##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
   þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file
    no. 001-33457
      Pinnacle Gas Resources,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

30-0182582(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)1 E. Alger Street
    Sheridan, Wyoming(Address of principal
    executive offices)

82801(Zip code)   Registrants telephone number, including area code:
    (307) 673-9710
  Securities Registered Pursuant to Section 12(b) of the
    Exchange Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock

Nasdaq Global Market   Securities
    Registered Pursuant to Section 12(g) of the Exchange
    Act:
  None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large Accelerated
    Filer o

Accelerated
    Filer o

Non-Accelerated
    Filer þ
    (Do not check if a smaller reporting company)

Smaller Reporting
    Company o   Rule 12b-2 o þ




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##### 





PINNACLE
    GAS RESOURCES, INC.
  Index to
    Form 10-K
   
 Part I


1Items 1. and 2.


Business and Properties


1Item 1A.


Risk Factors


23Item 1B.


Unresolved Staff Comments


37Item 3.


Legal Proceedings


37Item 4.


Submission of Matters to a Vote of Security
    Holders


38Part II


38Item 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


38Item 6.


Selected Financial Data


40Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operation


41Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


57Item 8.


Financial Statements and Supplementary Data


59Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


92Item 9A.


Controls and Procedures


92Item 9B.


Other Information


92Part III


92Item 10.


Directors, Executive Officers and Corporate
    Governance


92Item 11.


Executive Compensation


96Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


106Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


108Item 14.


Principal Accounting Fees and Services


109Part IV


110Item 15.


Exhibits and Financial Statement Schedules


110Summary of Director CompensationCertification of President and Chief Executive OfficerCertification of Senior Vice President, Chief Financial Officer and SecretaryCertification of President and Chief Executive OfficerCertification of Senior Vice President, Chief Financial Officer and Secretary   i




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##### Table of Contents



CAUTIONARY
    STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
  Form 10-K,
  
    projections and estimates concerning the timing and success of
    specific projects;
    our financial position or operating results;
    our business strategy;
    our budgets;
    the amount, nature and timing of capital expenditures;
    the drilling of wells;
    the development of recently acquired natural gas and oil
    properties;
    the timing and amount of future production of natural gas and
    oil;
    our operating costs and other expenses;
    our estimated future net revenues from natural gas and oil
    reserves and the present value thereof;
    our cash flow and anticipated liquidity; and
    our other plans and objectives for future operations.  Form 10-K
  
    our ability to implement our business strategy;
    the extent of our success in discovering, developing and
    producing reserves, including the risks inherent in exploration
    and development drilling, well completion and other development
    activities;
    fluctuations in the commodity prices for natural gas and crude
    oil;
    engineering, mechanical or technological difficulties with
    operational equipment, in well completions and workovers, and in
    drilling new wells;
    the effects of government regulation and permitting and other
    legal requirements;
    labor problems;
    environmental-related problems;
    the uncertainty inherent in estimating future natural gas and
    oil production or reserves;
    production variances from expectations;
    the substantial capital expenditures required for construction
    of pipelines and the drilling of wells and the related need to
    fund such capital requirements through commercial banks
    and/or
    public securities markets; ii




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##### Table of Contents




    disruptions, capacity constraints in or other limitations on our
    or others pipeline systems;
    our ability to effectively market our production;
    land issues and the costs associated with perfecting title for
    rights in some of our properties;
    our ability to develop and replace reserves;
    dependence upon key personnel;
    the lack of liquidity of our equity securities;
    operating hazards attendant to the natural gas and oil business,
    including down-hole drilling and completion risks that are
    generally not recoverable from third parties or insurance;
    potential mechanical failure or under-performance of significant
    wells;
    climatic conditions or natural disasters;
    acts of terrorism;
    the availability and cost of materials and equipment;
    delays in anticipated
    start-up
    dates;
    our ability to find and retain skilled personnel;
    the availability of capital;
    competition from, and the strength and financial resources of,
    our competitors; and
    general economic conditions.   iii




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##### Table of Contents



PART I  ITEMS 1
    AND 2
    BUSINESS
    AND PROPERTIES  General
    80-acre
    Merger
    with Quest Resource Corporation
  Form 10-K.
 1




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##### Table of Contents



Our
    Powder River Basin and Green River Basin CBM Projects
    Powder
    River Basin
    
    Wyoming.  Our principal Wyoming properties in
    the Powder River Basin are located in two distinct project
    areas: Recluse and Cabin Creek. As of December 31, 2007,
    substantially all of our natural gas production has come from
    the Recluse area. As of December 31, 2007, we held
    approximately 141,000 gross (61,000 net) acres in the
    Powder River Basin in Wyoming for prospective CBM development
    and we operated over 99% of this acreage. As of
    December 31, 2007, we had 328 approved drilling permits for
    our Powder River Basin properties in Wyoming and we are in the
    process of applying for an additional 349 drilling permits which
    we expect to be approved in 2008. We are actively developing our
    undeveloped acreage in the Cabin Creek area and anticipate
    drilling 95 gross (72 net) wells on our Powder River Basin
    properties in Wyoming during the first six months of 2008.
    Montana.  Our Montana properties are located in
    four project areas: Kirby, Deer Creek, Bear Creek and Bradshaw.
    As of December 31, 2007, we held approximately
    320,000 gross (223,000 net) acres in Montana for
    prospective CBM development and we operated 100% of this
    acreage. We have begun active development in both the Deer Creek
    and Kirby areas, and in 2007, we drilled 11 gross (8 net)
    wells in these areas. As of December 31, 2007, we had 92
    approved drilling permits for our Montana properties and we are
    in the process of applying for an additional 87 drilling permits
    which we expect to be approved in 2008. Of these additional
    permits, 54 are on fee and state land and 33 are on federal
    land. We are actively developing our undeveloped acreage in the
    Kirby and Deer Creek areas and anticipate drilling 5 gross
    (3 net) wells on our Montana properties during the first six
    months of 2008.  Green
    River Basin
  160-acre 80-acre
  160-acre
 2




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##### Table of Contents



80-acre
  2-year
  Summary
    of Our Powder River and Green River Basin Properties
    and First Six Months of 2008 Capital Budget
  Producing


ProducingWells as of


Wells as of


First Six Months 2008


Estimated


EstimatedDecember 31,


December 31,


Capital Budget(1)(2)


Potential


Total2007


2006


Gross


Net


Capital


Drilling


NetGross


Net


Gross


Net


Wells


Wells


Expenditures


Locations(3)


Acres(3)Recluse


431



214



407



208



11



4


$
0.5



500



16,000Cabin Creek


89



53



29



15



72



63



13.1



500



34,000Kirby


114



75



93



58



3



2



0.3



1,625



49,000Deer Creek


0



0



0



0



1



1



0.1



520



41,000Bear Creek


0



0



0



0















900



65,000Bradshaw


0



0



0



0



1



1



0.1



925



68,000Green River Basin(4)


0



0



0



0











1.2



170



32,000Other


0



0



0



0



12



5



1.0



400



11,000Total


634



342



529



281



100



76


$
16.3



5,540



316,000     (1)
    
    For the year ended December 31, 2007, we drilled
    87 gross (61 net) wells.(2)
    
    Excludes approximately $2.3 million in capital expenditures
    relating to plans of development costs for wells to be drilled
    in the future and $1.0 million of undeveloped leasehold
    acquisition costs in the first six months of 2008.(3)
    
    Estimated as of December 31, 2007.(4)
    
    Includes approximately $1.2 million of infrastructure and
    completion costs related to wells drilled in the first six
    months of 2008.  Strategy
    
    Accelerating the development of our acreage position by
    increasing the level of our drilling activity;
    Maintaining operational control over our assets in order to
    control the costs and timing of our exploration, development and
    production activities;
    Constructing and maintaining control over our low-pressure gas
    gathering systems that collect and transport our production;
    Maintaining a low-cost and efficient operating environment by
    exploiting the economies of scale that arise from developing our
    large contiguous acreage position;
    Proactively managing legal, regulatory and environmental issues
    to ensure the efficient and timely development of our asset base; 3




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##### Table of Contents




    Pursuing selective acquisitions that add attractive exploitation
    and development opportunities and also enhance the critical mass
    of our asset base;
    Pursuing selective acquisition opportunities that would allow us
    to apply our CBM development expertise in other areas in the
    Rocky Mountain region; and
    Exploring the potential of the deeper lease rights below the
    coal seams on our existing acreage position.  Competitive
    Strengths
    
    Experienced Management Team.  Our key personnel
    have significant experience managing CBM operations,
    particularly in the Powder River Basin. Our management team has
    an average of 20 years of experience in acquiring,
    developing and operating oil and gas properties, primarily in
    the Rocky Mountain region.
    Significant Reserve Potential.  According to
    the U.S. Department of Energy 2002 Powder River Basin
    Coalbed Methane Development and Produced Water Management Study,
    the Montana portion of the Powder River Basin is estimated to
    have substantial recoverable reserves. We hold a significant
    portion of the acreage that is prospective for CBM development
    in the Montana portion of the Powder River Basin.
    Low Geological Risk.  The coal seams in the
    Powder River Basin that we target have been extensively mapped
    as a result of a variety of natural resource development that
    has occurred in the region. Industry data from over
    23,500 wellbores drilled through the Fort Union
    formation allows us to determine the aerial extent, thickness,
    gas saturation, formation pressure and relative permeability of
    the coal seams we target for development, which reduces our dry
    hole risk.
    Low Development Risk and Predictable
    Results.  During the period from our inception in
    June 2003 to December 31, 2007, we completed 675 gross
    (365 net) of the 700 gross (386 net) CBM wells that we
    drilled on our acreage. As necessary infrastructure becomes
    available, we expect to complete the remaining gross wells
    drilled through December 31, 2007. Our overall drilling
    program is relatively predictable on an average well basis in
    terms of recoverable reserves, production rates and decline
    curves, which results in lower development risk.
    Large, Contiguous Acreage Position.  Our
    acreage position of approximately 494,000 gross (316,000
    net) acres includes one of the largest contiguous acreage
    positions in the Powder River Basin. Many of our leases are in
    large blocks, generally along the Wyoming and Montana border,
    adjacent to newly established areas of development activities.
    We believe the contiguous nature of the majority of our Powder
    River Basin properties gives us the necessary critical mass to
    better manage operating and development costs and surface
    issues, obtain pipeline access and execute our plans of
    development.
    Extensive Inventory of Drilling Locations.  As
    of December 31, 2007, our net acreage position was
    approximately 7% developed. As of December 31, 2007, we had
    identified approximately 5,540 CBM drilling locations on our
    existing acreage, primarily on
    80-acre
    spacing, targeting an average of three coal seams per location.
    Large Inventory of Drilling Permits.  As of
    December 31, 2007, we had 342 approved drilling permits for
    our Wyoming acreage, and we are in the process of applying for
    an additional 366 permits in Wyoming, which we expect to be
    approved in 2008. As of December 31, 2007, we had four
    plans of development approved for our Montana acreage, allowing
    us to drill 92 additional gross wells, and we are in the process
    of applying for an additional 87 permits which we expect to be
    approved in 2008. We believe that in the near future, we will
    have sufficient permits to support at least two years of our
    planned drilling activity.
    Attractive Cost Structure.  We believe our
    average cost structure is attractive due to the low geological
    risk, high completion rates, generally shallow drilling depths
    and low-cost completions, including multiple zone completions,
    associated with developing our CBM acreage position. Although
    our lease operating costs are 4




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##### Table of Contents



higher than average on a per Mcf basis while we are in our
    initial stages of development, we expect that our lease
    operating expenses will benefit from economies of scale as we
    grow, our maintaining high operatorship of our reserves and
    production, and our continuing cost management initiatives.  
    Control of Low-Pressure Gas Gathering
    Infrastructure.  As of December 31, 2007, we
    owned and operated approximately 250 miles of low-pressure
    gas gathering pipelines that primarily collect and transport our
    production in the Recluse area of Wyoming. We intend to
    construct, own and operate the additional low-pressure gas
    gathering system assets required to develop our acreage position.
    Marketing Flexibility.  Production from our
    acreage has access to several regional and interstate pipelines,
    providing sufficient takeaway capacity from our operating region
    and access to major gas demand centers in the United States.
    Local Presence.  We are headquartered in
    Sheridan, Wyoming, which is the center of our project areas in
    the Powder River Basin. Our local presence gives us insight into
    the issues associated with Powder River Basin CBM development
    and the ability to quickly and effectively communicate with
    landowners, mineral owners and regulatory agencies.  Our
    History
    non-U.S. persons
      
    In June 2003, we acquired approximately 57,000 gross
    (22,000 net) acres along with 210 gross (96 net) producing
    wells and shut-in wells in Wyoming from Gastar Exploration, Ltd.
    and certain of its affiliates.
    In March 2005, we acquired approximately 223,000 gross
    (196,000 net) undeveloped acres for prospective CBM development
    in Montana and Wyoming from a subsidiary of Marathon Oil
    Corporation. 5




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##### Table of Contents



Capital
    Expenditure Plan
    Overview
    of the CBM Industry and the Powder River Basin
         6




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##### Table of Contents



Drilling
    and Production
        Water
    Production and Management
      
    surface discharge;
    containment in reservoirs; 7




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##### Table of Contents




    irrigation of surface lands;
    injection to shallow sand formations;
    enhanced evaporation systems;
    treatment through ion exchange or reverse osmosis; and/or
    sub-surface irrigation.  hook-up,
    Recovery
    Characteristics
    Powder
    River Basin CBM Production Overview
    80-acre
  Hook-up, 12-inch
 8




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##### Table of Contents



hook-up. hook-up.
  Green
    River Basin CBM Production Overview
      160-acre
  Operations
  CBM
    Development, Projects and Operations
     9




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##### Table of Contents



80-acre
  Wyoming 
    Powder River Basin
        
    Recluse Recluse is located on the northern
    end of the Gillette Fairway, where a majority of Powder River
    Basin CBM has been produced to date. As of December 31,
    2007, we held approximately 59,000 gross (16,000 net) acres
    in the Recluse area, of which approximately 34% were developed.
    As of December 31, 2007, we operated approximately 100% of
    these properties. As of December 31, 2007, we were
    producing approximately 16.5 gross (6.8 net) MMcf per day
    from approximately 436 gross (217 net) wells in this area.
    During the year ended December 31, 2007, we drilled
    25 gross (12 net) wells. Our gas is gathered in over
    200 miles of low-pressure gathering systems which we
    installed and own. As of December 31, 2007, we had
    approximately 8.9 Bcf of net proved reserves in the Recluse
    area based on a CIG index price of $6.04 per 10




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##### Table of Contents



Mcf. We have identified approximately 500 potential drilling
    locations in Recluse and we plan to drill 11 gross (4 net)
    wells during the first six months of 2008.  
    Cabin Creek Our Cabin Creek project is
    located on the northern border of Wyoming adjacent to
    St. Marys Hanging Woman project to the west. As of
    December 31, 2007, we held approximately 46,000 gross
    (34,000 net) acres in Cabin Creek, of which approximately 15%
    were developed. As of December 31, 2007, we operated
    approximately 94% of these properties. As of December 31,
    2007, we participated in wells that were producing approximately
    5.6 gross (2.7 net) MMcf per day from approximately
    89 gross (53 net) wells in this area. During the year ended
    December 31, 2007, we drilled 51 gross (41 net) wells
    and participated in 29 gross (7 net) wells drilled by Nance
    Petroleum, a wholly owned subsidiary of St. Mary Land and
    Exploration. We entered into an agreement with Nance Petroleum
    to trade operations, whereby we operate wells in certain areas
    where they have small, stranded acreage positions and they
    operate in areas where we have similar positions. As of
    December 31, 2007, we have approximately 14.6 Bcf of
    net proved reserves in the Cabin Creek area based on a CIG index
    price of $6.04 per Mcf. We have identified approximately 500
    potential drilling locations and plan to drill 72 gross (63
    net) wells in the Cabin Creek area during the first six months
    of 2008.
    Other As of December 31, 2007, we held
    approximately 36,000 gross (11,000 net) acres in three
    non-core project areas in Wyoming, all of which are undeveloped.
    As of December 31, 2007, we operated approximately
    77 gross (55 net) wells in these areas and had
    approximately 0.9 Bcf of net proved reserves based on a CIG
    index price of $6.04 per Mcf. The wells were shut-in and we are
    currently planning to drill 12 gross (5 net) wells during
    the first six months of 2008.  Montana 
    Powder River Basin
    80-acre
    
    Kirby Kirby was acquired at the time of our
    initial formation in 2003. As of December 31, 2007, we held
    approximately 127,000 gross (49,000 net) acres in our Kirby
    project area, of which approximately 3% were developed. Kirby is
    located adjacent to and just north of Fidelity Exploration and
    Development Companys project area, which is north of J. M.
    Hubers project area in Wyoming. For the year ended
    December 31, 2007, Fidelity produced an average of
    33 MMcf per day from its project area. As of
    December 31, 2007, we 11




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##### Table of Contents



were producing approximately 2.2 gross (1.2 net) MMcf per
    day from approximately 114 gross (75 net) wells in this
    area. During the year ended December 31, 2007, we drilled
    4 gross (2 net) wells in our Coal Creek expansion area in
    the Kirby area at depths between 500 and 1,200 feet in the
    Wall and Flowers-Goodale coals. We have begun commercial gas
    production from Kirby and transport our Kirby gas production
    through the Bitter Creek Pipeline, which became operational in
    late August 2006. We plan to target up to six distinct coal
    seams in the Kirby area.    
    Deer Creek As of December 31, 2007, we
    held approximately 49,000 gross (41,000 net) acres in our
    Deer Creek project area, of which approximately 3% were
    developed. Our Deer Creek project area is located adjacent to
    St. Marys Hanging Woman project to the south and
    Fidelitys CX Ranch Field to the west. Extensive drilling
    activity has occurred in both areas to date.      
    Bear Creek As of December 31, 2007, we
    held approximately 72,000 gross (65,000 net) acres in our
    Bear Creek project area, all of which were undeveloped. Our Bear
    Creek project area is located adjacent to and just north of our
    Cabin Creek project area in Wyoming and northeast of
    St. Marys Hanging Woman project. We operate all of
    our acreage in Bear Creek, which was acquired from Marathon Oil
    Corp. in March 2005.    
    Bradshaw Our Bradshaw project area is located
    to the northeast of our Cabin Creek project area in Wyoming. As
    of December 31, 2007, we held approximately
    72,000 gross (68,000 net) acres in Bradshaw, all of which
    were undeveloped. As of December 31, 2007, we operated all
    of the acreage.    Wyoming 
    Green River Basin
   12




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##### Table of Contents



160-acre 80-acre
  Exploration &
    Production Activities
  Producing
    Wells and Acreage
    Approximate Leasehold AcreageProductive Wells


Developed


Undeveloped


TotalGross


Net


Gross


Net


Gross


Net


Gross


NetDecember 31, 2003


149



87



5,960



3,480



133,040



59,520



139,000



63,000December 31, 2004


312



165



12,480



6,600



181,520



69,400



194,000



76,000December 31, 2005


404



203



16,160



8,120



401,840



263,880



418,000



272,000December 31, 2006


529



281



26,160



17,400



427,840



290,600



454,000



308,000December 31, 2007


634



342



33,120



22,200



460,880



293,800



494,000



316,000   Lease
    Expirations
  Expiring Acres 2008


Held by Production


SuspendedGross


Net


Gross


Net


Gross


NetWyomingRecluse


170



85



29,301



14,967



609



304Cabin Creek


601



434



10,957



8,423



0



0Green River Basin


2,220



2,220



6,761



6,537



4,841



4,361MontanaBear Creek


3,965



2,989



844



769



66,020



57,163Deer Creek


1,360



1,120



4,940



3,843



38,817



32,553Bradshaw


0



0



0



0



61,327



60,662Kirby


35,120



18,033



21,750



12,135



34,651



17,324Totals


43,436



24,881



74,553



46,674



206,265



172,367  13




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##### Table of Contents



Natural
    Gas Reserves
    As of December 31,2003


2004


2005


2006(2)


2007Estimated net proved reserves:Proved developed producing (MMcf)


1,653



5,154



5,522



3,588



7,442Proved developed non-producing (MMcf)


3,279



2,277



2,690



4,292



3,016Total proved developed (MMcf)


4,932



7,431



8,212



7,880



10,458Proved undeveloped (MMcf)


13,212



17,346



18,827



12,409



15,263Total proved reserves (MMcf)


18,144



24,777



27,039



20,289



25,721Future cash flows before income taxes (in millions)

$
35.1


$
49.4


$
84.4


$
34.8


$
65.0Standardized measure (in millions)(1)

$
18.7


$
28.4


$
43.7


$
22.4


$
38.6Price used for computing reserves (CIG index price per Mcf as of
    December 31)

$
5.575


$
5.515


$
7.715


$
4.460


$
6.04     (1)
    
    The standardized measure of discounted future net cash flows
    represents the present value of future cash flows attributable
    to our proved reserves discounted at 10% after giving effect to
    income taxes, and as calculated in accordance with
    SFAS No. 69. Standardized measure does not represent
    an estimate of fair market value of our reserves.(2)
    
    Total proved reserves for 2006 declined primarily due to
    declines in the price of natural gas. Please see Item 1A,
    Risk Factors  Risks Related to Our
    Business  The volatility of natural gas and oil
    prices could have a material adverse effect on our business.  Summary
    of Well Activity
    Year Ended December 31,June 23,2003-December 31, 2003


2004


2005


2006


2007Gross


Net


Gross


Net


Gross


Net


Gross


Net


Gross


NetWells Drilled:Capable of Production


123



62



121



59



136



65



230



139



87



61Dry


1



0



1



1



1



1



0



0



0



0Wells Acquired


240



148



1



1



0



4



29



29



0



0Wells Abandoned


5



3



2



1



0



0



1



1



1



1Net Increase in Capable wells


357



207



119



58



135



68



258



167



86



60     Gas
    Gathering, Transportation and Compression
   14




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##### Table of Contents



and/or month-to-month
  Right-of-way month-to-month
  5 MMcf/day 3 MMcf/day,
 15




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##### Table of Contents



Marketing
    and Customers
    Hedging
    Activities
   16




---



##### Table of Contents



Year EndingDecember 31,2008(Unaudited)Natural Gas Collars:Contract volumes (MMBtu):Floor


1,098,000Ceiling


1,098,000Weighted-average fixed price per MMBtu(1):Floor

$
6.50Ceiling

$
8.20Fixed-price sales(2)

$
8.20Fair value, net (thousands)(3)

$
556Total Natural Gas Contracts:Contract volumes (MMBtu)


1,098,000Weighted-average fixed price per MMBtu(1)

$
6.50Fixed-price sales(2)

$
8.20Fair value, net (thousands)(3)

$
556     (1)
    
    Volumes hedged using the CIG index price published in the first
    issue of Inside FERCs Gas Market Report for each calendar
    month of the derivative transaction.(2)
    
    Assumes ceiling prices for natural gas collar volumes.(3)
    
    Fair value based on CIG index price in effect for each month as
    of December 31, 2007.  Competition
      Seasonal
    Nature of Business
   17




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##### Table of Contents



Employee
    and Labor Relations
    Regulation
      and/or
    Environmental
    Regulation of Gas Operations
  and/or
   18




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##### Table of Contents




    the Clean Air Act;
    the Federal Water Pollution Control Act/Clean Water Act;
    the National Environmental Policy Act;
    the Federal Land Policy and Management Act;
    the Safe Drinking Water Act;
    the Toxic Substances Control Act;
    the Comprehensive Environmental Response, Compensation and
    Liability Act (Superfund);
    the Solid Waste Disposal Act/Resource Conservation and Recovery
    Act;
    the Emergency Planning and Community Right to Know Act; and
    the Endangered Species Act;      and/or
 19




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##### Table of Contents



Federal
    Regulation of the Sale and Transportation of Gas
         20




---



##### Table of Contents



and/or
  State
    Regulation of Gas Operations
   21




---



##### Table of Contents



and/or
  Ground
    Water Well Applications and Reservoir Permits
    Permitting
    Issues for Federal Lands
       22




---



##### Table of Contents



Employee
    Health and Safety
    ITEM 1A
    RISK
    FACTORS    Risks
    Related to Our Business
  The
    volatility of natural gas and oil prices could have a material
    adverse effect on our business.
    
    the domestic and foreign supply of natural gas and oil;
    the activities of the Organization of Petroleum Exporting
    Countries and state-owned oil companies relating to oil price
    and production controls;
    overall domestic and global economic and political conditions;
    the consumption pattern of industrial consumers, electricity
    generators and residential users;
    weather conditions;
    natural disasters;
    acts of terrorism;
    political stability in the Middle East and elsewhere;
    domestic and foreign governmental regulations;
    the price and quantity of foreign imports; and
    the price and availability of alternative fuels.   23




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##### Table of Contents



PV-10
  Approximately
    71% of our total proved reserves as of December 31, 2007
    consist of undeveloped and developed non-producing reserves, and
    those reserves may not ultimately be developed or
    produced.
    Our
    estimated reserves are based on many assumptions, some of which
    may prove to be inaccurate. Any material inaccuracies in our
    reserve estimates or underlying assumptions will materially
    affect the quantities and present value of our
    reserves.
   24




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##### Table of Contents




    geological conditions;
    changes in governmental regulations and taxation;
    assumptions governing future prices;
    the amount and timing of actual production;
    future operating costs; and
    the capital costs of drilling new wells.    We may
    not be able to find, acquire or develop additional natural gas
    reserves that are economically recoverable.
    The
    development of natural gas properties involves substantial risks
    that may result in a total loss of investment.
    
    unexpected drilling conditions;
    pressure or irregularities in geologic formations;
    equipment failures or repairs;
    title problems;
    fires, explosions, blowouts, cratering, pollution and other
    environmental risks or other accidents;
    compliance with governmental regulations;
    adverse weather conditions;
    reductions in natural gas and oil prices;
    pipeline ruptures;
    unavailability or high cost of drilling rigs, other field
    services, equipment and labor; and
    limitations in the market for oil and gas. 25




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##### Table of Contents



and/or and/or
  We
    must obtain governmental permits and approvals for drilling
    operations, which can result in delays in our operations, be a
    costly and time consuming process, and result in restrictions on
    our operations.
  and/or and/or
  The
    issuance of permits for CBM development relating to leases on
    federal land in Montana is currently subject to an injunction
    and the approval of a Supplemental Environmental Impact
    Statement.
    The
    majority of our properties are located in a five-county region
    in the northern end of the Powder River Basin in northeastern
    Wyoming and southern Montana, making us vulnerable to risks
    associated with having our production concentrated in one
    area.
   26




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##### Table of Contents



Our
    natural gas sales are dependent on three customers and the loss
    of these customers would adversely affect our ability to market
    our gas.
    We may
    be adversely affected by natural gas prices in the Rocky
    Mountain region.
    We may
    suffer losses or incur liability for events for which we or the
    operator of a property have chosen not to obtain
    insurance.
    Our
    use of hedging arrangements could result in financial losses or
    reduce our income.
    Our
    business depends on gathering and transportation facilities
    owned by others. Any limitation in the availability of those
    facilities would interfere with our ability to market the
    natural gas we produce.
   27




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##### Table of Contents



Shortages
    of drilling rigs and equipment and experienced personnel could
    delay our operations.
    We may
    incur losses as a result of title deficiencies in the properties
    in which we invest.
      We are
    subject to environmental regulation that can materially
    adversely affect the timing and cost of our
    operations.
     28




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We are
    subject to complex governmental regulations which may materially
    adversely affect the cost of our business and result in delays
    in our operations.
      We
    operate in a highly competitive environment and our competitors
    may have greater resources than us.
    The
    coal beds from which we produce methane gas contain water that
    may hamper our ability to produce gas in commercial
    quantities.
    
    we cannot obtain future permits from applicable regulatory
    agencies;
    water of lesser quality is produced;
    our wells produce excess water; or
    new laws or regulations require water to be disposed of in a
    different manner.    Our
    coal bed methane wells typically have a shorter reserve life and
    lower rates of production than conventional natural gas wells,
    which may adversely affect our profitability during periods of
    low natural gas prices.
   29




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##### Table of Contents



Our
    business is difficult to evaluate because we have a limited
    operating history.
    We may
    have difficulty managing growth in our business.
    Our
    success depends on our key management personnel, the loss of any
    of whom could disrupt our business.
    Some
    of our directors may have conflicts of interest because they are
    also currently affiliates, directors or officers of entities
    that make investments in the energy sector and/or may compete
    with us. The resolution of these conflicts of interest may not
    be in our or our stockholders best
    interests.
      Our
    failure to complete and integrate future acquisitions
    successfully could reduce our earnings and slow our
    growth.
   30




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##### Table of Contents



Properties
    we acquire may not produce as projected, and we may be unable to
    determine reserve potential, identify liabilities associated
    with the properties or obtain protection from sellers against
    such liabilities.
    The
    coal beds from which we produce may be drained by offsetting
    production wells.
  80-acre 80-acre
  Substantial
    development activities could require significant outside
    capital, which may not be available or could change our risk
    profile.
    
    the level of production from existing wells;
    prices of natural gas and oil;
    our results in locating and producing new reserves;
    the success and timing of development of proved undeveloped
    reserves; and
    general economic, financial, competitive, legislative,
    regulatory and other factors beyond our control.  and/or
   31




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##### Table of Contents



Our
    credit facility imposes restrictions on us that may affect our
    ability to successfully operate our business.
    
    incur additional indebtedness;
    create liens;
    sell our assets or consolidate or merge with or into other
    companies;
    make investments and other restricted payments, including
    dividends; and
    engage in transactions with affiliates.    Because
    we are relatively small, management expects that we will be
    disproportionately negatively impacted by recently enacted
    changes in the securities laws and regulations, which are likely
    to increase our costs and require additional management
    resources.
    Form 10-K
  Form 10-K
 32




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##### Table of Contents



Risks
    Related to the Merger with Quest
  The
    value of the consideration received by our stockholders will
    vary with the value of Quest common stock.
    The
    integration of Quest and Pinnacle following the merger will
    present significant challenges that may reduce the anticipated
    potential benefits of the merger.
    
    integrating Quests and our existing businesses;
    preserving customer, supplier and other important relationships
    and resolving potential conflicts that may arise as a result of
    the merger;
    consolidating and integrating duplicative facilities and
    operations; and
    addressing differences in business cultures, preserving employee
    morale and retaining key employees, while maintaining focus on
    meeting the operational and financial goals of the combined
    company.    We
    will incur significant transaction and merger-related
    integration costs in connection with the merger.
       33




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While
    the merger is pending, we will be subject to business
    uncertainties and contractual restrictions that could adversely
    affect our business.
    Failure
    to complete the merger could negatively impact our stock price
    and future business and financial results because of, among
    other things, the disruption that would occur as a result of
    uncertainties relating to a failure to complete the
    merger.
    
    being required to pay Quest a termination fee of up to
    $3.0 million in certain circumstances;
    having had the focus of our management directed toward the
    merger and integration planning instead of on our core business
    and other opportunities that could have been beneficial to
    us; and
    incurring substantial transaction costs related to the merger.      The
    merger agreement limits our ability to pursue an alternative
    merger or acquisition proposal and requires us to pay a
    termination fee of $3.0 million if we do.
     34




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Some
    of our directors and executive officers have interests in the
    merger that are different from the interests of our
    stockholders.
      If the
    merger is approved by Quests and our stockholders, the
    date that our stockholders will receive the merger consideration
    is uncertain.
    Risks
    Related to our Relationship with DLJ Merchant Banking and Other
    Initial Stockholders
  Our
    founding stockholders have substantial influence over the
    outcome of certain stockholder votes and may exercise this
    voting power in a manner adverse to our other
    stockholders.
      Risks
    Relating to Our Common Stock
  The
    price of our common stock may be volatile and you may not be
    able to resell your shares at a favorable price.
    
    our operating and financial performance and prospects;
    quarterly variations in the rate of growth of our financial
    indicators, such as net income per share, net income and
    revenues;
    changes in revenue or earnings estimates or publication of
    research reports by analysts about us or the exploration and
    production industry;
    potentially limited liquidity; 35




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##### Table of Contents




    actual or anticipated variations in our reserve estimates and
    quarterly operating results;
    changes in natural gas and oil prices;
    speculation in the press or investment community;
    sales of our common stock by significant stockholders and future
    issuances of our common stock;
    actions by institutional investors before disposition of our
    common stock;
    increases in our cost of capital;
    changes in applicable laws or regulations, court rulings and
    enforcement and legal actions;
    commencement of or involvement in litigation;
    announcements by us or our competitors of strategic alliances,
    significant contracts, new technologies, acquisitions,
    commercial relationships, joint ventures or capital commitments;
    changes in market valuations of similar companies;
    adverse market reaction to any increased indebtedness we incur
    in the future;
    additions or departures of key management personnel;
    actions by our stockholders;
    general market conditions, including fluctuations in and the
    occurrence of events or trends affecting the price of natural
    gas and oil; and
    domestic and international economic, legal and regulatory
    factors unrelated to our performance.  The
    percentage ownership evidenced by the common stock is subject to
    dilution.
    Anti-takeover
    provisions in our certificate of incorporation, our bylaws and
    Delaware law could prohibit a change of control that our
    stockholders may favor and which could negatively affect our
    stock price.
    
    authorize the issuance of blank check preferred stock that could
    be issued by our board of directors to thwart a takeover attempt;
    classify the board of directors into staggered, three-year
    terms, which may lengthen the time required to gain control of
    our board of directors;
    prohibit cumulative voting in the election of directors, which
    would otherwise allow holders of less than a majority of stock
    to elect some directors;
    require super-majority voting by our stockholders to effect
    amendments to provisions of our certificate of incorporation
    concerning the number of directors; 36




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
    require super-majority voting by our stockholders to effect any
    stockholder-initiated amendment to any provision of our bylaws;
    limit who may call special meetings of our stockholders;
    prohibit stockholder action by written consent, thereby
    requiring all actions to be taken at a meeting of the
    stockholders;
    establish advance notice requirements for stockholder
    nominations of candidates for election to the board of directors
    or for stockholder proposals that can be acted upon at annual
    meetings of stockholders; and
    require that vacancies on the board of directors, including
    newly-created directorships, be filled only by a majority vote
    of directors then in office.    Because
    we have no plans to pay dividends on our common stock, investors
    must look solely to stock appreciation for a return on their
    investment in us.
    ITEM 1B
    UNRESOLVED STAFF COMMENTS    ITEM 3
    LEGAL
    PROCEEDINGS      No. DV-05-27)
 37




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##### Table of Contents



No. DV-05-70)
    No. 06-CV-01627-MDM-MEH)
    ITEM 4
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  ITEM 5
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    Information
      Sales Price Range per Share of Common StockHigh


LowYear ended December 31, 2007Fourth quarter

$
6.58


$
3.88Third quarter


8.10



3.55Second quarter(1)


8.74



7.37     (1)
    
    For the period from May 18, 2007, the date of our initial
    public offering, through June 30, 2007.   38




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Performance
    Graph
  Comparison
    of Cumulative Total Return
    Among Pinnacle Gas Resources, the Amex Natural Resources
    Index,
    and Russell 2000 Index
  
 39




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##### Table of Contents



ITEM 6
    SELECTED
    FINANCIAL DATA    Period fromInception(June 23) toDecember 31,


Year Ended December 31,2003


2004


2005


2006


2007(In thousands, except share and per share data)Statement of Operations Data:RevenuesGas sales

$
1,679


$
7,393


$
14,136


$
12,196


$
13,141Income from earn-in joint venture agreement


41



368



1,629



379



Total revenues


1,720



7,761



15,765



12,575



13,141Operating expensesLease operating expenses


772



1,445



1,781



2,993



4,721Production taxes


186



838



1,637



1,198



1,397Marketing and transportation


299



1,218



1,582



1,962



3,464General and administrative, net


729



1,552



2,267



4,343



5,179Organization costs


311















Depreciation, depletion, amortization and accretion


850



3,328



5,622



6,673



6,516Impairment of oil and gas properties


















18,225Total operating expenses


3,147



8,381



12,889



17,169



39,502Operating income (loss)


(1,427
)


(620
)


2,876



(4,594
)


(26,361
)Other income (expense)Gain (loss) on derivatives(1)






(766
)


(4,815
)


7,362



2,211Interest income


33



61



17



720



677Other income


3



4



129



484



379Unrealized derivative loss














(26
)


Interest expense






(2
)


(47
)


(168
)


(283
)Total other income (expense)


36



(703
)


(4,716
)


8,372



2,984Net income (loss)

$
(1,391
)

$
(1,323
)

$
(1,840
)

$
3,778


$
(23,377
)Preferred dividends, related party


(719
)


(2,623
)


(5,409
)


(20,964
)


Net income (loss) attributable to common stockholders

$
(2,110
)

$
(3,946
)

$
(7,249
)

$
(17,186
)

$
(23,377
)Net income (loss) per common shareBasic and diluted

$
(0.42
)

$
(0.79
)

$
(1.42
)

$
(0.87
)

$
(0.86
)Weighted average shares outstandingBasic and diluted(2)


5,000,000



5,000,000



5,094,800



19,783,118



27,281,680     (1)
    
    In order to provide a measure of stability to the cash flow in
    an environment of volatile oil and gas prices and to manage the
    exposure to commodity price risk, we chose to periodically hedge
    a portion of our oil and gas 40




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production using swap and collar agreements. We account for our
    derivative instruments under the provisions of Statement of
    Financial Accounting Standard No. 133, Accounting for
    Derivative Instruments and Hedging Activities
    (SFAS No. 133). SFAS No. 133
    requires us to record derivative instruments at their fair
    value. Our management has chosen not to use hedge accounting for
    these arrangements. For the years ended December 31, 2007,
    2006, 2005 and 2004 we have classified the gains and losses
    (both realized and unrealized) on derivatives to other
    income/expense in the statements of operations. We feel that
    this presentation fairly presents revenues derived from
    operations because the gains and losses on derivatives are
    comprised of a significant unrealized gain or loss for future
    periods which is not reflective of current operations.  (2)
    
    For all periods in which there was a net loss attributable to
    common stockholders, all of our stock options and warrants were
    anti-dilutive. Common stock equivalents of 4,965,000, 9,187,500,
    13,676,200, 1,035,000 and 871,000 at December 31, 2003,
    2004, 2005, 2006 and 2007, respectively, were excluded because
    they were anti-dilutive.  Period fromInception(June 23) toDecember 31,


Year Ended December 31,2003


2004


2005


2006


2007(In thousands)Statement of Cash Flows Data:Net cash provided by (used in) operating activities

$
1,315


$
1,350


$
8,792


$
6,029


$
(16,685
)Net cash provided by (used in) investing activities


(14,313
)


(14,017
)


(25,301
)


(63,880
)


(9,423
)Net cash provided by (used in) financing activities


17,524



11,740



15,582



59,941



29,497Other Financial Data:Capital expenditures  exploration and production

$
13,977


$
13,149


$
20,866


$
62,340


$
14,006   As of December 31,2004


2005


2006


2007(In thousands)Balance Sheet Data:Cash and cash equivalents

$
3,599


$
2,672


$
4,762


$
8,151Property and equipment, net


43,054



63,529



127,189



125,011Total assets


54,504



77,081



150,332



146,593Long-term debt (including current portion)(1)


345



828



807



786Total liabilities


13,817



23,897



31,503



20,756Redeemable preferred stock(2)


18,338



31,400







Total stockholders equity


22,349



21,784



118,829



125,837     (1)
    
    Long-term debt does not include fair value of derivatives, asset
    retirement obligation and the long-term portion of production
    taxes.(2)
    
    On April 11, 2006, we used approximately $53.6 million
    of the net proceeds from our private placement to redeem all of
    the outstanding shares of our Series A Redeemable Preferred
    Stock, all of which were held by DLJ Merchant Banking.  ITEM 7
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATION  The discussion and analysis that follows should be read
    together with Item 6, Selected Financial Data and the
    accompanying financial statements and notes related thereto that
    are included elsewhere in this annual report. It includes
    forward-looking statements that may reflect our estimates,
    beliefs, plans and expected performance. The
 41




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forward-looking statements are based upon events, risks and
    uncertainties that may be outside our control. Our actual
    results could differ significantly from those discussed in these
    forward-looking statements. Factors that could cause or
    contribute to these differences include, but are not limited to,
    market prices for natural gas and oil, regulatory changes,
    estimates of proved reserves, economic conditions, competitive
    conditions, development success rates, capital expenditures and
    other uncertainties, as well as those factors discussed below
    and elsewhere in this annual report, including in Item 1A,
    Risk Factors, all of which are difficult to predict. As a result
    of these assumptions, risks and uncertainties, the
    forward-looking matters discussed may not occur.
  Overview
      non-U.S. persons
  Significant
    Developments
         42




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##### Table of Contents



Critical
    Accounting Policies
    
    Reserve evaluation and determination.
    Estimates of the timing and cost of our future drilling activity.
    Estimates of the fair valuation of hedges in place.
    Estimates of timing and cost of asset retirement obligations.
    Estimates of the expense and timing of exercise of stock options.
    Accruals of operating costs, capital expenditures and revenue.
    Estimates for litigation.  Oil
    and Gas Properties
         43




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##### Table of Contents



Gas
    Sales
    Asset
    Retirement Obligations
  and/or
        Year Ended December 31,2007


2006Beginning balance of asset retirement obligations

$
2,321


$
1,277Additional obligation added during the period


239



953Obligations settled during the period


(1
)


(2
)Revisions in estimates






(69
)Accretion expense


208



162Ending balance of asset retirement obligations

$
2,767


$
2,321  44




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##### Table of Contents



Inventory
    Property
    and Equipment
    Long-Lived
    Assets
    General
    and Administrative Expenses
    Income
    Taxes
       45




---



##### Table of Contents



Derivatives
      Stock-Based
    Compensation
      PV-10
 46




---



##### Table of Contents



EITF 96-18
    Year Ended December 31,2007

2006

2005

2004Expected Volatility

35%

35%

0%

0%Dividend Yield







Risk Free Interest Rate

4.79% to 4.80%

4.30% to 5.03%

3.46% to 4.44%

2.71% to 3.90%Weighted Average expected life (in years)

5

5

5

5   Accounts
    Receivable
   47




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##### Table of Contents



Transportation
    Costs
  00-10,
  Legal
    Estimates
    Per
    Share Information
    New
    Accounting Pronouncements
       48




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##### Table of Contents



Trends
    Affecting Our Business
        Results
    of Operations
   49




---



##### Table of Contents



Year
    Ended December 31, 2007 Compared to Year Ended
    December 31, 2006
  Gas sales
    volume.
    Gas sales
    revenue.
    Derivatives.
    Lease
    operating expenses.
    Production
    taxes.
   50




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##### Table of Contents



Marketing
    and transportation.
    General
    and administrative expenses, net.
    Depreciation,
    depletion, amortization and accretion.
    Impairment.
    Year
    Ended December 31, 2006 Compared To Year Ended
    December 31, 2005
  Gas sales
    volume.
   51




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##### Table of Contents



Gas sales
    revenue.
    Derivatives.
    Lease
    operating expenses.
    Production
    taxes.
    Marketing
    and transportation.
    General
    and administrative expenses, net.
   52




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##### Table of Contents



Depreciation,
    depletion, amortization and accretion.
    Liquidity
    and Capital Resources
    Credit Facility.
          
    incur liens;
    incur debt; 53




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##### Table of Contents




    make investments in other persons;
    declare dividends or redeem or repurchase stock;
    engage in mergers, acquisitions, consolidations and asset sales
    or amend our organizational documents;
    enter into certain hedging arrangements;
    amend material contracts; and
    enter into related party transactions.    PV-10
    Office Building Loan.
  Capital Expenditure Budget.
 54




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##### Table of Contents



Cash
    Flow from Operating Activities
      Cash
    Flow from Investing Activities
    Cash
    Flow from Financing Activities
      Sales and
    Issuances of Equity
  Common Stock.
  non-U.S. persons
 55




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##### Table of Contents



Series A Redeemable Preferred Stock. paid-in-kind paid-in-kind
    Warrants. paid-in-kind
 56




---



##### Table of Contents



Contractual
    Obligations
      Total


2008


2009-2010


2011-2012


Thereafter(In thousands)Notes payable in connection with the mortgage

$
786


$
23


$
51


$
58


$
654Asset retirement obligations


2,767



363



459



712



1,233Non-current production and property taxes


633







633







Total

$
4,185


$
386


$
1,143


$
770


$
1,886     ITEM 7A
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    Commodity
    Price Risk
   57




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##### Table of Contents



Year EndingDecember 31,2008(Unaudited)Natural Gas Collars:Contract volumes (MMBtu):Floor


1,098,000Ceiling


1,098,000Weighted-average fixed price per MMBtu(1):Floor

$
6.50Ceiling

$
8.20Fixed-price sales(2)

$
8.20Fair value, net (thousands)(3)

$
556Total Natural Gas Contracts:Contract volumes (MMBtu)


1,098,000Weighted-average fixed price per MMBtu(1)

$
6.50Fixed-price sales(2)

$
8.20Fair value, net (thousands)(3)

$
556     (1)
    
    Volumes hedged using the CIG index price published in the first
    issue of Inside FERCs Gas Market Report for each calendar
    month of the derivative transaction.(2)
    
    Assumes ceiling prices for natural gas collar volumes.(3)
    
    Fair value based on CIG index price in effect for each month as
    of December 31, 2007. 58




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ITEM 8
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                59




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Balance
    Sheets
  December 31,


December 31,2007


2006(In thousands, except share and per share data)ASSETSCurrent assetsCash and cash equivalents

$
8,151


$
4,762ReceivablesAccrued gas sales


3,062



2,364Joint interest receivables, net of $100 allowance for doubtful
    accounts


6,040



9,237Derivative instruments


556



2,856Inventory of material for drilling and completion


174



271Prepaid expenses


1,322



394Total current assets


19,305



19,884Property and equipment, at cost, net of accumulated depreciation


2,226



2,107Oil and gas properties, using full cost accounting, net of
    accumulated depletion and impairmentProved


33,965



39,988Unproved


88,820



85,094Inventory of material for drilling and completion


505



944Deposits


20



520Restricted certificates of deposit


1,752



1,795Total assets

$
146,593


$
150,332LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesLong term debt-current portion

$
23


$
21Trade accounts payable


7,767



17,567Revenue distribution payable


6,534



7,301Drilling prepayments from joint interest owners


28



289Asset retirement obligations, current


363



0Accrued liabilities


2,241



2,375Total current liabilities


16,956



27,553Asset retirement obligations, non-current


2,404



2,321Production taxes, non-current


633



843Long term
    debt-net of
    current portion


763



786Total liabilities


20,756



31,503Commitments and contingenciesSeries A Redeemable Preferred stock, $0.01 par value;
    25,000,000 authorized, 0 shares issued and outstanding at
    December 31, 2007 and 2006, respectively






Stockholders equityCommon stock, $0.01 par value; 100,000,000 authorized and
    29,019,751 and 25,131,301 shares issued and outstanding at
    December 31, 2007 and 2006, respectively


289



251Additional paid-in capital


149,701



119,354Accumulated deficit


(24,153
)


(776
)Total stockholders equity


125,837



118,829Total liabilities and stockholders equity

$
146,593


$
150,332    60




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Statements
    of Operations
  For the Years Ended December 31,2007


2006


2005(In thousands, except share and per share data)RevenuesGas sales

$
13,141


$
12,196


$
14,136Earn-in joint venture






379



1,629Total revenues


13,141



12,575



15,765Cost of revenues and expensesLease operating expenses


4,721



2,993



1,781Production taxes


1,397



1,198



1,637Marketing and transportation


3,464



1,962



1,582General and administrative, net


5,179



4,343



2,267Depreciation, depletion, amortization and accretion


6,516



6,673



5,622Impairment of oil and gas properties


18,225







Total cost of revenues and expenses


39,502



17,169



12,889Operating (loss)/income


(26,361
)


(4,594
)


2,876Other income(expense)Gain/(loss) on derivatives


2,211



7,362



(4,815
)Interest income


677



720



17Other income


379



484



129Unrealized derivative loss






(26
)


Interest expense


(283
)


(168
)


(47
)Total other income (expense)


2,984



8,372



(4,716
)Net (loss)/income before income taxes


(23,377
)


3,778



(1,840
)Income taxes










Net (loss)/income


(23,377
)


3,778



(1,840
)Preferred dividends






(20,964
)


(5,409
)Net loss attributable to common stockholders

$
(23,377
)

$
(17,186
)

$
(7,249
)Basic and diluted net loss per share

$
(0.86
)

$
(0.87
)

$
(1.42
)Weighted average shares outstanding  basic and diluted


27,281,680



19,783,118



5,094,800    61




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Statements
    of Cash Flows
 (In thousands)
  For the Years Ended December 31,2007


2006


2005Cash flows from operating activitiesNet (loss)/income

$
(23,377
)

$
3,778


$
(1,840
)Adjustments to reconcile net (loss)/income to net cash (used
    in)/provided by operating activitiesImpairment of oil and gas properties


18,225







Depreciation, depletion, amortization and accretion


6,516



6,673



5,622(Gain)/loss on derivatives


(2,211
)


(7,336
)


4,815Allowance for doubtful accounts






100



Stock-based compensation


867



368



Changes in assets and liabilitiesDecrease (increase) in receivables


2,499



(3,184
)


(2,214
)Decrease in inventory of material for drilling and completion


97



209



24Decrease (increase) in prepaid expenses


(928
)


(281
)


289(Decrease) increase in accounts payable and accrued liabilities


(17,344
)


6,179



(1,573
)(Decrease) increase in revenue distribution payable


(767
)


(764
)


3,672(Decrease) increase in drilling prepayments


(261
)


289



Asset retirement obligation settled this period


(1
)


(2
)


(3
)Net cash (used in)/provided by operating activities


(16,685
)


6,029



8,792Cash flows from investing activitiesCapital expenditures  exploration and production


(14,006
)


(62,340
)


(20,866
)Capital expenditures  property and equipment


(910
)


(714
)


(1,698
)Purchase of restricted certificates of deposits


43



(520
)


Deposits


500



(1,657
)


Decrease (increase) in inventory held for exploration and
    development


439



294



(733
)Realized gain on derivatives


4,511



663



(1,610
)Proceeds from the sale of assets held for sale






394



Increase in assets held for sale










(394
)Net cash used in investing activities


(9,423
)


(63,880
)


(25,301
)Cash flows from financing activitiesProceeds from the issuance of preferred stock










15,000Proceeds from the issuance of preferred stock










(300
)Proceeds from the issuance of common stock


33,750



141,187



169Issuance costs related to common stock


(4,232
)


(11,252
)


Dividends paid on preferred stock






(1,397
)


Redemption of preferred stock including redemption premium






(52,174
)


Repurchase and cancellation of common shares






(16,304
)


Principal payments on note payable and capital leases


(21
)


(119
)


(116
)Proceeds from long-term debt










829Net cash provided by financing activities


29,497



59,941



15,582Net increase (decrease) in cash and cash equivalents


3,389



2,090



(927
)Cash and cash equivalents at beginning of year


4,762



2,672



3,599Cash and cash equivalents at end of year

$
8,151


$
4,762


$
2,672Noncash investing and financing activitiesCapital expenditures included in trade accounts payable

$
7,200


$
6,232


$
2,941Asset retirement obligation included in oil and gas properties


239



884



656Assets acquired through capital leases










Capital lease asset relinquished










133Fair value of options and warrants










6,517Dividend paid in kind with the issuance of additional preferred
    stock






1,207



3,601Derivative liability related to preferred stock






232



42Cashless exercise of warrants and options






15,428



Inventory used in oil and gas properties






(294
)


733Supplemental cash flow informationCash payments for interest, net of amount capitalized

$
115


$
168


$
47    62




---



##### Table of Contents



Pinnacle
    Gas Resources, Inc.
  Statements
    of Redeemable Preferred Stock and Stockholders
    Equity
  Stockholders EquityAdditionalPreferred Stock


Common Stock


Fair Value of


Paid-In


AccumulatedShares


Amount


Shares


Amount


Warrants and Options


Capital


Deficit


Total(In thousands except share amounts)Balance at December 31, 2004


276,182



18,338



5,000,000



50



8,911



16,102



(2,714
)


22,349Issuance of preferred stock for cashnet of $300 of offering costs


150,000



14,658























Fair value of warrants at issuance






(5,197
)










5,197











5,197Issuance of common stock upon exercise of Class B Warrants
    at $.01










750,000



8







(8
)






Issuance of common stock upon exercise of options










50,000











167







167Dividends on preferred






















(4,089
)






(4,089
)Dividends paid in-kind on preferred


36,007



3,601























Warrants issued in connection with payment of dividend in-kind
    on preferred


















1,320



(1,320
)






Net loss


























(1,840
)


(1,840
)Balance at December 31, 2005


462,189



31,400



5,800,000



58



15,428



10,852



(4,554
)


21,784Dividends on preferred






















(1,397
)






(1,397
)Dividends paid in-kind on preferred


12,132



1,207























Stock-based compensation






















289







289Issuance of restricted shares










27,270











79







79Sales of common stock for cash in a private placement, net of
    offering costs of $11,252










12,835,230



128







129,807







129,935Redemption of preferred stock for cash, including redemption
    premium


(474,321
)


(32,607
)














(19,335
)






(19,335
)Repurchase and cancellation of common stock










(1,593,783
)


(16
)






(16,288
)






(16,304
)Cashless exercise of warrants and escalating options










8,062,584



81



(15,428
)


15,347







Net income


























3,778



3,778Balance as of December 31, 2006





$




25,131,301


$
251


$



$
119,354


$
(776
)

$
118,829Issuance of restricted shares





$




155,500


$



$



$
158


$



$
158Forfeiture of restricted shares










(17,050
)


















Sale of common stock for cash, net of offering costs of $4,232










3,750,000



38







29,480







29,518Stock-based compensation






















709







709Net Loss


























(23,377
)


(23,377
)Balance at December 31, 2007





$




29,019,751


$
289






$
149,701


$
(24,153
)

$
125,837    63




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements
  Note 1 
    Summary
    of Significant Accounting Policies  Business
    and Basis of Presentation
        out-of-pocket out-of-pocket
       64




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Stock
    Split
  25-for-1
  Use of
    Estimates
    Cash
    and Cash Equivalents
    Accounts
    Receivable
    Inventory
    Property
    and Equipment
   65




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    Buildings

30 yearsComputer hardware and software

3-5 yearsMachinery, equipment and vehicles

5 yearsOffice furniture and equipment

3-5 years   Long-Lived
    Assets
    Oil
    and Gas Properties
    unit-of-production
   66




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    Asset
    Retirement Obligations
  and/or units-of-production
      December 31,2007


2006(In thousands)Beginning balance of asset retirement obligations

$
2,321


$
1,277Additional obligation added during the period


239



953Obligations settled during the period


(1
)


(2
)Revisions in estimates






(69
)Accretion expense


208



162Ending balance of asset retirement obligations

$
2,767


$
2,321   Capitalized
    Interest
   67




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Restricted
    Assets
  Certificates of deposit.
  Deposits.
  Gas
    Sales
    General
    and Administrative Expenses
    Transportation
    Costs
  00-10,
  Per
    Share Information
   68




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    25-for-1
  Income
    Taxes
    Derivatives
        Stock-Based
    Compensation
     69




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
      EITF 96-18
    Year Ended December 31,2007

2006

2005Expected Volatility

35%

35%

0%Dividend Yield





Risk Free Interest Rate

4.79% to

4.30% to

3.46% to4.80%

5.03%

4.44%Weighted Average expected life (in years)

5

5

5     New
    Accounting Pronouncements
   70




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
          Note 2 
    Earn-In
    Joint Venture Agreement     71




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Note 3 
    Property
    and Equipment    December 31,2007


2006(In thousands)Building

$
1,420


$
1,420Computer hardware and software


964



546Machinery, equipment and vehicles


1,192



958Office furniture and equipment


201



1503,777



3,074Less accumulated depreciation and amortization


(1,551
)


(967
)Total

$
2,226


$
2,107     Note 4 
    Acquisitions
    and Divestitures  2005
    Transactions
        2006
    Transactions
      2007
    Transactions
   72




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Note 5 
    Unproved
    Properties      Period

Acquisition


Exploration


Development


CapitalizedIncurred

Costs


Costs


Costs


Interest


Total2003

$
12,915


$



$



$



$
12,9152004


112















1122005


13,167



1,418







148



14,7332006


30,316



27,018











57,3342007


1,147



2,579











3,726$
57,657


$
31,015


$



$
148


$
88,820   Suspended
    Wells Costs
    For the Years Ended December 31,2007


2006


2005(In thousands)Beginning balance

$
28,436


$
4,938


$
Additions to capitalized exploratory well costs pending
    determination of proved reserves


6,659



27,018



4,938Reclassifications to wells, facilities, and equipment based on
    the determination of proved reserves


(4,080
)


(3,520
)


Ending balance

$
31,015


$
28,436


$
4,938     For the Years Ended December 31,2007


2006


2005(In thousands)Exploratory well costs capitalized for one year or less

$
6,659


$
27,018


$
4,938Exploratory well costs capitalized for more than one year


24,356



1,418



Ending balance at December 31,

$
31,015


$
28,436


$
4,938Number of projects with exploratory well costs that have been
    capitalized more than a year


3



1



  73




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    Note 6 
    Accrued
    Liabilities    December 31,2007


2006(In thousands)Production taxes

$
2,333


$
2,960Payroll and related taxes


541



2582,874



3,218Less production taxes due after one year


(633
)


(843
)Total

$
2,241


$
2,375     Note 7 
    Derivatives  Hedging
    Contracts
    MMbtu per


Fixed PriceProduct

Day


Range


Time PeriodDecember 31, 2007Natural Gas  Collar


3,000


$
6.50 - $ 8.20



1/08 - 12/08December 31, 2006Natural Gas  Collar


1,000


$
5.00 - $ 5.20



10/04 -  9/07Natural Gas  Collar


1,000


$
6.50 - $10.50



9/06 - 12/07Natural Gas  Collar


3,000


$
7.00 - $ 9.05



1/07 - 12/07December 31, 2005Natural Gas  Collar


1,000


$
5.00 - $ 5.20



10/04 -  9/07Natural Gas  Collar


750


$
5.00 - $ 5.50



10/04 -  9/06Natural Gas  Collar


1,750


$
6.70 - $ 7.90



1/06 - 12/06    74




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
      Other
    Derivatives
  No. 00-19,
    Note 8 
    Revenue
    Distributions Payable    December 31,2007


2006(In thousands)Revenue payable on current production

$
844


$
1,193Revenues payable in suspense


5,690



6,108Total revenues payable

$
6,534


$
7,301     Note 9 
    Line-of-Credit   75




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
      
    incur liens;
    incur debt;
    make investments in other persons;
    declare dividends or redeem or repurchase stock;
    engage in mergers, acquisitions, consolidations and asset sales
    or amend the Companys organizational documents;
    enter into certain hedging arrangements;
    amend material contracts; and
    enter into related party transactions.    PV-10
 76




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Note 10 
    Long-Term
    Debt and Capital Lease Obligations    December 31,2007


2006(In thousands)Note payable to a bank with interest at 6.875% until
    December 15, 2008 when it goes to Sheridan Bank prime plus
    1/2%. Due in monthly installment of $6,414 through
    November 15, 2015 when unpaid principal and interest are
    due. The note is collateralized by the building

$
786


$
807Less current portion


(23
)


(21
)Total

$
763


$
786     Years Ending December 31:2008

$
232009


252010


262011


28Thereafter


684Total

$
786   Note 11 
    Income
    Taxes    December 31,2007


2006


2005(In thousands)Current income tax expense

$



$



$
Deferred income tax expense (benefit)


7,765



628



(203
)Change in valuation allowance


(7,765
)


(628
)


203Total income tax benefit

$



$



$
     December 31,2007


2006


2005Federal income tax rate


(34
)%


(34
)%


(34
)%Change in valuation allowance and other


34



34



34Effective tax rate



%



%



%  77




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    December 31,2007


2006


2005(In thousands)Deferred tax assetsNet operating loss carry-forward

$
10,996


$
2,954


$
416Oil and gas properties










565Unrealized loss on hedges










1,089Other


141



92



36Gross deferred tax assets


11,137



3,046



2,106Deferred tax liabilitiesOil and gas properties


2,893



1,699



Property and equipment


41



127



771Impairments and abandonments










458Unrealized gain on hedges


189



971



Gross deferred tax liabilities


3,123



2,797



1,229Net deferred tax asset


8,014



249



877Less valuation allowance


(8,014
)


(249
)


(877
)Deferred tax asset

$



$



$
            78




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Note 12 
    Stock
    Option Plans  Options
    Under Employee Option Plans
        Year 1


20
%Year 2


30Year 3


50100
%   de minimis
      Weighted Average


Weighted Average


AggregateNumber of


Exercise Price


Remaining


IntrinsicShares


per Share


Contractual Life


valueOutstanding, December 31, 2005


645,000


$
4.56Granted


455,000



9.57Canceled or forfeited


(65,000
)


5.92Outstanding, December 31, 2006


1,035,000


$
6.68Granted


120,000



10.03Canceled or forfeited


(284,000
)


8.47Outstanding, December 31, 2007


871,000


$
6.56



4.56


$
80,000Exercisable at December 31, 2007


435,500


$
5.32



3.91


$
80,000Weighted average fair value of options granted during the period





$
10.03  79




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    Options Outstanding


Options ExercisableWeighted AverageExercise


Number of Shares


Remaining


Number


Weighted AveragePrices


Outstanding


Contractual Life


Exercisable


Exercise Price


Fair Value Determination$
4.00



137,500



2.8 years



137,500


$
4.00


Black-Scholes (minimum value)$
4.80



345,000



4.3 years



222,500


$
4.80


Black-Scholes (minimum value)$
5.20



112,500



5.0 years



22,500


$
5.20


Black-Scholes$
8.40



45,000



6.4 years






$
8.40


Black-Scholes$
11.00



231,000



5.4 years



53,000


$
11.00


Black-Scholes871,000







435,500     Weighted AverageNumber of


Exercise PriceShares


per ShareOutstanding, December 31, 2004


437,500


$
4.24Granted


320,000



4.80Exercised


(50,000
)


3.32Canceled or forfeited


(62,500
)


4.00Outstanding, December 31, 2005


645,000



4.56Granted


455,000



9.57Canceled or forfeited


(65,000
)


5.92Outstanding, December 31, 2006


1,035,000



6.68Granted


120,000



10.03Canceled or forfeited


(284,000
)


8.47Outstanding December 31, 2007


871,000


$
6.56   Restricted
    Stock
     80




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
      Weighted-AverageGrant-DateShares


Fair ValueNon-vested at December 31, 2005





$
11.00Granted


36,360



11.00Forfeited


(9,090
)


11.00Non-vested at December 31, 2006


27,270



11.00Granted


155,500



8.41Forfeited


(26,140
)


9.67Vested


(9,090
)


11.00Non-vested at December 31, 2007


147,540


$
8.57     Note 13 
    Redeemable
    Preferred Stock  Series A
    Redeemable Preferred Stock
       81




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    Note 14 Stockholders Equity
  Common
    Stock
      non-U.S. persons
    Warrants
   82




---



##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
      Weighted AverageGrant DateNumber of


Weighted Average


Fair ValueWarrants


Price per Share


per ShareOutstanding, December 31, 2004


6,250,000


$
4.00Granted


5,030,725



3.40


$
1.58Exercised


(750,000
)


.01Outstanding, December 31, 2005


10,530,725



4.00Granted


303,300



4.00


$
2.49Redemption


(10,834,025
)


4.00Outstanding, December 31, 2006





$
   Escalating
    Options
       83




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Weighted AverageWeighted Average


Grant DateNumber of


Price per Share


Fair ValueShares


(at grant(1))


per ShareEscalating Options Outstanding, December 31, 2004


2,500,000


$
4.00Escalating Options Granted










Escalating Options Outstanding, December 31, 2005


2,500,000



4.00Redemption of Escalating Options


(2,500,000
)


4.00Escalating Options Outstanding, December 31, 2006





$
     (1)
    
    Does not include the effects of the escalation clause.  Note 15 
    Commitments
    and Contingencies  Operating
    Lease
      Year Ending December 31,2008

$
85,0002009


7,000Total minimum lease payments

$
92,000   Gas
    Gathering Contracts
    Employment
    Agreements
     84




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
      Litigation
      No. DV-05-27)
  No. DV-05-70)
   85




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    No. 06-CV-01627-MDM-MEH
  Regulations
      Environmental
    Note 16 
    Loss Per
    Share    Note 17 
    Major
    Customers    86




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  December 31,2007


2006


2005Enserco


58
%


66
%


76
%Western Gas Resources






21
%


24
%United Energy Trading


36
%


11
%


Canterra


5
%






Other


1
%


2
%


100
%


100
%


100
%   Note 18 
    Fair
    Value of Financial Instruments      Note 19 
    Subsequent
    Events            Note 20 
    Supplemental
    Oil and Gas Information  Estimated
    Proved Oil and Gas Reserves (Unaudited)
   87




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
      Natural Gas(Mcf)Proved reserves as of December 31, 2003


18,144,960Extension, discoveries and other additions


8,052,360Revisions of previous estimates


87,685Production


(1,507,652
)Proved reserves as of December 31, 2004


24,777,353Purchases of reserves in place


249,510Extension, discoveries and other additions


3,214,834Revisions of previous estimates


1,003,745Production


(2,206,813
)Proved reserves as of December 31, 2005


27,038,629Purchases of reserves in place


329,792Extension, discoveries and other additions


7,954,735Revisions of previous estimates(1)


(12,621,500
)Production


(2,413,130
)Proved reserves as of December 31, 2006


20,288,526Purchases of reserves in place


Extension, discoveries and other additions


7,673,024Revisions of previous estimates(1)


1,147,906Production


(3,388,792
)Proved reserves as of December 31, 2007


25,720,664Proved developed reserves as of December 31, 2004


7,430,984December 31, 2005


8,211,794December 31, 2006


7,879,271December 31, 2007


10,457,663     (1)
    
    The revision in 2007 is primarily due to the price increase on
    December 31, 2007 to $6.04, based on the Rocky Mountain CIG
    Index, from the December 31, 2006 price of $4.46. The
    revision in 2006 is primarily due to the price decrease from
    December 31, 2005 of $7.72, based on the Rocky Mountain CIG
    Index, to the December 31, 2006 price of $4.46. 88




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Aggregate
    Capitalized Costs
    December 31,2007


2006(In thousands)Proved oil and gas properties

$
72,967


$
55,179Unproved oil and gas properties


88,820



85,094Total


161,787



140,273Less accumulated depreciation, depletion, amortization and
    ceiling write-down


(39,002
)


(15,191
)Net capitalized costs

$
122,785


$
125,082   Costs
    Incurred in Oil and Gas Producing Activities
    December 31,2007


2006


2005(In thousands)Property acquisition costsProved

$
1,357


$
7,283


$
423Unproved


1,146



30,316



13,315Total property acquisition costs


2,503



37,599



13,738Exploration costs


2,579



23,498



4,938Development costs


16,124



7,496



5,114Asset retirement costs


239



863



656Total costs

$
21,445


$
69,456


$
24,446   Oil
    and Gas Operations
    December 31,2007


2006


2005(In thousands)Revenues

$
13,141


$
12,575


$
15,765Production costs and taxes


9,582



6,153



5,000Impairment of oil and gas properties


18,225







Depreciation, depletion, amortization


5,518



6,015



5,224Accretion of asset retirement obligations


208



162



70Results of operations from producing activities (excluding
    corporate overhead and interest costs)

$
(20,392
)

$
245


$
5,471Depletion per MCF equivalent

$
1.63


$
2.49


$
2.37  89




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
  Standardized
    Measure of Discounted Future Net Cash Flows Relating to Proved
    Oil and Gas Reserves (Unaudited)
    December 31,2007


2006


2005(In thousands)Future cash inflows

$
123,380


$
73,376


$
175,314Future production costs


(42,388
)


(25,975
)


(54,167
)Future development costs


(15,952
)


(12,596
)


(36,754
)Future income tax expense


(5,236
)


(2,950
)


(14,859
)Future cash flows


59,804



31,855



69,53410% annual discount for estimated timing on cash flows


(21,245
)


(9,471
)


(25,849
)Standardized measure of discounted future cash flows

$
38,559


$
22,384


$
43,685     December 31,2007

2006

2005Weighted average gas price per Mcf

$
6.04


$
4.460


$
7.715       December 31,2007


2006


2005(In thousands)Beginning of period

$
22,384


$
43,685


$
28,408Net change from purchases of minerals in place






760



394Net change in sales and transfer prices, net of production costs


8,391



(40,437
)


(669
)Revision of previous quantity estimates


13,166



(7,018
)


2,634Sales of oil and gas, net of production costs


(3,559
)


(6,043
)


(7,524
)Development cost incurred, previously estimated


(3,021
)


(8,044
)


(8,926
)Net change in income taxes


(2,286
)


11,908



(7,276
)Changes in future development costs


951



21,719



34,058Accretion of discount


2,533



5,854



2,586End of period

$
38,559


$
22,384


$
43,685    90




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##### Table of Contents



PINNACLE
    GAS RESOURCES, INC.
  Notes to
    Financial Statements  (Continued)
    Note 21 
    Quarterly
    Financial Data (Unaudited)    Three Months EndedMarch 31,


June 30,


September 30,


December 31,2007


2007


2007


2007Year ended December 31, 2007:Revenues


3,654



3,436



2,722



3,329Cost of revenue and expenses


(21,699
)


(6,457
)


(5,773
)


(5,573
)Net Income (Loss)


(18,150
)


(2,071
)


(1,151
)


(2,005
)Basic net income (loss) per share


(0.72
)


(0.08
)


(0.04
)


(0.07
)Diluted net income (loss) per share


(0.72
)


(0.08
)


(0.04
)


(0.07
)   Three Months EndedMarch 31,


June 30,


September 30,


December 31,2006


2006


2006


2006Year ended December 31, 2006:Revenues


4,006



2,972



2,912



2,685Cost of revenue and expenses


(3,578
)


(4,723
)


(5,082
)


(3,786
)Net Income (Loss)


1,067



(19,904
)


914



737Basic net income (loss) per share


0.18



(0.87
)


0.04



0.03Diluted net income (loss) per share


(0.07
)


(0.87
)


0.04



0.03  91




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##### Table of Contents



ITEM 9
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A
    CONTROLS
    AND PROCEDURES  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Internal
    Control Over Financial Reporting
      ITEM 9B
    OTHER
    INFORMATION   PART III  ITEM 10
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  Directors,
    Executive Officers and Key Employees
    Name

Age

PositionSteven A. Webster


55


Chairman of the BoardPeter G. Schoonmaker


49


Chief Executive Officer, President and DirectorRonald T. Barnes


48


Chief Financial Officer, Senior Vice President and SecretaryRobert L. Cabes, Jr.


38


DirectorJeffrey P. Gunst


31


DirectorSylvester P. Johnson, IV


51


DirectorF. Gardner Parker


66


DirectorSusan C. Schnabel


46


DirectorThomas G. McGonagle


48


DirectorWilliam W. DeLapp, Jr.


59


Vice President  OperationsGordon L. Olson*


56


Vice President  Engineering     *
    
    Mr. Olson resigned effective March 17, 2008.   92




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##### Table of Contents



Directors
    and Executive Officers
  Steven A. Webster.
  Peter G. Schoonmaker.
  Ronald T. Barnes.
  Robert L. Cabes, Jr.
 93




---



##### Table of Contents



Jeffrey P. Gunst.
  Sylvester P. Johnson, IV.
  F. Gardner Parker.
  Susan C. Schnabel.
  Thomas G. McGonagle.
  Additional
    Key Employees
  William DeLapp.
 94




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##### Table of Contents



Gordon L. Olson.
  Section 16(a)
    Beneficial Ownership Reporting Compliance
    Code of
    Ethics
    Corporate
    Governance
   95




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##### Table of Contents



ITEM 11
    EXECUTIVE
    COMPENSATION  Compensation
    Committee Report
  Form 10-K. Form 10-K.
         Compensation
    Discussion and Analysis
  Introduction
      Overview
    of Our Compensation Policies and Objectives
    Elements
    of Compensation
    
    a base salary; 96




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##### Table of Contents




    a performance-based cash bonus;
    long-term equity incentive awards, which in 2007 consisted of
    grants of restricted stock; and
    limited perquisites and other benefits.        Base Salary.
    Performance-Based Bonus.
  Performance Metric

Threshold


Target


MaximumNet production volume (Bcf)


4.0



5.0



6.0Proved reserve additions (Bcf)


28



35



42Lease operating expenses ($/well/month)

$
1,000


$
900


$
800  97




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##### Table of Contents



98




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##### Table of Contents



Equity Incentive Awards.
    Perquisites and Other
    Benefits.
  Stock
    Option Practices
  and/or
  Payments
    in Connection with a Change of Control or
    Termination
     99




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##### Table of Contents



Stock
    Ownership Requirements
    Role
    of the Executive Officers in Determining Executive
    Compensation
    Executive
    Compensation
  2007
    Summary Compensation Table
    Non-EquityStock

Option

Incentive Plan

All OtherName and Principal Position

Year

Salary

Awards

Awards

Compensation

Compensation(1)

TotalPeter G. Schoonmaker


2007


$
250,000


$
10,518


$



$
125,000
(2)

$



$
385,518Chief Executive Officer, President and Director


2006



220,000







146,622



30,000
(3)


271,000



667,622Ronald T. Barnes


2007


$
200,000


$
7,012


$



$
75,000
(2)

$



$
282,012Chief Financial Officer, Senior Vice President and
    Secretary


2006



180,000







161,143



25,000
(3)


221,000



587,143     (1)
    
    Messrs. Schoonmaker and Barnes received no perquisites or
    benefits not made generally available on a non-discriminatory
    basis to all employees. The amount reported for 2006 was a
    one-time bonus paid in connection with the timely filing of a
    registration statement relating to our April 2006 private
    placement.(2)
    
    Pursuant to the 2007 Management Incentive Plan.(3)
    
    Pursuant to the 2006 Incentive Compensation Plan. 100




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##### Table of Contents



Grants
    of Plan-Based Awards During 2007
    All Other StockEstimated Future Payouts Under


Awards: Number of


Grant Date FairNon-Equity Incentive Plan Awards(1)


Shares of Stock


Value of StockName

Grant Date


Threshold ($)


Target ($)


Maximum ($)


(#)(2)


Awards ($)Peter G. Schoonmaker


July 19, 2007


$
6,250


$
125,000


$
250,000July 20, 2007















30,000


$
209,400Ronald T. Barnes


July 19, 2007


$
3,750


$
75,000


$
150,000July 20, 2007















20,000


$
139,600     (1)
    
    Pursuant to the 2007 Management Incentive Plan.(2)
    
    Pursuant to the Stock Incentive Plan.  Employment
    Agreements
      Incentive
    Plan Awards
     101




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##### Table of Contents



Outstanding
    Equity Awards at 2007 Fiscal Year-End
    Option Awards

Stock AwardsNumber of

Number of







MarketSecurities

Securities





Number of

Value ofUnderlying

Underlying





Shares of

Shares ofUnexercised

Unexercised

Option

Option

Stock That

Stock ThatOptions

Options

Exercise

Expiration

Have Not

Have NotName

Exercisable (#)

Unexercisable (#)

Price ($)

Date

Vested (#)

Vested ($)Peter G. Schoonmaker


82,500






$
4.00


June 30, 2010


30,000
(8)

$
137,400
(9)30,000






$
4.00


March 5, 201125,000



25,000
(1)

$
4.80


December 9, 201210,000



40,000
(2)

$
5.20


January 1, 20134,000



16,000
(3)

$
11.00


June 1, 2013Ronald T. Barnes


25,000






$
4.00


January 3, 2011


20,000
(8)

$
91,600
(9)50,000






$
4.80


June 23, 201118,750



18,750
(4)

$
4.80


January 3, 20126,250



6,250
(5)

$
4.80


December 9, 201210,000



40,000
(2)

$
5.20


January 1, 20132,500



10,000
(6)

$
5.20


February 16, 20133,000



12,000
(7)

$
11.00


June 1, 2013     (1)
    
    Options were granted December 9, 2005. The remaining
    options vest on December 9, 2008.(2)
    
    Options were granted January 1, 2006. 15,000 options vested
    on January 1, 2008. The remaining options vest on
    January 1, 2009.(3)
    
    Options were granted June 1, 2006. 6,000 and 10,000 of the
    remaining options vest on June 1, 2008 and 2009,
    respectively.(4)
    
    Options were granted January 3, 2005. The remaining options
    vested on January 3, 2008.(5)
    
    Options were granted on December 9, 2005. The remaining
    options vest on December 9, 2008.(6)
    
    Options were granted on February 16, 2006. 3,750 options
    vested on February 16, 2008. The remaining options vest on
    February 16, 2009.(7)
    
    Options were granted June 1, 2006. 4,500 and 7,500 of the
    remaining options vest on June 1, 2008 and 2009,
    respectively.(8)
    
    Shares of restricted stock were granted effective July 20,
    2007 and vest in equal one-third increments on the third, fourth
    and fifth anniversaries of the date of grant.(9)
    
    Based on the closing price of our common stock of $4.58 on
    December 31, 2007. 102




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##### Table of Contents



Potential
    Payments Upon Termination or
    Change-in-Control
    Terminationwithout


Termination





TerminationCause or


Following a


Termination


for Causefor Good


Change of


Due to


or withoutName

Benefit

Reason


Control(1)


Death


Good ReasonPeter G. Schoonmaker

Severance

$
250,000


$
375,000


$
125,000


$
Prorated bonus(2)


125,000



125,000



125,000



Insurance premiums(3)


20,825



20,825



20,825



Health savings account
    contributions(3)


4,950











Acceleration of stock
    options and restricted
    stock(4)


202,650



202,650



202,650



Unused vacation(5)


4,808



4,808



4,808



4,808Ronald T. Barnes

Severance


200,000



300,000



100,000



Prorated bonus(2)


75,000



75,000



75,000



Insurance premiums(3)


20,825



20,825



20,825



Health savings account
    contributions(3)


4,950











Acceleration of stock
    options and restricted
    stock(4)


106,100



106,100



106,100



Unused vacation(5)


3,846



3,846



3,846



3,846     (1)
    
    The proposed merger with Quest will constitute a change of
    control under the employment agreements.(2)
    
    Estimated based on the executives 2007 bonus under our
    2007 Management Incentive Plan.(3)
    
    Estimated based on the amount paid during 2007.(4)
    
    Represents the in-the-money value of options that
    would accelerate and the value of restricted stock that would
    accelerate, assuming a price per share of $4.58, the closing
    price of our common stock on December 31, 2007.(5)
    
    Estimated based on the number of unused vacation days during
    2007.   103




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##### Table of Contents



nolo contendere
           104




---



##### Table of Contents



2007 Director
    Compensation
  Fees Earned or


Stock


All OtherPaid in Cash


Awards


Compensation


TotalName

($)


($)(1)


($)


($)Steven A. Webster

$
40,500


$
19,477


$



$
59,977Robert L. Cabes, Jr.


53,000



19,477







72,477Jeffrey P. Gunst


35,500



19,477







54,977Sylvester P. Johnson, IV(2)


47,000



19,477







66,477F. Gardner Parker


63,000



19,477







82,477Susan C. Schnabel


37,000



19,477







56,477Thomas G. McGonagle


10,000



2,495







12,495Peter G. Schoonmaker(3)














     (1)
    
    Each non-employee director other than Mr. McGonagle was
    granted 2,000 shares of restricted stock effective
    February 12, 2007. The shares of restricted stock vested on
    February 12, 2008. In connection with his appointment to
    the Board of Directors, Mr. McGonagle was granted
    4,500 shares of restricted stock effective August 22,
    2007. Mr. McGonagles shares will vest 33%, 33% and
    34% on the first, second and third anniversaries of the date of
    grant, respectively. None of such shares of restricted stock had
    vested and all such shares of restricted stock were outstanding
    as of December 31, 2007. The grant date fair value of the
    grants to our non-employee directors other than
    Mr. McGonagle was $22,000. The grant date fair value of the
    grant to Mr. McGonagle was $20,700.(2)
    
    All cash compensation earned by Mr. Johnson for his service
    as a director goes directly to Carrizo.(3)
    
    Mr. Schoonmaker is our President and Chief Executive
    Officer and receives no compensation for serving as a director.      Compensation
    Committee Interlocks and Insider Participation
   105




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##### Table of Contents



ITEM 12
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS  Security
    Ownership of Certain Beneficial Owners and Management
    
    each person known by us to be the beneficial owner of 5% or more
    of our outstanding common stock;
    each of our directors;
    each of our named executive officers; and
    all directors and executive officers as a group.  c/o Pinnacle
 Number ofShares ofCommon StockBeneficially


PercentName and Address of Beneficial Owner

Owned(1)


of ClassDLJ Merchant Banking Partners III, L.P. and affiliated funds(2)


9,599,502



33.1
%Quest Resource Corporation(3)


9,599,502



33.1CCBM, Inc.(4)


2,423,753



8.4Ronald L. Eubel(5)


1,752,524



6.0Eubel Brady & Suttman Asset Management, Inc.(6)


1,751,244



6.0Peter G. Schoonmaker(7)


207,100




*Ronald T. Barnes(8)


184,000




*Steven A. Webster(9)


15,636




*Robert L. Cabes, Jr.


6,545




*Thomas G. McGonagle


14,500




*Jeffrey P. Gunst


6,545




*Sylvester P. Johnson, IV(10)


3,030




*F. Gardner Parker


6,545




*Susan C. Schnabel(11)


6,545




*All directors and executive officers as a group (9 Persons)


450,446



1.6
%     *
    
    Less than 1%.(1)
    
    The number of shares beneficially owned is determined under
    rules promulgated by the SEC and the information is not
    necessarily indicative of beneficial ownership for any other
    purpose. Under such rules, beneficial ownership includes any
    shares as to which the individual has sole or shared voting
    power or investment power and also any shares that the
    individual has the right to acquire within 60 days through
    the exercise of any stock option or other right. The inclusion
    herein of such shares, however, does not constitute an admission
    that the named stockholder is a direct or indirect beneficial
    owner of such shares. Unless otherwise indicated, each person or
    entity named in the table has sole voting power and investment
    power (or shares such power with his or her spouse) with respect
    to all shares of capital stock listed as owned by such person or
    entity.(2)
    
    The reported shares are held by the following DLJ Merchant
    Banking funds: (i) DLJ Merchant Banking Partners III, L.P.;
    (ii) DLJ Merchant Banking III, Inc., as Advisory General
    Partner on behalf of DLJ Offshore Partners III, C.V.;
    (iii) DLJ Merchant Banking III, Inc., as Advisory General
    Partner on behalf of DLJ Offshore Partners III-1, C.V. and as
    attorney-in-fact for DLJ Merchant Banking III, L.P., as
    Associate General Partner of DLJ Offshore Partners III-1, C.V.;
    (iv) DLJ Merchant Banking III, Inc., as Advisory General
    Partner on behalf of DLJ Offshore Partners III-2, C.V. and as
    attorney-in-fact for DLJ Merchant Banking III, L.P., as
    Associate 106




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##### Table of Contents



General Partner of DLJ Offshore Partners III-2, C.V.;
    (v) DLJ MB Partners III GmbH & Co. KG;
    (vi) Millennium Partners II, L.P.; and (vii) MBP III
    Plan Investors, L.P.Credit Suisse, a Swiss bank (the Bank), owns the
    majority of the voting stock of Credit Suisse Holdings (USA)
    Inc., a Delaware corporation, which in turn owns all of the
    voting stock of Credit Suisse (USA) Inc., a Delaware corporation
    (CS-USA). The entities discussed in the above
    paragraph are merchant banking funds managed by indirect
    subsidiaries of CS-USA and form part of Credit Suisses
    asset management business. The ultimate parent company of the
    Bank is Credit Suisse Group (CSG). CSG disclaims
    beneficial ownership of the reported common stock that is
    beneficially owned by its direct and indirect subsidiaries.All of the DLJ Merchant Banking entities can be contacted at
    Eleven Madison Avenue, New York, New York
    10010-3629
    except for the three Offshore Partners entities,
    which can be contacted at John B. Gosiraweg, 14, Willemstad,
    Curacao, Netherlands Antilles.(3)
    
    Quest Resource Corporation entered into a Support Agreement,
    dated October 15, 2007 and amended February 6, 2008,
    with the DLJ Merchant Banking funds which obligates the DLJ
    Merchant Banking funds to vote their shares in favor of matters
    relating to the merger of us with a subsidiary of Quest. Due to
    Quests right under the Support Agreement to direct the
    voting of the shares of common stock held by the DLJ Merchant
    Banking Funds, Quest may be deemed to have shared voting power
    over such shares, and may therefore be deemed to be the
    beneficial owner of such shares. Quest does not control the
    voting of such shares with respect to other matters, does not
    possess any other rights as a stockholder with respect to such
    shares and does not have any dispositive power over such shares.
    Quest disclaims any beneficial ownership of such shares. The
    address of Quest Resource Corporation is 210 Park Avenue,
    Suite 2750, Oklahoma City, OK 73102.(4)
    
    CCBM, Inc. is a wholly owned subsidiary of Carrizo. The address
    of each of Carrizo and CCBM, Inc. is 1000 Louisiana Street,
    Suite 1500, Houston, Texas 77002. The reported shares
    include 3,030 shares of restricted common stock granted to
    Mr. Johnson that he is obligated to transfer to CCBM, Inc.
    upon vesting.(5)
    
    Mr. Eubel has sole voting and dispositive power over
    1,280 shares. The reported shares include
    1,751,244 shares held by Eubel Brady & Suttman
    Asset Management, Inc. As a result of his ownership of and
    position with Eubel Brady & Suttman Asset Management,
    Inc., Mr. Eubel may be deemed to be an indirect beneficial
    owner of the 1,751,244 shares held by Eubel
    Brady & Suttman Asset Management, Inc. The address of
    Mr. Eubel is 7777 Washington Village Dr., Suite 210,
    Dayton, OH 45459.(6)
    
    The address of Eubel Brady & Suttman Asset Management,
    Inc. is 7777 Washington Village Dr., Suite 210, Dayton, OH
    45459. Due to their ownership of and positions with Eubel
    Brady & Suttman Asset Management, Inc.,
    Messrs. Ronald L. Eubel, Mark E. Brady, Robert J. Suttman,
    William E. Hazel and Bernard J. Hotgreive may be deemed to be
    indirect beneficial owners of the reported shares.(7)
    
    The reported shares include 82,500 shares issuable within
    60 days upon exercise of options granted under our 2003
    Stock Option Plan. The reported shares also include
    84,000 shares issuable within 60 days upon exercise of
    options granted under our Stock Incentive Plan, but they do not
    include 66,000 shares underlying options that are not
    exercisable within 60 days granted under our Stock
    Incentive Plan. The reported shares also include
    10,000 shares that were purchased in our private placement,
    600 shares that were purchased in our initial public
    offering and 30,000 shares of restricted common stock
    granted under our Stock Incentive Plan.(8)
    
    The reported shares include 153,000 shares of common stock
    issuable within 60 days upon exercise of options granted
    under our Stock Incentive Plan, but they do not include
    49,500 shares of common stock underlying options that are
    not exercisable within 60 days granted under our Stock
    Incentive Plan. The reported shares also include
    10,000 shares that were purchased in our private placement,
    1,000 shares that were purchased in our initial public
    offering and 20,000 shares of restricted common stock
    granted under our Stock Incentive Plan.(9)
    
    The reported shares include 9,091 shares that were
    purchased in our private placement.(10)
    
    Mr. Johnson is obligated to transfer to CCBM, Inc. upon
    vesting any shares of restricted common stock granted to him as
    a non-employee director.(11)
    
    Ms. Schnabel is obligated to transfer to the funds
    affiliated with DLJ Merchant Banking any shares of restricted
    stock granted to her as a non-employee director upon vesting. 107




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##### Table of Contents




    
    The reported shares include 3,030 shares of restricted
    common stock granted to each of our non-employee directors under
    our Stock Incentive Plan, effective as of April 11, 2006.
    These shares of restricted common stock will vest as follows:
    1,515 shares on April 11, 2008 and 1,515 shares
    on April 11, 2009.
    
    The reported shares include 4,500 shares of restricted
    common stock granted to Mr. McGonagle under our Stock
    Incentive Plan, effective as of August 22, 2007. These
    shares of restricted common stock will vest in one-third
    increments over three years, beginning on the first anniversary
    of the effective date of the grant.  Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Number of Securities to be


Weighted-Average


Number of SecuritiesIssued Upon Exercise of


Exercise Price of


Remaining Available forPlan Category

Outstanding Options


Outstanding Options


Future IssuanceEquity compensation plans approved by stockholders


1,036,720


$
6.73



1,713,280Equity compensation plans not approved by stockholders


None







Total


1,036,720


$
6.73



1,713,280   Change of
    Control
    ITEM 13
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE  Review,
    Approval or Ratification of Transactions with Related
    Persons
  Form 10-K,
  Director
    Independence
    
    the director is, or at any time during the last three years was,
    employed by us;
    the director or any family member of the director has accepted
    compensation from us in excess of $100,000 during any period of
    twelve consecutive months during the last three years, other
    than board or committee 108




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##### Table of Contents



fees, compensation paid to a family member who is a
    non-executive employee of us, benefits under a tax-qualified
    retirement plan or non-discretionary compensation;  
    the director is a family member of a person who is, or at any
    time during the last three years was, employed by us as an
    executive officer;
    the director or any family member of the director is a partner
    in, or a controlling shareholder or executive officer of, any
    organization to which we made, or from which we received,
    payments for property or services during the current or last
    three years that exceeded the greater of 5% of the
    recipients consolidated gross revenues for that year or
    $200,000, other than payments arising solely from investments in
    our securities or payments under non-discretionary charitable
    contribution matching programs;
    the director or any family member of the director is employed as
    an executive officer of another entity where at any time during
    the last three years any of our executive officers serve on the
    compensation committee of such other entity; or
    the director or any family member of the director is a current
    partner of our outside auditor, or the director or any family
    member of the director was a partner or employee of our outside
    auditor who worked on our audit at any time during the last
    three years.      ITEM 14
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES    2007


2006(In thousands)Audit fees

$
197


$
138Audit-related fees(1)


156



251Tax fees(2)


43



11All other fees






Total

$
396


$
400     (1)
    
    Fes were paid for services relating to registration of
    restricted shares, review of registration statements, comfort
    letters and SEC filing and review process.(2)
    
    Fees were paid for tax return preparation, tax planning, tax
    research and tax evaluation of business transactions. 109




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##### Table of Contents



Audit
    Committee Pre-Approval Policies
     PART IV  ITEM 15
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES                          ExhibitNumber



Description2
.1



Amended and Restated Agreement and Plan of Merger, dated as of
    February 6, 2008, among Quest Resources Corporation,
    Pinnacle Gas Resources, Inc. and Quest MergerSub, Inc.
    (incorporated by reference to Exhibit 2.1 to the Current
    Report on
    Form 8-K
    (File
    No. 000-17371)
    filed by Quest Resource Corporation on February 6, 2008).3
.1



Second Amended and Restated Certificate of Incorporation of
    Pinnacle Gas Resources, Inc. (incorporated by reference to
    Exhibit 3.1 to the Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on May 10, 2006).3
.2



Amended and Restated Bylaws of Pinnacle Gas Resources, Inc.
    (incorporated by reference to Exhibit 3.2 to the
    Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on May 10, 2006)4
.1



Amended and Restated Securityholders Agreement, dated
    February 16, 2006 (incorporated by reference to
    Exhibit 4.1 to the Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on May 10, 2006). 110




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##### Table of Contents



ExhibitNumber



Description4
.2



Registration Rights Agreement, dated April 11, 2006
    (incorporated by reference to Exhibit 4.2 to the
    Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on May 10, 2006).10
.1



Termination of AMI Agreement, dated April 11, 2006, by and
    among Pinnacle Gas Resources, Inc., CCBM, Inc., Carrizo
    Oil & Gas, Inc., U.S. Energy Corp., Crested Corp. and
    the CSFB Parties (as defined therein) (incorporated by reference
    to Exhibit 10.1 to Amendment No. 1 to the Registration
    Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.2



Credit Agreement, dated February 12, 2007, by and among
    Pinnacle Gas Resources, Inc., as Borrower, the Lenders from time
    to time party thereto and Royal Bank of Scotland plc,
    individually and as Administrative Agent (incorporated by
    reference to Exhibit 10.2 to Amendment No. 1 to the
    Registration Statement on
    Form S-1
    (File
    No. 333-139556)
    filed by Pinnacle Gas Resources, Inc. on April 3, 2007).10
.3



Letter regarding waiver and amendment of Credit Agreement, dated
    March 9, 2007 (incorporated by reference to
    Exhibit 10.3 to Amendment No. 1 to the Registration
    Statement on
    Form S-1
    (File
    No. 333-139556)
    filed by Pinnacle Gas Resources, Inc. on April 3, 2007).10
.4



Purchase and Sale Agreement, dated February 7, 2006,
    between Kennedy Oil and Pinnacle Gas Resources, Inc.
    (incorporated by reference to Exhibit 10.5 to Amendment
    No. 1 to the Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.5



Gas Gathering Agreement (Low Pressure Field Gathering) by and
    among Bitter Creek Pipelines, LLC and Pinnacle Gas Resources,
    Inc., Quaneco L.L.C. and Dolphin Energy Corporation
    (incorporated by reference to Exhibit 10.6 to Amendment
    No. 1 to the Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.6



Gas Gathering Agreement (High Pressure Gathering Line) by and
    among Bitter Creek Pipelines, LLC and Pinnacle Gas Resources,
    Inc., Quaneco L.L.C. and Dolphin Energy Corporation
    (incorporated by reference to Exhibit 10.7 to Amendment
    No. 1 to the Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.7



Midstream Transportation Agreement, effective December 1,
    2003, by and between Pinnacle Gas Resources, Inc. and Clear
    Creek Natural Gas, LLC (incorporated by reference to
    Exhibit 10.8 to Amendment No. 1 to the Registration
    Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.8



Amended and Restated Stock Incentive Plan, effective
    February 16, 2006 (incorporated by reference to
    Exhibit 10.9 to Amendment No. 1 to the Registration
    Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.9



Form of Stock Option Agreement (incorporated by reference to
    Exhibit 10.10 to Amendment No. 1 to the Registration
    Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.10



Form of Restricted Stock Grant Agreement (incorporated by
    reference to Exhibit 10.11 to Amendment No. 1 to the
    Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.11



Form of Indemnification Agreement (incorporated by reference to
    Exhibit 10.13 to Amendment No. 1 to the Registration
    Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on September 15,
    2006).10
.12



Purchase/Placement Agreement, dated March 31, 2006, between
    Pinnacle Gas Resources, Inc. and Friedman, Billings, &
    Ramsey & Co., Inc. (incorporated by reference to
    Exhibit 10.18 to the Registration Statement on
    Form S-1
    (File
    No. 333-133983)
    filed by Pinnacle Gas Resources, Inc. on May 10, 2006).*10
.13



Summary of Director Compensation. 111




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##### Table of Contents



ExhibitNumber



Description10
.14



Employment Agreement, dated July 20, 2007, by and between
    Pinnacle Gas Resources, Inc. and Peter G. Schoonmaker
    (incorporated by reference to Exhibit 10.1 to the Current
    Report on
    Form 8-K
    (File
    No. 001-33457)
    filed by Pinnacle Gas Resources, Inc. on July 24, 2007).10
.15



Employment Agreement, dated July 20, 2007, by and between
    Pinnacle Gas Resources, Inc. and Ronald T. Barnes (incorporated
    by reference to Exhibit 10.2 to the Current Report on
    Form 8-K
    (File
    No. 001-33457)
    filed by Pinnacle Gas Resources, Inc. on July 24, 2007).10
.16



Pinnacle Gas Resources, Inc. Management Incentive Plan
    (incorporated by reference to Exhibit 10.3 to the Current
    Report on
    Form 8-K
    (File
    No. 001-33457)
    filed by Pinnacle Gas Resources, Inc. on July 24, 2007).*31
.1



Certification of President and Chief Executive Officer of
    Pinnacle Gas Resources, Inc. pursuant to
    Rules 13a-14(a)
    and 15d-14(a).*31
.2



Certification of Senior Vice President, Chief Financial Officer
    and Secretary of Pinnacle Gas Resources, Inc. pursuant to
    Rules 13a-14(a)
    and 15d-14(a).*32
.1



Certification of President and Chief Executive Officer of
    Pinnacle Gas Resources, Inc. pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.*32
.2



Certification of Senior Vice President, Chief Financial Officer
    and Secretary of Pinnacle Gas Resources, Inc. pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Filed herewith
    
    Management contract or compensatory plan or arrangement 112




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##### Table of Contents



SIGNATURES
      By:
    /s/  Peter
    G. Schoonmaker   Title:
    President and Chief Executive Officer      Signature

Date/s/  Peter
    G. SchoonmakerPeter
    G. Schoonmaker

President and Chief Executive Officer (Principal Executive
    Officer) and Director

March 18, 2008/s/  Ronald
    T. BarnesRonald
    T. Barnes

Senior Vice President and Chief Financial Officer (Principal
    Financial Officer and Principal Accounting Officer)

March 18, 2008/s/  Steven
    A. WebsterSteven
    A. Webster

Chairman of the Board of Directors

March 18, 2008/s/  Robert
    L. Cabes, Jr.Robert
    L. Cabes, Jr.

Director

March 18, 2008/s/  Jeffrey
    P. GunstJeffrey
    P. Gunst

Director

March 18, 2008/s/  S.
    P. Johnson, IVS.
    P. Johnson, IV

Director

March 18, 2008/s/  Thomas
    G. McGonagleThomas
    G. McGonagle

Director

March 18, 2008/s/  F.
    Gardner ParkerF.
    Gardner Parker

Director

March 18, 2008/s/  Susan
    C. SchnabelSusan
    C. Schnabel

Director

March 18, 2008  113