UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-K








T
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
fiscal year ended December 31,
2008





£
            TRANSITION
      REPORT PURSUANT TO SECTION 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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes £ No T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No T





Indicate
by check mark whether the issuer: (i) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 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 £





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by referencein Part III of this Form 10-K or
any amendment to this Form 10-K.. T





Indicate
by check mark whether the issuer is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in rule 12b-2 of the Exchange Act.





Large
      accelerated filer £
              Accelerated
      filer £
              Non-accelerated
      filer £
              Smaller
      reporting Company T





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T





The
aggregate market value of common stock held by non-affiliates of the registrant
at March 5, 2009, based upon the last reported sales prices on the OTCBB, was
$3,863,418





As of
March 5, 2009, there were approximately 41,310,578 (net of 1,117,973 treasury
shares) shares of common stock outstanding.













TABLE OF CONTENTS








PART
      I
                    PageItem
      1.
                    Business
                    1Item
      1A.
                    Risk Factors
                    2Item
      2.
                    Properties
                    6Item
      3.
                    Legal Proceedings
                    10Item
      4.
                    Submission of Matters to a Vote of Security
      Holders
                    11PART
      IIItem
      5.
                    Market for Registrant’s Common Equity, Related
      Stockholder   Matters and Issuer Purchases of Equity
      Securities
                    11Item
      7.
                    Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                    13Item
      8.
                    Financial Statements and Supplementary Data
                    21Item
      9.
                    Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                    21Item
      9A.
                    Controls and Procedures
                    21Item
      9B.
                    Other Information
                    22PART
      IIIItem
      10.
                    Directors, Executive Officers and Corporate
      Governance
                    22Item
      11.
                    Executive Compensation
                    25Item 12.
                    Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                    27Item
      13.
                    Certain Relationships and Related Transactions, and Director
      Independence
                    28Item
      14.
                    Principal Accountant Fees and Services
                    28Item
      15.
                    Exhibits, Financial Statement Schedules
                    29





Table of Contents





PART
I




ITEM
      1.
            BUSINESS





Overview





Petrosearch
Energy Corporation (the “Company”, “Petrsearch” and “we”), 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 current
operations focused in North Texas with existing production in Texas and
Oklahoma.   A majority of our effort since the sale of our
Barnett Shale Project in July, 2008 has been to focus on pursuing strategic
alternatives for the Company that will create the most value for our
shareholders, as well as  focusing on the development of our Texas
Panhandle water flood that we operate .





Our
History





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.





Shares of
our common stock 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 on a waterflood project in
North Texas. Our strategic goal is to build intrinsic shareholder value through
focused operations from this project while maintaining a low cost structure at
every level of our Company.  We have also been in the process of
identifying and evaluating other potential opportunities that would complement
our current business plan and create economic value.  We believe that
the Company has a strong financial position, given the lack of debt and
significant cash position.  We intend to use this strong position to
create value for the shareholders, whether it be in the form of a merger with a
public or private company, or a significant acquisition or sale.  The
Company is currently involved in ongoing negotiations with a third party in
connection with a possible merger transaction.  However, as of the
date of this agreement no defnititve documents have been executed and no
assurance can be given that a transaction will be entered into or completed.





On June
25, 2008 we executed a binding agreement for the sale of our limited partnership
interest in DDJET Limited LLP (“DDJET”) (“Barnett Shale project”) to Cinco
County Barnett Shale LLC (“Cinco”), one of the other two partners in DDJET, for
a cash purchase price of $36,000,000.  On June 26, 2008 Cinco paid to
Barnett Petrosearch the required $1,800,000 non-refundable deposit to be applied
to the purchase price and fulfilled all the other necessary requirements to bind
both Cinco and the Company to the sale.  On July 18, 2008 the Company
received the balance of the proceeds of the sale of $30,729,008, the net amount
after deducting the $1,800,000 down payment previously received from Cinco and
$3,470,992 of costs previously owed by the Company which were assumed by Cinco
pursuant to the June 25, 2008 agreement.





As of
December 31, 2008 we have $5,209,093 of pre-tax PV-10 (present value discounted
at 10% of future net revenues) for proved reserves associated with our
properties,.  See “Oil and Natural Gas Reserves” for a reconciliation
of 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.





As of
December 31, 2008, the Company had proved reserves of 1,662,786 barrels of oil
equivalent (Boe).  This is a decrease of 496,685, or twenty three
percent from the proved reserves as of December 31, 2007 which were 2,159,471
Boe.  This decrease relates to i) the sale of the Barnett Shale
project in July 2008; and ii) the reclassification of reserves from proved to
probable for the Gruman 18-1 due to mechanical and down-hole problems with the
well. As of December 31, 2008, the Company’s standardized measure of discounted
future net cash flows relating to the Company’s interest in proved oil and gas
reserves were $4,839,059.





1
 Table of Contents





Employees





As of
December 31, 2008, 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.





ITEM
      1A.
            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.





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, 2008 we incurred a net operating loss of
$18,811,019.  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.





The
trading price of our common stock entails additional regulatory requirements,
which may negatively affect such trading price.





Generally,
the Securities and Exchange Commission defines a “penny stock” as any equity
security not traded on an exchange or quoted on NASDAQ that has a market price
of less than $5.00 per share.  The trading price of our common stock
is below $5.00 per share.  As a result of this price level, our common
stock is considered a penny stock and trading in our common stock is subject to
the requirements of certain rules promulgated under the Securities Exchange Act
of 1934.  These rules require additional disclosure by broker-dealers
in connection with any trades generally involving penny stocks 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.





2
 Table of Contents





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).





3
 Table of Contents





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.





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.





4
 Table of Contents





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.





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-K 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.





5
 Table of Contents





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.





ITEM
      2.
            PROPERTIES





Barnett Shale Project -- In
December 2006, through our wholly owned subsidiary, Barnett Petrosearch LLC
(“Barnett Petrosearch”), we joined in the formation of a partnership, DDJET
Limited LLP (“DDJET”), for the development of a natural gas integrated venture
to explore and develop assets in the Barnett Shale. We owned a 5.54% interest in
DDJET along with partners Metroplex Barnett Shale LLC (a wholly owned subsidiary
of Exxon Mobil Corporation), and Cinco County Barnett Shale LLC (“Cinco” - a
privately held Dallas-based company).  On February 29, 2008 we
announced that we executed an authorization for the general partner of the
Partnership to immediately commence a sales marketing program to interested
potential purchasing parties in order to fully assess the current market value
of the Partnership.  On June 25, 2008 we executed a binding agreement
for the sale of our limited partnership interest in DDJET to Cinco, one of the
other two partners in DDJET, for a cash purchase price of
$36,000,000.  On June 26, 2008 Cinco paid to Barnett Petrosearch the
required $1,800,000 non-refundable deposit to be applied to the purchase price
and fulfilled all the other necessary requirements to bind both Cinco and the
Company to the sale.  On July 18, 2008 the Company received the
balance of the proceeds of the sale of $30,729,008, the net amount after
deducting the $1,800,000 down payment previously received from Cinco and
$3,470,992 of costs previously owed by the Company to the Partnership which were
assumed by Cinco pursuant to the June 25, 2008 agreement.





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 nine of
these older wells to determine their mechanical status and establish potential
productivity. Three of these wells have been equipped and are now capable of
producing. Another three wells have been equipped/converted for water injection
which was initiated in September 2008.  We have prepared a detailed
study and development plan for the field. As of December 31, 2008, 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.





6
 Table of Contents





To
provide 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,
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, which we have met.  We 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,
which we fully expect to meet.  In addition we are re-injecting our
own treated production water from the oil and gas lease we
operate.  We are required to pay a scaled management fee to CPS which
commenced on the date the facility opened on the basis of the volume of treated
and re-injected water derived from our production.  We have approval
from the regulatory agencies to add eight 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.





The
Company made the decision to commence the project and implement the first phase
of the water flood project using a portion of the proceeds from the sale of the
DDJET partnership interest.  This first phase, which commenced in
September 2008, enables the Company to spend the least amount of capital needed
to measure the level of initial response of the water injection.  The
Company will then be able to make decisions on the future development of the
project, and its impact on future potential strategic
alternatives.  Due to many different factors, a response time for the
water flood can not be accurately projected, but the Company is hopeful that the
initial level of response will be known in the next six months.  As of
the date of this filing there has been no meaningful response from the
waterflood.





Gruman Prospect, Stark County, North
Dakota -On March 28, 2006, we spudded the Gruman 18-3 well intended to
be either an increased density well if it proved to be up dip of the Gruman 18-1
producing well or a water injection well if it was down dip. The well reached
total depth of 9,890 feet on April 14, 2006, and was completed as an injection
well.  On February 1, 2007, we began injecting produced water into the
Gruman 18-3 well. The goal was to reduce the cost of operating the Gruman 18-1
by eliminating the need to truck produced water to a disposal
facility.  Further testing or stimulation may be necessary to achieve
the desired future injection rates.





During
2008 the pump on the Gruman 18-1 producer has been repaired or replaced three
times.  The pump was last repaired in early July 2008 after which
fluid flow into the wellbore diminished to near zero.  In order to
re-establish production we are considering supplementing the produced water
injection volume in the Gruman 18-3 well with water from the Dakota formation
for pressure maintenance in the mound. Further, we are giving consideration to
deepening the 18-1 well to expose more of the mound.  The Gruman well
continued to have pump and motor issues.  This along with an
unexpected decline in reservoir pressure has severely affected our ability to
produce the well.  There has been no production on the well since May
2008.  Additionally, due to the mechanical and down-hole problems with
the well, the reserves that were previously classified as proved are no longer
able to be classified as such.





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 670


Houston,
      TX 77057
            Dallas,
      Texas  75206





7
 Table of Contents





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, 2008 our standardized measure of discounted future net cash flows
was $4,839,059. 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, 2008.
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.





Net
      present value of future net cash flows, before income
taxes
                      
                      $
                      5,209,093Future
      income taxes, discounted at 10%
                      
                      
                      (370,034
                      )Standardized
      measure of discounted future net cash flows
                      
                      $
                      4,839,059





The
following table sets forth summary information with respect to our proved
reserves as of December 31, 2008, as estimated by compiling reserve information,
which was prepared by the engineering firms of Ryder Scott Company 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, 2008Proved
      Developed
                    
                    
                    13,077
                    
                    
                    
                    -
                    
                    
                    
                    13,077
                    
                    
                    $
                    215,417Proved
      Undeveloped
                    
                    
                    1,522,042
                    
                    
                    
                    766,000
                    
                    
                    
                    1,649,709
                    
                    
                    $
                    4,993,676Total
      Proved
                    
                    
                    1,535,119
                    
                    
                    
                    766,000
                    
                    
                    
                    1,662,786
                    
                    
                    $
                    5,209,093





(1)Estimated
using a conversion ratio of 1.0 Bbl/6.0 Mcf (thousand cubic feet).





Total
pre-tax PV-10 value decreased to $5,209,093 as of December 31, 2008 from
$55,485,780  as of December 31, 2007.  The factors that
caused the significant decrease in the PV-10 value and the decrease in the
reserve quantities from 2007 to 2008 were related mainly to i) the significant
decrease in the price of oil as of the end of 2008 as opposed to the end of
2007; ii) the sale of the Barnett Shale project in July 2008; and iii) the
mechanical and down hole problems associated with our Gruman 18-1 well in North
Dakota that caused the reserves to be reclassified as probable, as opposed to
proved.





8
 Table of Contents





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.





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 5, 2009:





No. of
                    Wells
                  
                  
                  WI
                    (Oil)
                  
                  
                  WI
                    (Gas)Gordon
      1-18
                  
                  
                  1
                  
                  
                  
                  95
                  %
                  
                  
                  N/AQuinduno(1)
                  
                  
                  4
                  
                  
                  
                  100
                  %
                  
                  
                  100
                  %Corbett
      N. 13 #1
                  
                  
                  1
                  
                  
                  
                  10
                  %
                  
                  
                  10
                  %Total
      Productive Wells
                  
                  
                  6





(1)
            Project
      in which the Company’s working interest reduces to 90% (as described
      herein– North Texas/Panhandle Water Flood Project
  Section)





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 5, 2009:





Wells
                      
                      
                      AcreageState
                      
                      
                      
                      Gross
                      
                      
                      Net
                      
                      
                      Gross
                      
                      
                      NetDeveloped
      acreage:Texas:Maddox
      (Quinduno)
                      
                      16
      Oil
                      
                      
                      16
                      
                      
                      
                      16
                      
                      
                      
                      1,755
                      
                      
                      
                      1,755North
      Dakota
                      
                      Oil
                      
                      
                      1
                      
                      
                      
                      .85
                      
                      
                      
                      280
                      
                      
                      
                      238Oklahoma:Gordon
      1-18
                      
                      Oil
                      
                      
                      1
                      
                      
                      
                      .95
                      
                      
                      
                      610
                      
                      
                      
                      579Corbett
      N.#13-1
                      
                      Gas
                      
                      
                      1
                      
                      
                      
                      .10
                      
                      
                      
                      552
                      
                      
                      
                      55Total
      Developed
                      
                      
                      
                      
                      19
                      
                      
                      
                      
                      
                      
                      
                      3,197
                      
                      
                      
                      2,627Undeveloped
      acreage:N/A
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      Undeveloped
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      
                      
                      19
                      
                      
                      
                      
                      
                      
                      
                      3,197
                      
                      
                      
                      2,627





9
 Table of Contents





Operator
Activities





We
currently operate 100% of our producing properties, and generally seek to become
the operator of record on properties we drill or acquire.





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, 2008, range from a direct working interest of 100% to
10%.  In 2008 we drilled two wells in our Barnett Shale Project that
was sold in June of 2008.  Additionally, there were two wells in our
Barnett Shale Project that were drilled as of June 30, 2008 but were not
completed before our sale of the Project in July 2008.





Year Ended
December 31,2008
                  
                  
                  2007
                  
                  
                  2006Development
      Wells:Productive
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1Non-Productive
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1Total
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2Exploratory
      Wells:Productive
                  
                  
                  2
                  
                  
                  
                  12
                  
                  
                  
                  1Non-Productive
                  
                  
                  -
                  
                  
                  
                  3
                  
                  
                  
                  1Total
                  
                  
                  2
                  
                  
                  
                  15
                  
                  
                  
                  2Total
      Wells:Productive
                  
                  
                  2
                  
                  
                  
                  12
                  
                  
                  
                  2Non-Productive
                  
                  
                  -
                  
                  
                  
                  3
                  
                  
                  
                  22
                  
                  
                  
                  15
                  
                  
                  
                  4





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, 2008 and December 31, 2007





2008
                  
                  
                  2007Average
      sales price per barrel of oil
                  
                  $
                  90.99
                  
                  
                  $
                  69.55Average
      sales price per Mcf of gas
                  
                  $
                  8.90
                  
                  
                  $
                  6.19Lifting
      costs per barrel of oil equivalent*
                  
                  $
                  34.77
                  
                  
                  $
                  20.32





*
Excludes the costs of re-entry into wells to assess non-producing
assets





ITEM
      3.
            LEGAL
      PROCEEDINGS





On April
11, 2007, the Company was served with a lawsuit filed against it titled Cause
No. 2007-16502; D. John Ogren, R. Bradford Perry and Chester Smitherman v.
Petrosearch Corporation; 133rdJudicial District Court, Harris County, Texas.  The plaintiffs
were three (3) Series A Preferred shareholders who derived their original shares
from Texas Commercial Resources, Inc. (“TCRI”) and became Series A Preferred
shareholders of Petrosearch Energy Corporation as a result of the prior
mergers.  The plaintiffs had alleged that Petrosearch Corporation (and
TCRI, its predecessor) failed to pay accrued, cumulative dividends and refused
to allow conversion of their Series A Preferred Stock into Common
Stock.    The plaintiffs had alleged breach of contract,
fraud and violation of Section 33 of the Texas Securities Act and have requested
the award of actual and exemplary damages, interest and attorneys’
fees.   The lawsuit likewise requested the Court to compel the
payment of accrued dividends and the examination of the Company’s books and
records. The lawsuit was settled in September 2008 and the settlement was paid
100% by the Company's insurance policy.  The payment of the settlement
is not an admission of liability, as the Company denies all allegations of
wrongdoing contained in the lawsuit.





10
 Table of Contents





The
Company currently is not a party to any other material pending legal
proceedings.





ITEM4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND 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,
2008.





Quarter
                
                High
                
                
                Low1st
      Quarter 2007
                
                $
                1.60
                
                
                $
                0.612nd
      Quarter 2007
                
                $
                1.85
                
                
                $
                1.203rd
      Quarter 2007
                
                $
                1.59
                
                
                $
                1.004th
      Quarter 2007
                
                $
                1.25
                
                
                $
                0.741st
      Quarter 2008
                
                $
                0.98
                
                
                $
                0.572nd
      Quarter 2008
                
                $
                0.81
                
                
                $
                0.283rd
      Quarter 2008
                
                $
                0.55
                
                
                $
                0.264th
      Quarter 2008
                
                $
                0.29
                
                
                $
                0.12





Treasury
Stock – Stock Repurchase Plan





In July
2008 the Board of Directors approved a stock repurchase plan (the “Repurchase
Plan”) in which the Company is authorized to repurchase up to $5 million of
market value or 10 million shares of its common stock in open market purchases
or in privately negotiated transactions. The purchases are to be at the
discretion of senior management and will be dependent upon market conditions.
The Repurchase Plan did not require any minimum purchase and can be suspended or
terminated by the Board of Directors at any time.





In
October and November of 2008, the Company purchased 214,800 shares of its common
stock at an average share price of approximately $0.21 to be classified as
treasury stock.  In February 2009 the Company purchased 903,173 shares
of its common stock at an average price of $0.18 (see below).  As of
March 5, 2009 pursuant to the Repurchase Plan the company has purchased an
aggregate of 1,117,973 shares of common stock at an average price of
$.186.  All purchase prices were negotiated based on recent market
prices.





In
February of 2009, the Company entered into an agreement with a warrant holder
which provides for the following:  1) purchase by the Company of
903,173 shares of common stock held by the warrant holder, 2) purchase by the
Company of 5,000,000 warrants of the warrant holder, and 3) settlement of any
and all liquidated damages under the registration rights of the
warrants.   The total amount paid by the Company to the warrant
holder as part of this agreement is $285,000 which was paid in February of
2009.





Warrant
Buybacks





In
February and March of 2009 the Company repurchased 13,930,479 of the 14,807,859
total warrants outstanding as of December 31, 2008 for an average purchase price
of less than $0.01 per warrant as negotiated.  These warrants have
been cancelled.  The balance of the warrants now outstanding
represents 6.4% of the total outstanding warrants as of December 31, 2008 and
leaves the Company with a total of 877,380 warrants as of the date of this
filing.





Record
Holders





On March
5, 2009, the last sales price for the common stock as reported on the OTCBB was
$0.14 and there were 41,310,578 shares (net of 1,117,973 treasury shares) common
shares outstanding.  On March 5, 2009, there were approximately 2,500
stockholders of record of the common stock.





11
 Table of Contents





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.





On
September 4, 2008 the Company filed Preliminary Schedule 14A stating that at the
annual shareholder meeting the Company plans to seek shareholder approval to
amend the Articles of Incorporation to increase the number of authorized shares
of common stock from 100,000,000 to 300,000,000.  The proposed
increase in the authorized Common Stock was recommended by the Board to assure
that an adequate supply of authorized unissued shares is available for use
primarily in connection with corporate transactions, such as mergers and/or
acquisitions. However; the Company at this time has decided to delay the
shareholders meeting pending its decision regarding its plans to pursue
strategic alternatives for the Company.





ISSUER
PURCHASES OF EQUITY SECURITIES





Period
                    
                    (a) Total Number of Shares (or Units)
      Purchased (1)
                    
                    
                    (b) Average Price Paid per Share (or
      Unit)
                    
                    
                    (c) Total Number of Shares (or Units) Purchased as
      Part of Publicly Announced Plans or Programs
                    
                    (d) Maximum Number (or Approximate Dollar Value)
      of Shares (or Units) that May Yet Be Purchased Under the Plans or
      ProgramsOctober
      2008 (October 10 - October 17)
                    
                    
                    194,800
                    
                    
                    $
                    0.21
                    
                    
                    
                    194,800November
      2008 (November 3)
                    
                    
                    20,000
                    
                    
                    $
                    0.20
                    
                    
                    
                    20,000February
      2009 (February 18)
                    
                    
                    903,173
                    
                    
                    $
                    0.18
                    
                    
                    
                    903,173Total
                    
                    
                    1,117,973
                    
                    
                    $
                    0.19
                    
                    
                    
                    1,117,973
                    
                    8,882,027
      shares/$4,792,741
(2)





(1)
            All
      of the shares purchased were through a plan publicly announced on July 2,
      2008





(2)
            This
      plan for the repurchase of $5 million of market value or 10 million shares
      of its common stock was announced on July 2, 2008. Any purchases under the
      plan are anticipated to occur over the 12 month period ending on July 1,
      2009.  The repurchase plan may be suspended or terminated at any
      time.





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.





12
 Table of Contents





EQUITY COMPENSATION PLAN
INFORMATION





The
following table sets forth all equity compensation plans as of December 31,
2008:





Plan
      category
                        
                        Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                          
                          (a)
                        
                        
                        Weighted-average
      exercise price of outstanding options, warrants and rights
                          
                          (b)
                        
                        
                        Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                          
                          (c)Equity
      compensation plans approved by security holders
                        
                        
                        N/A
                        
                        
                        
                        N/A
                        
                        
                        
                        N/AEquity
      compensation plans not approved by security holders
                        
                        
                        N/A
                        
                        
                        
                        N/A
                        
                        
                        
                        N/ATotal
                        
                        
                        N/A
                        
                        
                        
                        N/A
                        
                        
                        
                        N/A





RECENT
SALES OF UNREGISTERED SECURITIES





All
previous sales of unregistered securities during 2008 have been previously
disclosed in Form 10-Q’s and Form 8-Ks.





ITEM7.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Overview





We
believe we have been successful over the past several years at building a
quality portfolio of oil and gas assets through economical financings and when
necessary, monetizing those assets at opportune times to create the most value
for the Company.  Given the current market conditions over the broad
economy and more specifically the oil and natural gas market, the sale of our
Barnett Shale asset in July 2008 near the peak of natural gas prices was
extremely fortunate.  The sale left the Company with a substantive
cash balance, no debt and a significant waterflood asset.  We intend
to use this strong position to create value for the shareholders, whether it is
in the form of a merger with a public or private company, or a significant
acquisition or sale.  The Company is currently involved in ongoing
negotiations with a third party in connection with a possible merger
transaction.  However, as of the date of this agreement no definitive
documents have been executed and no assurance can be given that a transaction
will be entered into or completed.





RESULTS
OF OPERATIONS





The
following discussion should be read in conjunction with our audited consolidated
financial statements as of December 31, 2008 and the related notes to the
financial statements.





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, 2008 Compared to the Year Ended December 31,
2007





Revenues





Consolidated
oil and gas production revenue for the year ended December 31, 2008 was
$1,400,480 versus $1,827,664 for the year ended December 31,
2007.   The decrease in revenue is from the decrease in
production associated with the down-hole mechanical and pressure depletion
problems associated with the Gruman – North Dakota well and as a result of the
sale of the SW Garwood properties in May 2008.  The significant
decrease from these two properties was partially offset by increased revenues
from our Barnett Shale project which was sold in July 2008.  See below
for revenue detail for the years ended December 31, 2008 and 2007.





13
 Table of Contents




12/31/2008
                                          
                                          
                                          %
      of
                                          
                                          
                                          12/31/2007
                                          
                                          
                                          %
      ofYTD
                                          
                                          
                                          Total
                                          
                                          
                                          YTD
                                          
                                          
                                          TotalBarnett
      Shale
                                          
                                          $
                                          999,945
                                          
                                          
                                          
                                          71
                                          %
                                          
                                          $
                                          601,814
                                          
                                          
                                          
                                          33
                                          %Gruman
      - North Dakota
                                          
                                          
                                          177,436
                                          
                                          
                                          
                                          13
                                          %
                                          
                                          
                                          790,976
                                          
                                          
                                          
                                          43
                                          %SW Garwood
                                          
                                          
                                          26,255
                                          
                                          
                                          
                                          2
                                          %
                                          
                                          
                                          220,356
                                          
                                          
                                          
                                          12
                                          %Panhandle
      - Water Flood
                                          
                                          
                                          9,442
                                          
                                          
                                          
                                          1
                                          %
                                          
                                          
                                          12,854
                                          
                                          
                                          
                                          1
                                          %Oklahoma
                                          
                                          
                                          165,904
                                          
                                          
                                          
                                          12
                                          %
                                          
                                          
                                          150,240
                                          
                                          
                                          
                                          8
                                          %Other
                                          
                                          
                                          21,498
                                          
                                          
                                          
                                          2
                                          %
                                          
                                          
                                          51,424
                                          
                                          
                                          
                                          3
                                          %Total
                                          
                                          $
                                          1,400,480
                                          
                                          
                                          
                                          100
                                          %
                                          
                                          $
                                          1,827,664
                                          
                                          
                                          
                                          100
                                          %





To
further explain the variance in revenue from 2007 to 2008, we have provided the
following break-out of production and prices for the two years.





2008
                      
                      
                      2007Barrels
      of Oil
                      
                      
                      3,790
                      
                      
                      
                      12,842Price
      per Barrel
                      
                      $
                      90.99
                      
                      
                      $
                      69.55Mcf
      of Gas
                      
                      
                      115,464
                      
                      
                      
                      135,061Price
      per Mcf
                      
                      $
                      8.90
                      
                      
                      $
                      6.19





As noted
in the above table, the increase in oil and gas prices helped offset the
decrease in revenue since 2007 from lower production.  The total
effects on revenue from the oil and gas price increases were approximately
$275,357 and $366,248, respectively.





Lease
Operating and Production Tax Expense





Lease
operating and production tax expenses for the year ended December 31, 2008 was
$808,172 versus $731,915 for the year ended December 31, 2007,
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 twenty three percent decrease in
revenue from the year ended December 31, 2007 to the year ended December 31,
2008, the lease operating expenses increased ten percent because of increased
expense work-over related to the Quinduno Field and the Gruman – North Dakota
wells.  The workovers for the Quinduno field were related to the
commencement of the initial stags of the waterflood in 2008, while the workovers
related to the Gruman North Dakota well were done in an attempt to resolve the
mechanical and down-hole issues with the well.  Unfortunately, the
workovers on the Gruman – North Dakota well were not successful in getting the
well back to producing.





Depletion,
Depreciation and Amortization





Costs for
depletion, depreciation and amortization for the year ended December 31, 2008,
and 2007, were $577,394 and $909,311, respectively.  This decrease is
mainly due to a significant decrease in the amortizable costs at December 31,
2008 as compared to the same period in 2007 and a significant decrease in
production for that same period.  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, 2008 was significantly lower
than the depletion for the same period in 2007.





General
and Administrative Expenses





General
and administrative expenses for the years ended December 31, 2008 and 2007 were
$3,112,047 and $3,022,739, respectively.  The difference of $89,308 is
approximately a three percent increase.  Although the total general
and administrative expenses had a minimal increase from 2007 to 2008 personnel
costs were up twenty nine percent; however, this increase in personnel cost was
off set by a decrease in travel, corporate, accounting, legal and professional,
third party consultants and office expenses.  The increase in
personnel costs was due mainly to the issuance of equity bonuses (non-cash) to
management and all full time employees. These non-cash bonuses were awarded to
management and employees in 2008 given the fact that all of the management and
employees stock warrants had expired in 2008.  A summary listing of
general and administrative expenses is provided below.





14
 Table of Contents




YE December 31
                
                
                YE December 31,2008
                
                
                2007Personnel
      Costs
                
                $
                1,739,296
                
                
                $
                1,345,281Travel,
      Meals, and Entertainment
                
                
                45,097
                
                
                
                53,609Corporate
      Expenses
                
                
                249,269
                
                
                
                311,371Accounting,
      Legal, and Professional Fees
                
                
                548,967
                
                
                
                762,684Third
      Party Consultants and Contractors
                
                
                206,584
                
                
                
                239,440Office
      Expenses
                
                
                190,654
                
                
                
                203,539Other
                
                
                132,180
                
                
                
                106,815Total
      General and Administrative
                
                $
                3,112,047
                
                
                $
                3,022,739





Net
Operating Loss





We
generated a net operating loss of $(18,811,019), for the year ended December 31,
2008, compared to a net operating loss of $(2,836,301), for the year ended
December 31, 2007.  The main reason for the significant difference of
$(15,974,718) relates to a required non-cash impairment of the Company’s oil and
gas properties.  Under the Full Cost Method of accounting for oil and
gas properties, there is a ceiling on the amount of capitalized costs of
assets.  That “ceiling” mainly refers to the fact that the net
unamortized oil and gas assets can not exceed the present value discounted at
10% of future net revenues (“PV-10”) of the proved reserves.  Due to
the significant


decrease
in oil and gas prices as of December 31, 2008, the PV-10 of our proved reserves
was significantly lower than our unamortized costs, resulting in a significant
non-cash impairment.  The variance also related to a decrease in
revenues, offset by a significant decrease in depreciation, depletion and
amortization  and minimal increases in general and administrative and
lease operating expenses.





Other
Income (Expense)





We had
Other Income of $15,768,571 for the year ended December 31, 2008, compared to
Other Expense of $3,699,131 for the year ended December 31, 2007, an increase of
$19,467,702 from the prior year.   This increase is mainly due to
the gain on the sale of our Barnett Shale project and a decrease in interest
expense resulting from extinguishment of all debt in 2008, which were partially
offset by a loss on extinguishment of debt in 2008.





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. The sale of the Barnett Shale
interest will significantly reduce our production revenues going forward as
indicated by the fact that the Barnett Shale consisted of 33% of the revenue for
the year ended December 31, 2007.  The continued pump and reservoir
issues with the Gruman – North Dakota well will also negatively impact our
future revenues given the fact that the Gruman well accounted for 43% of the
revenues for the year ended December 31, 2007.   Therefore, due
to the sale of the Barnett interest and the operational issues with the Gruman –
North Dakota well we note that our past performance with regard to revenues and
cash flow will not be indicative of future expected
results.   See below for revenue detail by property for the years
ended December 31, 2007 and 2006.





15
 Table of Contents




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
                                          %





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.  Also a major impact on the increase
in revenues was the significant increase in Mcf of gas produced, mainly from our
Barnett Shale project and partially from our SW Garwood project.  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.





16
 Table of Contents




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.





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 note and the warrant, and executed a Pledge and
Security Agreement and a Registration Rights Agreement.  These
convertible notes were repaid in full on July 21, 2008.  In exchange
for cancelling the note and releasing the collateral the note holders were paid
the outstanding principal and accrued interest through July 21,
2008.





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 was repaid
in full on July 21, 2008.  In exchange for cancelling the note and
releasing the collateral, the note holder was paid the outstanding principal and
accrued interest through July 21, 2008.





17
 Table of Contents





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.





It was
decided in April 2008 that the Kallina 46#1 well was uneconomic and the decision
was made that the well needed to be plugged and abandoned.  In May
2008 the Company received a full release of all the liens, security interests,
rights, claims and benefits of every kind in, on and under the November 2006
Secured Term Note with Laurus Master Fund, Ltd, as well as that same release on
all the other collateral documents associated with that
financing.  The November 2006 financing was specifically recourse to
the Kallina 46#1 well and the associated lease acreage only.  The debt
related to the Laurus financing was extinguished on the financial statements of
the Company in May, 2008 as well as any interest that was charged in relation to
the Note was reversed in that same period.





As part
of this transaction, the Company has conveyed their interest in the Kallina 46#1
well and the associated lease acreage to a third party along with the Company’s
interest in the Pintail #1 well, Pintail Flats #1 well and the associated
acreage of Pintail and Pintail Flats.  Also as a part of this
transaction, the Company has transferred operatorship of all the existing and
future wells in this SW Garwood Prospect to the third party. In exchange for the
conveyance of the wells and acreage and the transfer of operatorship, the
Company received nominal cash consideration as well as the third party has
assumed the liability of plugging the Kallina 46#1 well.





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 remained $10,000,000.  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 contain a “put” provision which allows 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
issuance.  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 became due and a payment of
$1,602,500 was paid in full to Fortuna Energy.  As per the revolving
credit agreement, as part of being paid back in full, Fortuna Energy returned to
the Company all of the overriding royalties issued to Fortuna
Energy.  The main override related to a 2% override in the Company’s
North Dakota, Gruman project.





The
475,000 warrants were put back to the Company in October 2008 for a total
payment to Fortuna of $308,750.





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 STATEMENTS 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.





18
 Table of Contents





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 above. 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-K are based on information
available to us on the date of the Form 10-K.  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-K.





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, 2008, 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.





19
 Table of Contents





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:





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 and $0 at
December 31, 2008.  If applicable, 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.





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.





20
 Table of Contents





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 $313,750 during the year ended December 31,
2008.  As of December 31, 2008, there is no estimated unrecognized
compensation expense from unvested stock options.





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
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





The
information required by this Item 8 is included in this report beginning on page
32.





ITEM
      9.
            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
      9A.
            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,
2008.





Management’s
Annual Report on Internal Control over Financial Reporting





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.





21
 Table of Contents





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, 2008. 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, 2008 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.





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 2008 that materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





ITEM
      9B.
            OTHER
      INFORMATION





None





PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE





The
following table sets forth our Directors and executive officers as of December
31, 2008.





Name
                        
                        Age
                        
                        PositionRichard
      D. Dole
                        
                        63
                        
                        Director,
      Chairman, President and CEOWayne
      Beninger
                        
                        55
                        
                        Chief
      Operating OfficerDavid
      Collins
                        
                        40
                        
                        Chief
      Financial OfficerGerald
      Agranoff
                        
                        62
                        
                        DirectorRichard
      Majeres
                        
                        42
                        
                        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 Chairman and CEO of Double Eagle
Petroleum Company (DBLE, NASDAQ Global Select Market).   Mr. Dole graduated from
Colorado State University.





22
 Table of Contents





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).





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 1995.  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, 2008 the Board of Directors held five
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.





23
 Table of Contents





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, 2008 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.  During the fiscal year ended December 31,
2008 the Compensation Committee held three meetings.





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.





24
 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
      11.
            EXECUTIVE
      COMPENSATION





The
following table sets forth certain compensation information for the following
individuals for fiscal years ended December 31, 2008 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,
                                      
                                      2008
                                      
                                      $
                                      250,000
                                      
                                      
                                      $
                                      150,000
                                      
                                      
                                      $
                                      100,000
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      $
                                      500,000Richard
      Dole(1)
                                      
                                      CEO
      and President
                                      
                                      2007
                                      
                                      $
                                      223,750
                                      
                                      
                                      $
                                      120,000
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      $
                                      343,7502008
                                      
                                      $
                                      215,000
                                      
                                      
                                      $
                                      86,250
                                      
                                      
                                      $
                                      58,750
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      $
                                      360,000David
      Collins (2)
                                      
                                      CFO
                                      
                                      2007
                                      
                                      $
                                      201,875
                                      
                                      
                                      $
                                      65,000
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      $
                                      266,8752008
                                      
                                      $
                                      250,000
                                      
                                      
                                      $
                                      86,250
                                      
                                      
                                      $
                                      58,750
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      $
                                      395,000Wayne
      Beninger (3)
                                      
                                      COO
                                      
                                      2007
                                      
                                      $
                                      250,000
                                      
                                      
                                      $
                                      55,000
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      305,000





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 one
      year 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.





25
 Table of Contents





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
and were amended and restated as of September 2, 2008.  In determining
to amend the executive officers employment agreements, the Board of Directors
considered, among other factors, that (i) the substantial reduction in
the  aforementioned severance obligations (in excess of $1.1 million)
would make the company more attractive to a potential strategic partner and (ii)
the changes in the employment agreements would ensure an environment that allows
the executive officers to objectively evaluate and effect all potential
strategic alternatives which may arise.





The
amended and restated employment contracts with Messrs. Dole, Collins and
Beninger provide for an employment term of two years, expiring on May 1,
2009.  Each of the amended and restated 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 amended and restated 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, under the amended and
restated  agreements, each executive officer has agreed to a fixed sum
payable upon certain triggering events which sum, in the aggregate, is
substantially less than the sum payable under the pre-amendment
agreements.  The triggering events which give rise to each officer’s
severance amount are any of the following events:  (i) the employment
agreement is terminated by the Company without “cause”, (ii) the employee
terminates his employment for “good reason”, (iii) the employee’s employment is
voluntarily (by the employee) or involuntarily terminated upon a “Change in
Control”, or (iv) the agreement expires (on April 30, 2009) without the
occurrence of any of the events listed in (i), (ii) or (iii)
above.  With respect to Mr. Beninger and Mr. Collins, the fixed
severance amount is $550,000.  With respect to Mr. Dole, the fixed
severance amount is $850,000.





Outstanding
Equity Awards at Fiscal Year End 2008:





OPTION AWARDS
                                                      
                                                      STOCK AWARDSName
                                                        (a)
                                                      
                                                      Number of Securities Underlying Unexercised
      Options (#) Exercisable
                                                        (b)
                                                      
                                                      Number of Securities Underlying Unexercised
      Options (#) Unexercisable
                                                        (c)
                                                      
                                                      Equity Incentive Plan Awards: Number of Securities
      Underlying Unexercised Unearned Options
                                                        (#)
                                                        (d)
                                                      
                                                      Option Exercise Price ($)
                                                        (e)
                                                      
                                                      Option Expiration Date
                                                        (f)
                                                      
                                                      Number of Shares or Units of Stock that have not
      Vested (#)
                                                        (g)
                                                      
                                                      Market Value of Shares or Units of Stock that have
      not Vested
                                                        ($)
                                                        (h)
                                                      
                                                      Equity Incentive Plan Awards: Number of Unearned
      Shares, Units or Other Rights that have not Vested
                                                        ($)
                                                        (i)
                                                      
                                                      Equity Incentive Plan Awards: Market or Payout
      Value of Unearned Shares, Units or Other Rights that have not
      Vested
                                                        ($)
                                                        (j)None





LONG-TERM
INCENTIVE PLANS





We
currently have no Long-Term Incentive Plans.





DIRECTOR
COMPENSATION





For the
year ending December 31, 2008, the Board of Directors approved compensation of
$75,000 to independent board members, Gerald Agranoff and Richard Majeres, for
their services for 2008. This amount was to be paid at least one-third in stock
with the balance in cash; with the cash paid quarterly and the balance paid by
the issuance of shares of our restricted common stock.





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
                
                $
                50,000
                
                
                $
                25,000
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                75,000Richard
      Majeres
                
                $
                37,500
                
                
                $
                37,500
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-
                
                
                $
                75,000





26
 Table of Contents





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





The
following table sets forth certain information at March 5, 2009 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 5, 2009 we had 41,310,578 (net of 1,117,973
treasury shares) shares of common stock issued and outstanding.





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
                      
                      
                      487,016
                      (2)
                      
                      
                      1.15
                      %Common
      Stock
                      
                      Wayne
      Beninger
                        Chief
      Operating Officer
                        675
      Bering Drive, Suite 200
                        Houston,
      Texas  77057
                      
                      
                      376,579
                      (3)
                      
                      
                      0.89
                      %Common
      Stock
                      
                      David
      J. Collins
                        Vice
      President and Chief Financial Officer
                        675
      Bering Drive, Suite 200
                        Houston,
      Texas  77057
                      
                      
                      769,073
                      (4)
                      
                      
                      1.81
                      %Common
      Stock
                      
                      Gerald
      Agranoff
                        Director
                        675
      Bering Drive, Suite 200
                        Houston,
      Texas  77057
                      
                      
                      55,893
                      (5)
                      
                      
                      0.13
                      %Common
      Stock
                      
                      Richard
      Majeres
                        Director
                        675
      Bering Drive, Suite 200
                        Houston,
      Texas  77057
                      
                      
                      178,364
                      (6)
                      
                      
                      0.42
                      %All
      Officers and Directors as a group (total of  5)
                      
                      
                      1,866,925
                      (7)
                      
                      
                      4.40
                      %Common
      Stock
                      
                      Commonwealth
      Bank of Australia
                        48
      Martin Place, Level 2
                        Sydney
      NSW 2000, Australia
                      
                      
                      3,850,000
                      (8)
                      
                      
                      9.07
                      %Common
      Stock
                      
                      Ironman
      Energy Master Fund
                        2211
      Norfolk, Suite 611
                        Houston,
      Texas 77098
                      
                      
                      2,541,459
                      (9)
                      
                      
                      5.99
                      %Common
      Stock
                      
                      Wellington
      Trust Company, NA
                        75
      State Street
                        Boston,
      MA 02109
                      
                      
                      2,455,871
                      (10)
                      
                      
                      5.79
                      %Common
      Stock
                      
                      Allen
      Crosswell
                        2121
      Sage, Suite 290
                        Houston,
      TX 77056
                      
                      
                      3,000,488
                      (11)
                      
                      
                      7.07
                      %





27
 Table of Contents





(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 5,
2009.  As of March 5, 2009 there were 41,310,578 (net of 1,117,973
treasury shares) shares of our common stock issued and outstanding.





(2)Includes
487,016 shares of common stock held directly.


(3)  Includes
376,579 shares of common stock held directly.


(4)  Includes 769,073 shares of common stock held
directly.


(5)  Includes
55,893 shares of common stock held directly.


(6)  Includes
178,364 shares of common stock held directly.





(7)  Includes
1,866,925 shares of common stock held directly.


(8)  Includes
the following: 2,790,000 shares held by First State Investments Global Resources
Long Short Fund Limited; and 500,000 shares held by Colonial First State
Wholesale Global Resources Long Short Fund; and 401,000 shares held by First
State Investments Global Energy Long Short Master Fund; and 159,000 shares held
by Colonial First State Wholesale Global Energy Long Short Fund.


(9)  Includes
2,425,259 shares owned by Ironman Energy Master Fund and 116,200 shares owned by
Ironman PI Fund (QP), LP.


(10)  Includes
2,455,871 owned by Wellington Trust Company, NA


(11)  Includes
2,421,738 shares owned directly by Allen Crosswell and 578,750 shares held by
CHLG Funding.


____________________________





ITEM
      13.
            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;





(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
      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, L.L.P. for the audit of our
annual financial statements for fiscal year 2008 and fiscal year 2007 and the
aggregate fees paid or accrued for audit-related services and all other services
rendered by Ham, Langston & Brezina, L.L.P. for fiscal year 2008 and fiscal
year 2007.





2008
                  
                  
                  2007Audit
      fees
                  
                  $
                  80,400
                  
                  
                  $
                  105,700Audit-related
      fees
                  
                  
                  0
                  
                  
                  
                  0Tax
      fees
                  
                  
                  4,500
                  
                  
                  
                  17,000All
      other fees
                  
                  
                  7,017
                  
                  
                  
                  2,275Total
                  
                  $
                  91,917
                  
                  
                  $
                  124,975





28
 Table of Contents





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.





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, L.L.P. was compatible with the maintenance of that
firm’s independence in the conduct of its auditing functions.





ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





Exhibit
                        Number
                      Description3.1
                      Articles
      of Incorporation of Petrosearch Energy Corporation (1)3.2
                      Bylaws
      of Petrosearch Energy Corporation (1)3.3
                      Articles
      of Merger (1)4.1
                      Share
      Purchase Agreement dated January 24, 2005 with CBarney Investments (1)4.2
                      Amended
      Share Purchase Agreement dated April 19, 2005 with CBarney Investments
      (1)4.3
                      Share
      Purchase Agreement dated January 24, 2005 with Mark X (1)4.4
                      Amended
      Share Purchase Agreement dated April 19, 2005 with Mark X (1)4.5
                      Share
      Purchase Agreement with Mark 1 dated November 24, 2004 (1)4.6
                      Common
      Stock Purchase Warrant [Form Of] (1)4.7
                      Subscription
      and Registration Rights Agreement [Form Of] (1)10.1
                      Revolving
      Credit Facility dated October 1, 2004 with Fortuna Asset Management (1)10.2
                      Revolving
      Credit Note dated October 2004 with Fortuna Energy, L.P. (1)10.3
                      Assignment
      of Overriding Royalty Interest (Fortuna Energy, L.P.) dated October 2004
      (1)10.4
                      Pledge
      Agreement (Fortuna Energy, L.P.) dated October 2004 (1)10.5
                      Master
      Deed of Trust (Fortuna) dated October 2004 (1)10.6
                      Amended
      and Restated Revolving Credit Note with Fortuna Energy, LP dated September
      29, 2005 (5)10.7
                      Amended
      and Restated Revolving Credit Agreement with Fortuna Energy, LP dated
      September 29, 2005 (5)10.8
                      Warrant
      Agreement (Fortuna Energy, LP dated September 29, 2005 (5)10.9
                      Joint
      Operating Agreement [Form Of] (1)10.10
                      Employment
      Agreement dated November 15, 2004 with Richard Dole (1)10.11
                      Employment
      Agreement dated May 1, 2005 with Wayne Beninger (1)10.12
                      Employment
      Agreement dated May 1, 2005 with David Collins (1)10.13
                      Gas
      Purchase, Gathering, Treating and Processing Agreement with Bear Paw
      Energy, LLCdated
      December 1, 2003 (2)10.14
                      Crude
      Oil Purchase Contract with Plains Marketing, L.P. dated January 25, 2005
      (2)10.15
                      Lease
      Purchase Contract with Eighty Eight Oil, LLC dated November 1, 2003 (2)10.16
                      Asset
      Purchase Agreement with Quinduno Energy dated October 18, 2005 (6)10.17
                      Agreement
      with Rock Energy Partners Operating, L.P. and Rock Energy Partners, L.P.
      dated January 11, 2006 (7)10.18
                      Amended
      Right of First Refusal Agreement with Rock Energy Partners Operating, L.P.
      and Rock Energy Partners, L.P. dated January 11, 2006 (7)10.19
                      Subscription
      Agreement (Form Of)(8)10.20
                      Warrant
      Agreement (Form Of)(8)10.21
                      Extension
      Agreement with ExxonMobil Corporation dated March 30, 2006 (9)10.22
                      Second
      Amended and Restated Program Agreement with Harding Company dated August
      29, 2006 (10)10.23
                      Second
      Amendment to Petrosearch-Garwood Agreement dated September 21, 2006 (11)10.24
                      Option
      Agreement with Rock Energy Partners dated September 21, 2006 (12)10.25
                      Securities
      Purchase Agreement dated November 1, 2006, by and between Garwood
      Petrosearch, Inc. and Laurus Master Fund, Ltd.(12)





29
 Table of Contents




10.26
                  Secured
      Term Note dated November 1, 2006, by and between Garwood Petrosearch, Inc.
      and Laurus Master Fund, Ltd. (12)10.27
                  Stock
      Pledge Agreement dated November 1, 2006, by and between Petrosearch Energy
      Corporation and Laurus Master Fund, Ltd. (12)10.28
                  Master
      Security Agreement dated November 1, 2006, by Garwood Petrosearch, Inc.
      (12)10.29
                  Deed
      of Trust dated November 1, 2006 by Garwood Petrosearch, Inc. (12)10.30
                  Common
      Stock Purchase Warrant dated November 1, 2006, by Garwood Petrosearch,
      Inc. (12)10.31
                  Partnership
      Agreement dated December 15, 2006 (DDJET) (13)





10.32
                  Note
      and Warrant Purchase Agreement with RCH Petro Investors, LP dated February
      1, 2007 (14)10.33
                  8%
      Senior Secured Convertible Note dated February 7, 2007 (RCH Petro
      Investors, LP) (14)10.34
                  Pledge
      and Security Agreement dated February 7, 2007 (RCH Petro Investors, LP)
      (14)10.35
                  Registration
      Rights Agreement dated February 7, 2007 (RCH Petro Investors, LP) (14)10.36
                  Warrant
      Agreement dated February 7, 2007 (RCH Petro Investors) (14)10.37
                  Employment
      Agreement of Richard D. Dole(15)10.38
                  Employment
      Agreement of Wayne Beninger(15)10.39
                  Employment
      Agreement of David Collins(15)10.40
                  Note
      and Warrant Purchase Agreement dated November 9, 2007(16)10.41
                  8%
      Senior Secured Convertible Note dated November 9, 2007 (Form of)(16)10.42
                  Pledge
      and Security Agreement dated November 9, 2007(16)10.43
                  Registration
      Rights Agreement dated November 9, 2007(16)10.44
                  Warrant
      Agreement dated November 9, 2007 (Form of)(16)10.45
                  Investment
      Banking Agreement with Arabella Securities (17)10.46
                  Extension
      to Employment Agreement – Wayne Beninger(20)10.47
                  Extension
      to Employment Agreement – David Collins(20)10.48
                  Amended
      and Restated Employment Agreement of Richard Dole(21)10.49
                  Amended
      and Restated Employment Agreement of Wayne Beninger(21)10.50
                  Amended
      and Restated Employment Agreement of David Collins(21)14.1
                  Code
      of Ethics (4)21.1
                  List
      of Subsidiaries *23.1
                  Consent
      of Ryder Scott Company, March 9, 2009 *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.*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.*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.*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.*





Footnotes to
Exhibits:


*
                  Filed
      herewith.1
                  Previously
      filed as an exhibit to our Form SB-2 Registration Statement on June 6,
      2005 and incorporated herein by reference.2
                  Previously
      filed as an exhibit to our Form SB-2/A Amendment No. 1 Registration
      Statement on August 1, 2005 and incorporated herein by
      reference.3
                  Previously
      filed as an exhibit to our Form SB-2/A, Amendment No. 2 Registration
      Statement on August 5, 2005 and incorporated herein by
      reference.4
                  Previously
      filed as an exhibit to our Form SB-2/A, Amendment No. 3 Registration
      Statement on August 23, 2005 and incorporated herein by
      reference.5
                  Previously
      filed as an exhibit to our current report on Form 8-K filed October 4,
      2005 and incorporated herein by reference.6
                  Previously
      filed as an exhibit to our current report on Form 8-K filed November 2,
      2005 and incorporated herein by reference.7
                  Previously
      filed as an exhibit to our current report on Form 8-K filed January 18,
      2006 and incorporated herein by reference.8
                  Previously
      filed as an exhibit to our current report on Form 8-K filed February 9,
      2006 and incorporated herein by reference.9
                  Previously
      filed as an exhibit to our current report on Form 8-K filed April 3, 2006
      and incorporated herein by
reference.





30
 Table of Contents




10
                  Previously
      filed as an exhibit to our current report on Form 8-K filed September 5,
      2006 and incorporated herein by reference.11
                  Previously
      filed as an exhibit to our current report on Form 8-K filed September 27,
      2006 and incorporated herein by reference.12
                  Previously
      filed as an exhibit to our current report on Form 8-K filed November 7,
      2006 and incorporated herein by reference.13
                  Previously
      filed as an exhibit to our current report on Form 8-K filed December 20,
      2006 and incorporated herein by reference.14
                  Previously
      filed as an exhibit to our current report on Form 8-K filed February 7,
      2007 and incorporated herein by reference.15
                  Previously
      filed as an exhibit to our Form 8-K filed on June 7, 2007 and incorporated
      herein by reference.16
                  Previously
      filed as an exhibit to our current report on Form 8-K filed November 13,
      2007 and incorporated herein by reference.17
                  Previously
      filed as an exhibit to our Form SB-2/A, Amendment No. 2 Registration
      Statement on July 3, 2007 and incorporated herein by
    reference18
                  Previously
      filed as an exhibit to our Form SB-2 Registration Statement on February 1,
      2008 and incorporated herein by reference.19
                  Previously
      filed as an exhibit to our Form S-1/A Registration Statement on April 17,
      200820
                  Previously
      filed as an exhibit to our Form S-1/A Registration Statement on May 22,
      200821
                  Previously
      filed as an exhibit to our Form 8-K filed on June 30,
  2008





31
 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 March 25, 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-K
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
              March
      25, 2009Richard
      D. Dole
              and
      Chairman of the BoardBy
      /s/ David J. Collins
              Chief
      Financial Officer,
              March
      25, 2009David
      J. Collins
              Chief
      Accounting Officer,and
      Principal Financial OfficerBy
      /s/ Gerald Agranoff
              Director
              March
      25, 2009Gerald
      AgranoffBy
      /s/ Richard Majeres
              Director
              March
      25, 2009Richard
      Majeres





32
 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, 2008 and 2007 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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, 2008 and 2007, 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 24,
2009





33
 Table of Contents





PETROSEARCH
ENERGY CORPORATION


CONSOLIDATED
BALANCE SHEETS


December
31, 2008 and December 31, 2007





ASSETS
                    
                    December 31,
                      2008
                    
                    
                    December 31,
                      2007Current
      assets:Cash
      and cash equivalents
                    
                    $
                    12,810,370
                    
                    
                    $
                    8,033,611Accounts
      receivable:Joint
      owners-billed, net of allowance of $50,148 at December 31, 2008 And
      $62,179 at December 31, 2007
                    
                    
                    146
                    
                    
                    
                    203,671Joint
      owners-unbilled
                    
                    
                    59
                    
                    
                    
                    3,568Oil
      and gas production sales
                    
                    
                    33,510
                    
                    
                    
                    319,926Prepaid
      expenses and other current assets
                    
                    
                    482,970
                    
                    
                    
                    987,155Total
      current assets
                    
                    
                    13,327,055
                    
                    
                    
                    9,547,931Property
      and equipment:Oil
      and gas properties, full cost method of accounting:Properties
      subject to amortization
                    
                    
                    24,668,141
                    
                    
                    
                    33,235,534Properties
      not subject to amortization
                    
                    
                    -
                    
                    
                    
                    7,099,601Other
      property and equipment
                    
                    
                    153,031
                    
                    
                    
                    153,031Total
                    
                    
                    24,821,172
                    
                    
                    
                    40,488,166Less
      accumulated depreciation, depletion and amortization
                    
                    
                    (19,136,640
                    )
                    
                    
                    (3,266,658
                    )Total
      property and equipment, net
                    
                    
                    5,684,532
                    
                    
                    
                    37,221,508Prepaid
      oil and gas costs
                    
                    
                    -
                    
                    
                    
                    1,432,906Deferred
      tax asset
                    
                    
                    3,454,071
                    
                    
                    
                    -Other
      assets
                    
                    
                    247,474
                    
                    
                    
                    834,287Total
      assets
                    
                    $
                    22,713,132
                    
                    
                    $
                    49,036,632LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent
      liabilities:Current
      portion of long-term debt
                    
                    $
                    -
                    
                    
                    $
                    2,066,087Accounts
      payable
                    
                    
                    329,810
                    
                    
                    
                    960,020Accrued
      liabilities for Barnett property costs
                    
                    
                    -
                    
                    
                    
                    2,379,073Accrued
      liabilities
                    
                    
                    337,463
                    
                    
                    
                    1,582,689Warrants
      subject to mandatory redemption
                    
                    
                    -
                    
                    
                    
                    321,140Total
      current liabilities
                    
                    
                    667,273
                    
                    
                    
                    7,309,009Long-term
      debt, net of current portion – Kallina
                    
                    
                    -
                    
                    
                    
                    6,919,890Convertible
      debt
                    
                    
                    -
                    
                    
                    
                    13,914,013Other
      long-term obligations
                    
                    
                    776,870
                    
                    
                    
                    699,914Total
      liabilities
                    
                    
                    1,444,143
                    
                    
                    
                    28,842,826Stockholders'
      equity:Preferred
      stock, par value $1.00 per share, 20,000,000 sharesAuthorized:Series
      A 8% convertible preferred stock, 1,000,000 shares authorized; 227,245
      shares issued and outstanding at December 31, 2008 and 483,416 shares
      issued and outstanding at December 31, 2007
                    
                    
                    227,245
                    
                    
                    
                    483,416Series
      B convertible preferred stock, 100,000 shares authorized; 43,000 shares
      issued and outstanding at December 31, 2008 and December 31,
      2007
                    
                    
                    43,000
                    
                    
                    
                    43,000Common
      stock, par value $0.001 per share, 100,000,000 shares Authorized;
      42,425,679 and 40,941,841 shares issued and outstanding at December 31,
      2008 and December 31, 2007, respectively
                    
                    
                    42,426
                    
                    
                    
                    40,941Additional
      paid-in capital
                    
                    
                    34,447,694
                    
                    
                    
                    33,196,588Un-issued
      common stock
                    
                    
                    -
                    
                    
                    
                    288,172Accumulated
      deficit
                    
                    
                    (13,446,688
                    )
                    
                    
                    (13,858,311
                    )Less
      214,800 treasury shares, at cost
                    
                    
                    (44,688
                    )
                    
                    
                    -Total
      stockholders' equity
                    
                    
                    21,268,989
                    
                    
                    
                    20,193,806Total
      liabilities and stockholders' equity
                    
                    $
                    22,713,132
                    
                    
                    $
                    49,036,632





The
accompanying notes are an integral part of these consolidated financial
statements





34
 Table of Contents





PETROSEARCH
ENERGY CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


for the
years ended December 31, 2008 and 2007





Year
      EndedDecember
      31,2008
                
                
                2007Oil
      and gas production revenues
                
                $
                1,400,480
                
                
                $
                1,827,664Operating
      costs and expenses:Lease
      operating and production taxes
                
                
                808,172
                
                
                
                731,915Depreciation,
      depletion and amortization
                
                
                577,394
                
                
                
                909,311Impairment
      of oil and gas properties
                
                
                15,713,886
                
                
                
                -General
      and administrative
                
                
                3,112,047
                
                
                
                3,022,739Total
      costs and expenses
                
                
                20,211,499
                
                
                
                4,663,965Operating
      loss
                
                
                (18,811,019
                )
                
                
                (2,836,301
                )Other
      income / (expense):Interest
      income
                
                
                179,642
                
                
                
                230,951Interest
      expense
                
                
                (1,348,940
                )
                
                
                (1,905,066
                )Amortization
      of financing costs and debt discount
                
                
                (1,444,009
                )
                
                
                (2,021,628
                )Gain
      on sale of DDJET interest
                
                
                21,814,753
                
                
                
                -Loss
      on extinguishment of debt
                
                
                (3,445,265
                )
                
                
                -Change
      in value of warrant liability
                
                
                12,390
                
                
                
                (3,388
                )Total
      other income / (expense), net
                
                
                15,768,571
                
                
                
                (3,699,131
                )Loss
      before provision for income taxes
                
                
                (3,042,448
                )
                
                
                (6,535,432
                )Deferred
      tax (expense)/benefit
                
                
                3,454,071
                
                
                
                -Net
      income (loss)
                
                $
                411,623
                
                
                $
                (6,535,432
                )Basic
      and diluted net loss per common share
                
                $
                0.01
                
                
                $
                (0.17
                )Weighted
      average common shares
                
                
                41,797,282
                
                
                
                39,476,379





The
accompanying notes are an integral part of these consolidated financial
statements





35
 Table of Contents





PETROSEARCH
ENERGY CORPORATION


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


For
the years ended December 31, 2008 and 2007





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
      at December  31, 2007
                                                        
                                                        
                                                        40,941,841
                                                        
                                                        
                                                        $
                                                        40,941
                                                        
                                                        
                                                        
                                                        483,416
                                                        
                                                        
                                                        $
                                                        483,416
                                                        
                                                        
                                                        
                                                        43,000
                                                        
                                                        
                                                        $
                                                        43,000
                                                        
                                                        
                                                        $
                                                        33,196,588
                                                        
                                                        
                                                        $
                                                        288,172
                                                        
                                                        
                                                        $
                                                        (13,858,311
                                                        )
                                                        
                                                        $
                                                        20,193,806





The
accompanying notes are an integral part of these consolidated financial
statements





36
 Table of Contents





PETROSEARCH
ENERGY CORPORATION


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


For
the years ended December 31, 2008 and 2007





Series
      A
                                                                  
                                                                  
                                                                  Series
      B
                                                                  
                                                                  
                                                                  Additional
                                                                  
                                                                  
                                                                  Unissued
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Total
      Stock-Common Stock
                                                                  
                                                                  
                                                                  Preferred Stock
                                                                  
                                                                  
                                                                  Preferred Stock
                                                                  
                                                                  
                                                                  Paid-In
                                                                  
                                                                  
                                                                  Common
                                                                  
                                                                  
                                                                  Treasury
                                                                  
                                                                  
                                                                  Accumulated
                                                                  
                                                                  
                                                                  HoldersShares
                                                                  
                                                                  
                                                                  Amount
                                                                  
                                                                  
                                                                  Shares
                                                                  
                                                                  
                                                                  Amount
                                                                  
                                                                  
                                                                  Shares
                                                                  
                                                                  
                                                                  Amount
                                                                  
                                                                  
                                                                  Capital
                                                                  
                                                                  
                                                                  Stock
                                                                  
                                                                  
                                                                  Stock
                                                                  
                                                                  
                                                                  Deficit
                                                                  
                                                                  
                                                                  EquityBalance
      at December 31, 2007
                                                                  
                                                                  
                                                                  40,941,841
                                                                  
                                                                  
                                                                  $
                                                                  40,941
                                                                  
                                                                  
                                                                  
                                                                  483,416
                                                                  
                                                                  
                                                                  $
                                                                  483,416
                                                                  
                                                                  
                                                                  
                                                                  43,000
                                                                  
                                                                  
                                                                  $
                                                                  43,000
                                                                  
                                                                  
                                                                  $
                                                                  33,196,588
                                                                  
                                                                  
                                                                  $
                                                                  288,172
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  (13,858,311
                                                                  )
                                                                  
                                                                  $
                                                                  20,193,806Issuance
      of common stock committed
                                                                  
                                                                  
                                                                  297,085
                                                                  
                                                                  
                                                                  
                                                                  298
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  287,874
                                                                  
                                                                  
                                                                  
                                                                  (288,172
                                                                  )
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  -Common
      stock issued for interest expense
                                                                  
                                                                  
                                                                  501,448
                                                                  
                                                                  
                                                                  
                                                                  501
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  401,125
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  401,626Common
      stock issued for employee and  board
compensation
                                                                  
                                                                  
                                                                  645,893
                                                                  
                                                                  
                                                                  
                                                                  646
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  313,104
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  313,750Conversion
      of preferred stock to common stock
                                                                  
                                                                  
                                                                  39,412
                                                                  
                                                                  
                                                                  
                                                                  40
                                                                  
                                                                  
                                                                  
                                                                  (256,171
                                                                  )
                                                                  
                                                                  
                                                                  (256,171
                                                                  )
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  256,131
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  -Additional
      costs of raising capital
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (7,128
                                                                  )
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (7,128
                                                                  )Repurchase
      of common stock
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (44,688
                                                                  )
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (44,688
                                                                  )Net
      income
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  411,623
                                                                  
                                                                  
                                                                  
                                                                  411,623Balance
      at  December 31, 2008
                                                                  
                                                                  
                                                                  42,425,679
                                                                  
                                                                  
                                                                  $
                                                                  42,426
                                                                  
                                                                  
                                                                  
                                                                  227,245
                                                                  
                                                                  
                                                                  $
                                                                  227,245
                                                                  
                                                                  
                                                                  
                                                                  43,000
                                                                  
                                                                  
                                                                  $
                                                                  43,000
                                                                  
                                                                  
                                                                  $
                                                                  34,447,694
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  (44,688
                                                                  )
                                                                  
                                                                  $
                                                                  (13,446,688
                                                                  )
                                                                  
                                                                  $
                                                                  21,268,989





The
accompanying notes are an integral part of these consolidated financial
statements.





37
 Table of Contents





PETROSEARCH
ENERGY CORPORATION


CONSOLIDATED
STATEMENT OF CASH FLOWS


For
the years ended December 31, 2008 and 2007





2008
                
                
                2007Cash
      flows from operating activities:Net
      income (loss)
                
                $
                411,623
                
                
                $
                (6,535,432
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depletion,
      depreciation and amortization expense
                
                
                577,394
                
                
                
                909,311Gain
      on sale of oil and gas properties
                
                
                (21,814,753
                )
                
                
                -Impairment
      of oil and gas properties
                
                
                15,713,886
                
                
                
                -Stock-based
      compensation and interest expense
                
                
                715,376
                
                
                
                990,795Amortization
      of deferred rent
                
                
                (8,995
                )
                
                
                (5,082
                )Amortization
      of debt discount and beneficial conversion feature
                
                
                1,173,497
                
                
                
                1,644,124Amortization
      of financing costs
                
                
                270,512
                
                
                
                377,504Accretion
      of asset retirement obligation
                
                
                37,314
                
                
                
                33,433Change
      in value of warrant liability
                
                
                (12,390
                )
                
                
                3,388Bad
      debt expense
                
                
                -
                
                
                
                25,000Deferred
      tax benefit
                
                
                (3,454,071
                )
                
                
                -Loss
      on extinguishment of debt
                
                
                3,445,104
                
                
                
                -Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                493,450
                
                
                
                30,537Prepaid
      expenses and other assets
                
                
                (53,495
                )
                
                
                (344,140
                )Accounts
      payable and accrued liabilities
                
                
                (515,247
                )
                
                
                865,391Trade
      note payable
                
                
                -
                
                
                
                (409,819
                )Net
      cash used in operating activities
                
                
                (3,020,795
                )
                
                
                (2,414,990
                )Cash
      flows from investing activities:Proceeds
      from sale of Barnett interest
                
                
                36,000,000
                
                
                
                -Capital
      expenditures, including purchases and development of
      properties
                
                
                (6,931,880
                )
                
                
                (9,082,326
                )Net
      cash used provided by (used in) investing activities
                
                
                29,068,120
                
                
                
                (9,082,326
                )Cash
      flows from financing activities:Additional
      costs of raising capital
                
                
                (7,128
                )
                
                
                (19,343
                )Purchase
      of treasury stock
                
                
                (44,688
                )
                
                
                -Payment
      of warrant liability
                
                
                (308,750
                )
                
                
                -Proceeds
      from convertible debt
                
                
                -
                
                
                
                18,100,000Repayment
      of notes payable
                
                
                (20,910,000
                )
                
                
                (2,265,348
                )Net
      cash (used in) provided by financing activities
                
                
                (21,270,566
                )
                
                
                15,815,309Net
      increase in cash and cash equivalents
                
                
                4,776,759
                
                
                
                4,317,993Cash
      and cash equivalents at beginning of period
                
                
                8,033,611
                
                
                
                3,715,618Cash
      and cash equivalents at end of period
                
                $
                12,810,370
                
                
                $
                8,033,611Supplemental
      disclosures of cash flow information:Interest
      paid
                
                $
                551,217
                
                
                $
                399,315Income
      taxes paid
                
                
                -
                
                
                
                -





The
accompanying notes are an integral part of these consolidated financial
statements.




38
 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
current operations are focused in North Texas with existing production in Texas
and Oklahoma.   A majority of the Company’s effort since the sale
of its Barnett Shale Project in June, 2008 has been to focus on pursuing
strategic alternatives for the Company that will create the most value for its
shareholders, as well as focusing on the development of the Company’s Texas
Panhandle water flood that it operates .





Principles of
Consolidation





The
consolidated financial statements presented herein include the accounts of the
Company and its wholly-owned subsidiaries.  In addition, during 2008
and 2007, 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 had a 5.54 percent ownership interest until the time of sale in
2008.  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.





39
 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 includes 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, 2008 and 2007:





2008
                  
                  
                  2007Depletion
      Expense
                  
                  $
                  546,783
                  
                  
                  $
                  879,171Depletion
      expense per BOE produced
                  
                  $
                  23.61
                  
                  
                  $
                  24.41





At
December 31, 2007, unproved oil and gas properties not subject to amortization
included $7,099,601 of property acquisition, exploration and development costs
that are not being amortized.  Unproved leasehold costs at December
31, 2007 consisted of interest in leases located in Mississippi, Oklahoma and
Texas.  All of the costs were reclassified to the amortizable base in
2008 when they were evaluated and proved reserves were discovered, impairment
was indicated or when the lease terms expired.    Other
unproved costs at December 31, 2007 were written-off to the full cost pool when
the properties were sold in 2008.





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, 2008
and 2007 was $30,611 and $30,140, respectively.





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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 31,2008
                  
                  
                  2007Beginning
      asset retirement obligation
                  
                  $
                  804,855
                  
                  
                  $
                  875,077Liabilities
      incurred
                  
                  
                  11,276
                  
                  
                  
                  5,798Liabilities
      settled
                  
                  
                  (11,276
                  )
                  
                  
                  (5,732
                  )Revisions
      in estimated cash flows
                  
                  
                  1,565
                  
                  
                  
                  (103,721
                  )Properties
      sold
                  
                  
                  (79,211
                  )
                  
                  
                  -Accretion
      expense
                  
                  
                  37,314
                  
                  
                  
                  33,433Ending
      asset retirement obligation
                  
                  $
                  764,523
                  
                  
                  $
                  804,855





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, 2008 and 2007, the
Company provided an allowance of $50,148 and $62,179, 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, 2008 and 2007.  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.




As
described below under recently issued accounting pronouncements, the Company
adopted FAS 157 on January 1, 2008. FAS 157, among other things, defines
fair value, establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category measured at fair
value on either a recurring or nonrecurring basis. FAS 157 clarifies that
fair value is an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. As a basis for considering such assumptions,
FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:





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Level
      1.
            Observable
      inputs such as quoted prices in active markets for identical assets or
      liabilities;


Level
      2.
            Inputs,
      other than quoted prices included within Level 1, that are observable
      either directly or indirectly; and


Level
      3.
            Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.





As of
December 31, 2008, the Company did not have any assets or liabilities that are
measured at fair value on a recurring basis.





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, 2008 and 2007, the Company has
included approximately $132,800 and $185,000, respectively, 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 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 71% of the Company’s 2008 revenue, 24% of
its revenue was received from two customers in 2008.   Excluding
the Company’s revenue from the DDJET Partnership, which comprises 33% of the
Company’s 2007 revenue, 59% of its revenue was received from three customers in
2007.





2008
                  
                  
                  2007Customer
      A
                  
                  $
                  167,666
                  
                  
                  $
                  729,896Customer
      B
                  
                  
                  27,942
                  
                  
                  
                  194,519Customer
      C
                  
                  
                  164,912
                  
                  
                  
                  161,919DDJET
                  
                  
                  999,248
                  
                  
                  
                  601,790Others
                  
                  
                  40,712
                  
                  
                  
                  139,540Total
                  
                  $
                  1,400,480
                  
                  
                  $
                  1,827,664





42
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The
Company had no other single customer that accounted for 10% or more of revenues
in 2008 or 2007.  The Company believes 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,
2008, 55% and 30% of accounts receivable from oil and gas sales were from two
customers.  As of December 31, 2008, 82% 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.





Earnings (Loss) Per
Share





The
Company provides basic and dilutive earnings (loss) per common share information
for each year presented.  The basic net earnings / (loss) per common
share is computed by dividing the net earnings (loss) by the weighted average
number of common shares outstanding.  Diluted net earnings (loss) per
common share is computed by dividing the net earnings (loss), adjusted on an “as
if converted” basis, by the weighted average number of common shares outstanding
plus potential dilutive securities.





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 2008 and 2007 was $2,089 and
$102,625, 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.





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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, 2008, 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.





Recently Issued Accounting
Pronouncements





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 did not
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.





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 on January 1, 2008 was not material to the
Company’s consolidated results of operations, financial position or cash
flows.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS
No. 160”). SFAS No. 160 amends ARB No. 51 to establish accounting
and reporting standards for the noncontrolling interest (minority interest) in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 also requires consolidated net income to
be reported, and disclosed on the face of the consolidated statement of
operations, at amounts that include the amounts attributable to both the parent
and the noncontrolling interest. Additionally, SFAS No. 160 establishes a
single method for accounting for changes in a parent’s ownership interest in a
subsidiary that does not result in deconsolidation and that the parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. SFAS
No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The Company will apply the requirements of SFAS
No. 160 upon its adoption on January 1, 2009 and does not expect it to
have a material impact on its financial position and results of
operations.





In
December 2007, the FASB issued SFAS No 141(R), “Business Combinations” (“SFAS
No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141, “Business
Combinations” (“SFAS No. 141”), however retains the fundamental
requirements that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination.
SFAS No. 141(R) requires an acquirer to recognize the assets acquired,
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, at their fair values as of that date, with specified limited
exceptions. Changes subsequent to that date are to be recognized in earnings,
not goodwill. Additionally, SFAS No. 141 (R) requires costs incurred
in connection with an acquisition be expensed as incurred. Restructuring costs,
if any, are to be recognized separately from the acquisition. The acquirer in a
business combination achieved in stages must also recognize the identifiable
assets and liabilities, as well as the noncontrolling interests in the acquiree,
at the full amounts of their fair values. SFAS No. 141(R) is effective for
business combinations occurring in fiscal years beginning on or after
December 15, 2008. The Company will apply the requirements of SFAS
No. 141(R) upon its adoption on January 1, 2009 and does not expect it
to have a material impact on its financial position and results of
operations.





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In
February 2008, the FASB issued Staff Position FAS 157-2, Effective Date of
FASB Statement No. 157, which delayed the effective date of
SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are measured at fair value on a recurring basis.
FSP FAS 157-2 establishes January 1, 2009 as the effective date of
SFAS No. 157 with respect to these fair value measurements for the
Company. We do not currently expect the application of the fair value framework
established by SFAS No. 157 to non-financial assets and liabilities
measured on a non-recurring basis to have a material impact on our consolidated
financial statements. However, the Company will continue to assess the potential
effects of SFAS No. 157 as additional guidance becomes
available.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(“SFAS No. 161”). SFAS No. 161 amends the requirements of SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS No. 133”), to require enhanced disclosure about how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and how derivative instruments and related hedged items affect
an entity’s financial position, financial performance, and cash flows. SFAS
No. 161 is effective for fiscal years beginning after November 15,
2008, with early adoption encouraged. The Company will apply the requirements of
SFAS No. 161 upon its adoption on January 1, 2009 and does not expect
it to have a material impact on its financial position or results of operations
or related disclosures.





In April
2008, the FASB issued Staff Position No. 142-3, “Determination of Useful
Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No 141(R), “Business
Combinations” (“SFAS No. 141(R)”), and other U.S. Generally Accepted
Accounting Principles. FSP FAS 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early adoption is prohibited. The guidance
for determining the useful life of a recognized intangible asset should be
applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements should be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. The Company will
apply the requirements of FSP FAS 142-3 upon its adoption on January 1,
2009 and it currently does not expect the adoption of FSP FAS 142-3 to have a
material impact on its financial position and results of
operations.





In
May 2008, the FASB issued FASB Staff Position No. APB 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)”, or FSP No. APB 14-1. FSP
No. APB 14-1 clarifies that convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14 “Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants”. Additionally, the FSP
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP No. APB 14-1 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The implementation of this standard will not
have an impact on our consolidated financial position or results of
operations.





45
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In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (“GAAP”) in the United States (“the
GAAP hierarchy). This Statement is effective 60 days following the Security
and Exchange Commission’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles”. The Company currently
adheres to the GAAP hierarchy as presented in SFAS No. 162, and therefore does
not expect its adoption will have a material impact on its consolidated results
of operations and financial condition.





In June
2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 applies to the
calculation of earnings per share (“EPS”) described in paragraphs 60 and 61
of FASB Statement No. 128, “Earnings per Share” for share-based payment
awards with rights to dividends or dividend equivalents. It states that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of EPS pursuant to the two-class method.
FSP EITF 03-6-1 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. All prior-period EPS data presented
shall be adjusted retrospectively to conform to the provisions of this FSP. The
Company will apply the requirements of FSP EITF 03-6-1 upon its adoption on
January 1, 2009 and it currently does not expect the adoption of
FSP EITF 03-6-1 to have a material impact on its financial position and
results of operations.





In
September 2008, the FASB issued FSP FAS No. 133-1 and FIN 45-4, Disclosures
about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement
No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161 (“FSP FAS No. 133-1 and FIN
45-4”). FSP FAS No. 133-1 and FIN 45-4 requires enhanced disclosures about
credit derivatives and guarantees. The FSP is effective for financial statements
issued for reporting periods ending after November 15, 2008. The adoption
of FSP FAS No. 133-1 and FIN 45-4 did not have a material impact on the
Company’s consolidated financial statements.





In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FSP FAS 157-3”),
to help constituents measure fair value in markets that are not active. FSP FAS
157-3 is consistent with the joint press release the FASB issued with the
Securities and Exchange Commission (“SEC”) on September 30, 2008, which
provides general clarification guidance on determining fair value under SFAS
No. 157 when markets are inactive. FSP FAS 157-3 was effective upon
issuance, including prior periods for which financial statements had not been
issued. The adoption of FSP 157-3 did not have a material impact on the
Company’s consolidated financial statements.





In
December 2008, the FASB issued FSP FAS No. 140-4 and FIN 46R-8 Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46R-8”). FSP FAS
140-4 and FIN 46R-8 require additional disclosures about transfers of financial
assets and involvement with variable interest entities. The requirements apply
to transferors, sponsors, servicers, primary beneficiaries and holders of
significant variable interests in a variable interest entity or qualifying
special purpose entity. FSP FAS 140-4 and FIN 46R-8 is effective for financial
statements issued for reporting periods ending after December 15, 2008. FSP
FAS 140-4 and FIN 46R-8 affect only disclosures and therefore did not have a
material impact on the Partnership’s consolidated financial
statements.





On
December 31, 2008, the Securities and Exchange Commission (SEC) adopted
major revisions to its rules governing oil and gas company reporting
requirements. These include provisions that permit the use of new technologies
to determine proved reserves and that allow companies to disclose their probable
and possible reserves to investors. The current rules limit disclosure to only
proved reserves. The new disclosure requirements also require companies to
report the independence and qualifications of the person primarily responsible
for the preparation or audit of reserve estimates, and to file reports when a
third party is relied upon to prepare or audit reserves estimates. The new
rules also require that oil and gas reserves be reported and the full-cost
ceiling value calculated using an average price based upon the prior 12-month
period. The new oil and gas reporting requirements are effective for annual
reports on Form 10-K for fiscal years ending on or after December 31,
2009, with early adoption not permitted. We are in the process of assessing the
impact of these new requirements on our financial position, results of
operations and financial disclosures.





46
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2.
            Sale of Barnett Shale
      Interest





In
December 2006, through the Company’s wholly owned subsidiary, Barnett
Petrosearch LLC, (“Barnett Petrosearch”) the Company joined in the formation of
a partnership, DDJET Limited LLP (“DDJET”), for the development of a natural gas
integrated venture to explore and develop assets in the Barnett Shale. The
Company owned a 5.54% interest in DDJET along with partners Metroplex Barnett
Shale LLC, a wholly owned subsidiary of Exxon Mobil Corporation, and Cinco
County Barnett Shale LLC, a privately held Dallas-based company
(“Cinco”).





On
February 11, 2008 the Company executed an authorization for the general partner
of the Partnership to immediately commence a sales marketing program to
interested potential purchasing parties in order to fully assess the current
market value of the Partnership.  On June 25, 2008 the Company
executed a binding agreement for the sale of its limited partnership interest in
DDJET to Cinco for a cash purchase price of $36,000,000.  On June 26,
2008 Cinco paid to Barnett Petrosearch the required $1,800,000 non-refundable
deposit to be applied to the purchase price and fulfilled all the other
necessary requirements to bind both Cinco and Petrosearch to the
sale.  On July 18, 2008 the Company received the balance of the
proceeds of the sale in the amount of $30,729,008.  These proceeds
were net of the $1,800,000 down payment previously received from Cinco and
$3,470,992 of costs previously owed by the Company which were assumed by Cinco
pursuant to the June 25, 2008 agreement.





Because
the Company utilizes the Full Cost Accounting method to account for its oil and
gas assets, in order to record a gain on the sale transaction the sale must have
significantly altered the relationship between capitalized costs and proved
reserves. Being that the amortization rate per barrel of oil equivalent
decreased by greater than 50% from before the sale as opposed to after the sale,
the Company deemed the alteration of the relationship between capitalized costs
and proved reserves to be significant. The reason there was such an alteration
was due to the fact that a significant portion of the Barnett Shale’s capital
costs was related to undeveloped acreage that did not have any proved reserves
associated with it; as opposed to the Company’s other assets whose capital costs
are more directly related to proved reserves. As a result, a gain of $21,814,753
has been generated by the sale of the Company’s interest in DDJET.





3.
            Agreements
      Pertaining to Oil and Gas
Properties





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 were 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 was 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.





47
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4.
            Prepaid Expenses and
      Other Current Assets





Prepaid
expenses and other current assets consist of the following at December 31, 2008
and 2007:





2008
                  
                  
                  2007Prepaid
      expenses
                  
                  $
                  180,055
                  
                  
                  $
                  172,093Prepaid
      bonds
                  
                  
                  302,915
                  
                  
                  
                  292,332Current
      portion of financing costs
                  
                  
                  -
                  
                  
                  
                  498,668Other
      receivables
                  
                  
                  -
                  
                  
                  
                  24,062$
                  482,970
                  
                  
                  $
                  987,155





5.
            Accrued Liabilities
      and Other Long-Term
Obligations





Accrued
liabilities consist of the following at December 31, 2008 and 2007:





2008
                  
                  
                  2007Revenue
      payable and operated prepayment liability
                  
                  $
                  29,426
                  
                  
                  $
                  52,141Accrued
      interest payable
                  
                  
                  -
                  
                  
                  
                  914,367Accrued
      liabilities for capital additions
                  
                  
                  100,061
                  
                  
                  
                  38,530Financing
      costs payable
                  
                  
                  -
                  
                  
                  
                  251,125Accrued
      liability for professional fees
                  
                  
                  119,302
                  
                  
                  
                  142,599Current
      portion of asset retirement obligation
                  
                  
                  -
                  
                  
                  
                  128,023Other
      accrued expenses
                  
                  
                  88,674
                  
                  
                  
                  55,904$
                  337,463
                  
                  
                  $
                  1,582,689





Other
long-term obligations consist of $764,523 for asset retirement obligations and
$12,347 for non-current deferred rent obligations as of December 31,
2008.  Other long-term obligations consist of $676,832 for asset
retirement obligations and $23,082 for non-current deferred rent obligations as
of December 31, 2007.





6.
            Extinguishment of
      Debt





At
December 31, 2008 no debt remained outstanding.





Convertible
Securities





In July,
2008, the Company extinguished all of its convertible debt outstanding and
related interest by repaying the principal balance of $18,775,000 and accrued
and unpaid interest of $87,734.  Total cash payments made were
$18,862,734.  At the time of the extinguishment, the unamortized debt
discount of $3,795,272 and the unamortized financing costs of $747,160 totaled
$4,542,432, which was recorded as loss on extinguishment of debt in the third
quarter of 2008.





Project
Financing





In
November 2006, the Company signed a Securities Purchase Agreement and Secured
Term Note with Laurus Master Fund, Ltd to provide financing for the drilling of
its Kallina 46 #1 well and payment of the future completion costs for the
Kallina 46 #1 well.  The November 2006 financing was specifically
recourse to the Kallina 46 #1 well and the associated lease acreage
only.





In April
2008, it was determined that the Kallina 46 #1 well was uneconomic and the
decision was made that the well needed to be plugged and abandoned. In May 2008
the Company received a full release of all the liens, security interests,
rights, claims and benefits of every kind in, on and under the November 2006
Secured Term Note with Laurus Master Fund, Ltd, as well as that same release on
all the other collateral documents associated with that financing.  As
part of this transaction, the Company conveyed their interest in the Kallina
46#1 well and the associated lease acreage to a third party.





48
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As a
result of the legal release described above, the debt related to the Laurus
financing has been extinguished on the financial statements of the Company in
May, 2008.  In addition, the accrued interest, unamortized debt
discount, and unamortized financing costs have also been written-off as well as
the net book value of the Kallina well.





The gain
on extinguishment of this debt was accounted for according to APB 26, “Early
Extinguishment of Debt”.  A difference between the reacquisition price
and the net carrying amount of the extinguished debt was recognized as a gain in
the amount of $1,097,328 in the accompanying statements of operations for
2008.





Revolving
Credit Agreement





On April
1, 2008 the total outstanding balance of the revolving credit facility became
due and a payment of $1,602,500 was paid in full to Fortuna Energy, which closed
out the revolving credit facility as of that date.  Pursuant to the
revolving credit agreement, and as part of being paid back in full, Fortuna
Energy returned to the Company all of the overriding royalties related to the
Company’s assets that were issued to Fortuna Energy.  The most
significant override relates to a 2% override of the Company’s net interest in
the Company’s North Dakota, Gruman project.





7.
            Income
      Taxes





Through
December 31, 2008, the Company has incurred more losses than income since its
inception and, therefore, has not been subject to federal income
taxes.  As of December 31, 2008, the Company had net operating loss
(“NOL”) carryforwards for income tax purposes of approximately $4.8 million
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,
2008 and 2007 are as follows:





2008
                  
                  
                  2007Deferred
      tax assets:Net
      operating loss carry-forward
                  
                  $
                  1,667,494
                  
                  
                  $
                  7,460,112Percentage
      depletion carryforward
                  
                  
                  521,309
                  
                  
                  
                  -Book/tax
      basis difference in property, plant and equipment
                  
                  
                  1,247,645
                  
                  
                  
                  -Allowance
      for doubtful accounts
                  
                  
                  13,013
                  
                  
                  
                  21,140Contribution
      carryover
                  
                  
                  4,611
                  
                  
                  
                  4,480Total
      deferred tax assets
                  
                  
                  3,454,072
                  
                  
                  
                  7,485,732Less
      valuation allowance
                  
                  
                  -
                  
                  
                  
                  (1,768,021
                  )Net
      deferred tax asset
                  
                  
                  3,454,072
                  
                  
                  
                  5,717,711Deferred
      tax liabilities:Book/tax
      basis difference in oil and Gas properties
                  
                  
                  -
                  
                  
                  
                  (5,709,685
                  )Book/tax
      basis difference in property and equipment
                  
                  
                  -
                  
                  
                  
                  (8,026
                  )Total
      deferred tax liability
                  
                  
                  -
                  
                  
                  
                  (5,717,711
                  )Net
      deferred tax
                  
                  $
                  3,454,072
                  
                  
                  $
                  -





49
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In
assessing the realizability of the deferred tax assets, management considers
whether it is more likely than not that some or all of the deferred tax assets
will not be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which the use of such net operating losses are allowed. As of December 31, 2008,
the Company has determined that it is more likely than not that all of the
deferred tax assets will be utilized.





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 35% for 2008 and 34% for 2007 were applied to pre-tax income and loss for the
years ended December 31, 2008 and 2007 is as follows:





2008
                                          
                                          
                                          2007Amount
                                          
                                          
                                          %
                                          
                                          
                                          Amount
                                          
                                          
                                          %Expense
      (Benefit) for income tax at federal statutory rate
                                          
                                          $
                                          (1,064,857
                                          )
                                          
                                          
                                          (35.0
                                          )%
                                          
                                          $
                                          (2,222,047
                                          )
                                          
                                          
                                          (34.0
                                          )%Non-deductible
      expenses and other
                                          
                                          
                                          (621,193
                                          )
                                          
                                          
                                          (20.4
                                          )
                                          
                                          
                                          2,870,081
                                          
                                          
                                          
                                          44.0Change
      in valuation allowance
                                          
                                          
                                          (1,768,021
                                          )
                                          
                                          
                                          (58.1
                                          )
                                          
                                          
                                          (648,034
                                          )
                                          
                                          
                                          (10.0
                                          )$
                                          (3,454,071
                                          )
                                          
                                          
                                          (113.50
                                          )
      %
                                          
                                          $
                                          -
                                          
                                          
                                          
                                          -
                                          %




The
Company adopted the provisions of FASB Interpretation No. 48 — Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN
48”) on January 1, 2007. The adoption of FIN 48 did not have a material effect
on the Company’s financial position, results of operations or cash flows. The
Company has not recorded any liabilities as of December 31, 2008 related to the
adoption of FIN 48. Subsequent to adoption, there have been no changes to the
Company’s assessment of uncertain tax positions.





50
 Table of Contents





The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. As of December 31, 2008, the Company made no provision for
interest or penalties related to uncertain tax positions. The Company files
income tax returns in the U.S. federal jurisdiction and various states. There
are currently no federal or state income tax examinations underway for these
jurisdictions. Furthermore, the Company is no longer subject to U.S. federal
income tax examinations by the Internal Revenue service for tax years before
2004 and for state and local tax authorities for years before 2003. The
Company’s tax years of 2004 and forward are subject to examination by federal
and state taxing authorities.





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 $202,658 of which $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, 2008 and 2007 was $99,989 and $100,312,
respectively.





Contract Related to
Operations





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 provided that CPS, at its sole
expense, design and construct a water treatment facility no later than 90 days
from the effective date of the agreement that would be capable of treating all
of 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,  committed to be capable of injecting not less than 2,000
bbls of treated water per day derived from third party production water within
30 days after the facility opened, and 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 opened, in addition to
re-injecting its own treated production water from the oil and gas lease it
operates.  The Company is required to pay a scaled management fee to
CPS commencing on the date the facility opened 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.





Unused Letters of
Credit





The
Company has unused letters of credit supporting its drilling bonds in the total
amount of $130,000 which expire at various times in 2009 and 2010.





Legal
Proceedings





On April
11, 2007, the Company was served with a lawsuit filed against it titled Cause
No. 2007-16502; D. John Ogren, R. Bradford Perry and Chester Smitherman v.
Petrosearch Corporation; 133rdJudicial District Court, Harris County, Texas.  The plaintiffs
were three (3) Series A Preferred shareholders who derived their original shares
from Texas Commercial Resources, Inc. (“TCRI”) and became Series A Preferred
shareholders of Petrosearch Energy Corporation as a result of the prior
mergers.  The plaintiffs had alleged that Petrosearch Corporation (and
TCRI, its predecessor) failed to pay accrued, cumulative dividends and refused
to allow conversion of their Series A Preferred Stock into common
stock.    The plaintiffs had alleged breach of contract,
fraud and violation of Section 33 of the Texas Securities Act and have requested
the award of actual and exemplary damages, interest and attorneys’
fees.   The lawsuit likewise requested the Court to compel the
payment of accrued dividends and the examination of the Company’s books and
records. The lawsuit was settled in September 2008 and the settlement was paid
100% by the Company's insurance policy.  The payment of the settlement
is not an admission of liability, as the Company denies all allegations of
wrongdoing contained in the lawsuit.





51
 Table of Contents





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).  The current terms of the employment agreements
follow:





The
employment contracts with Messrs. Collins, Beninger, and Dole provide for an
employment term of two years beginning on May 1, 2007 and automatically expire
at 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.





Each
executive officer will receive a fixed severance payment in the event of a
triggering event.   The triggering events which give rise to
severance amounts are any of the following events:  (i) the employment
agreement is terminated by the Company without “cause”, (ii) the employee
terminates his employment for “good reason”, (iii) the employee’s employment is
voluntarily (by the employee) or involuntarily terminated upon a “Change in
Control”, or (iv) the agreement expires (on April 30, 2009) without the
occurrence of any of the events listed in (i), (ii) or (iii)
above.  With respect to Mr. Beninger and Mr. Collins, the fixed
severance amount is $550,000.  With respect to Mr. Dole, the fixed
severance amount is $850,000.





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).





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, 2008 and 2007, the Company has 1,000,000 shares of Series A 8%
Convertible Preferred Stock (“Series A Preferred”) authorized and 227,245 and
483,416 shares outstanding, respectively.  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, 2008, no dividends have been declared
and approximately $115,895 of dividends were in arrears related to the Series A
Preferred if the Company decided to declare dividends.





52
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As of
December 31, 2008 and 2007, 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.





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.





No
warrants were issued during 2008.  For warrants granted to employees
or directors during 2007, the fair value of such warrants was estimated at the
date of grant using a Black-Scholes option-pricing model with the following
assumptions:





2007Dividend
      yield
                -0-Expected
      volatility
                88%
      - 105%Risk
      free interest
                4.52%Expected
      lives
                3-4
      years





The
Black-Scholes option valuation model was developed for use in estimating fair
value of traded options or warrants that have no vesting restrictions and are
fully transferable.  In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.  Because the Company’s stock warrants have characteristics
significantly different from those of traded options/warrants, and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock
warrants.





The
Company issued the following warrants in 2007:





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.





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.





53
 Table of Contents





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
(as described in Note 6 above), 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.  During
2008, the Company paid $308,750 to Fortuna to redeem the instrument when they
exercised the put feature..





A summary
of the Company’s stock warrant activity and related information for the years
ended December 31, 2008 and 2007 follows:





Number
      of Shares Under
      Warrant
                            
                            
                            Exercise
      Price
                            
                            
                            Weighted
      AverageExercise Price
                            
                            
                            Weighted
      AverageGrant Date Fair Value ($/share)
                            
                            Total
      IntrinsicValue WarrantExercises (1)(2)Warrants
      outstanding at December 31, 2006
                            
                            
                            14,147,690
                            
                            
                            $
                            0.92-$9.75
                            
                            
                            $
                            1.88Issued
                            
                            
                            7,207,145
                            
                            
                            $
                            1.40-$1.50
                            
                            
                            $
                            1.43
                            
                            
                            $
                            0.48Cancelled
                            
                            
                            (1,050,007
                            )
                            
                            $
                            4.88-$9.75
                            
                            
                            $
                            7.93Warrants
      outstanding at December 31, 2007
                            
                            
                            20,304,828
                            
                            
                            $
                            .092-$2.00
                            
                            
                            $
                            1.41Exercise
      of put by warrant holder
                            
                            
                            (475,000
                            )
                            
                            $
                            0.92
                            
                            
                            $
                            0.92Cancelled
                            
                            
                            (5,021,969
                            )
                            
                            $
                            0.98-$1.95
                            
                            
                            $
                            1.93Warrants
      outstanding at December 31, 2008
                            
                            
                            14,807,859
                            
                            
                            $
                            0.92-$2.00
                            
                            
                            $
                            1.24





54
 Table of Contents





All
outstanding stock warrants are exercisable at December 31, 2008.  A
summary of outstanding stock warrants at December 31, 2008 follows:





Number of Common StockEquivalents
                                      
                                      Expiration
      Date
                                      
                                      Remaining
      Contracted Life (Years)
                                      
                                      Weighted
      Average Remaining Contractual Term
      (Years)
                                      
                                      Exercise
      Price
                                      
                                      Weighted
      Average Exercise Price
                                      
                                      Aggregate
      Intrinsic Value(1)1,060,714
                                      
                                      February
      2010
                                      
                                      
                                      1.08
                                      
                                      
                                      
                                      $
                                      2.00
                                      
                                      $
                                      2.001,982,145
                                      
                                      November
      2010
                                      
                                      
                                      1.88
                                      
                                      
                                      
                                      $
                                      1.50
                                      
                                      $
                                      1.505,225,000
                                      
                                      January
      2011
                                      
                                      
                                      2.00
                                      
                                      
                                      
                                      $
                                      1.40
                                      
                                      $
                                      1.40100,000
                                      
                                      October
      2011
                                      
                                      
                                      2.79
                                      
                                      
                                      
                                      $
                                      .92
                                      
                                      $
                                      .926,440,000
                                      
                                      December
      2011
                                      
                                      
                                      2.92
                                      
                                      
                                      
                                      $
                                      .92
                                      
                                      $
                                      .9214,807,859
                                      
                                      
                                      
                                      
                                      
                                      
                                      2.32
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $0





(1)
            The
      intrinsic value of a warrant is the amount by which the current market
      value of the underlying stock exceeds the exercise price of the warrant,
      or the market price at the end of the period less the exercise
      price.


(2)
            The
      weighted average grant date fair value was determined by using the Black
      Scholes Option Pricing Model as described
above.





The
following table provides a detail of stock-based compensation incurred during
the years ended December 31, 2008, and 2007:





2008
                  
                  
                  2007Restricted
      stock – Interest Expense
                  
                  $
                  401,626
                  
                  
                  $
                  574,897Restricted
      stock – General and Administrative
                  
                  
                  313,750
                  
                  
                  
                  127,726Restricted
      stock – Property Costs
                  
                  
                  -
                  
                  
                  
                  1,677,000Committed
      restricted stock
                  
                  
                  -
                  
                  
                  
                  288,172Total
      stock-based compensation
                  
                  
                  715,376
                  
                  
                  
                  2,667,795Less
      capitalized property costs
                  
                  
                  -
                  
                  
                  
                  (1,677,000
                  )Stock
      compensation expense, net of amounts capitalized
                  
                  $
                  715,376
                  
                  
                  $
                  990,795





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.





Treasury Stock – Stock
Repurchase Plan





In July
2008 the Board of Directors approved a stock repurchase plan in which the
Company is authorized to repurchase up to $5 million of market value or 10
million shares of its common stock in open market purchases or in privately
negotiated transactions. The purchases are to be at the discretion of senior
management and will be dependent upon market conditions. The Repurchase Plan
does not require any minimum purchase and can be suspended or terminated by the
Board of Directors at any time.





In
October and November of 2008, the Company purchased 214,800 shares of its common
stock at an average share price of approximately $0.21 to be classified as
treasury stock.  In February 2009 the Company purchased 903,173 shares
of its common stock at an average price of $0.18.  As of March 5, 2009
the company has purchased in total, 1,117,973 shares of common stock at an
average price of $.186.





10.
            Related Party
      Transactions





During
the years ended December 31, 2008 and 2007, the Company did not engage in any
transactions with related parties.





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 Table of Contents





11.
            Earnings Per
      Share





Following
is a reconciliation of the numerators and denominators of the basic and diluted
EPS computations for 2008 and 2007:





Year
      Ended
                    December 31,2008
                  
                  
                  2007Basic
      EPS:Net
      income (loss)
                  
                  $
                  411,623
                  
                  
                  $
                  (6,535,432
                  )Less:
      Preferred stock dividends (1)
                  
                  
                  (18,180
                  )
                  
                  
                  (38,673
                  )Net
      income (loss) available to common stockholders
                  
                  $
                  393,443
                  
                  
                  $
                  (6,574,105
                  )Weighted
      average shares of common stock
                  
                  
                  41,797,282
                  
                  
                  
                  39,476,379Basic
      net income (loss) per share
                  
                  $
                  0.01
                  
                  
                  $
                  (0.17
                  )Diluted
      EPS:Income
      (loss) available to common stockholders
                  
                  $
                  393,443
                  
                  
                  $
                  (6,574,105
                  )Plus
      assumed conversions
                  
                  
                  18,180
                  
                  
                  
                  38,673Net
      income (loss) used for diluted EPS
                  
                  $
                  411,623
                  
                  
                  $
                  (6,535,432
                  )Weighted
      average shares of common stock
                  
                  
                  41,797,282
                  
                  
                  
                  39,476,379Plus
      effect of dilutive securities:Convertible
      preferred stock
                  
                  
                  74,547
                  
                  
                  
                  -Weighted
      average shares used for Diluted EPS
                  
                  
                  41,871,829
                  
                  
                  
                  39,476,379Diluted
      net income (loss) per share
                  
                  $
                  0.01
                  
                  
                  $
                  (0.17
                  )





(1)
Dividends are undeclared





For the
year ended December 31, 2007, 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 common shares and convertible preferred stock
convertible into 94,218 common shares.





12.
            Non-Cash Investing and
      Financing Activities





During
the years ended December 31, 2008 and 2007, the Company engaged in various
non-cash financing and investing activities as follows:





2008
                  
                  
                  2007Decrease
      in prepaid drilling for property costs
                  
                  $
                  1,432,906
                  
                  
                  $
                  960,674Issuance
      of common stock for acquisition of property
                  
                  $
                  -
                  
                  
                  $
                  1,677,000Increase
      in accounts payable and accrued liabilities for property costs and prepaid
      drilling
                  
                  $
                  -
                  
                  
                  $
                  2,417,603Change
      in property costs associated with asset retirement
    obligation
                  
                  $
                  77,646
                  
                  
                  $
                  103,655Issuance
      of warrants with debt
                  
                  $
                  -
                  
                  
                  $
                  3,471,835Beneficial
      conversion feature on convertible debt
                  
                  $
                  -
                  
                  
                  $
                  2,667,968Issuance
      of notes payable for financing costs
                  
                  $
                  -
                  
                  
                  $
                  675,000Reclass
      of financing costs to debt discount
                  
                  $
                  -
                  
                  
                  $
                  306,088





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13.
            Impairment and Sale of
      Oil and Gas Properties





At
December 31, 2008, the net capitalized costs of crude oil and natural gas
properties included in the amortization base exceeded the present value of the
estimated reserves.  As such, a write-down of $15,713,886 was expensed
in the accompanying statement of operations to record this impairment in
2008.  No impairment was recorded for 2007 because the net capitalized
costs of crude oil and natural gas properties did not exceed the present value
of the estimated reserves at December 31, 2007.





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.





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, 2008.  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.





Oil
                    
                    
                    GasQuantity of Oil and Gas
      Reserves
                    
                    (Bbls)
                    
                    
                    (Mcf)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
                    
                    
                    
                    2,683,210Sale
      of oil and gas properties
                    
                    
                    -
                    
                    
                    
                    (1,770,002
                    )Production
                    
                    
                    (3,790
                    )
                    
                    
                    (116,189
                    )Revisions
      to previous estimate
                    
                    
                    (173,415
                    )
                    
                    
                    (31,019
                    )Total
      proved reserves at December 31, 2008
                    
                    
                    1,535,119
                    
                    
                    
                    766,000Proved
      developed reserves:December
      31, 2008
                    
                    
                    13,077
                    
                    
                    
                    0December
      31, 2007
                    
                    
                    257,660
                    
                    
                    
                    993,730





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 Table of Contents





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,
2008 and 2007:





2008
                  
                  
                  2007Unevaluated
      properties, not subject to amortization
                  
                  $
                  -
                  
                  
                  $
                  7,099,601Properties
      subject to amortization
                  
                  
                  24,668,141
                  
                  
                  
                  33,235,534Total
      capitalized costs
                  
                  
                  24,668,141
                  
                  
                  
                  40,335,135Less
      accumulated depletion, depreciation  and
      amortization
                  
                  
                  (19,025,561
                  )
                  
                  
                  (3,186,191
                  )Net
      capitalized costs
                  
                  $
                  5,642,580
                  
                  
                  $
                  37,148,944





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, 2008
and 2007:





2008
                  
                  
                  2007Acquisition
      costs
                  
                  $
                  1,817,837
                  
                  
                  $
                  4,132,070Exploration
      costs
                  
                  $
                  1,489,159
                  
                  
                  $
                  6,208,979Development
      costs
                  
                  $
                  2,571,487
                  
                  
                  $
                  222,278





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, 2008 and 2007:





2008
                  
                  
                  2007Future
      cash inflows
                  
                  $
                  59,994,406
                  
                  
                  $
                  168,883,862Future
      development and production costs
                  
                  
                  (41,435,442
                  )
                  
                  
                  (59,067,028
                  )Future
      net cash inflows before income taxes
                  
                  
                  18,558,964
                  
                  
                  
                  109,816,834Future
      income taxes
                  
                  
                  (1,318,360
                  )
                  
                  
                  (29,877,612
                  )Future
      net cash flows
                  
                  
                  17,240,604
                  
                  
                  
                  79,939,22210%
      discount factor
                  
                  
                  (12,401,545
                  )
                  
                  
                  (39,550,071
                  )Standardized
      measure of discounted future net cash inflow
                  
                  $
                  4,839,059
                  
                  
                  $
                  40,389,151





58
 Table of Contents





The
following are the principal sources of change in the standardized measure of
discounted future net cash flows during 2008:





Beginning
      of year
                  
                  $
                  40,389,151Sales
      of oil and gas produced, net of production costs
                  
                  
                  (592,308
                  )Net
      changes in prices and production costs
                  
                  
                  (42,737,734
                  )Sale
      of property
                  
                  
                  (2,196,201
                  )Development
      costs incurred during the period
                  
                  
                  2,527,992Revisions
      of estimated development costs
                  
                  
                  (1,781,392
                  )Revisions
      of previous quantity estimates
                  
                  
                  (7,603,637
                  )Accretion
      of discount
                  
                  
                  4,038,915Net
      change in income taxes
                  
                  
                  12,794,273$
                  4,839,059





Total
standardized measure of discounted future net cash inflow decreased to
$4,839,059 as of December 31, 2008 from $40,389,151 as of December 31,
2007.  The primary reason for the decrease in discounted future cash
flows is the decrease in oil and gas prices as of December 31, 2008 as compared
to December 31, 2007.





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.





15.
            Subsequent
      Events





In
February of 2009, the Company executed an agreement to terminate a contract for
professional services.  The total payment of $250,000 was paid in
February of 2009 and relieves the Company of all future obligations under the
engagement agreement with this third party.





In
February of 2009, the Company entered into an agreement with a warrant holder
which provides for the following:  1) purchase by the Company of
903,173 shares of common stock held by the warrant holder, 2) purchase by the
Company of 5,000,000 warrants of the warrant holder, and 3) settlement of any
and all liquidated damages under the registration rights of the
warrants.   The total amount paid by the Company to the warrant
holder as part of this agreement is $285,000 which was paid in February of
2009.





Excluding
the warrants mentioned above, subsequent to year end the Company canceled
8,930,479 warrants for an average price of less than $0.01 per
warrant.






59