UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington, DC
20549
 
 FORM
10-KSB/A
 Amendment
No. 1
 
 
 T
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
fiscal year ended December 31,
2007
 
 £
              TRANSITION
      REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ________ to  ________
 
 Commission
file
number:           000-51488
 
 PETROSEARCH ENERGY
CORPORATION
 (Exact
name of small business issuer as specified in its charter)
 
 NEVADA
              
              20-2033200(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)
 675
Bering Drive, Suite 200
 Houston,
TX 77057
 (Address
of principal executive offices)
 
 (713)
961-9337
 
 Securities
Registered Under Section 12(b) Of The Exchange Act:
 Title Of
Each Class n/a
 Name Of
Each Exchange On Which Registered   n/a
  Securities
Registered Pursuant to 12(g) of the Exchange Act:
 Title Of
Each Class
 Common
Stock, $0.001Par Value
 
 Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act   £
 
 Check
whether the issuer: (i) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days.   Yes
T No £
  Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. T
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes £ No T
 
 The
Issuer's revenues for the year ended December 31, 2007 were
$1,827,664.
 
 The
aggregate market value of Common Stock held by non-affiliates of the registrant
at March 14, 2008, based upon the last reported sales prices on the OTCBB, was
$18,527,250.
 
 As of
March 14, 2008, there were approximately 41,239,738 shares of Common Stock
outstanding.
  
 
 
  TABLE OF CONTENTSPART
      I
                PageItem
      1.
                Business
                1Item
      2.
                Properties
                3Item
      3.
                Legal Proceedings
                33Item
      4.
                Submission of Matters to a Vote of Security
      Holders
                9PART
      IIItem
      5.
                Market for Common Equity, Related Stockholder Matters and
      Small Business Issuer Purchases Of Equity Securities
                9Item
      6.
                Management's Discussion and Analysis or Plan of
      Operation
                11Item
      7.
                Financial Statements
                22Item
      8.
                Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                22Item
      8A.
                Controls and Procedures
                22Item
      8B.
                Other Information
                23PART
      IIIItem
      9.
                Directors, Executive Officers, Promoters, Control Persons
      and Corporate Governance; Compliance with Section 16(a) of The Exchange
      Act
                23Item
      10.
                Executive Compensation
                26Item
      11.
                Security
      Ownership of Certain Beneficial Owners and Management andRelated Stockholder
      Matters
                28Item
      12.
                Certain Relationships and Related Transactions, and
      Director Independence
                30Item
      13.
                Exhibits
                31Item
      14.
                Principal Accountant Fees and Services
                31
  Table of Contents
  Petrosearch
Energy Corporation is filing this Amendment No. 1 on Form 10-KSB/A to its Form
10-KSB for the year ended December 31, 2007 that was originally filed with the
Securities and Exchange Commission ("SEC") on March 24, 2008 (the "Original
10-KSB") (i) to add additional disclosure relating to the Company’s reserves,
production and costs; and (ii) include a statement that our annual report does
not require an attestation report from our registered public accounting
firm.
  This
Amendment No. 1 continues to speak as of the date of the Original 10-KSB, and we
have not updated the disclosure contained herein to reflect any events that
occurred at a later date other than that set forth above. All information
contained in this Amendment No. 1 is subject to updating and supplementing as
provided in our periodic reports filed with the SEC subsequent to the date of
the filing of the Original 10-KSB.
  PART
I
 
 ITEM 1
                BUSINESS
 
 Petrosearch
Energy Corporation (the “Company”), a Nevada corporation formed in November
2004, is an independent crude oil and natural gas exploration and production
company.  We are the successor of Petrosearch Corporation, a Texas
corporation formed in August 2003.  (All references to capitalization
and business operations herein apply to our current capitalization and operating
history, including our predecessor, Petrosearch Texas.)  We are a
resource based energy company with operations focused in two core areas of the
lower 48 states of the United States with existing production in North Dakota,
Texas and Oklahoma.   A majority of our effort over the next 12
months will focus on growth through the drill bit in our two Core
Areas:
 
 §
                The
      Barnett Shale project through our participation in DDJET Limited LLP;
      and
 §
                The
      Texas Panhandle water flood which we
operate.
 
 Our goal
is to develop additional production and reserves from our existing resource
base.
 
 We are
the successor to the business of Petrosearch Corporation, a Texas corporation
that was formed in August 2003.  In November 2004, shareholders of
Petrosearch Corporation approved a 6.5-to-1 reverse stock split which took
effect immediately prior to its merger with the Company on December 30,
2004.  The effect of the merger, among other things, was to re-domicile to
Nevada.  Upon the completion of the merger, shareholders of Petrosearch
Corporation were issued shares of our common and preferred stock representing
100% of the then issued and outstanding common and preferred
shares.
 
 Our
common shares have been publicly traded on the OTC Bulletin Board under the
symbol “PTSG” since November, 2005.   Our principal offices are
located at 675 Bering Drive, Houston, Texas 77057, and our telephone number is
713-961-9337.  Our website is www.petrosearch.com.
 
 Business
Plan
 
 We are a
resource based energy company with operations focused in two core areas of the
lower 48 states of the United States. Our strategic goal is to build intrinsic
shareholder value through focused operations in our two core property areas
while maintaining a low cost structure at every level of our
Company.  We intend to bring additional production and revenues from
our existing high quality resource base.  We also continue to identify
and evaluate other potential opportunities that would complement our current
business plan and create economic value.
 
 Over the
past two years, we have assembled an inventory of high quality drilling
opportunities in our core focus areas. We have a budget commitment of
approximately $11-12 million for lease acquisition and drilling in our Barnett
Shale partnership over the next year; and we have 23 producing locations for
development on our Texas panhandle waterflood.  In the Barnett Shale
project we have accumulated a significant leasehold position inside our 2
million acre, 8-county Contract Area and a multi-rig drilling program is planned
for the area over the next several years. We have embarked on a program to
exploit this inventory for the benefit of our shareholders.
 
 As of
December 31, 2007 we have $55,485,780 of pre-tax PV-10 for proved reserves
associated with our properties.  We are also focused on maintaining a
low cost structure throughout our business by maintaining tight control on our
corporate overheads and operating costs in our properties.
  1
 
 As
of December 31, 2007 we have $55,485,780 of pre-tax PV-10 for proved reserves
associated with our properties. See “Item 2. Properties – Oil and Natural Gas
Reserves” for a reconciliation to after-tax PV-10. We are also focused on
maintaining a low cost structure throughout our business by maintaining tight
control on our corporate overheads and operating costs in our
properties.
  Employees
  As of
December 31, 2007, we had five full-time employees and one part time employee,
of which three are in executive positions.  None of our employees are
represented by a union and we consider our employee relations to be
good.
  2
 Table of Contents
  ITEM 2
                PROPERTIES
 
 CORE
PROPERTIES:
 
 Barnett Shale Project -- Our
Barnett ShaleProject is part of the
Barnett Shale natural gas play in the Fort Worth Basin, which is arguably one of
the most exciting plays to emerge in the lower 48 states in the past decade. In
December 2006, through our wholly owned subsidiary, Barnett Petrosearch LLC, we
joined in the formation of a partnership, DDJET Limited LLP (“Partnership”), for
the development of the integrated venture. We own a 5.54% interest in the
Partnership along with partners Metroplex Barnett Shale LLC (a wholly owned
subsidiary of Exxon Mobil Corporation), which directs operations, and Cinco
County Barnett Shale LLC (a privately held Dallas-based company).
 
 The
Partnership’s assets include all leases acquired to-date within an 8-county
contract area, comprising approximately 2 million acres that was established
under a previous agreement among affiliates of the three partners. Partnership
assets also include associated facilities that include nearly 100 miles of
pipeline and an option on a separate pipeline right-of-way. Approximately 35
miles of gas pipeline facilities have been completed and are operational. We
believe our ownership of these pipeline assets is a strategic advantage in this
urban area.  A leasing program within the 8-county contract area and a
multi-rig drilling program is planned for 2008 and beyond.
 
 As of
March 14, 2008, 12 Partnership wells (seven in Ellis County and five in Tarrant
County) have been completed and are selling gas through the Partnership-owned
pipeline. The cumulative production rate of these 12 completed wells continues
to meet our expectations.  An additional two wells, in Tarrant County,
have been drilled and awaiting completion; and one well, also in Tarrant County
is being drilled.  As of December 31, 2007 our independent reserve
engineers, Cawley, Gillespie and Associates, Inc. estimated our net share of
proved natural gas reserves at 1.9 Bcfe.
 
 On
February 29, 2008 we announced that we executed an authorization for the general
partner of the Partnership to immediately commence a sales marketing program to
interested potential purchasing parties in order to fully assess the current
market value of the Partnership.  We have no obligation to sell our
Partnership interest and retain all of our rights under the Partnership
agreement in the event of a proposed sale by the partners in which the Company
chooses not to participate.
 
 Our Board
of Directors has retained Friedman, Billings, Ramsey & Co., Inc. (“FBR”) to
advise them in connection with a review of strategic alternatives that may be
available to the Company in connection with the possible Partnership
divestiture. The marketing of the Partnership interests presents us with various
options which include: 1) selling our interest in the Partnership at an
acceptable price; 2) utilizing certain preferential rights afforded to us under
the Partnership Agreement to acquire all or a part of the non-Company interests
which the Company could pursue by venturing with a strategic industry or
financial partner; or 3) retaining our current position in the Partnership with
new and/or existing partners.  To date, the Company and FBR have held
confidential discussions with a limited number of potential strategic and
financial partners and expect to continue the investigation of available options
as the Partnership sales process moves forward.
 
 North Texas/Panhandle Water Flood
Project -In November 2005, we acquired a 100% working interest in 1,755
acres in the Quinduno Field in Roberts County, Texas, in the Anadarko Basin. The
project is focused on infill drilling and the implementation of a water flood on
the property. Our leases at Quinduno have a large established resource base of
over 23 million barrels of original oil in place.  Since its discovery
in 1953, approximately 5.1 million barrels have been produced using primary
production.
 
 One
infill well has been drilled to date. We have an ongoing program to enter each
of the 19 old wells that have not been plugged. So far, we have entered seven of
these older wells to determine their mechanical status and establish potential
productivity. Two of these wells have been equipped and are now capable of
producing. We have prepared a detailed study and development plan for the field.
As of December 31, 2007, our independent engineers, Ryder Scott, estimated our
net share of proved oil reserves extractable by water flood at 1.5 million
barrels of oil equivalent.  Slightly deeper than the water flood zone,
the Moore County Limestone formation has undrilled exploration potential that
may be tested in a future well.
  3
 Table of Contents
  To
provide adequate water for injection, in November 2006 we executed a water
supply agreement with a landowner in the leasehold, which allows us to draw
fresh water from the aquifer underlying the landowner’s property. In that same
month, we received approval from the Panhandle Groundwater Authority District
(“PGAD”) to produce up to 5,000 barrels per day from the aquifer for use in the
flood.  We received the approval from the PGAD over the protest filed
with the PGAD by the Canadian River Municipal Water Authority (“CRMWA”)
attempting to preserve the freshwater for local municipal use only in the area
in which we own the rights to the fresh water.  We also applied to the
Texas Railroad Commission to amend a previously granted saltwater injection
permit to include fresh water injection. On January 5, 2007 we received a letter
from the Texas Railroad Commission (“TRRC”) informing us of a protest by CRMWA
contesting our application for fresh water injection in the Quinduno Field water
flood.   However, as of November 7, 2007, CRMWA has withdrawn
their protest and request for hearing as part of an agreement with CRMWA that
addresses their concerns with our use of fresh water for enhanced oil
recovery.
 
 In
January 2008 we signed an agreement with Complete Production Services Inc.
(“CPS”), an international oilfield service company which provides that CPS, at
its sole expense, will design and construct a water treatment facility no later
than 90 days from the effective date of the agreement that will be capable of
treating all of our production water up to a maximum of 10,000 bbls per day and
likewise treat and provide to the Company a minimum of 5,000 bbls per day
of  production water from third party sources.  We, in turn,
have committed to be capable of injecting not less than 2,000 bbls of treated
water per day derived from third party production water within 30 days after the
facility is opened, and have further committed to be capable of injecting not
less than 5,000 bbls of treated water per day derived from third party
production water within 180 days after the facility opens, in addition to
re-injecting our own treated production water from the oil and gas lease it
operates.  We will be required to pay a scaled management fee to CPS
commencing on the date the facility opens on the basis of the volume of treated
and re-injected water derived from our production.  We are currently
applying to regulatory agencies to add more wells to the existing flood permit,
as required under the agreement, to ensure our ability to inject the volumes
that CPS will make available.  We do not anticipate any difficulty
with obtaining the approval.
 
 At present we are also in negotiations
with several potential industry venture partners to allow for the commencement
of the flood to begin as soon as possible.
 
 SW Garwood, Colorado County, Texas –The Wilcox Trend, SWGarwood
field has had three wells drilled with one of these in the process of being
completed.  Two additional locations are on current
leases.   The initial well on this prospect, the Pintail #1,
completed in the Upper Wilcox in December 2004, paid out in April of
2006.  As of payout, we began participating in the production from the
well with a 16% working interest.  As of March 14, 2008  the
well was not producing as it was in the process of being worked
over.
 
 The
second well, the Pintail Flats #1, was completed and fracture stimulated in May,
2005 from 15,950 feet to 16,010 feet in the Lower Wilcox.  In July
2006 we re-completed and fracture stimulated an up-hole zone at 15,135 feet. The
well flowed back stimulation fluids with a 2000 Mcfpd gas rate into the sales
line as of August 3, 2006. As of March 14, 2008 the well was producing
approximately 70 Mcfpd.   We have a 16% working interest in the
well after payout. The well has four additional potentially productive zones in
the Lower Wilcox and five additional potentially productive zones in the Upper
Wilcox.
 
 A third
well, the Kallina 46 #1, began drilling in June, 2006 and reached its targeted
depth of 16,230 feet on August 6, 2006. We have attempted production from
several sands in the lower and middle Wilcox formations without achieving
commercial rates.  Data is currently being reviewed in consideration
of possibly plugging and abandoning the well.  We have an 87.5%
working interest in the Kallina lease and the Kallina 46 #1 well before payout
and a 75.5% interest after payout.
 
 In order
to finance the Kallina #46-1 well and future wells on the Kallina lease, we
signed a Securities Purchase Agreement and Secured Term Note with Laurus Master
Fund, Ltd.  (“Laurus”) for Laurus to provide financing for the
drilling of the Kallina 46 #1 well and payment of the future completion costs
for the  Kallina 46 #1 well which is in process of being
completed.   We formed a subsidiary, Garwood Petrosearch Inc.,
(“Garwood”) to hold our interest in the Kallina Lease and the Kallina 46 #1
well.  Also, as a part of the financing arrangement,
Garwood  issued Laurus a Warrant to acquire, upon payout of the Note
indebtedness, 45% of Garwood’s outstanding common stock such that upon exercise
of the Warrant, Garwood would be owned 55% by us and 45% by Laurus and the sole
asset is the Kallina lease.
  4
 Table of Contents
  In the SW
Garwood Project, in addition to the working interest in the wells noted above,
we currently own a 16% after payout working interest in 960 acres of undeveloped
leases; and an 87.5% before payout and 75.5% after payout working interest in
438 acres.
 
 OTHER
PROJECT AREAS:
 
 Gruman Prospect, Stark County, North
Dakota -On March 28, 2006, we spudded the Gruman 18-3 well intended to
be either an increased density well if it proved to be up dip of the Gruman 18-1
producing well or a water injection well if it was down dip. The well reached
total depth of 9,890 feet on April 14, 2006, and was completed as an injection
well.  In October 2006, we undertook certain remedial work on the
Gruman 18-1 which has improved the production on the well. The well is currently
producing approximately 60 bopd and 10 Mcfpd.  We are currently
assessing the positive impact on the long term production.
 
 On
February 1, 2007, we began injecting produced water into the Gruman 18-3 well.
The result has been to reduce the cost of operating the Gruman 18-1 by
eliminating the need to truck produced water to a disposal facility. We are
considering supplementing this injection with water from the Dakota for pressure
maintenance in the mound. We have established that the Gruman 18-3 is in
pressure communication with the Gruman 18-1. Further testing or stimulation may
be necessary to achieve the desired future injection rates. Proved developed
reserves in the prospect to our share of the well as of December 31, 2007, were
215 Mbo and 68 MMcf of natural gas, as estimated by a third party engineering
firm, McCartney Engineering, LLC.
 
 Mississippi Tuscaloosa Prospects --We have identified five Tuscaloosa oil prospects in the Mississippi
Inland Salt Basin, in Yazoo County, comprising a maximum of 2,295 acres and up
to 18 potential drilling locations.  We are in discussions with a
potential industry partner to co-develop these prospects with
us.   Once a joint venture is established, we plan to initially
drill 8 locations, ranging from 6,150 feet to 7,500 feet in depth. Approximately
55% of the entire prospect acreage has been leased. We currently own 100% of the
prospect; however, we are in the final stages of negotiating a farm out
agreement with an industry partner.
 
 Oil
and Natural Gas Reserves
 
 Our
estimate of proved reserves is based on the quantities of oil and gas which
geological and engineering data demonstrate, with reasonable certainty, to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. The accuracy of any reserve estimate is a function of the
quality of available data, engineering and geological interpretation, and
judgment. For example, we must estimate the amount and timing of future
operations, development activities and costs, and work-over costs, all of which
may in fact vary considerably from actual results. In addition, as prices and
costs change from year to year, the estimate of proved reserves also
changes.  Any significant variance in these assumptions could
materially affect the estimated quantity and value of our reserves.
 
 Despite
the inherent imprecision in these engineering estimates, our reserves are used
throughout our financial statements. For example, since we use the
unit-of-production method to amortize our oil and gas properties, the quantity
of reserves could significantly impact our depreciation, depletion and
amortization expense and accretion expense. Our oil and gas properties are also
subject to a "ceiling" limitation based in part on the quantity of our proved
reserves. Finally, these reserves are the basis for our supplemental oil and gas
disclosures.  For the vast majority of our reserves, we engage
independent petroleum engineering firms to prepare our estimates of proved
hydrocarbon liquid and gas reserves.  These reserve estimates have not
previously been filed with any other Federal authority or agency.
  At December 31, 2007 our
standardized measure of discounted future net cash flows was $40,389,151. The
present value of future net pre-tax cash flows attributable to estimated net
proved reserves, discounted at 10% per annum, is a computation of the
standardized measure of discounted future net cash flows on a pre-tax basis. The
table below provides a reconciliation of Pre-tax PV-10 to the standardized
measure of discounted future net cash flows at December 31, 2007. Pre-tax PV-10
may be considered a non-GAAP financial measure under the SEC’s regulations. We
believe Pre-tax PV-10 to be an important measure for evaluating the relative
significance of our natural gas and oil properties. Pre-tax PV-10 is computed on
the same basis as the standardized measure of discounted future net cash flows
but without deducting income taxes. We further believe investors and creditors
may utilize our Pre-tax PV-10 as a basis for comparison of the relative size and
value of our reserves to other companies. However, Pre-tax PV-10 is not a
substitute for the standardized measure. Our Pre-tax PV-10 measure and the
standardized measure of discounted future net cash flows do not purport to
present the fair value of our natural gas and oil
reserves.
 5
 Table of Contents
  Net
      present value of future net cash flows, before income
      taxes
                    
                    $
                    55,485,780Future
      income taxes, discounted at 10%
                    
                    
                    (15,096,629
                    )Standardized
      measure of discounted future net cash flows
                    
                    $
                    40,389,151
 The
following table sets forth summary information with respect to our proved
reserves as of December 31, 2007, as estimated by compiling reserve information,
which was prepared by the engineering firms of Ryder Scott Company, Cawley,
Gillespie and Associates Inc., McCartney Engineering, LLC and internally
generated engineering estimates (internal estimates make up less
than  1% of our proved reserve estimates).
  Net Reserves
                
                
                Pre-Tax Present
                  Value of Future
                  Net RevenuesCategory
                
                Oil (Bbls)
                
                
                Gas (Mcf)
                
                
                BOE(1)December 31, 2007Proved Developed
                
                
                257,600
                
                
                
                993,743
                
                
                
                423,224
                
                
                $
                13,353,622Proved Undeveloped
                
                
                1,454,664
                
                
                
                1,689,500
                
                
                
                1,736,247
                
                
                $
                42,132,158Total Proved
                
                
                1,712,264
                
                
                
                2,683,243
                
                
                
                2,159,471
                
                
                $
                55,485,780
 
 (1)Estimated
using a conversion ratio of 1.0 Bbl/6.0 Mcf (thousand cubic feet).
 
 Total
PV-10 value increased to $55,485,780 as of December 31, 2007 from
$29,424,306  as of December 31, 2006.  The factors that
caused the significant increase in the PV-10 value and the increase in the
reserve quantities from 2007 to 2006 were related to i) the significant increase
in the price of oil as of the end of 2007 as opposed to the end of 2006; and ii)
the addition of our Barnett Shale reserves which did not exist in
2006.  These factors were partly offset by a decrease in our Garwood
Field reserves due to the Kallina 46 #1 not being a commercial
well.
 
 We note
that reserve and cash flow estimates utilize experience and judgment as well as
actual data, but actual results are often different than the
estimate.  Reserve engineering is a subjective process of estimating
underground accumulations of crude oil, condensate and natural gas that cannot
be measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. The quantities of oil and natural gas that are
ultimately recovered, production and operating costs, the amount and timing of
future development expenditures and future oil and natural gas sales prices may
differ from those assumed in these estimates. Therefore, the pre-tax 10% Present
Value of Future Net Revenues amounts shown above should not be construed as the
current market value of the oil and natural gas reserves attributable to our
properties.
 
 In
accordance with the guidelines of the Securities and Exchange Commission, the
engineers’ estimates of future net revenues from our properties and the pre-tax
10% Present Value of Future Net Revenues thereof are made using oil and natural
gas sales prices in effect as of the effective dates of such estimates and are
held constant throughout the life of the properties, except where such
guidelines permit alternate treatment, including the use of fixed and
determinable contractual price escalations.
  6
 
 Productive
Wells
 
 The
following table sets forth the total number of our active well bores and working
interests (WI) that we maintain in each well as of March 14, 2008.
 
 No. of
                  Wells
                
                
                WI
                  (Oil)
                
                
                WI
                  (Gas)Gruman 18-1
                
                1
                
                
                
                85
                %
                
                
                85
                %Gordon 1-18
                
                1
                
                
                
                95
                %
                
                
                N/AQuinduno(1)
                
                3
                
                
                
                100
                %
                
                
                100
                %Barnett Shale(3)
                
                12
                
                
                
                5.54
                %
                
                
                5.54
                %Pintail #1
                
                1
                
                
                
                16
                %
                
                
                16
                %REP Pintail Flats(2)
                
                1
                
                
                
                16
                %
                
                
                16
                %Corbett N. 13 #1
                
                1
                
                
                
                10
                %
                
                
                10
                %Total Productive Wells
                
                20
 
 (1)
                Project
      in which the Company’s working interest reduces to 90% (as described
      herein– North Texas/Panhandle Water Flood Project
  Section)
 (2)
                Well
      in SW Garwood Prospect, Colorado County, Texas, in which we have a
      reversionary back-in interest after
payout
 (3)
                Ownership
      is through a partnership interest in DDJET Limited
  LLP
  Acreage
 
 The
following table summarizes our gross and net developed and undeveloped natural
gas and crude oil wells and acreage under lease as of March 14,
2008:
 
 Wells
                
                
                AcreageState
                
                
                
                Gross
                
                
                Net
                
                
                Gross
                
                
                NetDeveloped acreage:Texas:Garwood
                
                Gas
                
                
                2
                
                
                
                .32
                
                
                
                1,280
                
                
                
                410Maddox (Quinduno)
                
                19 Oil, 1 Gas
                
                
                20
                
                
                
                20
                
                
                
                1,755
                
                
                
                1,755Barnett Shale
                
                Gas
                
                
                10
                
                
                
                .55
                
                
                
                1,332
                
                
                
                74North Dakota
                
                Oil(1)
                
                
                1
                
                
                
                .85
                
                
                
                280
                
                
                
                238Oklahoma:Gordon 1-18
                
                Oil
                
                
                1
                
                
                
                .95
                
                
                
                610
                
                
                
                579Corbett N.#13-1
                
                Gas
                
                
                1
                
                
                
                .10
                
                
                
                552
                
                
                
                55Total Developed
                
                
                
                
                35
                
                
                
                
                
                
                
                5,809
                
                
                
                3,111Undeveloped acreage:TexasBarnett Shale
                
                
                
                
                
                
                
                
                
                
                
                
                23,960
                
                
                
                1,328Garwood
                
                
                
                
                
                
                
                
                
                
                
                
                438
                
                
                
                383Mississippi:Dome Pickens
                
                
                
                
                
                
                
                
                
                
                
                
                725
                
                
                
                725Total Undeveloped
                
                
                
                
                
                
                
                
                
                
                
                
                25,123
                
                
                
                2,436Total
                
                
                
                
                
                
                
                
                
                
                
                
                30,932
                
                
                
                5,547
  7
  Operator
Activities
 
 We
currently operate approximately one-half of our producing properties, and
generally seek to become the operator of record on properties we drill or
acquire outside of our Barnett Shale Project.  We have a non-operated
partnership interest in our Barnett Shale project.
 
 Drilling
Activities
 
 The
following table sets forth our drilling activities for the last three fiscal
years.  Our working interests in the productive wells owned as of
December 31, 2007, range from a direct working interest of 100%, to an after
payout working interest of 16%, to a 5.5% Partnership interest.  In
2006-2007 we drilled 15 wells, with the 16th well
drilling as of the end of 2007 in our Barnett Shale Project.
  Year Ended December 31,2007
                
                
                2006
                
                
                2005Development Wells:Productive
                
                
                -
                
                
                
                1
                
                
                
                4
                (1)Non-Productive
                
                
                -
                
                
                
                1
                
                
                
                -0-Total
                
                
                -
                
                
                
                2
                
                
                
                4Exploratory Wells:Productive
                
                
                12
                (3)
                
                
                1
                
                
                
                1
                (2)Non-Productive
                
                
                3
                
                
                
                1
                
                
                
                4Total
                
                
                15
                
                
                
                2
                
                
                
                5Total Wells:Productive
                
                
                12
                
                
                
                2
                
                
                
                5Non-Productive
                
                
                3
                
                
                
                2
                
                
                
                4Total
                
                
                15
                
                
                
                4
                
                
                
                9
 
 (1)
                Four
      wells associated with our former Blue Ridge property, sold effective July
      1, 2005.
 (2)
                We
      have a 16% working interest after payout in this well, the REP Pintail
      Flats.
 (3)
                There
      are two more wells that have been drilled and not completed in our Barnett
      Shale Project.
  Net
Production, Unit Prices and Costs
 
 The
following table presents certain information with respect to oil, gas and
condensate production attributable to interests in all of our fields. Including
the average sales prices received and average production costs during the fiscal
periods ended December 31, 2007 and December 31, 2006
 
 2007
                
                
                2006Average sales price per barrel of
      oil
                
                $
                69.55
                
                
                $
                59.81Average sales price per Mcf of
      gas
                
                $
                6.19
                
                
                $
                8.45Lifting costs per barrel of oil
      equivalent*
                
                $
                20.32
                
                
                $
                16.84
 
 *
Excludes the costs of re-entry into wells to assess non-producing
assets
 
 Office
Properties
 
 We
currently have two office locations, one in Houston and one in Dallas,
Texas.  The addresses are as follows:
 
 675
      Bering Drive, Suite 200
                4925
      Greenville Avenue, Suite 670Houston,
      TX 77057
                Dallas,
      Texas  75206
  8
  On August
1, 2005, we leased our Dallas location, comprised of approximately 2,100 square
feet of office space which is held under a sixty-four month lease at a rate of
approximately $2,800 per month (with payments which began December
2005).  Since July 15, 2005, our principle executive offices have been
approximately 3,700 square feet of office space at 675 Bering Drive, Houston,
Texas.  We hold this space under a five-year lease agreement at a
lease rate of approximately $5,000 per month.  We believe these
properties are adequate for our corporate office needs.
 
 ITEM 3.
                LEGAL
      PROCEEDINGS
 
 On April
11, 2007, we were served with a lawsuit filed against us titled Cause No. 2007-16502; D. John Ogren,
R. Bradford Perry and Chester Smitherman v. Petrosearch Corporation;
133rdJudicial District Court, Harris
County, Texas.  The plaintiffs are three (3) Series A Preferred
shareholders who derived their original shares from Texas Commercial Resources,
Inc. (“TCRI”) and became Series A Preferred shareholders of Petrosearch Energy
Corporation as a result of the prior mergers.  The plaintiffs have
alleged that Petrosearch Corporation (and TCRI, its predecessor) failed to pay
accrued, cumulative dividends and refused to allow conversion of their Series A
Preferred Stock into Common Stock.    The plaintiffs have
alleged breach of contract, common law fraud, statutory fraud and violation of
Section 33 of the Texas Securities Act and have requested the award of actual
and exemplary damages, interest and attorneys’ fees.   The
lawsuit likewise requests the Court to compel the payment of accrued dividends
and the examination of the Company’s books and records. In January 2008, the
Plaintiffs amended their lawsuit and added Brad Simmons, Dan Denton and Britt
Brooks as defendants. These individuals are former officers and/or directors of
the Company or its predecessor entities.  The Company is currently
providing a defense to Simmons and Denton pursuant to provisions of the
Company’s Articles of Incorporation.   We deny the factual
allegations made in the lawsuit and are vigorously defending against the claims
made therein.
  ITEM 4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
  PART
II
 
 ITEM 5.
                MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
      BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
 
 Our
common stock is quoted on the OTCBB under the symbol "PTSG". The following table
sets forth the quarterly high and low of sales prices per share for the common
stock for the last two fiscal years. Our fiscal year ended December 31,
2007.
 
 Quarter
                
                High
                
                
                Low1stQuarter 2006
                
                $
                1.85
                
                
                $
                0.872ndQuarter 2006
                
                $
                1.63
                
                
                $
                0.823rdQuarter 2006
                
                $
                1.18
                
                
                $
                0.414thQuarter 2006
                
                $
                1.09
                
                
                $
                0.391stQuarter 2007
                
                $
                1.60
                
                
                $
                0.612ndQuarter 2007
                
                $
                1.85
                
                
                $
                1.203rdQuarter 2007
                
                $
                1.59
                
                
                $
                1.004thQuarter 2007
                
                $
                1.25
                
                
                $
                0.74
 
 Record
Holders
 
 On March
14, 2008, the last sales price for the common stock as reported on the OTCBB was
$0.57 and there were 41,239,738 common shares outstanding.  On March
14, 2008, there were approximately 2,500 stockholders of record of the common
stock.
  No
prediction can be made as to the effect,  if any, that future sales of
shares of our common  stock or
the  availability  of our common stock for future
sale  will  have  on
the  market  price  of
our  common  stock  prevailing  from
time-to-time.  The additional registration of our common stock and the
sale of substantial amounts of our common stock in the public market could
adversely affect the prevailing market price of our common stock
  9
  TRANSFER
AGENT AND REGISTRAR
 
 The
transfer agent and registrar for our common stock is:
 
 Corporate
Stock Transfer
 3200
Cherry Creek South Drive
 Suite
430
 Denver,
CO 80209
   DIVIDEND
POLICY
  There are
no restrictions in our articles of incorporation or bylaws that prevent us from
declaring dividends.   The Nevada Revised Statutes, however, do
prohibit us from declaring dividends where, after giving effect to the
distribution of the dividend:
  1.
                We
      would not be able to pay our debts as they become due in the usual course
      of business; or
 2.
                Our
      total assets would be less than the sum of our total liabilities plus the
      amount that would be needed to satisfy the rights of stockholders who have
      preferential rights superior to those receiving the
      distribution.
 
 We have
not declared any dividends and we do not plan to declare any dividends in the
foreseeable future.  Our current policy is to retain any earnings in
order to finance the expansion of our operations. Our Board of Directors will
determine future declaration and payment of dividends, if any, in light of the
then-current conditions they deem relevant and in accordance with the Nevada
Revised Statutes.
 
 EQUITY COMPENSATION PLAN
INFORMATION
 
 The
following table sets forth all equity compensation plans as of December 31,
2007:
 
 Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                
                
                Weighted-average
      exercise price of outstanding options, warrants and rights
                
                
                Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Plan
      category
                
                (a)
                
                
                (b)
                
                
                (c)Equity
      compensation plans approved by security holders
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/AEquity
      compensation plans not approved by security holders
                
                
                5,020,969
                
                
                $
                1.93
                
                
                
                158,133Total
                
                
                5,020,969
                
                
                $
                1.93
                
                
                
                N/A
 
 RECENT
SALES OF UNREGISTERED SECURITIES
 
 All
previous sales of unregistered securities have been previously disclosed in Form
10-QSB’s and Form 8-Ks.
  10
 
 ITEM
6.                
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 Overview
 
 We
believe we have been successful over the past two years with our plan of
improving the quality of our portfolio of oil and gas assets, as well as putting
financings together to enable us to economically develop these
assets.  We believe we have successfully high graded our portfolio
completing the acquisition of assets that have multiple year growth potential
and have secured cost effective financings to continue to develop our
projects.  Our inventory of assets allows for us to effectively align
our financing needs with the capital needs of the project, therefore, allowing
us to efficiently manage the amount and timing of our capital
expenditures.  Our two main assets are resource plays, which will
allow us to re-invest our capital into our projects to enhance the rates of
return, revenue growth and reserve growth.  We have also completed the
disposition of non-core assets that did not meet our risk/reward
parameters.
 
 We
believe we have been successful at creating an extremely high-graded portfolio
of oil and gas assets coupled with economical financings which will enable us to
continue to focus on the development of our high quality properties into
2008.  Management believes the development of our core assets should
have a significant impact on our production, revenues and cash flows in the
future.
  RESULTS
OF OPERATIONS
 
 The
following discussion should be read in conjunction with our audited consolidated
financial statements and the related notes to the financial statements included
in this Form 10-KSB.
 
 The
factors that most significantly affect our results of operations are: (i) the
sale prices of crude oil and natural gas; (ii) the amount of production sales;
and (iii) the amount of lease operating expenses. Sales of production and level
of borrowings are significantly impacted by our ability to maintain or increase
production and reserves from existing oil and gas properties through exploration
and development activities.
 
 
 For
the Year Ended December 31, 2007 Compared to the Year Ended December 31,
2006
 
 Revenues
 
 Consolidated
oil and gas production revenue for the year ended December 31, 2007 was
$1,827,664 versus $1,232,958 for the year ended December 31,
2006.   The increase in revenue is from the Barnett Shale Project
which did not account for any of the revenue in the year ended 2006 and
accounted for approximately 33% of the revenue for the year ended December 31,
2007.  In addition, our 16% reversionary interest in one SW Garwood
well was in effect for all of 2007, and only a portion of the prior
year.  The increase in revenue from the Barnett producing properties
and our reversionary interest in one of the SW Garwood wells were partially
offset by a slight decrease in production from our Gruman North Dakota well and
a decrease in our producing Oklahoma wells.  See below for revenue
detail for the years ended December 31, 2007 and 2006.
 
 12/31/2007
                
                
                %
      of
                
                
                12/31/2006
                
                
                %
      ofYTD
                
                
                Total
                
                
                YTD
                
                
                TotalBarnett
      Shale
                
                $
                601,814
                
                
                
                33
                %
                
                $
                -
                
                
                
                0
                %Gruman
      - North Dakota
                
                
                790,976
                
                
                
                43
                %
                
                
                825,800
                
                
                
                67
                %SW Garwood
                
                
                220,356
                
                
                
                12
                %
                
                
                96,521
                
                
                
                8
                %Panhandle
      - Water Flood
                
                
                12,854
                
                
                
                1
                %
                
                
                74,526
                
                
                
                6
                %Oklahoma
                
                
                150,240
                
                
                
                8
                %
                
                
                152,446
                
                
                
                12
                %Other
                
                
                51,424
                
                
                
                3
                %
                
                
                83,665
                
                
                
                7
                %Total
                
                $
                1,827,664
                
                
                
                100
                %
                
                $
                1,232,958
                
                
                
                100
                %
  11
  To
further explain the variance in revenue from 2006 to 2007, we have provided the
following break-out of production and prices for the two years.
 
 2007
                  
                  
                  2006Barrels
      of Oil
                  
                  
                  12,842
                  
                  
                  
                  16,502Price
      per Barrel
                  
                  $
                  69.55
                  
                  
                  $
                  59.81MCF
      of Gas
                  
                  
                  135,061
                  
                  
                  
                  14,283Price
      per MCF
                  
                  $
                  6.19
                  
                  
                  $
                  8.45
 
 As
noted in the above table, the increase in oil prices also played a role in the
increase in revenue since 2006. The total effect on revenue from the oil price
increase was approximately
$161,000.
  Lease
Operating and Production Tax Expense
 
 Lease
operating and production tax expenses for the year ended December 31, 2007 was
$731,915 versus $653,265 for the year ended December 31,
2006,  respectively.  These expenses relate to the costs
that are incurred to operate and maintain our wells and related production
equipment, including the costs applicable to the operating costs of support
equipment and facilities.  Although there was a forty eight percent
increase in revenue from the year ended December 31, 2006 to the year ended
December 31, 2007, the lease operating expenses increased only twelve percent
because in November 2005 we added approximately 30 existing wells associated
with our Quinduno Field Prospect, Roberts County, Texas that required
significant lease operating costs to be incurred in 2006 even though the wells
had minimal production.  These lease operating expenses incurred in
2006 were not necessary in 2007.  The costs expended in 2006 for the
existing, but non-productive wells were necessary for the planning of a
successful development plan of the waterflood project that will be needed to
realize the reserves in the Quinduno Field.
 
 Depletion,
Depreciation and Amortization
 
 Costs for
depletion, depreciation and amortization for the year ended December 31, 2007,
and 2006, were $909,311 and $391,347, respectively.  This significant
increase is mainly due to a significant increase in the amortizable costs at
December 31, 2007 as compared to the same period in 2006 as well as a
significant increase in production.  Given the fact that depletion is
calculated by multiplying the net amortizable costs times the units of
production in the related period relative to the total proved reserves, the
depletion amount for the year ended December 31, 2007 was significantly higher
than the depletion for the same period in 2006.
  General
and Administrative Expenses
 
 General
and administrative expenses for the years ended December 31, 2007 and 2006, were
$3,022,739 and $2,766,235, respectively.  The difference of $256,504
is mainly related to i) an increase in corporate expenses related to increased
costs for outside third party investor relations services; and ii) an increase
in legal fees, professional fees attributed to an ongoing lawsuit (as described
herein), a special project related to our land department and an increase in
expenditures for reserve engineer studies: and iii) an increase in other
expenses relating to an increase in accounts receivable bad debt
expense.   These increases were partially offset by a decrease in
personnel costs and travel, meals and entertainment.  A summary
listing of general and administrative expenses is provided below.
  12
 
 YE
      December 31
                
                
                YE
      December 31,2007
                
                
                2006Personnel
      Costs
                
                $
                1,345,281
                
                
                $
                1,472,268Travel,
      Meals, and Entertainment
                
                
                53,609
                
                
                
                107,832Corporate
      Expenses
                
                
                311,371
                
                
                
                234,313Accounting,
      Legal, and Professional Fees
                
                
                762,684
                
                
                
                544,627Third
      Party Consultants and Contractors
                
                
                239,440
                
                
                
                206,954Office
      Expenses
                
                
                203,539
                
                
                
                201,367Other
                
                
                106,815
                
                
                
                (1,126
                )Total
      General and Administrative
                
                $
                3,022,739
                
                
                $
                2,766,235
 
 Net
Operating Loss
 
 We
generated a net operating loss of $(2,836,301) or $(0.07) per share, for the
year ended December 31, 2007, compared to a net operating loss of $(2,577,889)
or $(0.08) per share, for the year ended December 31, 2006.  The
$258,412 variance is related mainly to an increase in D,D&A, lease operating
expenses and general and administrative expenses, offset partially with an
increase in revenues.
 
 Other
Income (Expense)
 
 The
($3,955,095) change from $255,964 in Other Income for the year ended December
31,  2006 versus ($3,699,131) in Other Expense for the year ended
December 31, 2007 is due to the significant increase in interest expense and
amortization of debt discount and change in warrant liability related to 1) the
non-recourse financing with Laurus Master Fund Ltd for the Kallina #46-1 well;
2) the $10 million Convertible note with RCH Petro Investors; and 3) the change
in liability related to warrants issued to Fortuna Energy with a put option
related to the revolving credit facility.  The significant difference
also relates to $1,000,000 in other income related to the sale of securities in
the year ended December 31, 2006 that did not occur in the year ended December
31, 2007.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Since
inception, we have primarily financed our operating and investing cash flow
needs through private offerings of equity securities, sales of crude oil and
natural gas, and the use of debt instruments such as convertible notes and
revolving credit facilities.  The proceeds from, and the utilization
of, all these methods have been, and Management believes will continue to be,
sufficient to keep the operations funded and the business plan moving
forward.  We plan to continue to utilize these methods to access
capital in order to implement our business plan, which we believe will be an
effective vehicle to carry out our business plan.
  Convertible
Securities
 
 On
November 9, 2007 we executed, with a group of accredited investors, a series of
Note and Warrant Purchase Agreements for the sale of  $8,100,000, 8%
Senior Secured Convertible Promissory Notes and three year warrants to purchase
1,928,571 shares of our common stock at an exercise price of $1.50 per share for
total gross proceeds to us of $8,100,000.   Upon closing the
transaction, we also issued the Convertible Note and the Warrant, and executed a
Pledge and Security Agreement and a Registration Rights
Agreement.
  On
February 1, 2007, we executed a Note and Warrant Purchase Agreement for the sale
of a $10,000,000 8% Senior Secured Convertible Promissory Note with RCH Petro
Investors, LP (“RCH”) and a four year warrant to purchase 5,000,000 shares of
our common stock at an exercise price of $1.40 per share for total gross
proceeds to us of $10,000,000.   We completed the transaction and
received funding on February 7, 2007.  Upon closing, we issued the
Convertible Note and the Warrant, and executed a Pledge and Security Agreement
and a Registration Rights Agreement.  This convertible note precludes the
Company from incurring indebtedness in excess of fifty percent (50%) of the
PV-10 value of the Company’s total proved reserves, plus the fair market value
of the leases and pipeline assets associated with the Company’s Barnett Shale
assets.
  13
 
 Private
Equity Placements
 
 In
December 2006, we completed sales of $3.2 million of our common stock in a
private offering.  We received net proceeds of approximately $3.0
million which were to be used for general corporate purposes.
 
 In
February 2006, we completed sales of $2.7 million of our common stock in a
private offering.  We received net proceeds of approximately $2.56
million which were to be used for general corporate purposes, including the
drilling of projects in our prospect inventory.
 
 Project
Financings
 
 In
November 2006, we signed a Securities Purchase Agreement and Secured Term Note
with Laurus Master Fund, Ltd to provide financing for the drilling of our
Kallina 46 #1 well and payment of the future completion costs for the Kallina 46
#1 well.   We formed a subsidiary, Garwood Petrosearch Inc., to
hold our interest in the Kallina Lease and the Kallina 46 #1
well.  Also, as a part of the financing arrangement,
Garwood  issued Laurus a Warrant to acquire, upon payout of the Note
indebtedness, 45% of Garwood’s outstanding common stock such that upon exercise
of the Warrant, Garwood would be owned 55% by us and 45% by
Laurus.  The collateral for this financing is specifically recourse to
the Kallina 46 #1 well and the associated lease acreage only.
 
 Revolving
Credit Agreement
 
 On
October 16, 2006, we amended our existing revolving credit facility with Fortuna
Energy, LP.   The principal available under the revolving
borrowing base remains $10,000,000, with a current outstanding balance of
$1,957,500 as of January 25, 2008.  Under the terms of the
transaction, Fortuna advanced us $780,000 for the purpose of paying amounts due
for the Barnett Shale Project.  As part of the financing, we provided
Fortuna additional collateral.  In addition, we agreed to issue to
Fortuna 475,000 five year warrants with a strike price of $0.92 per
share.  The Warrants will contain a “put” provision which will allow
Fortuna to “put” the warrants to the Company at a price of $0.65 per share for
two (2) years, which “put” period shall commence 180 days after the issuance of
the Letter Agreement. Additionally, as part of the transaction, we agreed to
issue 100,000 new warrants, which expire 5 years from the date of issue, at a
price of $0.92 per share to replace 100,000 warrants previously issued to
Fortuna at a price of $2.00 per share, which were previously set to expire on
November 1, 2007.  As of April 1, 2008 the revolving credit facility
becomes due and a payment of $1,602,500 is payable in full to Fortuna
Energy.  As per the revolving credit agreement, as part of being paid
back in full, Fortuna Energy must return to the Company all of the overriding
royalties issued to Fortuna energy.  The main override relates to a 2%
override in the Company’s North Dakota, Gruman project.
  Joint
Ventures
 
 We
continue to strive to develop relationships with institutions to participate in
our prospects.  Management believes this will reduce our capital risk
and increase the diversity of the projects in which we use our own
capital.  We intend to establish these drilling partnership
relationships with terms that are standard in the oil and gas
industry.
 
 FORWARD
LOOKING STATEMENT AND INFORMATION
 
 This
document contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are subject to risks
and uncertainties and are based on the beliefs and assumptions of management and
information currently available to management. The use of words such as
"believes," "expects," "anticipates," "intends," "plans," "estimates," "should,"
"likely" or similar expressions, indicates a forward-looking
statement.
 
 Forward-looking
statements are not guarantees of performance. They involve risks, uncertainties
and assumptions. Future results may differ materially from those expressed in
the forward-looking statements. Many of the factors that will determine these
results are beyond our ability to control or predict. Stockholders are cautioned
not to put undue reliance on any forward-looking statements, which speak only to
the date made. For those statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
  14
 
 Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events, or performance and underlying assumptions and other statements,
which are other than statements of historical facts. These statements are
subject to uncertainties and risks including, but not limited to, product and
service demands and acceptance, changes in technology, economic conditions, the
impact of competition and pricing, and government regulation and approvals.
Petrosearch cautions that assumptions, expectations, projections, intentions, or
beliefs about future events may, and often do, vary from actual results and the
differences can be material. Some of the key factors which could cause actual
results to vary from those Petrosearch expects include changes in natural gas
and oil prices, the timing of planned capital expenditures, availability of
acquisitions, uncertainties in estimating proved reserves and forecasting
production results, operational factors affecting the commencement or
maintenance of producing wells, the condition of the capital markets generally,
as well as our ability to access them, and uncertainties regarding environmental
regulations or litigation and other legal or regulatory developments affecting
our business.
 
 Our
expectations, beliefs and projections are expressed in good faith and are
believed to have a reasonable basis, including without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties. There can be no assurance, however,
that our expectations, beliefs or projections will result, be achieved, or be
accomplished.   Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date
hereof.  We undertake no duty to update these forward-looking
statements.
 
 CAUTIONARY
NOTE TO U.S. INVESTORS
 
 THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION PERMITS OIL AND GAS COMPANIES,
IN THEIR FILINGS WITH THE SEC, TO DISCLOSE ONLY PROVED RESERVES THAT A COMPANY
HAS DEMONSTRATED BY ACTUAL PRODUCTION OR CONCLUSIVE FORMATION TESTS TO BE
ECONOMICALLY AND LEGALLY PRODUCIBLE UNDER EXISTING ECONOMIC AND OPERATING
CONDITIONS. WE USE CERTAIN TERMS HEREIN, SUCH AS "PROBABLE", "POSSIBLE",
"RECOVERABLE", AND “RISKED," AMONG OTHERS, THAT THE SEC'S GUIDELINES STRICTLY
PROHIBIT US FROM INCLUDING IN FILINGS WITH THE SEC.  READERS ARE URGED TO
CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT
TO ADVISE INTERESTED PARTIES OF THE ADDITIONAL FACTORS WHICH MAY AFFECT OUR
BUSINESS.
 
 For a
discussion of some additional factors that may cause actual results to differ
materially from those suggested by the forward-looking statements, please read
carefully the information under "Risk Factors" section below. The identification
in this document of factors that may affect future performance and the accuracy
of forward-looking statements is meant to be illustrative and by no means
exhaustive. All forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
  We
operate in a very competitive and rapidly changing environment.  New
risks emerge from time to time and it is not possible for our management to
predict all risks, nor can we assess the impact of all risks on our business or
the extent to which any risk, or combination of risks, may cause actual results
to differ from those contained in any forward-looking statements.  All
forward-looking statements included in this Form 10-KSB are based on information
available to us on the date of the Form 10-KSB.  Except to the extent
required by applicable laws or rules, we undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
throughout this Form 10-KSB.
 
 RISK
FACTORS
 
 An
investment in our Common Stock involves a high degree of risk.  You
should carefully consider the risks described below before deciding to purchase
shares of our Common Stock.  If any of the events, contingencies,
circumstances or conditions described in the risks below actually occurs, our
business, financial condition or results of operations could be seriously
harmed.  The trading price of our Common Stock could, in turn, decline
and you could lose all or part of your investment.
  15
 
 Risks
Related to the Company
 
 Our
limited history makes an evaluation of us and our future extremely difficult,
and profits are not assured.
 
 We have a
limited operating history, having begun commercial drilling operations in August
2003.  There can be no assurance that we will be profitable in the
future or that the shareholders’ investments in us will be returned to them in
full, or at all, over time.  In view of our limited history in the oil
and gas exploration business, an investor must consider our business and
prospects in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development.  There
can be no assurance that we will be successful in undertaking any or all of the
activities required for successful commercial drilling
operations.  Our failure to undertake successfully such activities
could materially and adversely affect our business, prospects, financial
condition and results of operations.  In addition, there can be no
assurance that our exploration and production activities will produce oil and
gas in commercially viable quantities, if any at all.  There can be no
assurance that sales of our oil and gas production will ever generate
significant revenues, that we will ever generate additional positive cash flow
from our operations or that we will be able to achieve or sustain profitability
in any future period.
 
 We
have experienced recent substantial operating losses and may incur additional
operating losses in the future.
 
 During
the year ended December 31, 2007 we incurred a net operating loss of
$2,836,301.  In the event we are unable to increase our gross margins,
reduce our costs and/or generate sufficient additional revenues to offset our
increased costs, we may continue to sustain losses and our business plan and
financial condition will be materially and adversely affected.
 
 If
we default under the February 2007  and/or the November 2007 Senior
Secured Convertible Promissory Notes the principal and accrued interest would
become due and payable which could subject our assets which are pledged as
collateral to foreclosure and would substantially harm our cash position and
business prospects.
 
 In
February 2007 and November 2007, we borrowed $10,000,000 and $8,100,000,
respectively, under a series of 8% Senior Secured Convertible Promissory Notes.
The Promissory Notes contain events of default which, if triggered, would
require us to pay the principal and accrued interest under the Promissory Note
immediately (after the expiration of applicable cure periods). If an event of
default occurs under the Promissory Note and the holders declare all outstanding
principal and interest immediately due and payable, we may not be able to pay
the Promissory Note and our collateral would be subject to foreclosure by the
lender.  If we are able to pay the note, our cash position and
business prospects would be substantially harmed.
  The
trading price of our common stock entails additional regulatory requirements,
which may negatively affect such trading price.
 
 The
trading price of our common stock is below $5.00 per share.  As a
result of this price level, trading in our common stock would be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended.  These rules require additional disclosure by
broker-dealers in connection with any trades generally involving any non-NASDAQ
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions.  Such rules require the delivery, before any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and the risks associated therewith, and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally
institutions).  For these types of transactions, the broker-dealer
must determine the suitability of the penny stock for the purchaser and receive
the purchaser's written consent to the transaction before sale.  The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in our common
stock.  As a consequence, the market liquidity of our common stock
could be severely affected or limited by these regulatory
requirements.
  16
 
 We are dependent on key
personnel.
 
 We depend
to a large extent on the services of certain key management personnel, including
our executive officers and other key consultants, the loss of any of which could
have a material adverse effect on our operations. Specifically, we rely on Mr.
Richard Dole, Chairman, President and CEO, to maintain the strategic direction
of the Company.  We also rely on Mr. Wayne Beninger, Chief Operating
Officer, to oversee the technical evaluation of projects as well as operations
of the Company.  Although Messrs. Dole and Beninger currently serve
under employment agreements, there is no assurance that they will continue to be
employed by us.  We do not maintain, nor do we plan to maintain,
key-man life insurance with respect to any of our officers or
directors.
 
 We
are subject to potential liability from operations.
 
 We are
subject to potential liability from our operations, such as injuries to
employees or third parties, which are inherent in the management of oil and gas
programs.  While we intend to obtain and maintain appropriate
insurance coverage for these risks, there can be no assurance that our
operations will not expose us to liabilities exceeding such insurance coverage
or to liabilities not covered by insurance.
 
 We
may experience potential fluctuations in results of operations.
 
 Our
future revenues may be affected by a variety of factors, many of which are
outside our control, including (a) the success of project results; (b) swings in
availability of drilling services needed to implement projects and the pricing
of such services; (c) a volatile oil and gas pricing market which may make
certain projects that we undertake uneconomic; (d)  the ability to attract
new independent professionals with prospects in a timely and effective manner;
and (e) the amount and timing of operating costs and capital expenditures
relating to conducting our business operations and infrastructure.  As
a result of our limited operating history and the emerging nature of our
business plan, it is difficult to forecast  revenues or earnings
accurately, which may fluctuate significantly from quarter to
quarter.
 
 We participate in oil and gas leases
with third parties.
 
 We may
own less than 100% of the working interest in certain leases acquired by us, and
other parties will own the remaining portion of the working
interest.  Financial risks are inherent in any operation where the
cost of drilling, equipping, completing and operating wells is shared by more
than one person.  We could be held liable for the joint activity
obligations of the other working interest owners such as nonpayment of costs and
liabilities arising from the actions of the working interest
owners.  In the event other working interest owners do not pay their
share of such costs, we would likely have to pay those costs.  In such
situations, if we were unable to pay those costs, we could become
insolvent.
  We
may issue additional shares of common stock in the future, which could cause
dilution to all shareholders.
 
 We may
seek to raise additional equity capital in the future.  Any issuance
of additional shares of our common stock will dilute the percentage ownership
interest of all shareholders and may dilute the book value per share of our
common stock.
 
 Expansion
of our exploration program will require capital from outside
sources.
 
 We do not
currently have the financial resources to explore and drill all of our currently
identified prospects.  Absent raising additional capital or entering
into joint venture agreements, we will not be able to increase our exploration
and drilling operations at the projected rate.  This could limit the
size of our business. There is no assurance that capital will be available in
the future to us or that capital will be available under terms acceptable to
us.  We will need to raise additional money, either through the sale
of equity securities (which could dilute the existing stockholders' interest),
through the entering of joint venture agreements (which, while limiting our
risk, could reduce our ownership interest in particular assets), or from
borrowings from third parties (which could result in additional assets being
pledged as collateral and which would increase our debt service
requirements).
  17
 
 We
depend on industry vendors and may not be able to obtain adequate
services.
 
 We are
and will continue to be largely dependent on industry vendors for the success of
our oil and gas exploration projects.  These contracted services
include, but are not limited to, accounting, drilling, completion, workovers
(remedial down hole work on a well) and reentries (entering an existing well and
changing the direction and/or depth of a well), geological evaluations,
engineering, leasehold acquisition (landmen), operations, legal, investor
relations/public relations, and prospect generation.  We could be
harmed if we fail to attract quality industry vendors to participate in the
drilling of prospects which we  identify or if our industry vendors do
not perform satisfactorily.  We often have, and will continue to have,
little control over factors that would influence the performance of our
vendors.
 
 We
rely on third parties for production services and processing
facilities.
 
 The
marketability of our production depends upon the proximity of our reserves to,
and the capacity of, facilities and third party services, including oil and
natural gas gathering systems, pipelines, trucking or terminal facilities, and
processing facilities.  The unavailability or lack of capacity of such
services and facilities could result in the shut-in of producing wells or the
delay or discontinuance of development plans for properties.  A
shut-in or delay or discontinuance could materially adversely affect our
financial condition.  In addition, federal and state regulation of oil
and natural gas production and transportation affect our ability to produce and
market oil and natural gas on a profitable basis.
 
 We
may not operate all projects.
 
 We may
not operate all properties in which we have an interest; as a result, we may
have limited ability to exercise influence over, and control the risks
associated with, operations of these properties.  The failure of a
well operator to adequately perform operations, an operator's breach of the
applicable agreements or an operator's failure to act in ways that are in our
best interest could reduce our production and revenues.  The success
and timing of our development activities on properties operated by others
therefore depend upon a number of factors outside of our control, including the
operator's timing and amount of capital expenditures; expertise and financial
resources; inclusion of other participants in drilling wells; and use of
technology.
 
 There
is limited liquidity in our shares.
 
 There is
a limited market for our shares of common stock and an investor may not be able
to liquidate his or her investment regardless of the necessity of doing
so.  The prices of our shares are highly volatile. This could have an
adverse effect on developing and sustaining the market for our
securities.  If the market price of our common stock declines
significantly, you may be unable to resell your common stock at or above the
public offering price.  We cannot assure you that the market price of
our common stock will not fluctuate or decline significantly, including a
decline below the public offering price, in the future.  In addition,
the stock markets in general can experience considerable price and volume
fluctuations.
  18
 Table of Contents
  General
Risks of the Oil and Gas Business
 
 We
are subject to drilling and operational hazards.
 
 The oil
and gas business involves a variety of operating risks, including blowouts,
cratering and explosions, mechanical and equipment problems, uncontrolled flows
of oil and gas or well fluids, fires, marine hazards with respect to offshore
operations, formations with abnormal pressures, pollution and other
environmental risks, and natural disasters.  Any of these events could
result in loss of human life, significant damage to property, environmental
pollution, impairment of our operations and substantial
losses.  Locating pipelines near populated areas, including
residential areas, commercial business centers and industrial sites, could
increase these risks.  In accordance with customary industry practice,
we will maintain insurance against some, but not all, of these risks and
losses.  The occurrence of any of these events not fully covered by
insurance could have a material adverse effect on our financial position and
results of operations.
 
 We have competition from other
companies.
 
 A large
number of companies and individuals engage in drilling for gas and oil, and
there is competition for the most desirable prospects.  We will
encounter intense competition from other companies and other entities in the
sale of our gas and oil production.  We could be competing with
numerous gas and oil companies which may have financial resources significantly
greater than ours.  Further, the quantities of gas and oil to be
delivered by us may be affected by factors beyond our control, such as the
inability of the wells to deliver at the necessary quality and pressure,
premature exhaustion of reserves, changes in governmental regulations affecting
allowable production and priority allocations and price limitations imposed by
federal and state regulatory agencies.
 
 The
unavailability or high cost of drilling rigs, equipment, supplies, personnel and
oilfield services could materially adversely impact us.
 
 Drilling
activity in the area of our proposed initial activities is extremely high.
Increased drilling activity in these areas could decrease the availability of
rigs and our access to oilfield services.  Either shortages or
increases in the cost of drilling rigs, equipment, supplies or personnel could
delay or adversely affect our operations.  There can be no assurance
that we will be able to obtain the necessary equipment or services may not be
available to us at economical prices.
 
 Oil
and gas prices are volatile.
 
 Declines
in oil and gas prices may materially adversely affect our financial condition,
liquidity, ability to obtain financing and operating results.  Lower
oil and gas prices also may reduce the amount of oil and gas that we can produce
economically.  High oil and gas prices could preclude acceptance of
our business model.  Depressed prices in the future would have a
negative effect on our future financial results.  Historically, oil
and gas prices and markets have been volatile, with prices fluctuating widely,
and they are likely to continue to be volatile.  Prices for oil and
gas are subject to wide fluctuations in response to relatively minor changes in
supply of and demand, market uncertainty and a variety of additional factors
that are beyond our control.  These factors include, the domestic and
foreign supply of oil, the level of consumer product demand, weather conditions,
political conditions in oil producing regions, including the Middle East, the
ability of the members of the Organization of Petroleum Exporting Countries to
agree to and maintain oil price and production controls, the price of foreign
imports, actions of governmental authorities, domestic and foreign governmental
regulations, the price, availability and acceptance of alternative fuels; and
overall economic conditions.  These factors and the volatile nature of
the energy markets make it impossible to predict with any certainty future oil
and gas prices.  Our inability to respond appropriately to changes in
these factors could negatively affect their profitability.
  We
may have writedowns of our assets due to price volatility.
 
 SEC
accounting rules require us to review the carrying value of our oil and gas
properties on a quarterly basis for possible write-down or
impairment.  Under these rules, capitalized costs of proved reserves
may not exceed a ceiling calculated at the present value of estimated future net
revenues from those proved reserves.  Capital costs in excess of the
ceiling must be permanently written down.  A decline in oil and
natural gas prices or a change in reserve estimates could cause a write down
which would negatively affect our net income.
  19
 
 Estimates
of oil and gas reserves are uncertain and may vary substantially from actual
production.
 
 There are
numerous uncertainties inherent in estimating quantities of proved reserves and
in projecting future rates of production and timing of expenditures, including
many factors beyond our control.  Our oil and  gas reserves
set forth in this Form 10-KSB represent the estimated quantities of oil and gas
based on reports prepared by third party reserve engineers.  There is
a reasonable certainty of recovering the proved reserves as disclosed in those
reports.    Information relating to our proved oil and gas
reserves is based upon engineering data which demonstrates, with reasonable
certainty, to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Reserve engineering is a subjective
process of estimating underground accumulations of oil and natural gas that
cannot be measured in an exact manner. The accuracy of any reserve estimate is a
function of the quality of available geological, geophysical, engineering and
economic data, the precision of the engineering and judgment. As a result,
estimates of different engineers often vary. The estimates of reserves, future
cash flows and present value are based on various assumptions, including those
prescribed by the SEC relating to oil and natural gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds, and
are inherently imprecise.
 
 We
are subject to governmental regulations.
 
 Gas and
oil operations in the United States are subject to extensive government
regulation and to interruption or termination by governmental authorities on
account of ecological and other considerations. The Environmental Protection
Agency of the United States and the various state departments of environmental
affairs closely regulate gas and oil production effects on air, water and
surface resources.  Furthermore, proposals concerning regulation and
taxation of the gas and oil industry are constantly before
Congress.  It is impossible to predict future proposals that might be
enacted into law and the effect they might have on us.  Thus,
restrictions on gas and oil activities, such as production restrictions, price
controls, tax increases and pollution and environmental controls may have a
material adverse effect on us.
 
 The oil and gas industry is subject
to hazards related to pollution and environmental issues.
 
 Hazards
in the drilling and/or the operation of gas and oil properties, such as
accidental leakage or spillage, are sometimes encountered.  Such
hazards may cause substantial liabilities to third parties or governmental
entities, the payment of which could reduce distributions or result in the loss
of our leases.  Although it is anticipated that insurance will be
obtained by third-party operators for our benefit, we may be subject to
liability for pollution and other damages due to environmental events which
cannot be insured against due to prohibitive premium costs, or for other
reasons.  Environmental regulatory matters also could increase
substantially the cost of doing business, may cause delays in producing oil and
gas or require the modification of operations in certain areas.
 
 We
may experience rapid increases in our operating costs.
 
 The gas
and oil industry historically has experienced periods of rapid cost increases
from time to time.  Increases in the cost of exploration and
development would affect our ability to acquire equipment and
supplies.  Increased drilling activity could lead to shortages of
equipment and material which would make timely drilling and completion of wells
impossible.  The costs of producing oil and gas and conducting field
operations may also be subject to rapid cost changes that are not in our
control.  There is no assurance that over the life of any project
there will not be fluctuating or increasing costs in doing
business.
 
 OFF
BALANCE SHEET ARRANGEMENTS
    CRITICAL ACCOUNTING
POLICIES
  Our
discussion and analysis of our financial condition and results of operations are
based upon financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States, or
GAAP.  The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses.  We analyze our estimates,
including those related to oil and gas properties, income taxes, commitments and
contingencies and stock based compensation, and base our estimates on historical
experience and various other assumptions that we believe to be reasonable under
the circumstances.   Actual results may differ from these
estimates.   We believe the following critical accounting
policies are subject to significant judgments and estimates used in the
preparation of our financial statements:
  20
 Table of Contents
 
 Oil and Gas
properties.  The Company uses
the full cost method of accounting for oil and gas
operations.  Accordingly, all costs, including nonproductive costs and
certain overhead costs associated with acquisition, exploration and development
of oil and gas properties, are capitalized.  Net capitalized costs are
limited to the future net revenues, after income taxes, discounted at 10% per
year, from proven oil and gas reserves plus the cost of the properties not
subject to amortization.  Such capitalized costs, including the
estimated future development costs and remediation costs, if any, are depleted
by an equivalent units-of-production method, converting gas units (Mcf) to oil
units (barrels) at the ratio of six Mcf of gas to one barrel of
oil.  Also, with full cost accounting, no gain or loss is recognized
upon the disposal of oil and gas properties, unless such dispositions
significantly alter the relationship between capitalized costs and proven oil
and gas reserves.  Oil and gas properties not subject to amortization
consist of the cost of undeveloped leaseholds and other geological and
exploration costs, and totaled $7,099,601 at December 31, 2007.  These
costs are reviewed periodically by management for impairment, with the
impairment provision included in the cost of the oil and gas properties subject
to amortization.  Factors considered by management in its impairment
assessment include drilling results, re-evaluations of properties, terms of oil
and gas leases not held by production and available funds for exploration and
development.
 
 Reserve
Estimates.Our
estimates of oil and natural gas reserves, by necessity, are projections based
on geological and engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and
natural gas reserves and future net cash flows necessarily depend upon a number
of variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions governing future oil and
natural gas prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected there from may
vary substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves, which could affect the
carrying value of our oil and gas properties and/or the rate of depletion of the
oil and gas properties. Actual production, revenues and expenditures with
respect to our reserves will likely vary from estimates, and such variances may
be material.
 
 Income
taxes.The
Company uses the asset and liability method of accounting for income taxes,
under which deferred tax assets and liabilities are recognized for the future
tax consequences of (1) temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities, and (2)
operating loss and tax credit carryforwards.  Deferred income tax
assets and liabilities are based on enacted tax rates applicable to the future
period when those temporary differences are expected to be recovered or
settled.  The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income during the period the rate change is
enacted.  Deferred tax assets are recognized in the year in which
realization becomes determinable.  Periodically, management performs a
forecast of its taxable income to determine whether it is more likely than not
that a valuation allowance is needed, looking at both positive and negative
factors.  A valuation allowance for our deferred tax assets is
established, if in management’s opinion, it is more likely than not, that some
portion will not be realized.  At December 31, 2007, a valuation
allowance of $1,768,021 has been provided for deferred tax assets.
 
 Commitments and
contingencies.Liabilities for
loss contingencies arising from claims, assessments, litigation or other sources
are recorded when it is probable that a liability has been incurred and the
amount can be reasonably estimated.  Management does not see any
circumstances that would require the Company to record a loss contingency;
therefore, to date no commitments or contingencies have been
recorded.
  Stock based
compensation.Effective January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004) – Share-Based Payment
(“SFAS 123(R)”), which requires the measurement and recognition of compensation
expense for all share-based payment awards (including stock options) made to
employees and directors based on the estimated fair
value.  Compensation expense for equity-classified awards is measured
at the grant date based on the fair value of the award and is recognized as an
expense in earnings over the requisite service period using a graded vesting
method.  Total share-based compensation expense for equity-classified
employee awards, was $20,750 during the year ended December 31,
2007.  As of December 31, 2007, there is no estimated unrecognized
compensation expense from unvested stock options.
  21
 
 We use
the Black-Scholes valuation model to determine the fair value of each option
award. Expected volatilities are based on the historical volatility of our stock
over a period consistent with that of the expected terms of the options. The
expected terms of the options are estimated based on factors such as vesting
periods, contractual expiration dates, historical trends in our stock price and
historical exercise behavior. The risk-free rates for periods within the
contractual life of the options are based on the yields of U.S. Treasury
instruments with terms comparable to the estimated option
terms.   Prior to our adoption of the provisions of SFAS 123(R),
we previously accounted for the Plans under Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”), and related
interpretations and disclosure requirements established by SFAS 123 – Accounting
for Stock-Based Compensation, as amended by SFAS No. 148 – Accounting for
Stock-Based Compensation – Transition and Disclosure.
 
 ITEM 7.
                FINANCIAL
      STATEMENTS
  The
information required by this Item 7 is included in this report beginning on page
31.
 
 ITEM 8.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
 
 There
have been no changes in or disagreements with accountants on accounting and
financial disclosure.
  ITEM 8A.
                CONTROLS
      AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 Petrosearch
Energy Corporation’s Chief Executive Officer and Chief Financial Officer
performed an evaluation of the Company’s disclosure controls and procedures.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Securities Exchange Act
of 1934 is accumulated and communicated to the issuer’s management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures are effective as of
December 31, 2007.
 
 Management’s
Annual Report on Internal Control over Financial Reporting
 
 See Management’s Assessment of Internal
Control over Financial Reportingunder Item 7 of this Form
10-KSB.
 
 Changes
in Internal Control over Financial Reporting
 
 There
were no changes in the Company’s internal controls over financial reporting
during the fourth quarter of 2007 that materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
  22
  ITEM
      8B.
                OTHER
      INFORMATION
 
 None
 
 PART
III
  ITEM 9.
                DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
  ACT
 
 DIRECTORS
AND EXECUTIVE OFFICERS
  The
following table sets forth our Directors and executive officers as of December
31, 2007.
 
 Name
                
                Age
                
                PositionRichard D. Dole
                
                62
                
                Director, Chairman, President and
      CEOWayne Beninger
                
                54
                
                Chief Operating OfficerDavid Collins
                
                39
                
                Chief Financial OfficerGerald Agranoff
                
                61
                
                DirectorRichard Majeres
                
                41
                
                Director
 
 Richard D. Dole, Director, Chairman
of the Board, President and CEO
 Mr. Dole
joined us as a Director in July 2004, and assumed the positions of Chairman,
President and CEO in December 2004.  Mr. Dole previously served as
Vice President and Chief Financial Officer for Burlington Resources
International from 1998 to 2000. Since that time he has been active in
consulting and financial services. He was a co-founder of Benefits Access
Solutions, LLC, a company formed to provide financial services and benefit
options to employees and members of corporate organizations. He was also
co-founder and managing partner of Innovation Growth Partners, LLC, a firm that
provided management and consulting services to early stage companies. Mr. Dole’s
extensive industry experience includes being National Partner-in-Charge of
Business Process Solutions at KPMG.  Prior to that he was with Coopers
& Lybrand (now PriceWaterhouse Coopers) where he served as Assurance and
Business Advisory Partner for nearly 20 years and also served in numerous senior
management roles, including National Chairman for the Energy and Natural
Resources Industry practices for over 15 years and as the Vice Chairman for the
U.S. Process Management business unit.  From August 2003 to July 2004,
Mr. Dole was also a member of the Board of Directors of Westport Resources
Corporation (NYSE: WRC), a member of its audit committee and a designated
financial expert. He currently serves as a director of Double Eagle Petroleum
Company (DBLE, NASDAQ Global Select Market) and chairs the audit committee and
is the designated financial expert.  On December 11, 2007, Mr. Dole
was appointed the Non-Executive Chairman (effective December 31, 2007) of Double
Eagle Petroleum to coordinate
Double Eagle’s activities and management until a new CEO has been selected.Mr. Dole graduated from Colorado State University.
  Wayne
Beninger, Chief Operating Officer
 Mr.
Beninger joined us as Chief Operating Officer in May 2005.  Prior to
May 2005, Mr. Beninger served as President of Southwest Oil & Gas
Management, Inc. (“SOGMI”) which he founded in 1997 to provide oil and gas
property evaluation services, geologic prospect review, contract operating
services, technical support for initial public offerings and strategic planning
solutions for domestic and international projects. Prior to Mr. Beninger joining
the Company, SOGMI provided a significant amount of our engineering and
geological services for all projects.  From 1995 to 1997, Mr. Beninger
was the Vice President for Strategic Planning with WRT Energy Corporation. From
1982 to 1995 he was first employed by, and then was a partner in, The Scotia
Group, a domestic and international consulting firm where he provided petroleum
engineering and geological services for companies and projects in the majority
of active petroleum basins in both the U.S. and overseas. He has been active in
the oil and gas industry since 1976.  Mr. Beninger holds undergraduate
degrees in both petroleum engineering and geology from the University of
Southern California and has a number of industry publications to his
credit.  He is a member of the Society of Petroleum Engineers, Pi
Epsilon Tau (petroleum engineering honorary fraternity) and Sigma Gamma Epsilon
(geologic honorary fraternity).
  23
 
 David
Collins, Vice President, Chief Financial Officer
 Mr.
Collins joined Petrosearch Corporation as a Vice President and the Chief
Financial Officer in October 2003.  Previously, he served as the
Controller of Kazi Management VI, LLC, a diversified investment and management
organization actively involved in energy, retail food chains, aquaculture and
biotechnology from February 2002 to October 2003.  At Kazi Management
VI, he was responsible for the financial operations of multiple accounting
offices across the United States, as well as fourteen international and domestic
Companies.  Mr. Collins was also the Chief Financial Officer of ZK
Petroleum, an independent oil producer in South Texas. Prior to Kazi Management
VI, he served as an independent analyst for The March Group in St. Thomas,
U.S.V.I. from February 2001 to January 2002.  Mr. Collins previously
held the position of Chief Financial Officer of Federation Logistics, LLC in the
New York metropolitan area from November 1994 to January 2001.  Mr.
Collins graduated from Villanova University in 1990 with a Bachelor’s degree in
Accountancy.  He became a Certified Public Accountant and began his
career in the Financial Services Division of Ernst and Young in New York
City.  At Ernst and Young, he performed audits of Fortune 500
Companies.
 
 Gerald
N. Agranoff, Director
 Gerald N.
Agranoff joined us as a Director in May 2004.  Mr. Agranoff has been
counsel to the firm of Kupferman & Kupferman, L.L.P. in New York since 2004
and has been a general partner of SES Family Investment and Trading Partnership,
L.P., an investment partnership since 2004.  Mr. Agranoff has also
been a member of Inveraray Capital Management L.L.C., the investment manager of
Highlander Fund B.V. and Highlander Partners (USA) L.P since 2002.  He
is also a director and the chair of the audit committee of Triple Crown Media
Inc (symbol, TCMI). Active in Wall Street financial transactions for over two
decades, his specialties include taxation, investments and corporate finance.
From 1975 through 1981, Mr. Agranoff was engaged exclusively in the private
practice of law in New York and was an adjunct-instructor at New York
University's Institute of Federal Taxation. Previously, he served as
attorney-advisor to a Judge of the United States Tax Court. He holds an L.L.M.
degree in Taxation from New York University and J.D. and B.S. Degrees from Wayne
State University.
  Richard
Majeres, Director
 Richard
Majeres joined us as a Director in May 2004.  In December 2000, Mr.
Majeres was one of the founding partners of the Houston public accounting firm
Ubernosky & Majeres, PC, which currently operates as Ubernosky, Passmore
& Majeres, LLP, offering tax, audit, accounting and management consulting
services. Mr. Majeres has served as a partner of this firm since its inception
in December 2000.  From January 1999 to November 2000, Mr. Majeres was
a partner at Cox & Lord, PC.  Mr. Majeres graduated from Bemidji
State University, Bemidji, Minnesota in 1989 with a bachelor’s degree in
accounting. Upon graduation, he served as a field auditor with the Federal
Energy Regulatory Commission of the Department of Energy. Mr. Majeres became a
certified public accountant in 1992. He has extensive experience with oil and
gas entities, including exploration and development partnerships and
corporations and currently focuses a majority of his efforts on the Firm’s audit
practice.
 
 BOARD
OF DIRECTORS AND ITS COMMITTEES
  During
the fiscal year ended December 31, 2007 the Board of Directors held 8
meetings.  Mr. Dole is our only Director who is also an
Officer.  Our Board of Directors currently has an Audit Committee and
a Compensation Committee which are comprised of independent directors Richard
Majeres and Gerald Agranoff.  We do not have a Nominating
Committee.  The entire Board of Directors acts as our Nominating
Committee.
  Audit
Committee
 
 Our Audit
Committee is made up of our two independent Board members, Mr. Richard Majeres
and Mr. Gerald Agranoff.  Mr. Majeres is the Chairman of the Audit
Committee and is the designated Financial Expert.  During the fiscal
year ended December 31, 2007 the Audit Committee held four
meetings.
 
 Compensation
Committee
 
 On March
23, 2007 our Board of Directors approved the formation of a Compensation
Committee made up of our two independent Directors, Mr. Gerald Agranoff and Mr.
Richard Majeres.  Mr. Agranoff was designated the Chairman of the
Compensation Committee.
  24
 
 Security
Holders Recommendations to Board of Directors
 
 We do not
currently have a process for security holders to send communications to the
Board of Directors.  However, we welcome comments and questions from
our shareholders.  Shareholders can direct communications to our Chief
Executive Officer, Richard D. Dole, at our executive offices, 675 Bering Drive,
Suite 200, Houston, Texas  77057.  While we appreciate all
comments from shareholders, we may not be able to individually respond to all
communications.  We attempt to address shareholder questions and
concerns in our press releases and documents filed with the SEC so that all
shareholders have access to information about us at the same
time.  Mr. Dole collects and evaluates all shareholder
communications.  If the communication is directed to the Board of
Directors generally or to a specific director, Mr. Dole will disseminate the
communications to the appropriate party at the next scheduled Board of Directors
meeting.  If the communication requires a more urgent response, Mr.
Dole will direct that communication to the appropriate executive
officer.  All communications addressed to our directors and executive
officers will be reviewed by those parties unless the communication is clearly
frivolous.
 
 Our
Bylaws provide that nominations of persons for election to the Board of
Directors of the corporation may be made at a meeting of stockholders by or at
the direction of the Board of Directors or by any stockholder of the corporation
entitled to vote in the election of directors at the meeting who complies with
the following notice procedures, as set forth in the Bylaws:
 
 Nominations
of persons for election to the Board of Directors may be made at a meeting of
the shareholders at which directors are to be elected (a) by or at the direction
of the Board of Directors, or (b) by any shareholder of the Company who is a
shareholder of record at the time of the giving of such shareholders notice
provided for in Paragraph 3.3 (of the Bylaws), who shall be entitled to vote at
such meeting in the election of directors and who complies with the requirements
of Paragraph 3.3 (of the Bylaws). Such nominations, other than those made by or
at the direction of the Board of Directors shall be preceded by timely advance
notice in writing to the Secretary.  To be timely, a shareholder’s
notice shall be delivered to, or mailed and received at, the principal executive
offices of the Company (1) with respect to an election to be held at the annual
meeting of the shareholders of the Company, not later than the close of business
on the 90th day prior to the first anniversary of the preceding year’s annual
meeting; provided, however, in the event that the date of the annual meeting is
more than 30 days before or more than 60 days after such anniversary date,
notice by the shareholder to be timely must be so delivered not later than the
close of business on the later of the 90th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made by the Company; and (2) with respect to an election to be
held at a special meeting of shareholders of the Company for the election of
directors not later than the close of business on the 10th day following the day
on which notice of the date of the special meeting was mailed to shareholders of
the Company as provided in Paragraph 2.4 (of the Bylaws) or public disclosure of
the date of the special meeting was made, whichever first occurs.  Any
such shareholder’s notice to the Secretary shall set forth (x) as to each person
whom the shareholder proposes to nominate for election or re-election as a
director, (i) the name, age, business address and residence address of such
person; (ii) the principal occupation or employment of such person; (iii) the
number of shares of each class of capital stock of the Company’s beneficially
owned by such person; (iv) the written consent of such person to having such
person’s name placed in nomination at the meeting and to serve as a director if
elected; (v) any other information relating to such person that is required to
be disclosed in solicitations of proxies for election of directors, or is
otherwise required, pursuant to Regulation 14A under the Exchange Act, and (vi)
as to the shareholder giving the notice, (i) the name and address, as they
appear on the Company’s books of such shareholder, and (ii) the number of shares
of each class of voting stock of the Company which are then beneficially owned
by such shareholder. The presiding officer of the meeting of shareholders shall
determine whether the requirements of Paragraph 3.3 (of the Bylaws) have been
met with respect to any nomination or intended nomination.  If the
presiding officer determines that any nomination was not made in accordance with
the requirements of Paragraph 3.3 (of the Bylaws), he shall so declare at the
meeting and the defective nomination shall be
disregarded.  Notwithstanding the foregoing provisions..., a shareholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in
Paragraph 3.3 of the Bylaws.  For (purposes of the notice provisions
of the Bylaws), public disclosure shall be deemed to first be given to
shareholders when disclosure of such date of the meeting of shareholders is
first made in a press release reported by the Dow Jones News Services,
Associated Press or comparable national news service, or in a document publicly
filed by the Company with the Securities and Exchange Commission pursuant to
Sections 13, 14 or 15(d) of the Exchange Act.
  25
 Table of Contents
  COMPLIANCE
WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
  Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own beneficially more than ten percent of
our common stock, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission.  Based solely on the reports we
have received and on written representations from certain reporting persons, we
believe that the directors, executive officers, and greater than ten percent
beneficial owners have complied with all applicable filing
requirements.
 
 CODE
OF ETHICS
 
 Effective
August 19, 2005, the Board of Directors adopted a Code of Ethics for our
directors, officers and employees.  A copy of our Code of Ethics was
filed with our Form SB-2 registration statement filed with the SEC on August 23,
2005.
 
 ITEM 10.
                EXECUTIVE
      COMPENSATION
 
 The
following table sets forth certain compensation information for the following
individuals for fiscal years ended December 31, 2006 and
2007.   No other compensation was paid to our named executive
officers other than the compensation set forth below.
 
 Name and Principal
    Position(a)
                
                Title
                
                Year
                  (b)
                
                Salary
                  ($)
                  (c)
                
                
                Bonus
                  ($)
                  (d)
                
                
                Stock Awards
                  ($)
                  (e)
                
                
                Option Awards
                  ($)
                  (f)
                
                
                Non-Equity Incentive Plan
      Compensation
                  ($)
                  (g)
                
                
                Nonqualified Deferred Compensation
      Earnings
                  ($)
                  (h)
                
                
                All other compensation
                  ($)
                  (i)
                
                
                Total
                  ($)
                  (j)Chairman,
                
                2007
                
                $
                223,750
                
                
                $
                120,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                343,750Richard Dole(1)
                
                CEO and President
                
                2006
                
                $
                180,000
                
                
                
                -0-
                
                
                $
                160,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                340,0002007
                
                $
                201,875
                
                
                $
                65,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                266,875David Collins(2)
                
                CFO
                
                2006
                
                $
                180,000
                
                
                
                -0-
                
                
                $
                80,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                260,0002007
                
                $
                250,000
                
                
                $
                55,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                305,000Wayne Beninger(3)
                
                COO
                
                2006
                
                $
                250,000
                
                
                $
                50,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                300,000
 
 Notes to
Summary Compensation Table:
 
 (1)
                Mr.
      Dole was appointed as a Director in July 2004.  On December 30,
      2004, Mr. Dole assumed the roles of Chairman of our Board of Directors,
      President and Chief Executive Officer.  Mr. Dole became an
      employee of the Company as of January 1, 2005.  Mr. Dole renewed
      his  employment agreement with the Company in May 2007 for a
      term of two years which calls for compensation of $20,833 per
      month.
 (2)
                Mr.
      Collins was appointed Chief Financial Officer in September,
      2004.  Mr. Collins became an employee of the Company as of
      January 1, 2005.  Mr. Collins renewed his employment agreement
      with the Company May 1, 2007, for a  term of one year which
      calls for compensation of $17,916 per
month.
 (3)
                Mr.
      Beninger was appointed Chief Operating Officer and became an employee of
      the Company as of May 1, 2005.  Mr. Beninger renewed his
      employment agreement with the Company May 1, 2007, for a term of one year
      which calls for compensation of $20,830 per
  month.
 (4)
                The
      value of stock awards was determined based on the fair market value of the
      Company’s common stock on the grant
date.
  EMPLOYMENT
AGREEMENTS
  The
employment contracts in existence with officers and key personnel include
employment contracts with each of Richard Dole (Chairman, President and CEO),
David Collins (Chief Financial Officer) and Wayne Beninger, (Chief Operating
Officer).  These employment agreements became effective May 1,
2007.
  26
 
 The
employment contracts with Messrs. Collins and Beninger provide for an employment
term of one year and month to month thereafter, if not extended or
terminated.  The employment contract with Mr. Dole provides for an
employment term of two years and automatically renews for an identical term at
the end of the indicated term unless the Agreement is superseded by a new
agreement or unless notice of non-renewal is delivered in writing by the Company
at least 60 days prior to the end of the term.  Each of the employment
contracts provides for termination by the Company upon death or disability, with
six month severance payments for Messrs Collins and Beninger and 12 month
severance for Mr. Dole.  Each of the employment contracts permits
termination by the Company for cause, which includes malfeasance, misuse of
funds, insubordination, competing with the Company, a material uncured breach or
conviction for a felony or crime of moral turpitude.  The agreements
may be voluntarily terminated by the employee at any time, with no severance
payment.  Additionally, the respective employees may elect to
terminate their employment contract and receive severance pay upon a material
uncured breach by the Company or a change in control.  For purposes of
each agreement, a change in control is defined as an acquisition of voting
securities by a third party (other than directly from the Company) equivalent to
forty percent of the voting control of the Company (other than a subsidiary or
employee benefit plan), or accompanying a sale of all of the assets or a merger
(other than involving a subsidiary).  Upon termination for cause, the
employee is not entitled to severance pay.  A termination without
cause while a contract is pending, other than due to a change in control,
entitles the employees other than Mr. Dole to compensation of  six
months.  A termination without cause of Mr. Dole or non-renewal of Mr.
Dole’s agreement gives rise to a severance pay obligation equal to 24
months.  Upon a termination coupled with a change in control where Mr.
Dole is not offered a position for the identical salary and position, or Mr.
Dole should decline an offer of employment, the severance compensation Mr. Dole
will be entitled to is the sum of four years of base salary and the average of
his last two year’s bonuses (if any).  Upon a termination coupled with
a change in control where Messrs. Collins and Beninger are not offered a
position for the identical salary, or if Messrs. Collins and/or Beninger decline
an offer of employment (Messrs. Collins and/or Beninger only have the right to
decline the employment and receive the severance if Mr. Dole is not offered the
same salary and position, or Mr. Dole declines the offer for employment) they
will be entitled to severance compensation equal to the sum of two years of base
salary and the average of the last two year’s bonuses (if any).
  27
 Table of Contents
  Outstanding
Equity Awards at Fiscal Year End
 
 OPTION AWARDS
                
                STOCK AWARDSName
                
                Number of Securities Underlying Unexercised
      Options (#) Exercisable
                
                
                Number of Securities Underlying Unexercised
      Options (#) Unexercisable
                
                
                Equity Incentive Plan Awards: Number of Securities
      Underlying Unexercised Unearned Options (#)
                
                
                Option Exercise Price ($)
                
                Option Expiration Date
                
                Number of Shares or Units of Stock that have not
      Vested (#)
                
                
                Market Value of Shares or Units of Stock that have
      not Vested ($)
                
                
                Equity Incentive Plan Awards: Number of Unearned
      Shares, Units or Other Rights that have not Vested
    ($)
                
                
                Equity Incentive Plan Awards: Market or Payout
      Value of Unearned Shares, Units or Other Rights that have not Vested
      ($)(a)
                
                (b)
                
                
                (c)
                
                
                (d)
                
                
                (e)
                
                (f)
                
                (g)
                
                
                (h)
                
                
                (i)
                
                
                (j)Richard Dole
                
                
                2,687,738
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                1.95
                
                11/15/2008
                
                
                60,241
                (1)
                
                $
                58,433
                
                
                
                -0-
                
                
                
                -0-Wayne Beninger
                
                
                365,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                1.95
                
                11/15/2008
                
                
                36,145
                (1)
                
                $
                35,060
                
                
                
                -0-
                
                
                
                -0-92,308
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                0.98
                
                11/15/2008
                
                
                36,145
                (1)
                
                $
                35,060
                
                
                
                -0-
                
                
                
                -0-76,923
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                1.63
                
                11/15/2008
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-David Collins
                
                
                50,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                1.95
                
                11/15/2008
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-Richard Majeres
                
                
                50,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                1.95
                
                3/25/2008
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-Gerald Agranoff
                
                
                50,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                1.95
                
                3/25/2008
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
 
   DIRECTOR
COMPENSATION
 
 For the
year ending December 31, 2007, the Board of Directors approved compensation of
$45,000 to independent board members, Gerald Agranoff and Richard Majeres, for
their services for 2007. This amount was be paid one-half in cash, quarterly,
and one-half paid by the issuance of shares of our restricted common stock
valued as of the market close on March 30, 2007.
 
 Name
                  (a)
                
                Fees Earned or Paid in Cash
($)
                  (b)
                
                
                Stock Awards ($)
                  (c)
                
                
                Option Awards
                  ($)
                  (d)
                
                
                Non-Equity Incentive Plan
      Compensation
                  ($)
                  (e)
                
                
                Nonqualified Deferred
      Compensation Earnings($)
                  (f)
                
                
                All Other Compensation
                  ($)
                  (g)
                
                
                Total
                  ($)
                  (h)Gerald Agranoff
                
                $
                22,500
                
                
                $
                22,500
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                45,000Richard Majeres
                
                $
                22,500
                
                
                $
                22,500
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                45,000
  ITEM 11.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER
 
 The
following table sets forth certain information at March 14, 2008 with respect to
the beneficial ownership of shares of common stock by (i) each person known to
us who owns beneficially more than 5% of the outstanding shares of common stock
(based upon reports which have been filed and other information known to us),
(ii) each of our Directors, (iii) each of our Executive Officers and (iv) all of
our Executive Officers and Directors as a group. Unless otherwise indicated,
each stockholder has sole voting and investment power with respect to the shares
shown.  As of March 14, 2008 we had 41,239,738 shares of common stock
issued and outstanding.
  28
 
 Title of class
                
                Name and address of beneficial
      owner
                
                Amount and Nature of Beneficial
      Ownership
                
                
                Percentage of Common Stock(1)Common Stock
                
                Richard D. Dole
                  Chairman, President and CEO
                  675 Bering Drive, Suite 200
                  Houston,
    Texas  77057
                
                
                3,178,123
                2)
                
                
                7.20
                %Common Stock
                
                Wayne Beninger
                  Chief Operating Officer
                  675 Bering Drive, Suite 200
                  Houston,
    Texas  77057
                
                
                631,923
                (3)
                
                
                1.52
                %Common Stock
                
                David J. Collins
                  Vice President and Chief Financial
      Officer
                  675 Bering Drive, Suite 200
                  Houston,
    Texas  77057
                
                
                859,417
                (4)
                
                
                2.07
                %Common Stock
                
                Gerald Agranoff
                  Director
                  675 Bering Drive, Suite 200
                  Houston,
    Texas  77057
                
                
                75,773
                (5)
                
                
                0.18
                %Common Stock
                
                Richard Majeres
                  Director
                  675 Bering Drive, Suite 200
                  Houston,
    Texas  77057
                
                
                157,921
                (6)
                
                
                0.38
                %All Officers and Directors as a group (total
      of  5)
                
                
                4,903,157
                (7)
                
                
                10.93
                %Common Stock
                
                Commonwealth Bank of Australia
                  48 Martin Place, Level 2
                  Sydney NSW 2000, Australia
                
                
                8,000,000
                (8)
                
                
                17.68
                %Common Stock
                
                RCH Petro Investors
                  c/o RR Advisors LLC
                  200 Crescent Court, Suite 1060
                  Dallas, TX 75201
                
                
                15,637,548
                (9)
                
                
                27.81
                %Common Stock
                
                Allen Crosswell
                  2121 Sage, Suite 290
                  Houston, TX 77056
                
                
                2,941,488
                (10)
                
                
                7.05
                %Common Stock
                
                Wellington Trust Company, NA
                  75 State Street
                  Boston, MA 02109
                
                
                3,095,738
                (11)
                
                
                7.0%
                %
 
 (1) Under
Rule 13d-3 promulgated under the Exchange Act, a beneficial owner of a security
includes any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise has or shares: (i) voting
power, which includes the power to vote, or to direct the voting of shares; and
(ii) investment power, which includes the power to dispose or direct the
disposition of shares.  Certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share the
power to vote or the power to dispose of the shares).  In addition,
shares are deemed to be beneficially owned by a person if the person has the
right to acquire the shares (for example, upon exercise of an option) within 60
days of the date as of which the information is provided.  In
computing the percentage ownership of any person, the amount of shares is deemed
to include the amount of shares beneficially owned by such person (and only such
person) by reason of these acquisition rights.  As a result, the
percentage of outstanding shares of any person as shown in this table does not
necessarily reflect the person’s actual ownership or voting power with respect
to the number of shares of common stock actually outstanding on March 14,
2008.  As of March 14, 2008 there were 41,239,738 shares of our common
stock issued and outstanding.
  29
 Table of Contents
  (2)Includes
265,385 shares of common stock held directly and 2,912,738 shares of common
stock issuable upon the exercise of warrants.  Excludes 950,000
warrants issued to Mr. Dole that have been gifted to his children, to which Mr.
Dole disavows beneficial ownership.
 
 (3)  Includes
247,692 shares of common stock held directly and 384,231 shares of common stock
issuable directly upon the exercise of warrants.
 
 (4)  Includes 640,186 shares of common stock held directly and
219,231 shares of common stock issuable directly upon the exercise of
warrants.
 
 (5)  Includes
25,773 shares of common stock held directly and 50,000 shares of common stock
issuable upon the exercise of warrants.
 
 (6)  Includes
107,921 shares of common stock held directly and 50,000 shares of common stock
issuable upon the exercise of warrants.
 
 (7)  Includes
1,286,957 shares of common stock held directly and 3,616,200 shares of common
stock issuable upon the exercise of warrants to purchase additional shares of
common stock.
 
 (8)  Includes
the following: 2,940,000 shares held and 2,940,000 shares issuable upon the
exercise of warrants to purchase shares of common stock by First State
Investments Global Resources Long Short Fund Limted; and 500,000 shares held and
500,000 shares issuable upon the exercise of warrants to purchase additional
shares of common stock by Colonial First State Wholesale Global Resources Long
Short Fund; and 401,000 shares held and 401,000 shares issuable upon the
exercise of warrants to purchase additional shares of common stock by First
State Investments Global Energy Long Short Master Fund; and 159,000 shares held
and 159,000 shares issuable upon the exercise of warrants to purchase additional
shares of common stock by Colonial First State Wholesale Global Energy Long
Short Fund.
 
 (9)  Includes
637,548 shares held, 10,000,000 shares of common stock underlying a convertible
note and 5,000,000 shares issuable on the exercise of warrants
 .
 (10)  Includes
1,841,738 shares owned directly by Allen Crosswell, 599,750 shares held by CHLG
Funding and 500,000 shares issuable on the exercise of warrants held by CHLG
Funding.
 
 (11)  Includes
119,548 shares held directly, 595,238 shares issuable on the exercise of
warrants and 2,380,952 shares of common stock upon the conversion of a
convertible note.
 
 _____________________________
 
 We are
not aware of any arrangements that could result in a change of
control.
  ITEM 12.
                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
  None of
the following persons has any direct or indirect material interest in any
transaction to which we were or are a party since the beginning of our last
fiscal year, or in any proposed transaction to which we propose to be a
party:
 
 (A)
                any
      of our directors or executive
officers;
 
 (B)
                any
      nominee for election as one of our
directors;
  30
 (C)
                any
      person who is known by us to beneficially own, directly or indirectly,
      shares carrying more than 5% of the voting rights attached to our common
      stock; or
 
 (D)
                any
      member of the immediate family (including spouse, parents, children,
      siblings and in-laws) of any of the foregoing persons named in paragraph
      (A), (B) or (C) above.
 
 Director
Independence
 
 Two of
our Board of Directors, Mr. Gerald Agranoff and Mr. Richard Majeres, are
independent Board members
 
 ITEM 13.
                EXHIBITS
 
 Exhibit
14.1—Code of Ethics (Incorporated by reference to our Form SB-2 registration
statement filed on August 23, 2005).
 
 Exhibit
21.1—List of Subsidiaries (Incorporated by reference to our Form SB-2
registration statement filed on February 1, 2008).
  Exhibit
23.1 – Consent of McCartney Engineering LLC, March 19, 2008 (filed
herewith)
 
 Exhibit
23.2 -   Consent of Ryder Scott Company, March 19, 2008 (filed
herewith)
 
 Exhibit
23.3 -   Consent of Cawley, Gillespie and Associates, Inc., March
19, 2008 (filed herewith)
 
 Exhibit 31.1- Certification of
Chief Executive Officer of Petrosearch Energy Corporation required by Rule
13a-14(1) or Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  Exhibit 31.2- Certification of
Chief Financial Officer of Petrosearch Energy Corporation required by Rule
13a-14(1) or Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 Exhibit 32.1 - Certification of Chief Executive Officer
of Petrosearch Energy Corporation pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and Section 1350 of 18 U.S.C. 63.
 
 Exhibit 32.2  - Certification of Chief Financial Officer
of Petrosearch Energy Corporation  pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
 
 ITEM 14.
                PRINCIPAL
      ACCOUNTING FEES AND SERVICES
 
 The
following table sets forth the aggregate fees paid or accrued for professional
services rendered by Ham, Langston & Brezina for the audit of our annual
financial statements for fiscal year 2007 and fiscal year 2006 and the aggregate
fees paid or accrued for audit-related services and all other services rendered
by Ham, Langston & Brezina for fiscal year 2007 and fiscal year 2006.
 
 2007
                
                
                2006Audit
      fees
                
                $
                105,700
                
                
                $
                76,000Audit-related
      fees
                
                
                0
                
                
                
                0Tax
      fees
                
                
                17,000
                
                
                
                18,800All
      other fees
                
                
                2,275
                
                
                
                1,500Total
                
                $
                124,975
                
                
                $
                96,300
  The
category of “Audit fees” includes fees for our annual audit, quarterly reviews
and services rendered in connection with regulatory filings with the SEC, such
as the issuance of comfort letters and consents.
  31
  The
category of “Audit-related fees” includes employee benefit plan audits, internal
control reviews and accounting consultation.
  The
category of “Tax fees” includes consultation related to corporate development
activities.
  All above
audit services, audit-related services and tax services were pre-approved by the
Audit Committee, which concluded that the provision of such services by Ham,
Langston & Brezina was compatible with the maintenance of that firm’s
independence in the conduct of its auditing functions.
  32
 Table of Contents
  PETROSEARCH
ENERGY CORPORATION
 
 REPORT
OF MANAGEMENT
 
 Management
prepared, and is responsible for, the consolidated financial statements and the
other information appearing in this annual report. The consolidated financial
statements present fairly the Company’s financial position, results of
operations and cash flows in conformity with U.S. generally accepted accounting
principles. In preparing its consolidated financial statements, the Company
includes amounts that are based on estimates and judgments that Management
believes are reasonable under the circumstances. The Company’s financial
statements have been audited by Ham, Langston & Brezina, L.L.P., an
independent registered public accounting firm appointed by the Audit Committee
of the Board of Directors. Management has made available to Ham, Langston &
Brezina, L.L.P., all of the Company’s financial records and related data, as
well as the minutes of the stockholders’ and Directors’ meetings.
 
 MANAGEMENT’S
ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Petrosearch’s internal control system was designed to
provide reasonable assurance to the Company’s Management and Directors regarding
the preparation and fair presentation of published financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. This assessment was based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment, we
believe that as of December 31, 2007 the Company’s internal control over
financial reporting is effective based on those criteria.
  This annual report does not include
an attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to the rules of the Securities and Exchange Commission
that permit the Company to provide only management’s report in this annual
report.
   /S/Richard
      D. DoleRichard
      D. DoleChief
      Executive Officer
  33
 Table of Contents
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 To the
Board of Directors and Stockholders
 Petrosearch
Energy Corporation
 
 
 We have
audited the accompanying consolidated balance sheets of Petrosearch Energy
Corporation and subsidiaries as of December 31, 2007 and 2006 and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the years then ended.  These consolidated financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Petrosearch
Energy Corporation and subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
 
 
 
 /s/
      Ham, Langston & Brezina, L.L.P.
 
 
 
 Houston,
Texas
 
 March 21,
2008
  34
 Table of Contents
  PETROSEARCH ENERGY
CORPORATION
 CONSOLIDATED BALANCE
SHEETS
 December 31, 2007 and December
31, 2006
 
 December 31,
                
                
                December 31,ASSETS
                
                2007
                
                
                2006Current
      assets:Cash
                
                $
                8,033,611
                
                
                $
                3,715,618Accounts
      receivable:Joint
      owners-billed, net of allowance of $62,179 at December 31, 2007and $83,073
      at December 31, 2006
                
                
                203,671
                
                
                
                421,081Joint
      owners-unbilled
                
                
                3,568
                
                
                
                15,213Oil
      and gas production sales
                
                
                319,926
                
                
                
                146,408Prepaid
      expenses and other current assets
                
                
                987,155
                
                
                
                829,104Total
      current assets
                
                
                9,547,931
                
                
                
                5,127,424Property
      and equipment:Oil
      and gas properties, full cost method of accounting:Properties
      subject to amortization
                
                
                33,235,534
                
                
                
                23,462,639Properties
      not subject to amortization
                
                
                7,099,601
                
                
                
                6,309,169Other
      property and equipment
                
                
                153,031
                
                
                
                149,348Total
                
                
                40,488,166
                
                
                
                29,921,156Less
      accumulated depreciation, depletion and amortization
                
                
                (3,266,658
                )
                
                
                (2,357,347
                )Total
      property and equipment, net
                
                
                37,221,508
                
                
                
                27,563,809Prepaid
      oil and gas costs
                
                
                1,432,906
                
                
                
                14,507Other
      assets
                
                
                834,287
                
                
                
                656,790Total
      assets
                
                $
                49,036,632
                
                
                $
                33,362,530LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of long-term debt
                
                $
                2,066,087
                
                
                $
                1,863,531Current
      portion of long-term debt – Kallina
                
                
                -
                
                
                
                298,806Trade
      note payable
                
                
                -
                
                
                
                409,819Accounts
      payable
                
                
                960,020
                
                
                
                1,062,679Accrued
      liabilities for Barnett property costs
                
                
                2,379,073
                
                
                
                597,918Accrued
      liabilities
                
                
                1,582,689
                
                
                
                934,278Warrants
      subject to mandatory redemption
                
                
                321,140
                
                
                
                317,752Total
      current liabilities
                
                
                7,309,009
                
                
                
                5,484,783Long-term
      debt, net of current portion
                
                
                -
                
                
                
                2,066,074Long-term
      debt, net of current portion – Kallina
                
                
                6,919,890
                
                
                
                6,963,694Convertible
      debt
                
                
                13,914,013
                
                
                
                -Other
      long-term obligations
                
                
                699,914
                
                
                
                906,996Total
      liabilities
                
                
                28,842,826
                
                
                
                15,421,547Stockholders'
      equity:Preferred
      stock, par value $1.00 per share, 20,000,000 shares
      Authorized:Series
      A  8% convertible preferred stock, 1,000,000 shares authorized;
      483,416 shares issued and outstanding at December 31, 2007 and December
      31, 2006
                
                
                483,416
                
                
                
                483,416Series
      B convertible preferred stock, 100,000 shares authorized; 43,000 shares
      issued and outstanding at December 31, 2007 and December 31,
      2006
                
                
                43,000
                
                
                
                43,000Common
      stock, par value $0.001 per share, 100,000,000 shares Authorized;
      40,941,841 and 37,927,070 shares issued and outstanding at December 31,
      2007 and December 31, 2006, respectively
                
                
                40,941
                
                
                
                37,927Additional
      paid-in capital
                
                
                33,196,588
                
                
                
                23,928,090Un-issued
      common stock
                
                
                288,172
                
                
                
                771,429Accumulated
      deficit
                
                
                (13,858,311
                )
                
                
                (7,322,879
                )Total
      stockholders' equity
                
                
                20,193,806
                
                
                
                17,940,983Total
      liabilities and stockholders' equity
                
                $
                49,036,632
                
                
                $
                33,362,530
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  35
 Table of Contents
  PETROSEARCH ENERGY
CORPORATION
 CONSOLIDATED STATEMENTS OF
OPERATIONS
 for the years ended December 31,
2007 and 2006
 
 Year
      EndedDecember 31,2007
                
                
                2006Oil
      and gas production revenues
                
                $
                1,827,664
                
                
                $
                1,232,958Operating
      costs and expenses:Lease
      operating and production taxes
                
                
                731,915
                
                
                
                653,265Depreciation,
      depletion and amortization
                
                
                909,311
                
                
                
                391,347General
      and administrative
                
                
                3,022,739
                
                
                
                2,766,235Total
      costs and expenses
                
                
                4,663,965
                
                
                
                3,810,847Operating
      loss
                
                
                (2,836,301
                )
                
                
                (2,577,889
                )Other
      income (expense):Interest
      income
                
                
                230,951
                
                
                
                73,585Interest
      expense
                
                
                (1,905,066
                )
                
                
                (639,180
                )Amortization
      of financing costs and debt discount
                
                
                (2,021,628
                )
                
                
                (161,887
                )Gain
      on sale of securities
                
                
                -
                
                
                
                1,000,000Change
      in value of warrant liability
                
                
                (3,388
                )
                
                
                (16,554
                )Total
      other income (expense)
                
                
                (3,699,131
                )
                
                
                255,964Net
      loss
                
                $
                (6,535,432
                )
                
                $
                (2,321,925
                )Basic
      and diluted net loss per common share
                
                $
                (0.17
                )
                
                $
                (0.08
                )Weighted
      average common shares
                
                
                39,476,379
                
                
                
                31,253,819
 
 See
accompanying notes to unaudited condensed consolidated financial
statements
  36
 Table of Contents
  PETROSEARCH
ENERGY CORPORATION
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
 For
the years ended December 31, 2007 and 2006
  Series
      A
                
                
                Series
      B
                
                
                Additional
                
                
                Unissued
                
                
                
                
                
                Total
      Stock-Common
      Stock
                
                
                Preferred
      Stock
                
                
                Preferred
      Stock
                
                
                Paid-In
                
                
                Common
                
                
                Accumulated
                
                
                HoldersShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Stock
                
                
                Deficit
                
                
                EquityBalance
      at December 31, 2005
                
                
                28,497,761
                
                
                $
                28,497
                
                
                
                483,416
                
                
                $
                483,416
                
                
                
                43,000
                
                
                $
                43,000
                
                
                $
                18,089,828
                
                
                $
                545,000
                
                
                $
                (5,000,954
                )
                
                $
                14,188,787Common
      stock issued for cash
                
                
                8,368,576
                
                
                
                8,369
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,787,768
                
                
                
                771,429
                
                
                
                
                
                
                
                5,567,566Issuance
      of common stock committed
                
                
                500,000
                
                
                
                500
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                544,500
                
                
                
                (545,000
                )
                
                
                
                
                
                
                -Common
      stock issued for employee compensation
                
                
                300,000
                
                
                
                300
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                239,700
                
                
                
                
                
                
                
                
                
                
                
                240,000Common
      stock issued for services
                
                
                82,500
                
                
                
                83
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                54,501
                
                
                
                
                
                
                
                
                
                
                
                54,584Exercise
      of warrants
                
                
                178,233
                
                
                
                178
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                174,491
                
                
                
                
                
                
                
                
                
                
                
                174,669Issuance
      of warrants to lender
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                37,302
                
                
                
                
                
                
                
                
                
                
                
                37,302Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,321,925
                )
                
                
                (2,321,925
                )Balance
      at December  31, 2006
                
                
                37,927,070
                
                
                $
                37,927
                
                
                
                483,416
                
                
                $
                483,416
                
                
                
                43,000
                
                
                $
                43,000
                
                
                $
                23,928,090
                
                
                $
                771,429
                
                
                $
                (7,322,879
                )
                
                $
                17,940,983
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  37
 Table of Contents
  PETROSEARCH
ENERGY CORPORATION
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
 For
the years ended December 31, 2007 and 2006
 
 Series
      A
                
                
                Series
      B
                
                
                Additional
                
                
                Unissued
                
                
                
                
                
                Total
      Stock-Common
      Stock
                
                
                Preferred
      Stock
                
                
                Preferred
      Stock
                
                
                Paid-In
                
                
                Common
                
                
                Accumulated
                
                
                HoldersShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Stock
                
                
                Deficit
                
                
                EquityBalance
      at December 31, 2006
                
                
                37,927,070
                
                
                $
                37,927
                
                
                
                483,416
                
                
                $
                483,416
                
                
                
                43,000
                
                
                $
                43,000
                
                
                $
                23,928,090
                
                
                $
                771,429
                
                
                $
                (7,322,879
                )
                
                $
                17,940,983Issuance
      of common stock committed, net of additional costs of raising
      capital
                
                
                771,429
                
                
                
                771
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                751,315
                
                
                
                (771,429
                )
                
                
                
                
                
                
                (19,343
                )Common
      stock issued for leasehold costs
                
                
                1,700,000
                
                
                
                1,700
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,675,300
                
                
                
                
                
                
                
                
                
                
                
                1,677,000Common
      stock issued for employee compensation
                
                
                25,000
                
                
                
                25
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                20,725
                
                
                
                
                
                
                
                
                
                
                
                20,750Common
      stock issued for services
                
                
                50,000
                
                
                
                50
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                61,926
                
                
                
                
                
                
                
                
                
                
                
                61,976Common
      stock issued for interest expense
                
                
                437,308
                
                
                
                437
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                574,460
                
                
                
                
                
                
                
                
                
                
                
                574,897Common
      stock issued for board compensation
                
                
                31,034
                
                
                
                31
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                44,969
                
                
                
                
                
                
                
                
                
                
                
                45,000Common
      stock committed for interest expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                288,172
                
                
                
                
                
                
                
                288,172Issuance
      of warrants with debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,471,835
                
                
                
                
                
                
                
                
                
                
                
                3,471,835Beneficial
      conversion feature of convertible debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,667,968
                
                
                
                
                
                
                
                
                
                
                
                2,667,968Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,535,432
                )
                
                
                (6,535,432
                )Balance
      atDecember  31,
      2007
                
                
                40,941,841
                
                
                $
                40,941
                
                
                
                483,416
                
                
                $
                483,416
                
                
                
                43,000
                
                
                $
                43,000
                
                
                $
                33,196,588
                
                
                $
                288,172
                
                
                $
                (13,858,311
                )
                
                $
                20,193,806
 
 See
accompanying notes to unaudited condensed consolidated financial
statements
  38
 Table of Contents
  PETROSEARCH
ENERGY CORPORATION
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 For
the years ended December 31, 2007 and 2006
  2007
                
                
                2006Cash
      flows from operating activities:Net
      loss
                
                $
                (6,535,432
                )
                
                $
                (2,321,925
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depletion,
      depreciation and amortization expense
                
                
                909,311
                
                
                
                391,347Stock-based
      compensation and interest expense
                
                
                990,795
                
                
                
                294,584Amortization
      of deferred rent
                
                
                (5,082
                )
                
                
                (5,082
                )Amortization
      of debt discount and beneficial conversion feature
                
                
                1,644,124
                
                
                
                82,686Amortization
      of financing costs
                
                
                377,504
                
                
                
                79,201Accretion
      of asset retirement obligation
                
                
                33,433
                
                
                
                28,505Change
      in value of warrant liability
                
                
                3,388
                
                
                
                16,554Bad
      debt expense
                
                
                25,000
                
                
                
                -Gain
      on sale of securities
                
                
                -
                
                
                
                (1,000,000
                )Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                30,537
                
                
                
                488,455Prepaid
      expenses and other assets
                
                
                (344,140
                )
                
                
                (960,403
                )Accounts
      payable and accrued liabilities
                
                
                865,391
                
                
                
                853,423Trade
      note payable
                
                
                (409,819
                )
                
                
                409,819Net
      cash used in operating activities
                
                
                (2,414,990
                )
                
                
                (1,642,836
                )Cash
      flows from investing activities:Capital
      expenditures, including purchases and development of
      properties
                
                
                (9,082,326
                )
                
                
                (14,141,190
                )Proceeds
      from sale of property
                
                
                -
                
                
                
                509,015Proceeds
      from sale of securities
                
                
                -
                
                
                
                1,000,000Net
      cash used in investing activities
                
                
                (9,082,326
                )
                
                
                (12,632,175
                )Cash
      flows from financing activities:Additional
      costs of raising capital
                
                
                (19,343
                )
                
                
                -Proceeds
      from the sale of common stock
                
                
                -
                
                
                
                5,760,616Proceeds
      from exercise of warrants
                
                
                -
                
                
                
                174,669Proceeds
      from convertible debt
                
                
                18,100,000
                
                
                
                -Proceeds
      from notes payable
                
                
                -
                
                
                
                10,880,000Repayment
      of notes payable
                
                
                (2,265,348
                )
                
                
                (2,877,500
                )Net
      cash provided by financing activities
                
                
                15,815,309
                
                
                
                13,937,785Net
      increase (decrease) in cash and cash equivalents
                
                
                4,317,993
                
                
                
                (337,226
                )Cash
      and cash equivalents at beginning of period
                
                
                3,715,618
                
                
                
                4,052,844Cash
      and cash equivalents at end of period
                
                $
                8,033,611
                
                
                $
                3,715,618Supplemental
      disclosures of cash flow information:Interest
      paid
                
                $
                399,315
                
                
                $
                546,031Income
      taxes paid
                
                
                -
                
                
                
                -
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  39
 Table of Contents
  PETROSEARCH
ENERGY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 1.
                Organization and
      Significant Accounting
Policies
 
 Organization
 
 Petrosearch
Energy Corporation (the “Company”), a Nevada Corporation formed in November
2004, is an independent crude oil and natural gas exploration and production
company based in Houston, Texas, with a second office in Dallas,
Texas.  The Company is the successor of Petrosearch Corporation, a
Texas corporation formed in August 2003.  The Company’s operations are
focused in two main areas of the lower 48 states of the United States with
existing production in Texas, North Dakota and Oklahoma.  The majority
of the Company’s efforts are focused on growth through the drill bit in the
Barnett Shale project through its participation in DDJET Limited LLP and the
Texas panhandle water flood that it operates.  The Company’s goal is
to develop additional production and reserves from its existing resource
base.
 
 Principles of
Consolidation
 
 The
consolidated financial statements presented herein include the accounts of the
Company and its wholly-owned subsidiaries.  In addition, during 2007
and 2006, the consolidated financial statements of the Company include its
pro-rata share of the accounts of the DDJET Limited LLP Partnership, in which
the company has a 5.54 percent ownership interest.  All significant
inter-company accounts and transactions have been eliminated.
 
 Accounting
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period.  The Company’s most
significant financial estimates are based on remaining proved natural gas and
oil reserves. Estimates of proved reserves are key components of the Company’s
depletion rate for natural gas and oil properties and its full cost ceiling test
limitation. In addition, estimates are used in computing taxes, preparing
accruals of operating costs and production revenues, asset retirement
obligations and fair value of stock options and the related compensation
expense. See Note 14 — Supplemental Oil and Gas Information (Unaudited) for more
information relating to estimates of proved reserves. Because there are numerous
uncertainties inherent in the estimation process, actual results could differ
materially from these estimates.
 
 Business
Segments
 
 The
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards (“SFAS”) 131, “Disclosures about Segments of an Enterprise and Related
Information” establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise that
engage in activities from which it may earn revenues and incur expenses.
Operating segments have separate financial information and this information is
regularly evaluated by the chief decision maker for the purpose of allocating
resources and assessing performance.
 
 Segment
reporting is not applicable for the Company as each of its operating areas has
similar economic characteristics and each meets the criteria for aggregation as
defined in SFAS 131. All of the Company’s operations involve the exploration,
development and production of natural gas and oil, and all of its operations are
located in the United States. The Company has a single, company-wide management
team that administers all properties as a whole rather than as discrete
operating segments. The Company tracks only basic operational data by area, and
does not maintain comprehensive financial statement information by area. The
Company measures financial performance as a single enterprise and not on an
area-by-area basis. Throughout the year, the Company freely allocates capital
resources on a project-by-project basis across its entire asset base to maximize
profitability without regard to individual areas or segments.
  40
 Table of Contents
  Oil and Gas
Properties
 
 The
Company follows the full cost method of accounting for crude oil and natural gas
properties. Under this method, all direct costs and certain directly related
internal costs associated with acquisition of properties and successful, as well
as unsuccessful, exploration and development activities are capitalized.
Development costs capitalized include costs incurred to provide improved
recovery systems such as
the cost to drill injection wells. In addition if the materials injected in the
reservoir under improved recovery techniques are deemed to be of benefit over
the life of the entire project, the costs of the materials are capitalized and
amortized along with the wells and related facilities.
 
 Production
costs incurred to operate and maintain wells and related equipment and
facilities become part of the cost of oil and gas produced and are expensed
during the period incurred. Production
costs for the Company’s waterflood properties include a maximum $15,000 monthly
operating expense for maintenance of the water treatment facility. In addition,
production costs include any other costs to inject nonrecoverable materials into
the reservoir under improved recovery techniques when related to current
production.
 
 Depreciation,
depletion and amortization of capitalized crude oil and natural gas properties
and estimated future development costs, excluding unproved properties, are based
on the unit-of-production method based on proved reserves.
 
 Net capitalized costs of crude oil and
natural gas properties, as adjusted for asset retirement obligations, net of
salvage value, are limited, by country, to the lower of unamortized cost or the
cost ceiling, defined as the sum of the present value of estimated future net
revenues from proved reserves based on unescalated prices discounted at 10
percent, plus the cost of properties not being amortized, if any, plus the lower
of cost or estimated fair value of unproved properties included in the costs
being amortized, if any, less related income taxes. Excess costs are charged to
proved property impairment expense. No gain or loss is recognized upon sale or
disposition of crude oil and natural gas properties, except in unusual
circumstances.
 
 The
following table reflects the depletion expense incurred from oil and gas
properties during the years ended December 31, 2007 and 2006:
 
 2007
                
                
                2006Depletion
      Expense
                
                $
                879,171
                
                
                $
                361,933Depletion
      expense per BOE produced
                
                $
                24.41
                
                
                $
                18.51
 
 At
December 31, 2007 and 2006, unproved oil and gas properties not subject to
amortization included $7,099,601 and $6,309,169, respectively, of property
acquisition, exploration and development costs that are not being
amortized.  These costs will begin to be amortized when they are
evaluated and proved, reserves are discovered, impairment is indicated or when
the lease terms expire.  Unproved leasehold costs consist of interest
in leases located in Mississippi, Oklahoma and Texas.
 
 The
following table reflects the periods when costs were incurred for unproved oil
and gas properties costs:
 
 2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                TotalProperty
      acquisition costs
                
                $
                309,961
                
                
                $
                431,334
                
                
                $
                1,725,390
                
                
                $
                1,160,981
                
                
                $
                3,627,666Exploration
      costs
                
                
                -
                
                
                
                -
                
                
                
                2,576,703
                
                
                
                895,232
                
                
                
                3,471,935Total
                
                $
                309,961
                
                
                $
                431,334
                
                
                $
                4,302,093
                
                
                $
                2,056,213
                
                
                $
                7,099,601
 
 Unproved
properties represent costs associated with properties on which the Company is
performing exploration activities or intends to commence such
activities.  These costs are reviewed periodically for possible
impairments or reduction in value based on geological and geophysical data. If a
reduction in value has occurred, costs being amortized are
increased.
 
 Other Property and
Equipment
 
 Property
and equipment is stated at cost.  Depreciation is computed using the
straight-line method over the estimated useful lives of 3 to 5 years for office
furniture and equipment and transportation and other
equipment.  Additions or improvements that increase the value or
extend the life of an asset are capitalized.  Expenditures for normal
maintenance and repairs are expensed as incurred.  Disposals are
removed from the accounts at cost less accumulated depreciation and any gain or
loss from disposition is reflected in operations.  Depreciation
expense for other property and equipment for the years ended December 31, 2007
and 2006 was $30,140 and $29,414, respectively.
  41
 Table of Contents
  Asset Retirement
Obligations
 
 Effective
January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”).
This statement applies to obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction and development
of the assets. SFAS 143 requires that the fair value of a liability for a
retirement obligation be recognized in the period in which the liability is
incurred. For oil and gas properties, this is the period in which an oil or gas
well is acquired or drilled. The asset retirement obligation is capitalized as
part of the carrying amount of the Company’s oil and gas properties at its
discounted fair value. The liability is then accreted each period until the
liability is settled or the well is sold, at which time the liability is
reversed.
 
 A
reconciliation of the Company’s asset retirement obligation liability is as
follows:
 
 As
      of December 31,2007
                
                
                2006Beginning
      asset retirement obligation
                
                $
                875,077
                
                
                $
                633,455Liabilities
      incurred
                
                
                5,798
                
                
                
                76,826Liabilities
      settled
                
                
                (5,732
                )
                
                
                (30,056
                )Revisions
      in estimated cash flows
                
                
                (103,721
                )
                
                
                166,347Accretion
      expense
                
                
                33,433
                
                
                
                28,505Ending
      asset retirement obligation
                
                $
                804,855
                
                
                $
                875,077
 
 Cash and Cash
Equivalents
 
 For
purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less when purchased to
be cash equivalents.
 
 Receivables
 
 The
Company routinely assesses the recoverability of all material trade and other
receivables to determine their collectability.  Many of the Company’s
receivables are from joint interest owners on properties of which the Company is
the operator.  Thus, the Company may have the ability to withhold
future revenue disbursements to recover any non-payment of joint interest
billings.  Generally, the Company's crude oil and natural gas
receivables are collected within two months.  The Company accrues a
reserve on a receivable when, based on the judgment of management, it is
probable that a receivable will not be collected and the amount of any reserve
may be reasonably estimated.  As of December 31, 2007 and 2006, the
Company provided an allowance of $62,179 and $83,073, respectively, for doubtful
accounts for trade receivables or joint interest owner receivables.
 
 Fair Value of Financial
Instruments
 
 The
Company includes fair value information in the notes to financial statements
when the fair value of its financial instruments is different from the book
value.  When the book value approximates fair value, no additional
disclosure is made, which is the case for financial instruments outstanding as
of December 31, 2007 and 2006.  The Company assumes the book value of
those financial instruments that are classified as current approximates fair
value because of the short maturity of these instruments.  For
non-current financial instruments, the Company uses quoted market prices or, to
the extent that there are no available quoted market prices, market prices for
similar instruments
  42
 
 Restoration, Removal and
Environmental Liabilities
 
 The
Company is subject to extensive federal, state and local environmental laws and
regulations.  These laws regulate the discharge of materials into the
environment and may require the Company to remove or mitigate the environmental
effects of the disposal or release of petroleum substances at various
sites.  Environmental expenditures are expensed or capitalized
depending on their future economic benefit.  Expenditures that relate
to an existing condition caused by past operations and that have no future
economic benefit are expensed.
  Liabilities
for expenditures of a noncapital nature are recorded when environmental
assessments and/or remediation is probable, and the costs can be reasonably
estimated.  Such liabilities are generally undiscounted unless the
timing of cash payments for the liability or component is fixed or reliably
determinable.  As of December 31, 2007, the Company has included
approximately $185,000 in its asset retirement obligation liability for future
restoration costs on drilled properties.
 
 Concentration of Credit Risk
and Major Customers
 
 Financial
instruments which subject the Company to concentrations of credit risk include
cash and cash equivalents and accounts receivable.  The Company
maintains its cash and cash equivalents with major financial institutions
selected based upon management’s assessment of the banks’ financial
stability.  Balances regularly exceed the $100,000 federal depository
insurance limit.  The Company has not experienced any losses on
deposits.
 
 Excluding
the Company’s revenue from the DDJET Partnership, which is marketed by the
operator of the project and comprises 33% of the Company’s 2007 revenue, 59% of
its revenue was received from three customers in 2007.   During the year ended
December 31, 2006, 84% of the Company’s revenue was received from three
customers as follows:
 
 2007
                
                
                2006Customer
      A
                
                $
                729,896
                
                
                $
                787,839Customer
      B
                
                
                194,519
                
                
                
                83,375Customer
      C
                
                
                161,919
                
                
                
                160,605DDJET
                
                
                601,790
                
                
                
                -Others
                
                
                139,540
                
                
                
                201,139Total
                
                $
                1,827,664
                
                
                $
                1,232,958
 
 The Company had no other
single customer that accounted for 10% or more of revenues in 2007 or
2006.  The Companybelieves there is a sufficient market to
support its revenues in the event the Company was to lose some or all of its
current customers given the nature of the high demand of its
products.
 
 The
Company performs ongoing credit evaluations and generally requires no collateral
from its customers or other joint interest owners.  As of December 31,
2007, 42%, 27%, and 13% of accounts receivable from oil and gas sales were from
three customers.  As of December 31, 2007, 79% of accounts receivable
from joint interest owners was from one joint interest owner.  No
other single customer or joint interest owner accounted for more than 10% of
accounts receivable revenue or accounts receivable from joint
owners.
 
 Revenue
Recognition
 
 The
Company uses the entitlements method of accounting for the recognition of
natural gas and oil revenues. Under this method of accounting, income is
recorded based on the Company’s net revenue interest in production or nominated
deliveries. The Company recognizes and records sales gross of production taxes
when production is delivered to a specified pipeline point, at which time title
and risk of loss are transferred to the purchaser. The Company’s arrangements
for the sale of natural gas and oil are evidenced by written contracts with
determinable market prices based on published indices. The Company continually
reviews the creditworthiness of its purchasers in order to reasonably assure the
timely collection of its receivables. Historically, the Company has experienced
no material losses on receivables.
  43
 
 Earnings (Loss) Per
Share
 
 The
Company provides basic and dilutive earnings (loss) per common share information
for each year presented.  The basic net loss per common share is
computed by dividing the net loss by the weighted average number of common
shares outstanding.  Diluted net loss per common share is computed by
dividing the net loss, adjusted on an “as if converted” basis, by the weighted
average number of common shares outstanding plus potential dilutive
securities.  For the years ended December 31, 2007 and 2006, potential
dilutive securities, assuming the Company had net income, that had an
anti-dilutive effect and were not included in the calculation of diluted net
loss per common share consisted of warrants for the purchase of 1,596,234 and
63,210 common shares, respectively, and convertible preferred stock convertible
into 94,218 common shares.  In addition, potential dilutive
securities, assuming the Company had net income, that had an anti-dilutive
effect and were not included in the calculation of diluted net loss per common
share also consisted of debt convertible into 18,378,571 common shares in
2007.
  Stock Based
Compensation
 
 On
January 1, 2006, the Company adopted SFAS 123(R), “Share-Based Payment”
using the “modified prospective method” as defined by SFAS 123 (R).
SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized as stock-based compensation
expense in the Company’s Consolidated Statement of Operations based on their
fair values. Proforma disclosure is no longer an
alternative.  Accordingly, the Company now recognizes compensation
expense for all stock options.
 
 Capitalized
Interest
 
 The
Company capitalizes interest on expenditures made in connection with exploration
and development projects that are not subject to current
amortization.  Interest is capitalized only for the period that
activities are in progress to bring these projects to their intended
use.    Interest capitalized in 2007 and 2006 was $102,625
and $120,802, respectively.
 
 Income
Taxes
 
 The
Company uses the liability method in accounting for income
taxes.  Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and income tax
carrying amounts of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.  A valuation allowance, if necessary, is provided against
deferred tax assets, based upon management’s assessment as to their
realization.
 
 Other
Income
 
 On May 5,
2006 the Company sold 1,500,000 shares of Texcom Stock for a total of
$1,000,000.  The Company acquired the shares in November 2003 pursuant
to a merger and a sale of a subsidiary.
 
 Off Balance Sheet
Arrangements
 
 From
time-to-time, the Company enters into off-balance sheet arrangements and
transactions that can give rise to off-balance sheet obligations. As of December
31, 2007, the off-balance sheet arrangements and transactions that the Company
has entered into include two operating lease agreements for office space. The
Company does not believe that these arrangements are reasonably likely to
materially affect its liquidity or availability of, or requirements for, capital
resources.
 
 New
Accounting Pronouncements
 
 The
following new accounting pronouncements were adopted during 2007 and the effect
of such adoption, if applicable, has been presented in the accompanying
Consolidated Financial Statements:
  44
 
 SFAS No.155,“Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB
StatementsNo.133 and 140.”
In February 2006, the FASB issued SFAS No. 155, which amends SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
and SFAS No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.” SFAS No. 155 allows financial
instruments that have embedded derivatives to be accounted for at fair value at
acquisition, at issuance, or when a previously recognized financial instrument
is subject to a remeasurement (new basis) event, on an instrument-by-instrument
basis, in cases in which a derivative would otherwise have to be bifurcated.
SFAS No. 155 was effective for the Company for all financial instruments
acquired, issued, or subject to remeasurement after January 1, 2007, and
for certain hybrid financial instruments that have been bifurcated prior to the
effective date, for which the effect is to be reported as a cumulative-effect
adjustment to beginning retained earnings. The adoption of SFAS No. 155 did
not have an impact on the Company’s consolidated results of operations, cash
flows or financial position.
  In
July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (“FIN
48”), which clarifies the accounting for uncertainty in tax positions taken or
expected to be taken in a tax return, including issues relating to financial
statement recognition and measurement. FIN 48 provides that the tax effects from
an uncertain tax position can be recognized in the financial statements only if
the position is “more-likely-than-not” to be sustained if the position were to
be challenged by a taxing authority. The assessment of the tax position is based
solely on the technical merits of the position, without regard to the likelihood
that the tax position may be challenged. If an uncertain tax position meets the
“more-likely-than-not” threshold, the largest amount of tax benefit that is more
than 50 percent likely to be recognized upon ultimate settlement with the
taxing authority, is recorded. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings. Consistent with the requirements of FIN 48, the Company adopted FIN 48
on January 1, 2007. The Company evaluated the impact of adopting FIN 48 and
concluded that the interpretation did not have a material impact on its results
of operations or financial position.
 
 FSP No. FAS 123(R)-5, “Amendment of FASB Staff Position FAS
123(R)-1.” In October 2006, the FASB staff issued FSP No. FAS 123-5 to
address whether a modification of an instrument in connection with an equity
restructuring should be considered a modification for purposes of applying FSP
No. FAS 123(R)-1, “Classification and Measurement of Freestanding Financial
Instruments Originally Issued in Exchange for Employee Services under FASB
Statement No. 123(R).” In August 2005, the FASB issued FSP FAS 123(R)-1 to
defer indefinitely the effective date of paragraphs A230-A232 of SFAS
No. 123(R), and thereby require entities to apply the recognition and
measurement provisions of SFAS No. 123(R) throughout the life of an
instrument, unless the instrument is modified when the holder is no longer an
employee. The recognition and measurement of an instrument that is modified when
the holder is no longer an employee should be determined by other applicable
GAAP. FSP No. FAS 123(R)-5 addresses modifications of stock-based awards made in
connection with an equity restructuring and clarifies that for instruments that
were originally issued as employee compensation and then modified, and that
modification is made to the terms of the instrument solely to reflect an equity
restructuring that occurs when the holders are no longer employees, no change in
the recognition or the measurement (due to a change in classification) of those
instruments will result if certain conditions are met. The guidance in this FSP
was effective for the Company as of January 1, 2007. The adoption of FSP
No. FAS 123(R)-5 did not have a material effect on consolidated results of
operations, financial position or cash flows.
 
 FSP No. AUGAIR-1, “Accounting for Planned Major
Maintenance Activities.” In September 2006, the FASB issued FSP No.
AUG AIR-1. This FSP prohibits the use of the accrue-in-advance method of
accounting for planned major maintenance activities in annual and interim
financial reporting periods, if no liability is required to be recorded for an
asset retirement obligation based on a legal obligation for which the event
obligating the entity has occurred. The FSP also requires disclosures regarding
the method of accounting for planned major maintenance activities and the
effects of implementing the FSP. The guidance in this FSP was effective for The
Company as of January 1, 2007 and was to be applied retrospectively for all
financial statements presented. The adoption of FSP No. AUG AIR-1 did not have
an effect on the Company’s consolidated results of operations, financial
position or cash flows.
  45
 
 Pending.    The
following new accounting pronouncements have been issued, but have not yet been
adopted as of December 31, 2007:
 
 SFAS No.157, “Fair Value Measurements.” In
September 2006, the FASB issued SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 does not require
any new fair value measurements. However, in some cases, the application of SFAS
No. 157 may change the Company’s current practice for measuring and
disclosing fair values under other accounting pronouncements that require or
permit fair value measurements. For the Company, SFAS No. 157 is effective
as of January 1, 2008 and must be applied prospectively except in certain
cases. The adoption of SFAS No. 157 is not expected to materially affect
the Company’s consolidated results of operations, financial position or cash
flows.
  SFAS No.159, “The Fair Value Option for Financial
Assets and Financial Liabilities.” In February 2007, the FASB issued SFAS
No. 159, which permits entities to choose to measure certain financial
instruments at fair value. For the Company, SFAS No. 159 is effective as of
January 1, 2008. The Company has determined it will not elect fair value
measurements for financial assets and financial liabilities included in the
scope of SFAS No. 159.
 
 SFAS No.141R, “Business Combinations.” In
December 2007, the FASB issued SFAS No. 141R which replaces SFAS
No. 141, “Business Combinations.” SFAS No. 141R requires the acquiring
entity in a business combination to recognize all and only the assets acquired
and liabilities assumed in the transaction, establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities
assumed, requires the acquirer to disclose to investors and other users all of
the information they need to evaluate and understand the nature and financial
effect of the business combination and further requires that acquisition-related
costs, except for costs to issue debt or equity securities, be expensed in the
period incurred. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008 and
cannot be early adopted.
 
 SFAS No.160, “Noncontrolling Interest in Consolidated Financial
Statements.” In December 2007, the FASB issued SFAS No. 160 which
requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements. SFAS
No. 160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. SFAS No. 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008 and early adoption is prohibited. The Company is
currently evaluating the effect of adopting SFAS No. 160, and cannot
currently estimate the effect it will have on its consolidated results of
operations, financial position or cash flows.
  EITF 06-11 “Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards.” In June 2007, the FASB
Emerging Issues Task Force (EITF) reached a consensus that a realized income tax
benefit from dividends or dividend equivalents that are charged to retained
earnings and are paid to employees for equity classified nonvested equity
shares, nonvested equity share units and outstanding equity share options should
be recognized as an increase to additional paid-in capital. The amount
recognized in additional paid-in capital for the realized income tax benefit
from dividends on those awards should be included in the pool of excess tax
benefits available to absorb tax deficiencies on share-based payment awards.
EITF 06-11 will be applied prospectively to the income tax benefits that result
from dividends on equity-classified employee share-based payment awards that are
declared after December 31, 2007. The effect of adopting EITF 06-11 is not
expected to be material to the Company’s consolidated results of operations,
financial position or cash flows.
 
 EITF 07-01 “Accounting for Collaborative
Arrangements.” In December 2007, the FASB ratified a consensus reached by
the EITF to define collaborative arrangements and to establish reporting
requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. A
collaborative arrangement is a contractual arrangement that involves a joint
operating activity. These arrangements involve two (or more) parties who are
both (a) active participants in the activity and (b) exposed to
significant risks and rewards dependent on the commercial success of the
activity. EITF 07-01 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. An entity should report the effects of applying EITF 07-01 as a
change in accounting principle through retrospective application to all prior
periods presented for all arrangements existing as of the effective date. The
Company is currently evaluating the effect of adopting EITF 07-01, but does not
believe it will have a material effect on its consolidated results of
operations, financial position or cash flows.
  46
 Table of Contents
  2.
                Sale of Oil and Gas
      Properties
 
 In
November 2006, the Companysold its interests in
Burleson County, Texas for proceeds of $509,015.  The transaction has
been reflected in the accompanying financial statements as a reduction of
capitalized oil and gas properties as required by accounting principles
generally accepted in the United States of America.  Proformas are not
included as this was not a producing property.
 
 On August
20, 2007, a subsidiary of the Company assigned all rights, title and interest in
the Harper wellbore for $12,500 net to the subsidiary.
 
 3.
                Agreements Regarding
      Interests in Oil and Gas
Properties
 
 Barnett Shale Project, 8
Counties, Texas
 
 Effective
December 15, 2006, the Company’s wholly owned subsidiary, Barnett Petrosearch
LLC (“Barnett”), joined in the formation of a Partnership, DDJET Limited LLP,
(“Partnership”) for the development of Barnett Shale properties in the Fort
Worth Basin, Texas. Barnett owns a 5.54% interest in the Partnership along with
partners, Metroplex Barnett Shale LLC (a wholly owned subsidiary of Exxon Mobil
Corporation), which directs operations, and Cinco County Barnett Shale LLC, (a
privately held Dallas-based company).  The decision to hold the
Company’s ownership interest in the oil and gas leases and infrastructure assets
of the Barnett Shale project in a partnership was to ensure the alignment of the
interests of all the owners and to simplify the operations relative to the
project.
 
 The
Partnership’s assets include all leases acquired to date within an 8-county
contract area, under a previous agreement among affiliates of the three
partners, along with associated facilities including nearly 100 miles of
pipeline and options on separate pipeline rights of way. Pursuant to the
Partnership agreement the Company takes its gas in-kind and is billed separately
each month for its proportionate share of the leasing, drilling and completion
costs as if its interest was a working interest.  ExxonMobil has
agreed to market the Company’s gas for the first year of the
partnership.
 
 The
Partnership Agreement provides for an initial agreed capital and cash and
non-cash operating expense budget which runs through calendar
2008.  The Initial budget cannot be amended unless unanimously agreed
to by the partners. As of January 1, 2007, the Company’s capital requirement
through 2008 based upon Barnett’s Partnership percentage is approximately
$18,300,000.  The Partnership will continue its leasing activities
within the 8-county contract area, but the current oil and gas lease inventory
is sufficient to support all Partnership drilling activities through the initial
budget period.
 
 The
Partnership Agreement provides that if a partner does not meet its financial
obligations on a timely basis, the defaulting partner can be, among other
available remedies, expelled from the Partnership.  If this occurs and
if
unanimous  agreement  as  to  the  value
of the defaulting partner's Partnership
interest  cannot  be  reached, then the value of
that partner's interest will be determined  using  the
Partnership's appraisal methods.  All accrued obligations and fees
related to the valuation would then be deducted.  The resulting figure
would then be further reduced by an additional thirty percent (30%) to achieve a
figure which is the amount which would be paid to the defaulting partner for its
interest upon expulsion.
 
 As of
December 31, 2007 and 2006, the Company has capitalized Barnett property costs
of approximately $11,297,000 and $5,501,000, respectively.
  47
 
 In 2008,
the Company executed an authorization to the general partner of the Partnership
to immediately commence a sales marketing program to interested potential
purchasing parties in order to fully assess the current market value of
DDJET.  The Company has no obligation to sell its Partnership interest
and retains all of the rights under the DDJET partnership agreement in the event
of a proposed sale by the partners in which the Company chooses not to
participate.
  Southwest Garwood Project,
Colorado County, Texas
 
 Effective
November 1, 2006, the Company exercised its option to acquire a 100% working
interest (68% after payout working interest) from Rock Energy Partners
Operating, L.P. in the Anthony Kallina et al lease covering 438.16 acres and the
existing Kallina 46#1 well in the Southwest Garwood Field of Colorado County,
Texas.  As part of this transaction, the Company gave up a 20% working
interest in 240 acres and a 21.5% after payout working interest in 445
acres.
 
 In
connection with Petrosearch’s exercise of the option and acquisition of these
interests into its newly formed subsidiary, Garwood Petrosearch, Inc.
(“Garwood”), Garwood executed an agreement with Laurus Master Fund,
Ltd.  (“Laurus”) for Laurus to provide financing for the acquisition,
payment of the previous working interest owner’s vendor obligations and the
completion costs for the  Kallina 46#1 well (Note 6).
 
 On
November 13, 2006, Garwood farmed out a 12.5% working interest in the Kallina
lease and the Kallina 46 #1 well to an industry partner on a heads up
basis.  Garwood retains an 87.5% working interest in the Kallina lease
and the Kallina 46 #1 well before payout and a 59.5% working interest after
payout.
 
 In the SW
Garwood project, as a result of the exercise of this option and the sale of the
interest in the entire SW Garwood Project, Petrosearch entities now own a 16%
working interest in 640 acres; a 16% after payout working interest in 640 acres;
and an 87.5% before payout and 75.5% after payout working interest in 438
acres.
 
 The net
cost to exercise the Company’s option after the 12.5% farm-out was approximately
$4,500,000.  Included in property costs as of December 31, 2007 and
2006, is approximately $6,932,000 and $5,400,000, respectively, of costs related
to the Southwest Garwood Project.
 
 North Texas/Panhandle Water
Flood Project
 
 Effective
November 15, 2005, the Company entered into an agreement to purchase a 100%
working interest in 1755 acres of leases in the Quinduno Field located in
Roberts County, Texas from Quinduno Energy, L.L.C,
(“Quinduno”).   Subsequently on November 15, 2007, the parties
agreed to change the amount of shares and stock owed under the first
agreement.  The agreement and subsequent agreement provided for the
payment of the purchase price of $1,850,000 cash and 2,700,000 shares of
unregistered common shares of the Company valued at $2,767,000.  All
cash and stock due under the agreements have been paid as of December 31, 2007,
other than $300,000 which was paid in January 2008.  Upon completion
of the entire project, the seller will back in for a 10% working interest after
Petrosearch has been repaid all capital expenditure costs plus $9.5
million.
 
 At any
time after completion of the first phase of the project, which has been
completed as of December 31, 2007, should the Company, in the Company’s sole
discretion, determine to terminate further operations, then the Company must
offer Quinduno the Company’s interest in the leases for a purchase price equal
to an internal rate of return to the Company of twenty-two and one half percent
(22.5%), calculated monthly, using the closing date under the Agreement as the
commencement date and, taking into account all acquisition cash, all capital
expenditures, plus a sum of $7,500,000 and the net income received from the
project. Quinduno will have 45 days to exercise its right of refusal to
repurchase the leases, at which time, upon Quinduno's refusal to repurchase, the
Company may sell the Company’s interest in the leases to a third
party.
  48
 
 4.
                Prepaid Expenses and
      Other Current Assets
 
 Prepaid
expenses and other current assets consist of the following at December 31, 2007
and 2006:
 
 2007
                
                
                2006Prepaid
      expenses
                
                $
                172,093
                
                
                $
                244,775Prepaid
      bonds
                
                
                292,332
                
                
                
                285,022Current
      portion of financing costs
                
                
                498,668
                
                
                
                235,429Other
      receivables
                
                
                24,062
                
                
                
                63,878$
                987,155
                
                
                $
                829,104
  5.
                Accrued
      Liabilities
 
 Accrued
liabilities consist of the following at December 31, 2007 and 2006:
 
 2007
                
                
                2006Revenue
      payable and operated prepayment liability
                
                $
                52,141
                
                
                $
                367,915Accrued
      interest payable
                
                
                914,367
                
                
                
                169,060Accrued
      liabilities for capital additions
                
                
                38,530
                
                
                
                6,531Financing
      costs payable
                
                
                251,125
                
                
                
                193,050Accrued
      liability for professional fees
                
                
                142,599
                
                
                
                84,778Current
      portion of asset retirement obligation
                
                
                128,023
                
                
                
                -Other
      accrued expenses
                
                
                55,904
                
                
                
                112,944$
                1,582,689
                
                
                $
                934,278
 
 6.
                Long-Term Debt and
      Notes
 
 At
December 31, 2007, all principal payments are due within a three year period as
follows:
  2008
                
                
                2009
                
                
                2010
                
                
                Less Debt
                  Discount
                
                
                December 31,
                  2007 Debt BalanceRevolving
      Credit Facility
                
                $
                2,135,000
                
                
                
                -
                
                
                
                -
                
                
                
                (68,913
                )
                
                $
                2,066,087Secured
      Term Note
                
                
                -
                
                
                $
                7,127,152
                
                
                
                -
                
                
                
                (207,262
                )
                
                $
                6,919,890Convertible
      Debt (1)
                
                
                -
                
                
                
                -
                
                
                $
                18,775,000
                
                
                
                (4,860,987
                )
                
                $
                13,914,013Total
      Payments
                
                $
                2,135,000
                
                
                $
                7,127,152
                
                
                $
                18,775,000
                
                
                
                (5,137,162
                )
                
                $
                22,899,990
 
 (1) This
table assumes the convertible debt is not converted into shares of common stock
of the Company prior to the maturity date of the debt.
 
 Revolving Credit
Agreement
 
 On
September 29, 2005, the Company entered into an amended and restated revolving
credit agreement to borrow up to $10,000,000 over a two-year period to October
1, 2007, from a private, non-public entity.  The agreement has
supplemental terms that were effective on October 16, 2006 through a separate
letter agreement as discussed below. Proceeds of the credit line are to be used
to finance activity related to eight new prospects including costs associated
with acquisitions of oil and gas leases, oil and gas drilling, reworking,
production, transportation, marketing and plugging activities under the leases,
and all lender charges and fees.  Advances under the amended and
restated revolving credit agreement bear interest at a rate of the Wall Street
Journal Prime Rate plus three percent (3%) per year.  Each advance of
principal under the amended facility is treated as a separate loan and is
repayable in six (6) interest only installments followed by up to twenty four
(24) principal and interest installments based upon a 30-month amortization. The
Company will be assessed a one quarter of one percent (.25%) standby fee on
available undrawn principal each quarter.  The note matures on April
1, 2008. As of December 31, 2007, the balance outstanding under the line of
credit agreement was $2,135,000, all of which is due in 2008.
  49
 Table of Contents
  The loan
is collateralized by a first lien on the particular oil and gas leases acquired
with the funds which had a carrying amount of approximately $2.8M as of December
31, 2007, but the Company is entitled to obtain partial releases if the ratio of
proved developed and proved undeveloped reserves underlying the collateral base
meets certain criteria. According to the terms of the agreement, the unused
available funds under the line of credit will only be available for draw by the
Company if at all times the Company’s proved developed reserves equal or exceed
twenty-five percent (25%) of the outstanding principal and interest indebtedness
under the agreement and if the principal balance of the note outstanding after
the requested draw is less than the sum of 1) the actual costs of the oil and
gas lease purchased and or funded, and 2) the sum of 75% of the Company’s proved
developed reserves and 50% of the Company’s proved undeveloped reserves from all
sources pledged as collateral.
 
 As
consideration for entering into the agreement, the lender received an overriding
royalty in each oil and gas lease acquired with facility funds equal to 2% of
the Company's acquired net revenue interest in the lease. The overriding royalty
interests were earned when the lender funds have been utilized by the Company
for direct and or indirect acquisition expenses or drilling
expenses.  In addition, the lender received 100,000 warrants (2005
warrants) to purchase common stock of the Company at an exercise price of $2.00
per share and an expiration date of November 1, 2007.
 
 Under the
terms of the credit facility, the Company is required to offer to the lender the
opportunity to participate in up to a minimum of 33.3% and up to 100% based on
the sole discretion of the Company.
 
 On
October 16, 2006, the Company entered into a Letter Agreement to amend its
existing revolving credit facility with the lender.  The principal
available under the revolving borrowing base remains
$10,000,000.  Under the terms of the transaction, Fortuna advanced the
Company $780,000 for the purpose of paying amounts due for the Barnett Shale
Project which was repaid to Fortuna in December, 2006.  As part of the
financing, the Company pledged additional interests in its oil and gas
properties as collateral.  The lender also agreed to relinquish all of
its past and future overriding royalty interest assignments delivered to the
lender other than assignments associated with the Blue Ridge Field upon debt
repayment.  In addition, the Company agreed to issue to Fortuna
475,000 five year warrants with a strike price of $0.92 per share (2006
warrants).  The Warrants contain a "put" provision which will allow
Fortuna to "put" the warrants to the Company at a price of $0.65 per share for
two (2) years.  Additionally,  as  part of the
transaction, the Company agreed  to issue 100,000 new warrants, which
expire five (5) years from the date of  issue, at a price of $0.92 per
share (2006 warrants) to replace
100,000  warrants  previously  issued  to
Fortuna at a price of $2.00 per share,
which  were  previously  set  to  expire  on  November
1, 2007.  The warrants have piggyback registration
rights.  All other terms of the amended and restated revolving credit
agreement remain in full force and effect.
 
 The
Company allocates the proceeds received from debt with detachable warrants using
the relative fair value of the individual elements at the time of issuance. The
amount allocated to the 2006 and 2005 warrants as a debt discount was calculated
at $338,500 and $88,422, respectively.  The unamortized debt discount
was $68,913 and $335,395 at December 31, 2007 and 2006, respectively. The debt
discount is recognized as interest expense over the period until the notes
mature. In the event the debt is settled prior to the maturity date, an expense
will be recognized based on the difference between the carrying amount and the
amount of the payment.
 
 Secured Term
Note
 
 Garwood
Petrosearch, Inc. (“Garwood”), a wholly-owned subsidiary of the Company,
executed a Securities Purchase Agreement and Secured Term Note with an entity to
provide financing for payment of obligations related to the drilling of the
Kallina 46 #1 well and payment of the future completion costs for the Kallina 46
#1.   The note is for the amount of $8,300,000 and matures on
November 1, 2009.  Advances under the note bear interest at Wall
Street Journal Prime plus 2% with a minimum interest rate of 8% and a maximum
interest rate of 15%.  Payments under the note will be paid from 90%
of net production revenues beginning on the earlier to occur of (i) receipt of
actual proceeds from production from the Kallina 46 #1 well and (ii) a date
which is 120 days after the closing date of the transaction and require a
minimum monthly payment of $87,500.  Upon any event of default, the
lender would be entitled to receive 100% of the net production revenues relating
to oil and gas properties of Garwood.  The note is collateralized by
Garwood’s recently acquired interest in the Kallina 46 #1 well and the related
Section 46 acreage which had a carrying value of approximately $6.8M as of
December 31, 2007.  The note has a principal balance of $7,127,152
outstanding as of December 31, 2007 and $7,262,500 outstanding as of December
31, 2006.  The balance at December 31, 2007 reflects a reduction in
the principal balance for cash held in escrow by the lender’s attorney in the
amount of $135,348.  The unamortized debt discount, which is
recognized as interest expense over the period until the note matures, is
$207,262  as of December 31, 2007.
  50
 Table of Contents
  As a part
of the financing arrangement, Garwood  issued the lender a warrant to
acquire, upon payout of the note indebtedness, 45% of Garwood’s outstanding
common stock such that upon exercise of the warrant, Garwood would be owned 55%
by the Company and 45% by the lender.  The fair value of the warrant
at the time of the transaction was deemed to be of insignificant value due to
the lack of proved reserves and the initial stages of the
subsidiary.
 
 Convertible Debt
Agreements
 
 February
2007 Convertible Debt
 
 On
February 1, 2007 the Company executed a Note and Warrant Purchase Agreement with
an Institutional Investor for the sale of a $10,000,000, 8% Senior Secured
Convertible Promissory Note and a four-year warrant to purchase 5,000,000 shares
of common stock at an exercise price of $1.40 per share for total proceeds of
$10,000,000.  At the option of the investor, the three-year
Convertible Note will be convertible into shares of common stock at a price of
$1.00 per share after the earlier of one year from the closing of the
transaction or three months after a registration statement relating to this
transaction becomes effective.  The Warrant is exercisable one year
after the closing of the transaction.
 
 The
Company may elect to redeem part or all of the outstanding Convertible Note at
the later of (i) such time as RCH Petro Investors, L.P. (RCH) has the right to
convert; and (ii) twelve months from the date of closing, at one-hundred ten
percent (110%) of the principal amount of the Convertible Note, provided however
that such redemption right only applies if, upon receiving notice of redemption,
the lender has the right to convert all the shares the Company intends to redeem
at the applicable conversion price and the applicable registration statement for
the resale of such shares of common stock is effective.
 
 The
Convertible Note is collateralized by a security interest in twenty five percent
of the membership interest of the Company’s wholly owned subsidiary, Exploration
Holding Co., LLC, which owns one-hundred percent of Barnett Petrosearch,
LLC.  Barnett Petrosearch is the subsidiary which owns a 5.54%
interest in DDJET, Ltd, LLP, and participates in the Barnett Shale
Project.  The collateral had a carrying value of approximately $44,000
as of December 31, 2007, which included a payable to the parent company in the
amount of $2.5M.
 
 In
conjunction with issuance of the convertible debt, the company entered into a
registration rights agreement which requires the Company to file a registration
statement on or before April 20, 2007, which was done.  If the Company
would not have filed by April 20, 2007, or if there was failure to go effective
within 150 days of the filing date, it would have been subjected to liquidated
damages up to $1,000,000.
 
 The
debentures meet the definition of conventional convertible debt in EITF Issue
No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock. The Company has evaluated each of
the features of the debentures and concluded that none of these features
constitute embedded derivatives. Specifically, the registration rights
agreement does not result in derivative treatment because the damages are
capped.
  51
 
 The
Company allocated the debt proceeds to the warrants and the debt based on the
relative fair value of each. In accordance with EITF 98-5 and EITF 00-27, the
Company recorded a discount of $2.7 million to the convertible note for the
intrinsic value of conversion options embedded in debt instruments based upon
the differences between the fair value of the underlying common stock at the
commitment date of the note transaction and the effective conversion price
embedded in the note. The fair value assigned to the warrants of $2.7 million
was also recorded as a debt discount.  As of December 31, 2007, the
unamortized discount on the note is $3,904,281.
  An
additional note with similar terms in the amount of $450,000 was entered into
with a third party for financing costs on February 2007 convertible
debt.  The unamortized discount on this note is $189,228 as of
December 31, 2007.
 
 November
2007 Convertible Debt
 
 On
November 9, 2007, the Company executed a Note and Warrant Purchase Agreement
(the “Purchase Agreement”) with thirteen accredited investors including
institutional investors and high net worth individuals (the “Purchasers”) for
the sale of a series of 8% Senior Secured Convertible Promissory Notes (the
“Convertible Notes”) and three (3) year warrants to purchase an aggregate of
1,928,575 shares of the Company’s common stock at an exercise price of $1.50 per
share (the “Warrants”) for total gross proceeds to the Company of $8,100,000
(the “Offering”).
 
 The
Convertible Notes will mature three years from the date of issuance and will
accrue interest payable quarterly in arrears in cash or common stock (priced
using the closing price of the last trading day of the quarter), at the
Company’s option (subject to certain equity conditions), at the rate of eight
percent (8%) per annum if paid in cash, or eight and one-half percent (8.5%) if
paid in common stock of the Company.  At the option of the Purchasers,
the Convertible Notes are convertible into shares of the Company’s common stock
at a price per share of $1.05 at any time and from time to time after the
original issue date.  During the term of the Convertible Notes, the
Company is subject to a debt incurrence test under which the total debt of the
Company, inclusive of the Convertible Notes shall not exceed 50% of the PV-10
value of the Company’s total Proved Reserves plus the fair market value of the
leases and pipeline assets associated with the Barnett Shale
Project.
 
 The
Convertible Note is collateralized by a security interest in five percent (5%)
of the membership interest of the Company’s wholly owned subsidiary, Exploration
Holding Co., LLC (“Exploration Holding”), which owns one-hundred percent (100%)
of Barnett Petrosearch, LLC
(“Barnett Petrosearch”).  Barnett Petrosearch owns a
5.54% interest in DDJET, Limited, LLP, and participates in the Barnett Shale
Project.  The collateral interest shall stay in place until all
required conditions contained in the Convertible Notes have been met, including,
but not limited to (i) the Company’s common stock trades above $1.50 for a
period of 10 consecutive trading days, (ii) the Purchasers have the ability to
convert the Convertible Notes and (iii) the sooner of (A) three (3) months after
the effective date of the Registration Statement or (B) twelve (12) months from
the original issue date has passed.  The collateral for the
Convertible Notes may be proportionately reduced under certain
circumstances.  The collateral had a carrying value of approximately
$9,000 as of December 31, 2007, which included a payable to the parent company
in the amount of $505,000.
 
 The
Company may elect to redeem part or all of the outstanding Convertible Notes on
or after twelve (12) months from the original issue date.
 
 In
conjunction with issuance of the convertible debt, the company entered into a
registration rights agreement which requires the Company to file a registration
statement on or before February 1, 2008, which was done.  If the
Company, would not have filed by February 1, 2008, it would have been subjected
to liquidated damages up to $750,000.
 
 The
debentures meet the definition of conventional convertible debt in EITF Issue
No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock. The Company has evaluated each of
the features of the debentures and concluded that none of these features
constitute embedded derivatives. Specifically, the registration rights agreement
does not result in derivative treatment because the damages are
capped.
  52
 
 The
Company allocated the debt proceeds to the warrants and the debt based on the
relative fair value of each. The fair value assigned to the warrants of $782,141
was recorded as a debt discount.  There was no beneficial conversion
feature associated with this debt.  As of December 31, 2007, the
unamortized discount on the note is $746,735.
 
 An
additional note with similar terms in the amount of $225,000 was entered into
with a third party for financing costs on the November 2007 convertible
debt.  The unamortized discount on this note is $20,743 as of December
31, 2007.
  Trade Note
Payable
 
 Effective
October 24, 2006, the Company entered into a note payable agreement with a
vendor in the amount of $487,293 bearing interest at an annual rate of 11.25%
and a maturity date of November 1, 2007.  The uncollateralized note
had a balance outstanding of $409,819 as of December 31, 2006 which was repaid
in full in 2007.
 
 7.
                Income
      Taxes
 
 Through
December 31, 2007, the Company has incurred losses since its inception and,
therefore, has not been subject to federal income taxes.  As of
December 31, 2007, the Company had net operating loss (“NOL”) carryforwards for
income tax purposes of approximately $21,941,000 which expire in various tax
years through 2027.  Under the provisions of Section 382 of the
Internal Revenue Code, the ownership change in the Company that resulted from
the recapitalization of the Company could limit the Company’s ability to utilize
its NOL carryforward to reduce future taxable income and related tax
liabilities.  Additionally, because United States tax laws limit the
time during which NOL carryforwards may be applied against future taxable
income, the Company may be unable to take full advantage of its NOL for federal
income tax purposes should the Company generate taxable income.
 
 The
composition of deferred tax assets and the related tax effects at December 31,
2007 and 2006 are as follows:
 
 2007
                
                
                2006Deferred
      tax assets:Net
      operating loss carry-forward
                
                $
                7,460,112
                
                
                $
                7,246,463Allowance
      for doubtful accounts
                
                
                21,140
                
                
                
                28,245Contribution
      carryover
                
                
                4,480
                
                
                
                3,515Total
      deferred tax assets
                
                
                7,485,732
                
                
                
                7,278,223Less
      valuation allowance
                
                
                (1,768,021
                )
                
                
                (2,416,054
                )Net
      deferred tax asset
                
                
                5,717,711
                
                
                
                4,862,169Deferred
      tax liabilities:Book/tax
      basis difference in oil and Gas properties
                
                
                (5,709,685
                )
                
                
                (4,851,493
                )Book/tax
      basis difference in property and equipment
                
                
                (8,026
                )
                
                
                (10,676
                )Total
      deferred tax liability
                
                
                (5,717,711
                )
                
                
                (4,862,169
                )Net
      deferred tax
                
                $
                -
                
                
                $
                -
  53
 Table of Contents
  The
difference between the income tax benefit in the accompanying statement of
operations and the amount that would result if the U.S. Federal statutory rate
of 34% were applied to pre-tax loss for the years ended December 31, 2007 and
2006 is as follows:
 
 2007
                
                
                2006Amount
                
                
                %
                
                
                Amount
                
                
                %Benefit
      for income tax at federal statutory rate
                
                $
                (2,222,047
                )
                
                
                (34.0
                )%
                
                $
                (789,455
                )
                
                
                (34.0
                )%Non-deductible
      expenses and other
                
                
                2,870,081
                
                
                
                44.0
                
                
                
                2,037
                
                
                
                0.0Change
      in valuation allowance
                
                
                (648,034
                )
                
                
                (10.0
                )
                
                
                787,418
                
                
                
                34.0$
                -
                
                
                
                -
                %
                
                $
                -
                
                
                
                -
                %
 
 As of
December 31, 2007 and 2006, the Company did not have any unrecognized tax
benefits.  The Company recognizes accrued interest and penalties
related to unrecognized tax benefits as a component of tax expense, but did not
have any such interest or penalties during 2007 or 2006.
 
 8.
                Commitments and
      Contingencies
 
 Operating
Lease
 
 The
Company rents office space under long-term office leases that expire through
2010.  The future minimum lease payments required under the operating
leases that have initial non-cancelable lease terms in excess of one year amount
to $302,647 of which $99,989 is to be paid in 2008, $101,888 is to be paid in
2009, and $100,770 is to be paid in 2010.  Rent expense incurred under
operating leases during the years ended December 31, 2007 and 2006 was $100,312
and $95,152, respectively.
 
 Legal
Proceedings
 
 On April
11, 2007, the Company was served with a lawsuit filed against it titled Cause
No. 2007-16502; D. John Ogren, R. Bradford Perry and Chester Smitherman v.
Petrosearch Corporation; 133rdJudicial District Court, Harris County, Texas.  The plaintiffs
are three (3) Series A Preferred shareholders who derived their original shares
from Texas Commercial Resources, Inc. (“TCRI”) and became Series A Preferred
shareholders of Petrosearch Energy Corporation as a result of the prior
mergers.  The plaintiffs have alleged that Petrosearch Corporation
(and TCRI, its predecessor) failed to pay accrued, cumulative dividends and
refused to allow conversion of their Series A Preferred Stock into Common
Stock.    The plaintiffs have alleged breach of contract,
fraud and violation of Section 33 of the Texas Securities Act and have requested
the award of actual and exemplary damages, interest and attorneys’
fees.   The lawsuit likewise requests the Court to compel the
payment of accrued dividends and the examination of the Company’s books and
records. The Company denies the factual allegations made in the lawsuit and
intend to vigorously defend against the claims made therein.  An
estimate of possible loss or range of possible loss cannot be made at this
time.
 
 The
Company currently is not a party to any other material pending legal
proceedings.
 
 Employment
Agreements
 
 The
employment contracts in existence with officers and key personnel include
employment contracts with each of Richard Dole (Chairman, President and CEO),
David Collins (Chief Financial Officer) and Wayne Beninger, (Chief Operating
Officer).  These employment agreements became effective May 1,
2007.
 
 The
employment contracts with Messrs. Collins and Beninger provide for an employment
term of one year and month to month thereafter, if not extended or
terminated.  The employment contract with Mr. Dole provides for an
employment term of two years and automatically renews for an identical term at
the end of the indicated term unless the Agreement is superseded by a new
agreement or unless notice of non-renewal is delivered in writing by the Company
at least 60 days prior to the end of the term.  Each of the employment
contracts provides for termination by the Company upon death or disability, with
six month severance payments for Messrs Collins and Beninger and 12 month
severance for Mr. Dole.  Each of the employment contracts permits
termination by the Company for cause without severance payments.  The
agreements may be voluntarily terminated by the employee at any time, with no
severance payment.  Additionally, the respective employees may elect
to terminate their employment contract and receive severance pay upon a material
uncured breach by the Company or a change in control.  For purposes of
each agreement, a change in control is defined as an acquisition of voting
securities by a third party (other than directly from the Company) equivalent to
forty percent of the voting control of the Company (other than a subsidiary or
employee benefit plan), or accompanying a sale of all of the assets or a merger
(other than involving a subsidiary).  A termination without cause
while a contract is pending, other than due to a change in control, entitles the
employees other than Mr. Dole to compensation of six months.  A
termination without cause of Mr. Dole or non-renewal of Mr. Dole’s agreement
gives rise to a severance pay obligation equal to 24 months.  Upon a
termination coupled with a change in control where Mr. Dole is not offered a
position for the identical salary and position, or Mr. Dole should decline an
offer of employment, the severance compensation Mr. Dole will be entitled to is
the sum of four years of base salary and the average of his last two year’s
bonuses (if any).  Upon a termination coupled with a change in control
where Messrs. Collins and Beninger are not offered a position for the identical
salary, or if Messrs. Collins and/or Beninger decline an offer of employment
(Messrs. Collins and/or Beninger only have the right to decline the employment
and receive the severance if Mr. Dole is not offered the same salary and
position, or Mr. Dole declines the offer for employment) they will be entitled
to severance compensation equal to the sum of two years of base salary and the
average of the last two year’s bonuses (if any).
  54
 Table of Contents
  9.
                Stockholders’
      Equity
 
 The
Company has the authority to issue up to 120,000,000 shares of stock, consisting
of 100,000,000 shares of common stock, par value $.001 per share, and 20,000,000
shares of preferred stock, par value $1.00 per share.
 
 Preferred
Stock
 
 The
Company’s articles of incorporation authorize the issuance of up to 20,000,000
shares of preferred stock with characteristics determined by the Company’s board
of directors.
 
 As of
December 31, 2007 and 2006, the Company has 1,000,000 shares of Series A 8%
Convertible Preferred Stock (“Series A Preferred”) authorized and 483,416 shares
outstanding.  The shares have a par and stated value of $1.00 per
share.  If declared by the Board of Directors, dividends are to be
paid quarterly in cash or in common stock of the Company to the holders of
shares of the Series A Preferred.  The shares of the Series A
Preferred rank senior to the common stock both in payment of dividends and
liquidation preference.  The Series A Preferred is convertible into
common stock of the Company at a conversion price of $6.50 per
share.  Beginning August 19, 2003, the Company had the right to redeem
all or part of the shares of Series A Preferred for cash at a redemption price
equal to $6.50 per share plus all accrued and unpaid dividends on the shares to
be redeemed.  As of December 31, 2007, no dividends have been declared
and approximately $208,673 of dividends was in arrears related to the Series A
Preferred if the Company decided to declare dividends.
 
 As of
December 31, 2007 and 2006, the Company has 100,000 shares authorized and 43,000
shares issued and outstanding of Series B Convertible Preferred Stock (“Series B
Preferred”).  The shares have a par and stated value of $1.00 per
share.  The shares of the Series B Preferred rank senior to the common
stock in liquidation preference.  The Series B Preferred is
convertible into common stock of the Company at an initial conversion price of
$2.14 per share at the option of the holder.  Beginning October 1,
2003, the Company had the right to redeem all or part of the shares of Series B
Preferred for cash at a redemption price equal to $6.50 per share.
  55
 
 Stock
Warrants
 
 The
Company has periodically issued incentive stock warrants to executives,
officers, directors and employees to provide additional incentives to promote
the success of the Company’s business and to enhance the ability to attract and
retain the services of qualified persons.  Warrants have also been
issued as part of capital financing transactions.  The issuances of
such warrants are approved by the Board of Directors.  The exercise
price of a warrant granted is determined by the fair market value of the stock
on the date of grant.  The Company issues shares of authorized common
stock upon the exercise of the warrant.
 
 In
December 2004, the FASB issued SFAS 123(R), which is a revision of
SFAS 123.  SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock warrants, to be recognized as
stock-based compensation expense in the Company’s Consolidated Statements of
Operations based on their fair values.  For purposes of determining
compensation expense associated with stock warrants, the fair value of the
Company’s stock was determined based upon the Black-Scholes option pricing
model.
  For
warrants granted to employees or directors during 2007 and 2006, the fair value
of such warrants was estimated at the date of grant using a Black-Scholes
option-pricing model with the following assumptions:
 
 2007
                
                
                2006Dividend
      yield
                
                -0-
                
                
                -0-Expected
      volatility
                
                88%
      - 105%
                
                
                70%
      - 100%Risk
      free interest
                
                4.52%
                
                
                3.00%
      - 4.79Expected
      lives
                
                3-4
      years
                
                
                3–5
      years
 
 The
Black-Scholes option valuation model was developed for use in estimating fair
value of traded options or warrants that have no vesting restrictions and are
fully transferable.  In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.  Because the Company’s stock warrants have characteristics
significantly different from those of traded options/warrants, and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock
warrants.
 
 The
Company issued the following warrants in 2007 and 2006:
 
 Pursuant
to convertible debt issued in February of 2007, the Company issued 5,225,000
four year warrants to purchase common stock of the Company with an exercise
price of $1.40.  The fair value assigned to the warrants of $2,667,968
was recorded as a debt discount.  The warrant holder has certain
registration rights with regards to the warrant as described in the debt note
(Note 6).
 
 Pursuant
to convertible debt issued in November of 2007, the Company issued 1,982,145
three year warrants to purchase common stock of the Company with an exercise
price of $1.50.  The fair value assigned to the warrants of
$803,867  was recorded as a debt discount.  The warrant
holder has certain registration rights with regards to the warrant as described
in the debt note (Note 6).
 
 Pursuant
to a private placement done in February, 2006, the Company issued 964,285 three
year warrants, which were subsequently modified to four year warrants in 2007,
to purchase shares of the Company’s common stock with an exercise price of $2.00
per share to the accredited investors.  In addition, the Company
issued 96,429 warrants to purchase shares of the Company’s common stock to the
placement agency.  The warrants issued to the placement agent are
exercisable for four years, as modified in 2007, and have an exercise price of
$2.00 per share.  The shares of common stock underlying the warrants
have piggyback registration rights.  The fair value of the warrants of
$674,084 was offset in equity as a cost of raising capital.  The fair
value of the modification was also offset in equity as a cost of raising
capital.
 
 In
connection with the modification of the Revolving Credit Agreement with Fortuna
(Note 6), the Company modified the terms of 100,000 warrants held by Fortuna by
extending the expiration date from November 1, 2007 to October 15, 2011, and by
lowering the exercise price from $2.00 to $0.92 per share.  The
difference in value between the new and revised warrants of $37,302 was based on
the Black-Scholes Option Pricing Model and was recorded as additional debt
discount with an offset to additional paid in capital.  In addition to
the modification of warrants, the Company granted Fortuna 475,000 warrants at an
exercise price of $0.92 for a term of five years.  The warrants are
“puttable” back to Fortuna for a period of two years, commencing 180 days from
issuance, at a price of $0.65 per share.  In addition, there are
piggyback registration rights for the warrants upon the Company’s next
registration of any securities. In compliance with FAS 150 “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity”, the fair value of the warrants of $301,198 was recorded as a liability
in the accompanying financial statements and was marked-to-market as of December
31, 2007 to $321,140 rather than additional paid in capital.  The
warrants were valued by a third party using the Black-Scholes Option Pricing
Formula with a put option floor.  If settlement would have occurred at
December 31, 2007, the Company would have paid $308,750, which is the maximum
amount the Company could be required to pay to redeem the
instrument.
  56
 Table of Contents
  Pursuant
to a private placement done in December, 2006, the Company issued 6,440,000 five
year warrants to purchase shares of the Company’s common stock with an exercise
price of $0.92 per share to the accredited investors.  The shares of
common stock underlying the warrants have piggyback registration
rights.  The value of the warrants of $3,359,104 was recorded in
equity as a cost of raising capital.
 
 A summary
of the Company’s stock warrant activity and related information for the years
ended December 31, 2007 and 2006 follows:
 
 Weighted
                
                
                TotalAverage
                
                
                IntrinsicNumber
      of
                
                
                
                
                
                Weighted
                
                
                Grant
                
                
                ValueShares
                
                
                
                
                
                Average
                
                
                Date
      Fair
                
                
                WarrantUnder
                
                
                Exercise
                
                
                Exercise
                
                
                Value
                
                
                ExercisesWarrant
                
                
                Price
                
                
                Price
                
                
                ($/share)
                
                
                (1)Warrants
      outstanding at December 31, 2005
                
                
                8,495,058
                
                
                $
                0.98-$9.75
                
                
                $
                3.57Issued
                
                
                8,075,714
                
                
                $
                0.92-$2.00
                
                
                $
                1.06
                
                
                $
                0.54Exercised
                
                
                (178,233
                )
                
                $
                0.98
                
                
                $
                0.98
                
                
                
                
                
                
                $
                84,082Cancelled
                
                
                (2,244,849
                )
                
                $
                0.98-$1.63
                
                
                $
                5.41Warrants
      outstanding at December 31, 2006
                
                
                14,147,690
                
                
                $
                0.92-$9.75
                
                
                $
                1.88Issued
                
                
                7,207,145
                
                
                $
                1.40-$1.50
                
                
                $
                1.43
                
                
                $
                0.48Exercised
                
                
                -Cancelled
                
                
                (1,050,007
                )
                
                $
                4.88-$9.75
                
                
                $
                7.93Warrants
      outstanding at December 31, 2007
                
                
                20,304,828
                
                
                $
                .092-$2.00
                
                
                $
                1.41
 
 All
outstanding stock warrants are exercisable at December 31, 2007.  A
summary of outstanding stock warrants at December 31, 2007 follows:
 
 WeightedNumber
      of
                
                
                
                Remaining
                
                Average
                
                
                
                
                WeightedCommon
                
                
                
                Contracted
                
                Remaining
                
                
                
                
                Average
                
                AggregateStock
                
                Expiration
                
                Life
                
                Contractual
                
                Exercise
                
                
                Exercise
                
                IntrinsicEquivalents
                
                Date
                
                (Years)
                
                Term (Years)
                
                Price
                
                
                Price
                
                Value(1)150,000
                
                March
      2008
                
                
                .21
                
                
                
                $
                1.95
                
                
                $
                1.9520,000
                
                August
      2008
                
                
                .63
                
                
                
                $
                1.95
                
                
                $
                1.954,851,969
                
                November
      2008
                
                
                .88
                
                
                
                $
                0.98-$1.95
                
                
                $
                1.931,060,714
                
                February
      2010
                
                
                2.08
                
                
                
                $
                2.00
                
                
                $
                2.001,982,145
                
                November
      2010
                
                
                2.88
                
                
                
                $
                1.50
                
                
                $
                1.505,225,000
                
                January
      2011
                
                
                3.00
                
                
                
                $
                1.40
                
                
                $
                1.40575,000
                
                October
      2011
                
                
                3.79
                
                
                
                $
                .92
                
                
                $
                .926,440,000
                
                December
      2011
                
                
                3.92
                
                
                
                $
                .92
                
                
                $
                .9220,304,828
                
                
                
                
                
                
                2.72
                
                
                
                
                
                
                
                
                $350,750
 
 (1)
                The
      intrinsic value of a warrant is the amount by which the current market
      value of the underlying stock exceeds the exercise price of the warrant,
      or the market price at the end of the period less the exercise
      price.
 (2)
                The
      weighted average grant date fair value was determined by using the Black
      Scholes Option Pricing Model as described
above.
  57
 Table of Contents
  The
following table provides a detail of stock-based compensation incurred during
the years ended December 31, 2007, and 2006:
 
 2007
                
                
                2006Restricted
      stock – Interest Expense
                
                $
                574,897
                
                
                $
                -Restricted
      stock – General and Administrative
                
                
                127,726
                
                
                
                294,584Restricted
      stock – Property Costs
                
                
                1,677,000
                
                
                
                -Committed
      restricted stock
                
                
                288,172
                
                
                
                -Total
      stock-based compensation
                
                
                2,667,795
                
                
                
                294,584Less
      capitalized property costs
                
                
                (1,677,000
                )
                
                
                -Stock
      compensation expense, net of amounts capitalized
                
                $
                990,795
                
                
                $
                294,584
 
 The above
table excludes common stock issued for cash, warrants issued in financing
arrangements, debt discounts recorded in equity, and common stock issued for
exercise of warrants.  As of December 31, 2007, total compensation
cost related to nonvested awards of common stock not yet recognized is $131,250
which will vest and be recognized over three years.
 
 10.
                Related Party
      Transactions
 
 During
the years ended December 31, 2007 and 2006, the Company did not engage in any
transactions with related parties.
 
 11.
                Earnings Per
      Share
 
 Following
is a reconciliation of the numerators and denominators of the basic and diluted
EPS computations for the years ended December 31, 2007 and 2006:
 
 2007
                
                
                2006Net
      loss
                
                $
                (6,535,432
                )
                
                $
                (2,321,925
                )Less:  Preferred
      stock dividends
                
                
                (38,673
                )
                
                
                (38,673
                )Net
      loss available to common  stockholders
    (numerator)
                
                $
                (6,574,105
                )
                
                $
                (2,360,598
                )Weighted
      average shares of common stock
                
                
                39,476,379
                
                
                
                31,253,819Basic
      and diluted net loss per share
                
                $
                (0.17
                )
                
                $
                (0.08
                )
  58
  12.
                Non-Cash Investing and
      Financing Activities
 
 During
the years ended December 31, 2007 and 2006, the Company engaged in various
non-cash financing and investing activities as follows:
 
 2007
                
                
                2006Decrease
      in prepaid drilling for property costs
                
                $
                960,674
                
                
                $
                -Reduction
      in note receivable for property costs
                
                $
                -
                
                
                $
                282,532Issuance
      of common stock for acquisition of property
                
                $
                1,677,000
                
                
                $
                -Reduction
      in financing costs for transfer of overriding royalty
    interest
                
                $
                -
                
                
                $
                46,348Increase
      in accounts payable and accrued liabilities for property costs and prepaid
      drilling
                
                $
                2,417,603
                
                
                $
                870,080Change
      in property costs associated with asset retirement
    obligation
                
                $
                103,655
                
                
                $
                243,172Increase
      in accrued liabilities for costs of raising capital
                
                $
                -
                
                
                $
                193,050Issuance
      of warrants with debt
                
                $
                3,471,835
                
                
                $
                338,500Beneficial
      conversion feature on convertible debt
                
                $
                2,667,968
                
                
                $
                -Issuance
      of notes payable for financing costs
                
                $
                675,000
                
                
                $
                -Reclass
      of financing costs to debt discount
                
                $
                306,088
                
                
                $
                -
  13.
                Impairment and Sale of
      Oil and Gas Properties
 
 At
December 31, 2007 and 2006, the net capitalized costs of crude oil and natural
gas properties included in the amortization base did not exceed the present
value of the estimated reserves; as such, no write-down was
recorded.
 
 14.
                Supplemental Oil and
      Gas Information – Unaudited
 
 The
following supplemental information regarding the oil and gas activities of the
Company is presented pursuant to the disclosure requirements promulgated by the
Securities and Exchange Commission ("SEC") and SFAS No. 69, Disclosures About
Oil and Gas Producing Activities (`Statement 69").
 
 Estimated Quantities of
Proved Oil and Gas Reserves
 
 Set forth
below is a summary of the changes in the estimated quantities of the Company's
crude oil and condensate, and gas reserves for the periods indicated, as
estimated by the Company as of December 31, 2007.  All of the
Company's reserves are located within the United States.  Proved
reserves cannot be measured exactly because the estimation of reserves involves
numerous judgmental determinations.  Accordingly, reserve estimates
must be continually revised as a result of new information obtained from
drilling and production history, new geological and geophysical data and changes
in economic conditions.
 
 Proved
reserves are estimated quantities of gas, crude oil, and condensate, which
geological and engineering data demonstrate, with reasonable certainty, to be
recoverable in future years from known reservoirs under existing economic and
operating conditions.  Proved developed reserves are proved reserves
that can be expected to be recovered through existing wells with existing
equipment and operating methods.
  59
 
 Oil
                
                
                GasQuantity of Oil and
      Gas Reserves
                
                (Bbls)
                
                
                (Mcf)Total
      proved reserves at December 31, 2005
                
                
                2,345,794
                
                
                
                1,843,747Extensions
      and discoveries
                
                
                3,421
                
                
                
                455,000Production
                
                
                (16,489
                )
                
                
                (17,504
                )Revisions
      to previous estimate
                
                
                (575,085
                )
                
                
                (971,834
                )Total
      proved reserves at December 31, 2006
                
                
                1,757,641
                
                
                
                1,309,409Extensions
      and discoveries
                
                
                -
                
                
                
                1,978,298Production
                
                
                (13,506
                )
                
                
                (135,061
                )Revisions
      to previous estimate
                
                
                (12,720
                )
                
                
                (460,436
                )Sale
      of property
                
                
                (19,091
                )
                
                
                (9,000
                )Total
      proved reserves at December 31, 2007
                
                
                1,712,324
                
                
                
                2,683,210Proved
      developed reserves:December
      31, 2007
                
                
                257,660
                
                
                
                993,730December
      31, 2006
                
                
                263,604
                
                
                
                557,409
  Capitalized Costs of Oil and
Gas Producing Activities
 
 The
following table sets forth the aggregate amounts of capitalized costs relating
to the Company's oil and gas producing activities and the aggregate amount of
related accumulated depletion, depreciation and amortization as of December 31,
2007 and 2006:
 
 2007
                
                
                2006Unevaluated
      properties, not subject to amortization
                
                $
                7,099,601
                
                
                $
                6,309,169Properties
      subject to amortization
                
                
                33,235,534
                
                
                
                23,462,639Total
      capitalized costs
                
                
                40,335,135
                
                
                
                29,771,808Less
      accumulated depletion, depreciation  and
      amortization
                
                
                (3,186,191
                )
                
                
                (2,307,020
                )Net
      capitalized costs
                
                
                37,148,944
                
                
                $
                27,464,788
 
 Costs Incurred in Oil and
Gas Producing Activities
 
 The
following table reflects the costs incurred in oil and gas property acquisition,
exploration and development activities during the years ended December 31, 2007
and 2006:
 
 2007
                  
                  
                  2006Acquisition
      costs
                  
                  $
                  4,132,070
                  
                  
                  $
                  3,884,783Exploration
      costs
                  
                  $
                  6,208,979
                  
                  
                  $
                  8,345,181Development
      costs
                  
                  $
                  222,278
                  
                  
                  $
                  2,687,742
 60
  Standardized Measure of
Discounted Future Net Cash Flows
 
 The
following table reflects the Standardized Measure of Discounted Future Net Cash
Flows relating to the Company's interest in proved oil and gas reserves as of
December 31, 2007 and 2006:
 
 2007
                
                
                2006Future
      cash inflows
                
                $
                168,883,862
                
                
                $
                110,627,480Future
      development and production costs
                
                
                (59,067,028
                )
                
                
                (50,421,345
                )Future
      net cash inflows before income taxes
                
                
                109,816,834
                
                
                
                60,206,135Future
      income taxes
                
                
                (29,877,612
                )
                
                
                (9,611,255
                )Future
      net cash flows
                
                
                79,939,222
                
                
                
                50,594,88010%
      discount factor
                
                
                (39,550,071
                )
                
                
                (25,820,824
                )Standardized
      measure of discounted future net cash inflow
                
                $
                40,389,151
                
                
                $
                24,774,056
 
 The
following are the principal sources of change in the standardized measure of
discounted future net cash flows during 2007:
 
 Beginning
      of year
                
                $
                24,774,056Sales
      of oil and gas produced, net of production costs
                
                
                (1,095,749
                )Net
      changes in prices and production costs
                
                
                22,552,380Extensions,
      discoveries, and improved recovery, less related costs
                
                
                2,180,055Sale
      of property
                
                
                (373,056
                )Development
      costs incurred during the period
                
                
                4,460,811Revisions
      of estimated development costs
                
                
                (3,553,848
                )Revisions
      of previous quantity estimates
                
                
                (1,677,813
                )Accretion
      of discount
                
                
                2,477,406Net
      change in income taxes
                
                
                (9,355,091
                )$
                40,389,151
 
 Total
standardized measure of discounted future net cash inflow increased to
$40,389,151 as of December 31, 2007 from $24,774,056 as of December 31,
2006.  The primary reason for the increase in discounted future cash
flows is the increase in oil prices as of December 31, 2007 as compared to
December 31, 2006.
 
 Standardized Measure of
Discounted Future Net Cash Flows
 
 Future
net cash flows at each year end, as reported in the above schedule, were
determined by summing the estimated annual net cash flows computed by: (1)
multiplying estimated quantities of proved reserves to be produced during each
year by current prices, and (2) deducting estimated expenditures to be incurred
during each year to develop and produce the proved reserves (based on current
costs).
 
 Income
taxes were computed by applying year-end statutory rates to pretax net cash
flows, reduced by the tax basis of the properties and available net operating
loss carryforwards.  The annual future net cash flows were discounted,
using a prescribed 10% rate, and summed to determine the standardized measure of
discounted future net cash flow.
 
 The
Company cautions readers that the standardized measure information which places
a value on proved reserves is not indicative of either fair market value or
present value of future cash flows.  Other logical assumptions could
have been used for this computation which would likely have resulted in
significantly different amounts.  Such information is disclosed solely
in accordance with Statement 69 and the requirements promulgated by the SEC to
provide readers with a common base for use in preparing their own estimates of
future cash flows and for comparing reserves among
companies.  Management of the Company does not rely on these
computations when making investment and operating decisions.
  61
 Table of Contents
  14.
                Subsequent
      Events
 
 With
regards to the North Texas/Panhandle Water Flood Project, in January, 2008, the
Company signed an agreement with Complete Production Services Inc. (“CPS”), an
international oilfield service company which provides that CPS, at its sole
expense, will design and construct a water treatment facility no later than 90
days from the effective date of the agreement that will be capable of treating
all of the project’s production water up to a maximum of 10,000 bbls per day and
likewise treat and provide to the project a minimum of 5,000 bbls per day
of  production water from third party sources.  The Company,
in turn, has committed to be capable of injecting not less than 2,000 bbls of
treated water per day derived from third party production water within 30 days
after the facility is opened, and have further committed to be capable of
injecting not less than 5,000 bbls of treated water per day derived from third
party production water within 180 days after the facility opens, in addition to
re-injecting its own treated production water from the oil and gas lease it
operates.  The Company will be required to pay a scaled management fee
to CPS commencing on the date the facility opens on the basis of the volume of
treated and re-injected water derived from the Company’s
production.  The Company is currently applying to regulatory agencies
to add more wells to the existing flood permit, as required under the agreement,
to ensure its ability to inject the volumes that CPS will make
available.  At present, the Company is in several negotiations with
potential industry venture partners to allow for the commencement of the flood
to begin as soon as possible.
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 Table of Contents
  SIGNATURES
 
 In accordance with the requirements
of Section 13 of 15(d) of the Exchange Act, the Registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
on January 15, 2009.
 
 
 PETROSEARCH
ENERGY CORPORATION
 
 By /s/
Richard D. Dole
 Richard
D. Dole
 President
and Chief Executive Officer
 
 In
accordance with the requirements of the Securities Act of 1933, this Form 10-KSB
has been signed below by or on behalf of the following persons in the capacities
and on the dates stated.
 
 Signature
                Title
                DateBy
      /s/ Richard D. Dole
                President,
      Chief Executive Officer
                January
      15, 2009Richard
      D. Dole
                and
      Chairman of the BoardBy
      /s/ David J. Collins
                Chief
      Financial Officer, Chief Accounting Officer
                January
      15, 2009David
      J. Collins
                and
      Principal Financial OfficerBy
      /s/ Gerald Agranoff
                Director
                January
      15, 2009Gerald
      AgranoffBy
      /s/ Richard Majeres
                Director
                January
      15, 2009Richard
      Majeres




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