income
      taxes paid
                      
                      $
                      -
                      
                      
                      $
                      -
 
 See
accompanying notes to unaudited condensed consolidated financial
statements
  5
 Index
  PETROSEARCH
ENERGY CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
              Interim Financial
      Statements
 
 The
accompanying interim unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted, pursuant to such rules and regulations.  These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto of
Petrosearch Energy Corporation (the “Company”) for the year ended December 31,
2007.  In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation of
financial position, results of operations and cash flows for the interim periods
presented have been included.  Operating results for the interim
periods are not necessarily indicative of the results that may be expected for
the respective full year.
 
 2.            Income
Taxes
 
 The
Company uses the liability method in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and income tax carrying amounts of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.  A valuation
allowance, if necessary, is provided against deferred tax assets, based upon
management's assessment as to their realization.
 
 The
difference between the 35% federal statutory income tax rate and amounts shown
in the accompanying interim financial statements is primarily attributable to
the following: 1) utilization of net operating loss carry-forwards, 2) changes
in the valuation allowance for the Company’s deferred tax assets, 3) current
year differences in depreciation for tax and book, and 4) percentage depletion
carryforward for tax purposes which is not allowed for book
purposes.
 
 3.
              New Accounting
      Pronouncements
 
 The
following new accounting pronouncement has been issued in 2008 and will be
adopted by the Company on January 1, 2009:
  In
March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133”
(“FAS No. 161”). This statement requires enhanced disclosures about
derivative and hedging activities. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008.  The Company will adopt FAS No. 161 on
January 1, 2009.  The Company does not believe that the standard
will have an impact on its consolidated financial statements due to the lack of
relevant activities.
  4.
              Stock
      Warrants
 
 The
Company has periodically issued incentive stock warrants to executives,
officers, directors and employees to provide additional incentives to promote
the success of the Company’s business and to enhance the ability to attract and
retain the services of qualified persons.  Warrants have also been
issued as part of capital financing transactions.  The issuances of
such warrants are approved by the Board of Directors.  The exercise
price of a warrant granted is determined by the fair market value of the stock
on the date of grant.  The Company issues shares of authorized common
stock upon the exercise of the warrant.
  6
 Index
  The
Company accounts for its stock warrant activity under the guidance provided by
Statement of Financial Accounting Standards No 123R.  SFAS 123(R)
requires all share-based payments to employees, including grants of employee
stock warrants, to be recognized as stock-based compensation expense in the
Company’s Consolidated Statements of Operations based on their fair
values.  For purposes of determining compensation expense associated
with stock warrants, the fair value of the Company’s warrants are determined
based upon the Black-Scholes option pricing model.  Because no
warrants were issued during the three and nine months ended September 30, 2008
and the three months ended September 30, 2007, the Company has no disclosures
with regards to the Black-Scholes option-pricing model assumptions. For the nine
months ended September 30, 2007, the fair value of the warrants issued was
estimated at the date of grant using the Black-Scholes option valuation model
with the following assumptions:
 
 2007Dividend
      yield
                  -0-Expected
      volatility
                  105%Risk
      free interest
                  4.52%Expected
      lives
                  4
      years
 
 The
Black-Scholes option valuation model was developed for use in estimating fair
value of traded options or warrants that have no vesting restrictions and are
fully transferable.  In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.  Because the Company’s stock warrants have characteristics
significantly different from those of traded options/warrants, and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock
warrants.
 
 A summary
of the Company’s stock warrant activity and related information for the nine
months ended September 30, 2008 follows:
 
 Weighted
                          
                          TotalAverage
                          
                          IntrinsicNumber
      of
                          
                          
                          
                          
                          
                          Weighted
                          
                          Grant
                          
                          ValueShares
                          
                          
                          
                          
                          
                          Average
                          
                          Date
      Fair
                          
                          WarrantUnder
                          
                          
                          Exercise
                          
                          
                          Exercise
                          
                          Value
                          
                          ExercisesWarrant
                          
                          
                          Price
                          
                          
                          Price
                          
                          ($/share)(2)
                          
                          (1)Warrants
      outstanding atDecember
      31, 2007
                          
                          
                          20,304,828
                          
                          
                          $
                          .92-$2.00
                          
                          
                          $
                          1.41Issued
                          
                          
                          -Exercised
                          
                          
                          -Expired
                          
                          
                          (170,000
                          )
                          
                          $
                          1.95
                          
                          
                          $
                          1.95Warrants
      outstanding atSeptember
      30, 2008
                          
                          
                          20,134,828
                          
                          
                          $
                          .92-$2.00
                          
                          
                          $
                          1.40
 
 All
outstanding stock warrants are exercisable and fully vested at September 30,
2008.  A summary of outstanding stock warrants at September 30, 2008
follows:
  7
 Index
 
 WeightedNumber
      of
                      
                      
                      
                      Remaining
                      
                      Average
                      
                      
                      
                      
                      WeightedCommon
                      
                      
                      
                      Contracted
                      
                      Remaining
                      
                      
                      
                      
                      Average
                      
                      AggregateStock
                      
                      Expiration
                      
                      Life
                      
                      Contractual
                      
                      Exercise
                      
                      
                      Exercise
                      
                      IntrinsicEquivalents
                      
                      Date
                      
                      (Years)
                      
                      Term (Years)
                      
                      Price
                      
                      
                      Price
                      
                      Value(1)4,851,969
                      
                      November
      2008
                      
                      
                      .13
                      
                      
                      
                      $
                      0.98-$1.95
                      
                      
                      $
                      1.931,060,714
                      
                      February
      2010
                      
                      
                      1.33
                      
                      
                      
                      $
                      2.00
                      
                      
                      $
                      2.001,982,145
                      
                      November
      2010
                      
                      
                      2.13
                      
                      
                      
                      $
                      1.50
                      
                      
                      $
                      1.505,225,000
                      
                      January
      2011
                      
                      
                      2.25
                      
                      
                      
                      $
                      1.40
                      
                      
                      $
                      1.40575,000
                      
                      October
      2011
                      
                      
                      3.04
                      
                      
                      
                      $
                      .92
                      
                      
                      $
                      .926,440,000
                      
                      December
      2011
                      
                      
                      3.17
                      
                      
                      
                      $
                      .92
                      
                      
                      $
                      .9220,134,828
                      
                      
                      
                      
                      
                      
                      1.99
                      
                      
                      
                      
                      
                      
                      
                      
                      $-0-
 
 (1)
              The
      intrinsic value of a warrant is the amount by which the current market
      value of the underlying stock exceeds the exercise price of the warrant,
      or the market price at the end of the period less the exercise
      price.
 (2)
              The
      weighted average grant date fair value is determined by using the Black
      Scholes Option Pricing Model as described
above.
 
 The
following table provides a detail of stock-based compensation incurred during
the nine months ended September 30, 2008 and 2007:
 
 Nine
      Months EndedSeptember
      30,2008
                      
                      
                      2007Restricted
      stock – Interest Expense
                      
                      $
                      401,626
                      
                      
                      $
                      352,834Restricted
      stock – General and Administrative
                      
                      
                      313,750
                      
                      
                      
                      108,383Restricted
      stock – Property Costs
                      
                      
                      -
                      
                      
                      
                      645,000Committed
      restricted stock
                      
                      
                      -
                      
                      
                      
                      222,062Total
      stock-based compensation
                      
                      $
                      715,376
                      
                      
                      $
                      1,328,279Less
      amounts capitalized
                      
                      
                      -
                      
                      
                      
                      (645,000
                      )Stock
      compensation expense, net of
amounts  capitalized
                      
                      $
                      715,376
                      
                      
                      $
                      683,279
 
 Amounts
capitalized in 2007 are for property costs.  The above table excludes
common stock issued for cash, warrants issued in financing arrangements, debt
discounts recorded in equity, and common stock issued for exercise of
warrants.
 
 5.
              Related Party
      Transactions
 
 Please
see Note 12 herein for discussion of the sale of the Barnett Shale interest to
Cinco County Barnett Shale LLC, a partner in the DDJET Limited LLP
partnership.
 
 6.
              Non-Cash Investing and
      Financing Activities
 
 During
the nine months ended September 30, 2008 and 2007, the Company engaged in
non-cash financing and investing activities as follows:
 
 Nine
      Months EndedSeptember
      30,2008
                        
                        
                        2007Reduction
      of prepaid drilling for development of oil and gas
    properties
                        
                        $
                        1,432,906
                        
                        
                        
                        -Change
      in property costs associated with asset retirement
    obligation
                        
                        $
                        78,036
                        
                        
                        
                        -Issuance
      of common stock for acquisition of property
                        
                        
                        -
                        
                        
                        $
                        645,000Beneficial
      conversion feature on convertible debt
                        
                        
                        -
                        
                        
                        $
                        2,667,968Issuance
      of warrants with debt
                        
                        
                        -
                        
                        
                        $
                        2,667,968Issuance
      of convertible debt for financing costs
                        
                        
                        -
                        
                        
                        $
                        450,000
  8
 Index
  7.
              Earnings Per
      Share
 
 The
Company reports its earnings per share in accordance with the provisions of SFAS
No. 128, which provides for calculation of "Basic" and "Diluted" earnings per
share.  Basic earnings per share includes no dilution and is computed
by dividing net income available to common shareholders by the weighted average
common shares outstanding for the period.  Diluted earnings per share
reflect the potential dilution of securities that could share in the earnings of
an entity similar to fully diluted earnings per share. Following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
computations for the three and nine months ended September 30, 2008 and
2007:
 
 Three
      Months Ended
                      September
      30,
                    
                    
                    Nine
      Months Ended
                      September
      30,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Basic
      EPS:Net
      income (loss)
                    
                    $
                    (5,211,352
                    )
                    
                    $
                    (1,426,048
                    )
                    
                    $
                    11,243,195
                    
                    
                    $
                    (4,658,687
                    )Less:
      Preferred stock dividends (undeclared)
                    
                    
                    (5,763
                    )
                    
                    
                    (9,668
                    )
                    
                    
                    (23,341
                    )
                    
                    
                    (29,005
                    )Net
      income (loss) available to common stockholders
                    
                    $
                    (5,217,115
                    )
                    
                    $
                    (1,435,716
                    )
                    
                    $
                    11,219,854
                    
                    
                    $
                    (4,687,692
                    )Weighted
      average shares of common stock
                    
                    
                    41,925,232
                    
                    
                    
                    39,553,131
                    
                    
                    
                    41,635,349
                    
                    
                    
                    39,181,688Basic
      net income (loss) per share
                    
                    $
                    (0.12
                    )
                    
                    $
                    (0.04
                    )
                    
                    $
                    0.27
                    
                    
                    $
                    (0.12
                    )Diluted
      EPS:Income
      (loss) available to common stockholders
                    
                    $
                    (5,217,115
                    )
                    
                    $
                    (1,435,716
                    )
                    
                    $
                    11,219,854
                    
                    
                    $
                    (4,687,692
                    )Plus
      assumed conversions
                    
                    
                    5,763
                    
                    
                    
                    9,668
                    
                    
                    
                    23,341
                    
                    
                    
                    29,005Net
      income (loss) used for diluted EPS
                    
                    $
                    (5,211,352
                    )
                    
                    $
                    (1,426,048
                    )
                    
                    $
                    11,243,195
                    
                    
                    $
                    (4,658,687
                    )Weighted
      average shares of common stock
                    
                    
                    41,925,232
                    
                    
                    
                    39,553,131
                    
                    
                    
                    41,635,349
                    
                    
                    
                    39,181,688Plus
      effect of dilutive securities:Convertible
      preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    79,762
                    
                    
                    
                    -Weighted
      average shares used for Diluted EPS
                    
                    
                    41,925,232
                    
                    
                    
                    39,553,131
                    
                    
                    
                    41,715,111
                    
                    
                    
                    39,181,688Diluted
      net income (loss) per share
                    
                    $
                    (0.12
                    )
                    
                    $
                    (0.04
                    )
                    
                    $
                    0.27
                    
                    
                    $
                    (0.12
                    )
 
 For the
three months ended September 30, 2008, potential dilutive securities had an
anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.  These securities included preferred stock
convertible into 64,014 common shares.
 
 For the
three and nine month period ended September 30, 2007, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.  For the three and nine months
ended September 30, 2007, these securities included in-the-money warrants for
the purchase of 1,954,346 and 2,013,511 common shares, respectively, and
preferred stock convertible into 94,218 common shares.
  9
 Index
  8.
              Legal
      Proceedings
 
 On April
11, 2007, the Company was served with a lawsuit filed against it titled Cause
No. 2007-16502; D. John Ogren, R. Bradford Perry and Chester Smitherman v.
Petrosearch Corporation; 133rdJudicial District Court, Harris County, Texas.  The
plaintiffs were three (3) Series A Preferred shareholders who derived their
original shares from Texas Commercial Resources, Inc. (“TCRI”) and became Series
A Preferred shareholders of Petrosearch Energy Corporation as a result of the
prior mergers.  The plaintiffs had alleged that Petrosearch Corporation
(and TCRI, its predecessor) failed to pay accrued, cumulative dividends and
refused to allow conversion of their Series A Preferred Stock into Common
Stock.    The plaintiffs had alleged breach of contract, fraud
and violation of Section 33 of the Texas Securities Act and have requested the
award of actual and exemplary damages, interest and attorneys’ fees.  
The lawsuit likewise requested the Court to compel the payment of accrued
dividends and the examination of the Company’s books and records. The
lawsuit was settled in September 2008 and the settlement was paid 100% by the
Company's insurance policy.  The payment of the settlement is not an
admission of liability, as the Company denies all allegations of wrongdoing
contained in the lawsuit.
 
 The
Company currently is not a party to any other legal proceedings.
 
 9.
              Short-term
      Investments
 
 The
Company’s available for sale investment portfolio consists of certificates of
deposit.   As of September 30, 2008, all of the Company’s
investments had maturities of less than one year.
  10.
              Fair Value
      Measurements
  The
Company adopted FAS 157 on January 1, 2008.  FAS 157, among other
things, defines fair value, establishes a consistent framework for measuring
fair value and expands disclosure for each major asset and liability category
measured at fair value on either a recurring or nonrecurring
basis.  FAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants.  As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability.  As a basis for considering such
assumptions, FAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
  10
 Index
 
 Level
      1.
                            
                            Observable
      inputs such as quoted prices in active markets for identical assets or
      liabilities;Level
      2.
                            
                            Inputs,
      other than quoted prices included within Level 1, that are observable
      either directly or indirectly; andLevel
      3.
                            
                            Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.
 
 As of
September 30, 2008, the Company’s assets and liabilities that are measured at
fair value on a recurring basis include the following:
 
 Total
                        
                        Quoted Prices in Active
Markets
                          (Level 1)
                        
                        
                        Significant Other Observable
      Inputs
                          (Level 2)
                        
                        Significant Unobservable
Inputs
                          (Level 3)Warrant
      liability
                        
                        $
                        308,750
                        
                        
                        
                        —
                        
                        
                        $
                        308,750
 
 11.
              Extinguishment of
      Debt
 
 Convertible
Securities
 
 In July,
2008, the Company extinguished all of its convertible debt outstanding and
related interest by repaying the principal balance of $18,775,000 and accrued
and unpaid interest of $87,734.  Total cash payments made were
$18,862,734.  At the time of the extinguishment, the unamortized debt
discount of $3,795,272 and the unamortized financing costs of $747,160 totaled
$4,542,432, which was recorded as loss on extinguishment of debt in the third
quarter of 2008.
 
 Project
Financing
 
 In
November 2006, the Company signed a Securities Purchase Agreement and Secured
Term Note with Laurus Master Fund, Ltd to provide financing for the drilling of
its Kallina 46 #1 well and payment of the future completion costs for the
Kallina 46 #1 well.  The November 2006 financing was specifically
recourse to the Kallina 46 #1 well and the associated lease acreage
only.
 
 In April
2008, it was determined that the Kallina 46 #1 well was uneconomic and the
decision was made that the well needed to be plugged and abandoned. In May 2008
the Company received a full release of all the liens, security interests,
rights, claims and benefits of every kind in, on and under the November 2006
Secured Term Note with Laurus Master Fund, Ltd, as well as that same release on
all the other collateral documents associated with that financing.  As
part of this transaction, the Company conveyed their interest in the Kallina
46#1 well and the associated lease acreage to a third party.
 
 As a
result of the legal release described above, the debt related to the Laurus
financing has been extinguished on the financial statements of the Company in
May, 2008.  In addition, the accrued interest, unamortized debt
discount, and unamortized financing costs have also been written-off as well as
the net book value of the Kallina well.
 
 The gain
on extinguishment of this debt was accounted for according to APB 26, “Early
Extinguishment of Debt”.  A difference between the reacquisition price
and the net carrying amount of the extinguished debt was recognized as a gain in
the amount of $1,097,328 in the accompanying statements of operations for the
nine months ended September 30, 2008.
  11
 Index
  Revolving
Credit Agreement
 
 On April
1, 2008 the total outstanding balance of the revolving credit facility became
due and a payment of $1,602,500 was paid in full to Fortuna Energy, which closed
out the revolving credit facility as of that date.  Pursuant to the
revolving credit agreement, and as part of being paid back in full, Fortuna
Energy returned to the Company all of the overriding royalties related to the
Company’s assets that were issued to Fortuna Energy.  The most
significant override relates to a 2% override of the Company’s net interest in
the Company’s North Dakota, Gruman project.
 
 12.
              Sale of Barnett Shale
      Interest
 
 In
December 2006, through the Company’s wholly owned subsidiary, Barnett
Petrosearch LLC, (“Barnett Petrosearch”) the Company joined in the formation of
a partnership, DDJET Limited LLP (“DDJET”), for the development of a natural gas
integrated venture to explore and develop assets in the Barnett Shale. The
Company owned a 5.54% interest in DDJET along with partners Metroplex Barnett
Shale LLC, a wholly owned subsidiary of Exxon Mobil Corporation, and Cinco
County Barnett Shale LLC, a privately held Dallas-based company
(“Cinco”).
 
 On
February 11, 2008 the Company executed an authorization for the general partner
of the Partnership to immediately commence a sales marketing program to
interested potential purchasing parties in order to fully assess the current
market value of the Partnership.  On June 25, 2008 the Company
executed a binding agreement for the sale of its limited partnership interest in
DDJET to Cinco for a cash purchase price of $36,000,000.  On June 26,
2008 Cinco paid to Barnett Petrosearch the required $1,800,000 non-refundable
deposit to be applied to the purchase price and fulfilled all the other
necessary requirements to bind both Cinco and Petrosearch to the
sale.  On July 18, 2008 the Company received the balance of the
proceeds of the sale in the amount of $30,729,008.  These proceeds
were net of the $1,800,000 down payment previously received from Cinco and
$3,470,992 of costs previously owed by the Company which were assumed by Cinco
pursuant to the June 25, 2008 agreement.
 
 The
transaction significantly altered the relationship between capitalized costs and
proved reserves, and there is substantial economic difference between the
properties sold and the properties retained.  As a result, a gain of
$21,814,753 has been generated by the sale of the Company’s interest in
DDJET.
 
 As
presented in the Company’s most recent annual report, as of December 31, 2007,
the Company’s proved gas reserves were 2,683,210 Mcf.  This included
1,878,367 of proved gas reserves attributable to the Company’s Barnett Shale
interest.  This sale has lead to an approximately 70% decrease in the
Company’s proved gas reserves and a 14% decrease in the Company’s total proved
reserves.
 As of
December 31, 2007, the Company’s proved developed gas reserves were 993,730
Mcf.  This included 920,887 of proved developed gas reserves
attributable to the Company’s Barnett Shale interest.  This sale has
lead to an approximately 93% decrease in the Company’s proved developed gas
reserves and a 36% decrease in the Company’s total proved developed
reserves.
 
 As of
December 31, 2007, the Company’s standardized measure of discounted future net
cash flows relating to the Company’s interest in proved oil and gas reserves
were $40,389,151. This included $2,180,055 attributable to the Company’s Barnett
Shale interest.  This sale has lead to an approximately 5% decrease in
the Company’s standardized measure of discounted cash flows.
 
 The
following represents the unaudited proforma effect on the unaudited condensed
consolidated statement of
operations  for  the  nine
months  ended  September
30,  2008  as  if the
transaction  occurred  on  January  1,
2008:
  12
 Index
 
 As Reported
                  
                  
                  Proforma Adjustments(1)
                  
                  
                  Proforma
                    (Unaudited)Oil
      and gas production revenue
                  
                  $
                  1,357,557
                  
                  
                  $
                  (995,445
                  )
                  
                  $
                  362,112Cost
      and expense
                  
                  
                  3,403,493
                  
                  
                  
                  (699,482
                  )
                  
                  
                  2,704,011Operating
      loss
                  
                  
                  (2,045,936
                  )
                  
                  
                  (295,963
                  )
                  
                  
                  (2,341,899
                  )Other
      income (expense);Interest
      income
                  
                  
                  105,785
                  
                  
                  
                  -
                  
                  
                  
                  105,785Interest
      expense
                  
                  
                  (1,347,117
                  )
                  
                  
                  236,173
                  
                  
                  
                  (1,110,944
                  )Amortization
      of financing costs and debt discount
                  
                  
                  (1,444,009
                  )
                  
                  
                  -
                  
                  
                  
                  (1,444,009
                  )Change
      in value of warrant liability
                  
                  
                  12,390
                  
                  
                  
                  -
                  
                  
                  
                  12,390Gain
      on sale of Barnett
                  
                  
                  21,814,753
                  
                  
                  
                  (36,511
                  )
                  
                  
                  21,778,242Loss
      on extinguishment of debt, net
                  
                  
                  (3,445,104
                  )
                  
                  
                  -
                  
                  
                  
                  (3,445,104
                  )Other
      income (expense); net
                  
                  
                  15,696,698
                  
                  
                  
                  199,662
                  
                  
                  
                  15,896,360Net
      income before provision for income tax
                  
                  
                  13,650,762
                  
                  
                  
                  (96,301
                  )
                  
                  
                  13,554,461Deferred
      tax expense
                  
                  
                  (2,407,567
                  )
                  
                  
                  32,742
                  
                  
                  
                  (2,374,825
                  )Net
      income (loss)
                  
                  $
                  11,243,195
                  
                  
                  $
                  (63,559
                  )
                  
                  $
                  11,179,636Basic
      and diluted net loss per common share
                  
                  $
                  0.27
                  
                  
                  $
                  0.00
                  
                  
                  $
                  0.27(1)
      Represents revenue and expenses in the nine months ended September 30,
      2008 from the Company’s interest in Barnett.
  13
 Index
  The
following represents the unaudited proforma effect on the unaudited condensed
consolidated statement of
operations  for  the  nine
months  ended  September 30,  2007
as  if the
transaction  occurred  on  January  1,
2007:
 
 As Reported
                  
                  
                  Proforma Adjustments(1)
                  
                  
                  Proforma
                    (Unaudited)Oil
      and gas production revenue
                  
                  $
                  1,163,451
                  
                  
                  $
                  (414,862
                  )
                  
                  $
                  748,589Cost
      and expense
                  
                  
                  3,157,348
                  
                  
                  
                  (423,662
                  )
                  
                  
                  2,733,686Operating
      loss
                  
                  
                  (1,993,897
                  )
                  
                  
                  8,800
                  
                  
                  
                  (1,985,097
                  )Other
      income (expense);Interest
      income
                  
                  
                  211,025
                  
                  
                  
                  -
                  
                  
                  
                  211,025Interest
      expense
                  
                  
                  (1,391,870
                  )
                  
                  
                  -
                  
                  
                  
                  (1,391,870
                  )Amortization
      of financing costs and debt discount
                  
                  
                  (1,374,146
                  )
                  
                  
                  -
                  
                  
                  
                  (1,374,146
                  )Change
      in value of warrant liability
                  
                  
                  (109,799
                  )
                  
                  
                  -
                  
                  
                  
                  (109,799
                  )Other
      income (expense); net
                  
                  
                  (2,664,790
                  )
                  
                  
                  -
                  
                  
                  
                  (2,664,790
                  )Net
      income (loss)
                  
                  $
                  (4,658,687
                  )
                  
                  $
                  8,800
                  
                  
                  $
                  (4,649,887
                  )Basic
      and diluted net loss per common share
                  
                  $
                  (0.12
                  )
                  
                  $
                  0.00
                  
                  
                  $
                  (0.12
                  )(1)
      Represents revenue and expenses in the nine months ended September 30,
      2007 from the Company’s interest in Barnett.
 
  13.
              Series
      A Preferred Stock
 
 As of
September 30, 2008 and December 31, 2007 the Company has 1,000,000 shares of
Series A 8% Convertible Preferred Stock (“Series A Preferred”) authorized and
285,786 and 483,416 shares outstanding, respectively.  If declared by
the Board of Directors, dividends are to be paid quarterly in cash or in common
stock of the Company to the holders of shares of the Series A
Preferred.  The shares of the Series A Preferred rank senior to the
common stock both in payment of dividends and liquidation
preference.  As of September 30, 2008, no dividends have been declared
and approximately $140,035 of dividends was in arrears related to the Series A
Preferred if the Company decided to declare dividends.
 
  14.
              Subsequent
      Events
  In
October of 2008, the Company purchased 194,800 shares of its common stock at an
average share price of approximately $0.21 to be classified as treasury
stock.
  14
 Index
 
 Item2.
              Management’s
      Discussion and Analysis or Plan of
Operation
 
 FORWARD
LOOKING STATEMENTS
  Statements
contained herein and the information incorporated by reference herein may be
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements can be
identified by the use of forward-looking terminology such as, but not limited
to, "may," "will," "expect," "anticipate," "estimate," "would be," "believe," or
"continue" or the negative or other variations of comparable
terminology.  We intend such forward-looking statements to be covered
by the safe harbor provisions applicable to forward-looking statements contained
in Section 21E of the Exchange Act. Such statements (none of which is intended
as a guarantee of performance) are subject to certain assumptions, risks and
uncertainties, which could cause our actual future results, achievements or
transactions to differ materially from those projected or anticipated. Such
risks and uncertainties are set forth herein.
 
 Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events, or performance and underlying assumptions and other statements,
which are other than statements of historical facts. These statements are
subject to uncertainties and risks including, but not limited to, product and
service demands and acceptance, changes in technology, economic conditions, the
impact of competition and pricing, and government regulation and approvals.
Petrosearch cautions that assumptions, expectations, projections, intentions, or
beliefs about future events may, and often do, vary from actual results and the
differences can be material. Some of the key factors which could cause actual
results to vary from those Petrosearch expects include changes in natural gas
and oil prices, the timing of planned capital expenditures, availability of
acquisitions, uncertainties in estimating proved reserves and forecasting
production results, operational factors affecting the commencement or
maintenance of producing wells, the condition of the capital markets generally,
as well as our ability to access them, and uncertainties regarding environmental
regulations or litigation and other legal or regulatory developments affecting
our business.
 
 Our
expectations, beliefs and projections are expressed in good faith and are
believed to have a reasonable basis, including without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties. There can be no assurance, however,
that our expectations, beliefs or projections will result, be achieved, or be
accomplished. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date
hereof.  We undertake no duty to update these forward-looking
statements.
 
 OVERVIEW
– CORPORATE STRATEGY
 
 We
believe we have been successful over the past few years with our plan of
solidifying the financial strength of the Company and improving the quality of
our oil and gas assets, some of which have been sold resulting in significant
gain to the Company.  A key element to our current strong financial
position was the sale of our Barnett Shale project in the second quarter of this
year.   This sale of our Barnett Shale project for $36 million
left us with a significant cash balance, no long or short term debt and
significant oil and gas reserves.  The sale was fortuitous in that (i)
we sold our Barnett Shale partnership interest near the height of natural gas
prices; (ii) we realized approximately $29,000 per net acre in the sale, as
opposed to current market values of approximately $5,000 or less per acre today;
and (iii) for us to have stayed in the Barnett Shale project we would have
needed to raise capital, which was unsuccessfully attempted prior to the sale
and in this current market would have been extremely difficult, if not
impossible.  Therefore, a possible scenario if we had stayed in the
partnership may have been that we would have defaulted under the Barnett Shale
partnership agreement and as a result we would have been forced to sell our
interest for 70% of the market value (pursuant to the partnership agreement),
which assuming $5,000 per acre market values would have realized an estimated
$12.2 million opposed to the $36 million actually realized.
 
 Our
current asset portfolio is primarily made up of a North Texas Panhandle water
flood project (the “Water Flood”) that has potential for multiple years of
growth.  The Water Flood is a resource play, which will allow us to
re-invest our capital into the project to enhance the rate of return, revenue
growth and reserve growth.  We have initiated the first phase of the
development of the Water Flood with a portion of the proceeds from the sale of
the Barnett Shale project, a decision that enables us to spend the least amount
of capital needed to measure the  level of initial response of the
water injection.  We will then be able to make decisions on the future
development of the project, and gauge the  impact of the response on
future potential strategic alternatives.
  15
 Index
  We
continue to pursue and evaluate all strategic alternatives
available.  Given our strong financial position, we believe we will
continue to see multiple opportunities to evaluate, and if appropriate, pursue.
Also, given the current energy asset and company valuations, and financial
market conditions where access to capital, both debt and equity, has become
limited, we believe that companies that have cash or access to capital have a
decided advantage to avail themselves of attractive value added
transactions.  We believe this plan of continuing to focus on the
development of our Water Flood, as well as continuing to pursue strategic
alternatives for the Company will give us the opportunity to create value for
the shareholders.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Since
inception, we have primarily financed our operating and investing cash flow
needs through private offerings of equity securities, sales of crude oil and
natural gas, sales of oil and gas assets and the use of debt instruments such as
convertible notes and revolving credit facilities.  We also, more
specifically, have sold one of our main projects, the Barnett Shale project, for
cash.  The proceeds from all these methods have been, and Management
believes will continue to be, sufficient to keep the operations funded and the
business plan moving forward.
 
 Convertible
Securities
 
 On
November 9, 2007 we executed, with a group of accredited investors, a series of
Note and Warrant Purchase Agreements for the sale of  $8,100,000, 8%
Senior Secured Convertible Promissory Notes and three year warrants to purchase
1,928,571 shares of our common stock at an exercise price of $1.50 per share for
total gross proceeds to us of $8,100,000.   Upon closing the
transaction, we also issued the Convertible Note and the Warrant, and executed a
Pledge and Security Agreement and a Registration Rights
Agreement.  These convertible notes were repaid in full on July 21,
2008.  In exchange for cancelling the note and releasing the
collateral the note holders were paid the outstanding principal and accrued
interest through July 21, 2008.  Currently, there is no outstanding
debt related to these convertible notes.
 
 On
February 1, 2007, we executed a Note and Warrant Purchase Agreement for the sale
of a $10,000,000 8% Senior Secured Convertible Promissory Note with RCH Petro
Investors, LP (“RCH”) and a four year warrant to purchase 5,000,000 shares of
our common stock at an exercise price of $1.40 per share for total gross
proceeds to us of $10,000,000.   We completed the transaction and
received funding on February 7, 2007.  Upon closing, we issued the
Convertible Note and the Warrant, and executed a Pledge and Security Agreement
and a Registration Rights Agreement. This convertible note precluded the Company
from incurring indebtedness in excess of fifty percent (50%) of the PV-10 value
of the Company’s total proved reserves, plus the fair market value of the leases
and pipeline assets associated with the Company’s Barnett Shale
assets.  This convertible note was repaid in full on July 21,
2008.  In exchange for cancelling the note and releasing the
collateral the note holder was paid the outstanding principal and accrued
interest through July 21, 2008.  Currently, there is no outstanding
debt related to this convertible note.
 
 Project
Financings
 
 In
November 2006, we signed a Securities Purchase Agreement and Secured Term Note
with Laurus Master Fund, Ltd to provide financing for the drilling of our
Kallina 46 #1 well and payment of the future completion costs for the Kallina 46
#1 well.   We formed a subsidiary, Garwood Petrosearch Inc., to
hold our interest in the Kallina Lease and the Kallina 46 #1
well.  Also, as a part of the financing arrangement,
Garwood  issued Laurus a Warrant to acquire, upon payout of the Note
indebtedness, 45% of Garwood’s outstanding common stock such that upon exercise
of the Warrant, Garwood would be owned 55% by us and 45% by
Laurus.
  16
 Index
  It was
decided in April 2008 that the Kallina 46#1 well was uneconomic and the decision
was made that the well needed to be plugged and abandoned. In May 2008 the
Company received a full release of all the liens, security interests, rights,
claims and benefits of every kind in, on and under the November 2006 Secured
Term Note with Laurus Master Fund, Ltd, as well as that same release on all the
other collateral documents associated with that financing.  The
November 2006 financing was specifically recourse to the Kallina 46#1 well and
the associated lease acreage only.  The debt related to the Laurus
financing was extinguished on the financial statements of the Company in May,
2008 as well as any interest that was charged in relation to the Note was
derecognized in that same period.
 
 As part
of this transaction, the Company has conveyed their interest in the Kallina 46#1
well and the associated lease acreage to a third party along with the Company’s
interest in the Pintail #1 well, Pintail Flats #1 well and the associated
acreage of Pintail and Pintail Flats.  Also as a part of this
transaction, the Company has transferred operatorship of all the existing and
future wells in this SW Garwood Prospect to the third party. In exchange for the
conveyance of the wells and acreage and the transfer of operatorship, the
Company received nominal cash consideration and the third party has assumed the
liability of plugging the Kallina 46#1 well.
 
 Revolving
Credit Agreement
 
 As of
April 1, 2008 the total outstanding balance of the revolving credit facility
became due and a payment of $1,602,500 was paid in full to Fortuna Energy, which
closed out the revolving credit facility as of that date.  Pursuant to
the revolving credit agreement and as part of being paid back in full, Fortuna
Energy returned to the Company all of the overriding royalties related to the
Company’s assets that were issued to Fortuna Energy.  The most
significant override relates to a 2% override of the Company’s net interest in
the North Dakota, Gruman project.
  As part
of the original amended revolving credit agreement terms, we agreed to issue to
Fortuna 475,000 warrants with a five year life and a strike price of $0.92 per
share.  The Warrants contained a “put” provision which allowed Fortuna
to “put” the warrants to the Company at a price of $0.65 per warrant for two (2)
years, which occurred in October, 2008. Additionally, as part of the
transaction, we agreed to issue 100,000 warrants, which expire 5 years from the
date of issue, at a price of $0.92 per share.
  Joint
Ventures
 
 We
continue to strive to develop relationships with institutions to participate in
our prospects.  Management believes this will reduce our capital risk
and increase the diversity of the projects in which we use our own
capital.  We intend to establish these drilling partnership
relationships with terms that are standard in the oil and gas
industry.
 
 CURRENT
PROJECTS AND CAPITAL REQUIREMENTS
 
 CORE
PROPERTIES:
 
 Barnett Shale Project -- In
December 2006, through our wholly owned subsidiary, Barnett Petrosearch LLC, we
joined in the formation of a partnership, DDJET Limited LLP (“DDJET”), for the
development of a natural gas integrated venture to explore and develop assets in
the Barnett Shale. We owned a 5.54% interest in DDJET along with partners
Metroplex Barnett Shale LLC (a wholly owned subsidiary of Exxon Mobil
Corporation), and Cinco County Barnett Shale LLC (“Cinco” - a privately held
Dallas-based company).
 
 On
February 29, 2008 we announced that we executed an authorization for the general
partner of the Partnership to immediately commence a sales marketing program to
interested potential purchasing parties in order to fully assess the current
market value of the Partnership.  On June 25 we executed a binding
agreement for the sale of our limited partnership interest in DDJET to Cinco,
one of the other two partners in DDJET, for a cash purchase price of
$36,000,000.  On June 26, 2008 Cinco paid to Barnett Petrosearch the
required $1,800,000 non-refundable deposit to be applied to the purchase price
and fulfilled all the other necessary requirements to bind both Cinco and
Petrosearch to the sale.  On July 18, 2008 the Company received the
balance of the proceeds of the sale of $30,729,008, the net amount after
deducting the $1,800,000 down payment previously received from Cinco and
$3,470,992 of costs previously owed by the Company to the Partnership which were
assumed by Cinco pursuant to the June 25, 2008 agreement.
  17
 Index
  North Texas/Panhandle Water Flood
Project -In November 2005, we acquired a 100% working interest in 1,755
acres in the Quinduno Field in Roberts County, Texas, in the Anadarko Basin. The
project is focused on infill drilling and the implementation of a water flood on
the property. Our leases at Quinduno have a large established resource base of
over 23 million barrels of original oil in place.  Since its discovery
in 1953, approximately 5.1 million barrels have been produced using primary
production.
 
 The
Company has commenced the first phase of the water flood project and began
injecting water into the formation in early September 2008.  To date,
three wells in the first water flood pattern have been converted for water
injection in which we are currently injecting approximately 2600 barrels of
treated water per day.  Additionally, one infill well drilled in the
center of the pattern is configured as a producer where we expect to observe the
initial response to water flood.  We are currently using the total
amount of treated water that is available from the water treatment facility
constructed on our lease by Complete Production Services Inc. (“CPS”), as
described below.  CPS is currently in the process of ramping up the
capacity of the water treatment facility and the barrels of water injected into
the formation will increase as the plant increases capacity.
 
 The
Company has prepared a detailed study and development plan which includes
entering each of the 19 old wells that have not been plugged. So far, we have
entered nine of these older wells to determine their mechanical status and
establish potential productivity or injectivity. Three of these wells have been
equipped and are now capable of producing and three, as noted above, have been
converted for water injection.  Further, two previously plugged wells
were re-entered but we were unable to complete them for water
injection.  As of December 31, 2007, our independent engineers, Ryder
Scott, estimated our net share of proved oil reserves extractable by water flood
at 1.5 million barrels of oil equivalent.  Slightly deeper than the
water flood zone, the Moore County Limestone formation has undrilled exploration
potential that may be tested in a future well.
 
 To
provide adequate water for injection, in November 2006 we executed a water
supply agreement with a landowner in the leasehold, which allows us to draw
freshwater from the aquifer underlying the landowner’s property. In that same
month, we received approval from the Panhandle Groundwater Authority District
(“PGAD”) to produce up to 5,000 barrels per day from the aquifer for use in the
flood.  This permit has since expired but we do not expect any
difficulty obtaining a new permit if needed to supplement the treated water
being used for injection.  We received the approval from the PGAD over
the protest filed with the PGAD by the Canadian River Municipal Water Authority
(“CRMWA”) attempting to preserve the freshwater for local municipal use only in
the area in which we own the rights to the freshwater.  We also
applied to the Texas Railroad Commission (“TRRC”) to amend a previously granted
saltwater injection permit to include fresh water injection. On January 5, 2007
we received a letter from the TRRC informing us of a protest by CRMWA contesting
our application for freshwater injection in the Quinduno Field water
flood.   However, as of November 7, 2007, CRMWA withdrew their
protest and request for hearing as part of an agreement with CRMWA that
addresses their concerns with our use of freshwater for enhanced oil
recovery.  This agreement also prevents CRMWA from protesting future
efforts to obtain approval from PGAD to produce the underlying freshwater
aquifer.
 
 In
January 2008 we signed an agreement with CPS, an international oilfield service
company which provided that CPS, at its sole expense, would design and construct
a water treatment facility no later than 90 days from the effective date of the
agreement that would be capable of treating all of our production water up to a
maximum of 10,000 bbls per day and likewise treat and provide to the Company a
minimum of 5,000 bbls per day of production water from third party
sources.  We, in turn, committed to be capable of injecting not less
than 2,000 bbls of treated water per day derived from third party production
water within 30 days after the facility opened, and further committed to be
capable of injecting not less than 5,000 bbls of treated water per day derived
from third party production water within 180 days after the facility opened, in
addition to re-injecting our own treated production water from
Quinduno.  The facility was fully operational September 19, 2008 at
which time the company was accepting and injecting a minimum of 2000 barrels of
water per day.  We are required to pay a scaled management fee to CPS
that commenced in September on the basis of the volume of treated and
re-injected water derived from our production.  We have received TRRC
permits to add a sufficient number of wells to the existing permit to meet our
obligation to inject the volumes that CPS will make
available.  Further, we will continue to add the appropriate number of
wells to the existing flood permit to continue with the development of the
flood.   We do not anticipate any difficulty with obtaining
future approvals.
  18
 Index
  SW Garwood, Colorado County, Texas
– In May 2008 we conveyed our interest in the three drilled wells and the
associated acreage in this SW Garwood prospect to an unaffiliated third
party.  As a part of that transaction, we also transferred
operatorship of all the existing and future wells in this SW Garwood prospect to
that third party. In exchange for the conveyance of the wells and acreage and
the transfer of operatorship, the Company received nominal cash consideration as
well as the third party’s assumption of the liability of plugging the Kallina 46
#1 well.
 
 OTHER
PROJECT AREAS:
 
 Gruman Prospect, Stark County, North
Dakota -On March 28, 2006, we spudded the Gruman 18-3 well intended to
be either an increased density well if it proved to be up dip of the Gruman 18-1
producing well or a water injection well if it was down dip. The well reached
total depth of 9,890 feet on April 14, 2006, and was completed as an injection
well.  On February 1, 2007, we began injecting produced water into the
Gruman 18-3 well. The goal was to reduce the cost of operating the Gruman
18-1 by eliminating the need to truck produced water to a disposal
facility.  Further testing or stimulation may be necessary to achieve
the desired future injection rates.
 
 During
2008 the pump on the Gruman 18-1 producer has been repaired or replaced three
times.  The pump was last repaired in early July 2008 after which
fluid flow into the wellbore diminished to near zero.  In order to
re-establish production we are considering supplementing the produced water
injection volume in the Gruman 18-3 well with water from the Dakota for pressure
maintenance in the mound. Further, we are giving consideration to deepening the
18-1 well to expose more of the mound.  The Gruman well continues to
have pump and motor issues.  This along with an unexpected decline in
reservoir pressure has severely affected our ability to produce the well during
the quarter, the well continues to have operational issues resulting in no
production.
 
 Proved
developed reserves in the prospect to our share of the well as of December 31,
2007, were 215 Mbo and 68 MMcf of natural gas, as estimated by a third party
engineering firm, McCartney Engineering, LLC.
 
 Mississippi Tuscaloosa Prospects --In June 2008 we agreed to farm-out out acreage in these prospects to an
industry partner for co-development.  The agreement allowed our
industry partner to operate the project and required that they commence drilling
of the first well on our acreage prior to October 1, 2008.  Under the
agreement the Company received a carried interest for 12.5% through casing point
of the first well and an option to purchase up to another 12.5% interest in the
well at cost.  For all future wells, the agreement provides us with
the same working interest as we chose on the first well.  Prior to
October 1 our partner tested the structure on offsetting acreage with a new
well.  The target zone was found as expected at approximately 6800’;
however, the well found only a few feet of oil on water.  After
testing, this well was determined to be non-commercial and our partner has
decided not to continue drilling.  While we are considering
alternatives for development of our leasehold position, it is likely that we
will allow the acreage to expire.
 
 
 RESULTS
OF OPERATIONS
 
 The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes and the other financial information appearing elsewhere in
this filing.
 
 The
factors that most significantly affect our results of operations are: (i) the
sale prices of crude oil and natural gas; (ii) the amount of production sales;
and (iii) the amount of lease operating expenses. Sales of production and level
of borrowings are significantly impacted by our ability to maintain or increase
production and reserves from existing oil and gas properties through exploration
and development activities.
  19
 Index
  For
the three months ended September 30, 2008 compared to the three months ended
September 30, 2007
 
 Revenues
 
 Consolidated
oil and gas production revenue for the three months ended September 30, 2008 was
$257,659 versus $426,931 for the three months ended September 30,
2007.  This represents a forty percent decrease in revenue in the
third quarter of 2008 over the third quarter of 2007.  This decrease
was mainly the result of the decreased production in our Gruman – North Dakota
well, which is related to pump and pressure depletion issues with the
well.  The Gruman well continues to have these mechanical and
reservoir issues and is not producing at this time. Also, the sale of the
Barnett Shale interest will significantly reduce our production revenues going
forward as indicated by the fact that the Barnett Shale consisted of
eighty-three percent of the revenue for the three months ended September 30,
2008.   Therefore, due to the sale of the Barnett interest and
the operational issues with the Gruman – North Dakota well we note that our past
performance with regards to revenues and cash flow will not be indicative of
future expected results.
 
 See below
for revenue detail by property from the third quarter of 2008 compared to the
third quarter of 2007.
 
 2008
                    
                    
                    %of
                    
                    
                    2007
                    
                    
                    %of3rd Qtr
                    
                    
                    Total
                    
                    
                    3rd Qtr
                    
                    
                    TotalBarnett
      Shale
                    
                    $
                    212,191
                    
                    
                    
                    83
                    %
                    
                    $
                    179,161
                    
                    
                    
                    42
                    %Gruman
      - North Dakota
                    
                    
                    -
                    
                    
                    
                    0
                    %
                    
                    
                    160,963
                    
                    
                    
                    38
                    %SW
      Garwood
                    
                    
                    -
                    
                    
                    
                    0
                    %
                    
                    
                    40,037
                    
                    
                    
                    9
                    %Panhandle
      - Water Flood
                    
                    
                    2,468
                    
                    
                    
                    1
                    %
                    
                    
                    1,573
                    
                    
                    
                    0
                    %Oklahoma
                    
                    
                    39,335
                    
                    
                    
                    15
                    %
                    
                    
                    36,766
                    
                    
                    
                    9
                    %Other
                    
                    
                    3,665
                    
                    
                    
                    1
                    %
                    
                    
                    8,431
                    
                    
                    
                    2
                    %Total
                    
                    $
                    257,659
                    
                    
                    
                    100
                    %
                    
                    $
                    426,931
                    
                    
                    
                    100
                    %
 
 To
further explain the decrease in revenue from the third quarter of 2007 to the
third quarter of 2008, we have provided the following break-out of production
and prices for the two periods.
 
 3Q
      2008
                    
                    
                    
                    3Q
      2007Barrels
      of Oil
                    
                    
                    439
                    
                    
                    
                    2,642Price
      per Barrel
                    
                    $
                    99.38
                    
                    
                    $
                    73.79MCF
      of Gas
                    
                    
                    18,866
                    
                    
                    
                    37,600Price
      per MCF
                    
                    $
                    11.29
                    
                    
                    $
                    5.94Total
      Barrels of Oil Equivalent
                    
                    
                    3,584
                    
                    
                    
                    8,927
 
 As noted
in the above table, the increase in oil and gas prices offset the fact that the
production was down by sixty percent.  The total effect on revenue
from the price increases was approximately $268,999; however the effect of the
decrease in production offset that positive effect by $(438,271) giving a net
effect of $(169,272) on revenue from the third quarter of 2007 to the third
quarter of 2008.
  20
 Index
  Lease
Operating and Production Tax Expense
 Lease
operating and production tax expenses for the quarters ended September 30, 2008
and 2007 were $160,162 and $146,400, respectively.  These expenses
relate to the costs that are incurred to operate and maintain our wells and
related production equipment, including the costs applicable to the operating
costs of support equipment and facilities.  Lease operating expenses
remained relatively constant, although revenue decreased by forty percent, due
to the fact that although the Gruman well has not been producing, the lease
operating costs related to the Gruman well remained constant during the
period.  Work on the well continues in an attempt to get the well back
on line.
 
 Depletion,
Depreciation and Amortization
 
 Costs for
depletion, depreciation and amortization for the quarters ended September 30,
2008 and 2007, were $86,736 and $222,871, respectively.  The decrease
is mainly due to a decrease in total barrels of oil equivalent production during
the quarter ended September 30, 2008 as compared to the same period in 2007 as
well as a decrease in the amortizable base used to calculate depletion, due to
the sale of the Barnett Shale project.  Given the fact that depletion
is calculated by multiplying the net amortizable costs times the units of
production in the related period relative to the total proved reserves, the
depletion amount for the third quarter of 2008 was significantly lower than
the depletion for the same period in 2007.
 
 General
and Administrative Expenses
 
 General
and administrative expenses for the quarters ended September 30, 2008 and 2007,
were $826,653 and $631,925, respectively.  The increase in total
general and administrative expense was mainly due to the increase in personnel
costs which was higher due to the fact that stock bonuses (non-cash) granted to
employees in 2007 vested in the third quarter of 2008, as well as a stock bonus
being granted to employees in the third quarter of 2008.  The total
non-cash bonuses to employees recorded in personnel costs in the third quarter
of 2008 were $229,375.  The increase in personnel costs were slightly
offset due to a decrease in accounting, legal and professional
fees.  A summary listing of general and administrative expenses is
provided below.
 
 3rd
      Quarter
                    
                    
                    3rd
      Quarter2008
                    
                    
                    2007Personnel
      Costs
                    
                    $
                    504,192
                    
                    
                    $
                    273,498Travel,
      Meals, and Entertainment
                    
                    
                    10,275
                    
                    
                    
                    1,503Corporate
      Expenses
                    
                    
                    68,214
                    
                    
                    
                    81,165Accounting,
      Legal, and Professional Fees
                    
                    
                    98,781
                    
                    
                    
                    143,379Third
      Party Consultants and Contractors
                    
                    
                    82,983
                    
                    
                    
                    71,955Office
      Expenses
                    
                    
                    44,310
                    
                    
                    
                    40,272Other
                    
                    
                    17,898
                    
                    
                    
                    20,153Total
      General and Administrative
                    
                    $
                    826,653
                    
                    
                    $
                    631,925
 
 Operating
Loss
 
 We
generated an operating loss of $(815,892), or $(0.02) per share, for the quarter
ended September 30, 2008, compared to an operating loss of $(574,265), or
$(0.01) per share, for the quarter ended September 30, 2007. The $(241,627)
variance is related mainly to a decrease in revenues, coupled with a decrease in
depletion expense and an increase in general and administrative
expenses.
 
 Other
Income (Expense)
 
 The
$(4,066,230) increase from $(851,783) in other expense for the quarter ended
September 30, 2007 to $(4,918,013) in other expense for the quarter ended
September 30, 2008 is due mainly to the loss recorded on the early
extinguishment of the convertible debt.  By paying the debt off early,
we had to accelerate the amortization of debt discount and financing costs of
approximately $4.5 million that would have been amortized over the life of the
convertible note, had we not paid it off early. When the convertible notes were
originally recorded, the accounting treatment was to record the debt discount to
the equity section of the balance sheet; therefore the net effect of the early
retirement of the convertible notes to the equity section of the balance sheet
is limited to the write-off of the unamortized financing costs of
$241,136.  It is just a reclassification from additional paid in
capital to retained earnings.  This loss was partially offset by a
decrease in interest expense and a decrease in amortization of debt discount,
both of which decreased because the convertible notes were paid off early in the
quarter.
  21
 Index
  For
the nine months ended September 30, 2008 compared to the nine months ended
September 30, 2007
 
 Revenues
 
 Consolidated
oil and gas production revenue for the nine months ended September 30, 2008 was
$1,357,557 versus $1,163,451 for the nine months ended September 30,
2007.  This represented a seventeen percent increase in revenue in the
nine months ended September 30, 2008 over the same period in
2007.  This increase is primarily due to the significant increase in
the revenues from our Barnett Shale project; however, the increase is offset by
a decrease in revenues from our Gruman North Dakota well (due to pump and
pressure depletion issues – discussed herein) and a decrease in revenues from
our SW Garwood project (due to the sale of that project – discussed
herein).   The Gruman well continues to have mechanical and
reservoir issues and is not producing at this time. Also, the sale of the
Barnett Shale interest will significantly reduce our production revenues going
forward as indicated by the fact that the Barnett Shale consisted of
seventy-four percent of the revenue for the nine months ended September 30,
2008.  The continued pump and reservoir issues with the Gruman – North
Dakota well will also negatively impact our future revenues given the fact that
the Gruman well accounted for thirteen percent of the revenues for the nine
months ended September 30, 2008.   Therefore, due to the sale of
the Barnett interest and the operational issues with the Gruman – North Dakota
well we note that our past performance with regard to revenues and cash flow
will not be indicative of future expected results.
 
 
 See below
for revenue detail by property for the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007.
 
 2008
                                            
                                            
                                            %
      of
                                            
                                            
                                            2007
                                            
                                            
                                            %
      of9-Months
                                            
                                            
                                            Total
                                            
                                            
                                            9-Months
                                            
                                            
                                            TotalBarnett
      Shale
                                            
                                            $
                                            995,445
                                            
                                            
                                            
                                            74
                                            %
                                            
                                            $
                                            414,862
                                            
                                            
                                            
                                            36
                                            %Gruman
      - North Dakota
                                            
                                            
                                            175,086
                                            
                                            
                                            
                                            13
                                            %
                                            
                                            
                                            404,889
                                            
                                            
                                            
                                            35
                                            %SW
      Garwood
                                            
                                            
                                            26,255
                                            
                                            
                                            
                                            2
                                            %
                                            
                                            
                                            179,689
                                            
                                            
                                            
                                            15
                                            %Panhandle
      - Water Flood
                                            
                                            
                                            3,608
                                            
                                            
                                            
                                            0
                                            %
                                            
                                            
                                            9,145
                                            
                                            
                                            
                                            1
                                            %Oklahoma
                                            
                                            
                                            123,448
                                            
                                            
                                            
                                            9
                                            %
                                            
                                            102,654
                                            
                                            
                                            
                                            9
                                            %Other
                                            
                                            
                                            33,715
                                            
                                            
                                            
                                            2
                                            %
                                            
                                            
                                            52,212
                                            
                                            
                                            
                                            4
                                            %Total
                                            
                                            $
                                            1,357,557
                                            
                                            
                                            
                                            100
                                            %
                                            
                                            $
                                            1,163,451
                                            
                                            
                                            
                                            100
                                            %
  22
 Index
  To
further explain the increase in revenue from the first nine months of 2007 to
the first nine months of 2008 we have provided the following break-out of
production and prices for the two periods.
 
 2008
                      9-Mos
                    
                    
                    2007
                      9-MosBarrels
      of Oil
                    
                    
                    3,121
                    
                    
                    
                    8,086Price
      per Barrel
                    
                    $
                    100.06
                    
                    
                    $
                    61.97MCF
      of Gas
                    
                    
                    114,334
                    
                    
                    
                    94,488Price
      per MCF
                    
                    $
                    8.91
                    
                    
                    $
                    6.39Total
      Barrels of Oil Equivalent
                    
                    
                    22,298
                    
                    
                    
                    24,156
 
 As noted
in the above table, the increase in oil and gas prices played a significant role
in the increase in revenue since 2007.  Price increase effects of
natural gas and oil on our revenue from the nine months ended September 30, 2007
to the nine months ended September 30, 2008 were $561,559; however the decrease
in production offset that increase by $(367,453).
 
 Lease
Operating and Production Tax Expense
 Lease
operating and production tax expenses for the nine months ended September 30,
2008 and 2007 were $709,984 and $489,291, respectively.  These
expenses relate to the costs that are incurred to operate and maintain our wells
and related production equipment, including the costs applicable to the
operating costs of support equipment and facilities.  Lease operating
expenses increased due to fact that there were 12 Barnett Shale wells on-line
for the first time during the nine months of 2008 that were not on-line for that
period in 2007.  In addition, repair and maintenance type work was
required on the Pintail and Gruman wells in 2008 causing total lease operating
expenses for these two wells to increase.
 
 Depletion,
Depreciation and Amortization
 
 Costs for
depletion, depreciation and amortization for the nine months ended September 30,
2008 and 2007, were $550,959 and $595,660, respectively.  The decrease
is due to (i) a decrease in total barrels of oil equivalent production in the
nine months ended September 30, 2008, as compared to the same period in 2007;
and (ii) lower costs in the amortizable base due to the sale of the SW Garwood
and Barnett Shale projects.  Given the fact that depletion is
calculated by multiplying the net amortizable costs times the units of
production in the related period relative to the total proved reserves, the
depletion amount for the first nine months of 2008 was lower than the depletion
for the same period in 2007.
  23
 Index
  General
and Administrative Expenses
 
 General
and administrative expenses for the nine months ended September 30, 2008 and
2007, were $2,142,550 and $2,072,397, respectively.  The slight
increase in total general and administrative expense was mainly due to the
increase in personnel costs which was higher due to the fact that stock bonuses
given to employees in 2007 vested in the third quarter of 2008, as well as a
stock bonus was granted to employees in the third quarter of
2008.  The increase in general and administrative expenses was
slightly offset due to a decrease in corporate expenses and third party
consultants.  A summary listing of general and administrative expenses
is provided below.
 
 9/30/2008
                    
                    
                    9/30/2007YTD Total
                    
                    
                    YTD TotalPersonnel
      Costs
                    
                    $
                    1,101,165
                    
                    
                    $
                    957,870Travel,
      Meals, and Entertainment
                    
                    
                    25,260
                    
                    
                    
                    38,091Corporate
      Expenses
                    
                    
                    186,051
                    
                    
                    
                    241,908Accounting,
      Legal, and Professional Fees
                    
                    
                    452,229
                    
                    
                    
                    414,261Third
      Party Consultants and Contractors
                    
                    
                    179,040
                    
                    
                    
                    210,453Office
      Expenses
                    
                    
                    145,188
                    
                    
                    
                    148,560Other
                    
                    
                    53,617
                    
                    
                    
                    61,254Total
      General and Administrative
                    
                    $
                    2,142,550
                    
                    
                    $
                    2,072,397
 
 Operating
Loss
 
 We
generated an operating loss of $(2,045,936), or $(0.05) per share, for the nine
months ended September 30, 2008, compared to an operating loss of $(1,993,897),
or $(0.05) per share, for the nine months ended September 30,
2007.  The $(52,039) variance is related to an increase in revenues
related to our Barnett Shale asset offset by an increase in lease operating
costs.
 
 Other
Income (Expense)
 
 The
$18,361,488 increase from $(2,664,790) in other expense for the nine months
ended September 30, 2007 to $15,696,698 in other income for the nine months
ended September 30, 2008 is due mainly to the gain of $21,814,753 related to the
sale of the DDJET interest in the Barnett Shale offset by the accelerated
amortization of debt discounts related to the extinguishment of the convertible
notes and the extinguishment of debt related to the forgiveness of the
non-recourse project financing related to the Company’s Kallina 46 #1 well in
the SW Garwood project. When the convertible notes were originally recorded, the
accounting treatment was to record the debt discount to the equity section of
the balance sheet; therefore the net effect of the early retirement of the
convertible notes to the equity section of the balance sheet is limited to the
write-off of the unamortized financing costs of $241,136.
 
 Impact
of the Sale of Barnett Shale Interest
 
 The sale
of the Barnett Shale interest has put the Company in a strong financial
position.  At the time of the sale the Company was able to pay off
approximately $18.7 million in convertible debt, and is left with approximately
$13.9 million in cash and $784,000 in short term investments on the balance
sheet as of September 30, 2008 and no corporate debt.  However, since
there will no longer be production revenues being received from the Barnett
Shale wells and the North Dakota well continues to experience downhole problems,
we have focused our efforts on the commencement of the waterflood project in
order to potentially compensate for the lack of production revenue from the
Barnett Shale and the decreased production from the North Dakota
well.
  24
 Index
  Off-Balance
Sheet Arrangements
 
 We had no
off-balance sheet arrangements during the fiscal quarter ended September 30,
2008.
 
 Item4.
              Controls
      and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 Petrosearch
Energy Corporation’s Chief Executive Officer and Chief Financial Officer
performed an evaluation of the Company’s disclosure controls and procedures.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Securities Exchange Act
of 1934 is accumulated and communicated to the issuer’s management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures are effective as of September 30,
2008.
 
 Changes
in internal controls
 
 There has
been no change in our internal control over financial reporting during the
quarter ended September 30, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
 
 Limitations
on the Effectiveness of Internal Controls
 
 Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud and
material error. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the internal control. The design of
any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.
 
 PART
II--OTHER INFORMATION
  Item
      1
              Legal
      Proceedings
 
 On April
11, 2007, the Company was served with a lawsuit filed against it titled Cause
No. 2007-16502; D. John Ogren, R. Bradford Perry and Chester Smitherman v.
Petrosearch Corporation; 133rdJudicial District Court, Harris County, Texas.  The
plaintiffs were three (3) Series A Preferred shareholders who derived their
original shares from Texas Commercial Resources, Inc. (“TCRI”) and became Series
A Preferred shareholders of Petrosearch Energy Corporation as a result of the
prior mergers.  The plaintiffs had alleged that Petrosearch Corporation
(and TCRI, its predecessor) failed to pay accrued, cumulative dividends and
refused to allow conversion of their Series A Preferred Stock into Common
Stock.    The plaintiffs had alleged breach of contract, fraud
and violation of Section 33 of the Texas Securities Act and have requested the
award of actual and exemplary damages, interest and attorneys’ fees.  
The lawsuit likewise requested the Court to compel the payment of accrued
dividends and the examination of the Company’s books and records. The
lawsuit was settled in September 2008 and the settlement was paid 100% by the
Company's insurance policy.  The payment of the settlement is not an
admission of liability, as the Company denies all allegations of wrongdoing
contained in the lawsuit.
  25
 Index
  Item2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 During
the three months ended September 30, 2008 we completed the following
transactions in reliance upon exemptions from registration under the Securities
Act of 1933, as amended (the "Act") as provided in Section 4(2) thereof. All
certificates issued in connection with these transactions were endorsed with a
restrictive legend confirming that the securities could not be resold without
registration under the Act or an applicable exemption from the registration
requirements of the Act. We believe that each person was a “qualified” investor
within the meaning of the Act and had knowledge and experience in financial and
business matters, which allowed them to evaluate the merits and risks of our
securities.  We believe each person was knowledgeable about our
operations and financial condition.
 
 On
September 9, 2008 we issued 100,563 restricted common shares valued at $62,500
to the two independent board members of the Company as compensation for their
service on the Board of Directors.
 
 On
September 9, 2008 we issued 545,330 restricted common shares valued at $251,250
to five employees of the Company as compensation.  Included in the
five employees were the CEO, COO and CFO.
  26
 Index
  Item6.
              Exhibits
 
 Exhibit Number
                Description of
  Exhibit31.1
                Rule 13a-14(a) Certification of Chief Executive
      Officer31.2
                Rule 13a-14(a) Certification of Chief Financial
      Officer32.1
                Section 1350 Certification of Chief Executive
      Officer32.2
                Section 1350 Certification of Chief Financial
      Officer
  27
 Index
  SIGNATURES
 
  In
accordance with the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
  
 Petrosearch
Energy Corporation
 
 Date:  November 14, 2008
 
 
 By:
                  /s/ Richard DoleRichard
      DoleChief
      Executive Officer, President and ChairmanBy:
                  /s/ David CollinsDavid
      CollinsChief
      Financial Officer, Chief Accounting Officer and Principal Financial
      Officer






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