Petrosearch Energy (PTSG) 10QSB 2007 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB

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

For the quarterly period ended September 30, 2007

o TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number: 000-51488

PETROSEARCH ENERGY CORPORATION

 (Exact name of small business issuer as specified in its charter)

NEVADA		20-2033200
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
	675 Bering Drive, Suite 200
	Houston, TX 77057
	(Address of principal executive offices)
	(713) 961-9337
	(Issuer’s telephone number)

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

Check whether the issuer: (i) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.   Yes x  No o

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  39,741,841 Shares of $0.001 par value Common Stock outstanding as of November 8, 2007

Transitional Small Business Disclosure Format (check one): Yes  oNo  x

1

PETROSEARCH ENERGY CORPORATION

FORM 10-QSB

For The Quarter Ended September 30, 2007

INDEX

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS	13
ITEM 3.	CONTROLS AND PROCEDURES	21
PART II - OTHER INFORMATION
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22
ITEM 6.	EXHIBITS	23
SIGNATURES		24

2

ITEM 1. FINANCIAL STATEMENTS

PETROSEARCH ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

September 30, 2007 and December 31, 2006

ASSETS	September30, 2007 (Unaudited)			December 31, 2006 (See note)
Current assets:
Cash	$	3,187,341		$	3,715,618
Accounts receivable:
Joint owners-billed, net of allowance of $37,179 at September 30, 2007and $83,073 at December 31, 2006		172,946			421,081
Joint owners-unbilled		803			15,213
Oil and gas production sales		321,985			146,408
Prepaid expenses and other current assets		976,435			829,104
Total current assets		4,659,510			5,127,424
Property and equipment:
Oil and gas properties, full cost method of accounting:
Properties subject to amortization		29,270,852			23,462,639
Properties not subject to amortization		7,121,241			6,309,169
Other property and equipment		153,032			149,348
Total		36,545,125			29,921,156
Less accumulated depreciation, depletion and amortization		(2,953,008	)		(2,357,347	)
Total property and equipment, net		33,592,117			27,563,809
Prepaid oil and gas costs		14,507			14,507
Other assets		695,103			656,790
Total assets	$	38,961,237		$	33,362,530

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	2,530,378		$	1,863,531
Current portion of long-term debt - Kallina		673,769			298,806
Trade note payable		42,724			409,819
Accounts payable		709,939			1,062,679
Accrued liabilities for Barnett property costs		332,719			607,013
Accrued liabilities		1,030,018			925,183
Warrant liability		427,551			317,752
Total current liabilities		5,747,098			5,484,783
Long-term debt, net of current portion		-			2,066,074
Long-term debt, net of current portion – Kallina		6,353,512			6,963,694
Convertible debt		5,986,518			-
Other long-term obligations		927,598			906,996
Total liabilities		19,014,726			15,421,547
Stockholders' equity:
Preferred stock, par value $1.00 per share, 20,000,000 shares authorized:
Series A  8% convertible preferred stock, 1,000,000 shares authorized; 483,416 shares issued and outstanding at September 30, 2007 and December 31, 2006		483,416			483,416
Series B convertible preferred stock, 100,000 shares authorized; 43,000 shares issued and outstanding at September 30, 2007 and December 31, 2006		43,000			43,000
Common stock, par value $0.001 per share, 100,000,000 shares Authorized; 39,556,789 and 37,927,070 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		39,556			37,927
Additional paid-in capital		31,140,043			23,928,090
Un-issued common stock		222,062			771,429
Accumulated deficit		(11,981,566	)		(7,322,879	)
Total stockholders' equity		19,946,511			17,940,983
Total liabilities and stockholders' equity	$	38,961,237		$	33,362,530

Note:  The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to unaudited condensed consolidated financial statements.

3

PETROSEARCH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

for the three months and  nine months ended September 30, 2007 and 2006

	Three Months Ended September 30						Nine Months Ended September 30
	2007			2006			2007			2006
Oil and gas production revenues	$	426,931		$	335,711		$	1,163,451		$	827,311
Operating costs and expenses:
Lease operating and production taxes		146,400			240,977			489,291			658,859
Depreciation, depletion and amortization		222,871			79,614			595,660			214,242
General and administrative		631,925			550,075			2,072,397			1,845,396
Total costs and expenses		1,001,196			870,666			3,157,348			2,718,497
Operating loss		(574,265	)		(534,955	)		(1,993,897	)		(1,891,186	)
Other income (expense):
Interest income		53,582			18,775			211,025			51,858
Interest expense		(492,850	)		(104,360	)		(1,391,870	)		(278,242	)
Amortization of financing costs
and debt discount		(507,327	)		(32,674	)		(1,374,146	)		(62,670	)
Change in value of warrant liability		94,812			-			(109,799	)		-
Gain on sale of investment		-			-			-			1,000,000
Total other income (expense)		(851,783	)		(118,259	)		(2,664,790	)		710,946
Net Income (Loss)	$	(1,426,048	)	$	(653,214	)	$	(4,658,687	)	$	(1,180,240	)
Basic and diluted net income (loss) per common share	$	(0.04	)	$	(0.02	)	$	(0.12	)	$	(0.04	)

See accompanying notes to unaudited condensed consolidated financial statements

4

PETROSEARCH ENERGY CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2007

					Series A				Series B				Additional		Unissued						Total Stock-
	Common Stock				Preferred Stock				Preferred Stock				Paid-In		Common			Accumulated			Holders
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Stock			Deficit			Equity
Balance at December 31, 2006		37,927,070	$	37,927		483,416	$	483,416		43,000	$	43,000	$	23,928,090	$	771,429		$	(7,322,879	)	$	17,940,983
Issuance 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		500,000		500										644,500								645,000
Common stock issued for employee compensation		25,000		25										20,725								20,750
Common stock issued for services		50,000		50										61,926								61,976
Common stock issued for interest expense		252,256		252										352,582								352,834
Common stock issued for board compensation		31,034		31										44,969								45,000
Common stock committed for interest expense																222,062						222,062
Issuance of warrants with debt														2,667,968								2,667,968
Beneficial conversion feature of convertible debt														2,667,968								2,667,968
Net loss																			(4,658,687	)		(4,658,687	)
Balance at September  30, 2007		39,556,789	$	39,556		483,416	$	483,416		43,000	$	43,000	$	31,140,043	$	222,062		$	(11,981,566	)	$	19,946,511

See accompanying notes to unaudited condensed consolidated financial statements

5

PETROSEARCH ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

For the nine months ended September 30, 2007 and 2006

	2007			2006
Cash flows from operating activities:
Net loss	$	(4,658,687	)	$	(1,180,240	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depletion, depreciation and amortization expense		595,660			214,242
Stock-based compensation and interest expense		683,279			1,923
Amortization of deferred rent		(11,711	)		(3,680	)
Amortization of debt discount		269,141			26,523
Amortization of beneficial conversion feature		872,454			-
Amortization of financing costs		258,789			36,147
Accretion of asset retirement obligation		27,231			22,717
Change in value of warrant liability		109,799			-
Gain on sale of securities		-			(1,000,000	)
Changes in operating assets and liabilities:
Accounts receivable		86,968			461,417
Trade note receivable		-			(466,972	)
Prepaid expenses and other assets		(300,520	)		(184,174	)
Accounts payable and accrued liabilities		(83,601	)		915,955
Trade note payable		(367,095	)		-
Net cash used in operating activities		(2,518,293	)		(1,156,142	)
Cash flows from investing activities:
Capital expenditures, including purchases and development of properties		(6,412,484	)		(6,233,269	)
Proceeds from sale of securities		-			1,000,000
Net cash used in investing activities		(6,412,484	)		(5,233,269	)
Cash flows from financing activities:
Proceeds from the sale of common stock		-			2,540,625
Proceeds from exercise of warrants		-			174,669
Proceeds from convertible debt		10,000,000			-
Proceeds from notes payable		-			1,800,000
Repayment of notes payable		(1,597,500	)		(587,500	)
Net cash provided by financing activities		8,402,500			3,927,794
Net increase (decrease) in cash and cash equivalents		(528,277	)		(2,461,617	)
Cash and cash equivalents at beginning of period		3,715,618			4,052,844
Cash and cash equivalents at end of period	$	3,187,341		$	1,591,227
Supplemental disclosures of cash flow information:
Interest paid	$	323,996		$	361,774
Income taxes paid	$	-		$	-

See accompanying notes to unaudited condensed consolidated financial statements

6

PETROSEARCH ENERGY CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Interim Financial Statements

The accompanying un-audited interim financial statements have been prepared without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to such rules and regulations.  These unaudited consolidated condensed financial statements should be read in conjunction with the audited financial statements and notes thereto of Petrosearch Energy Corporation (the “Company”) for the year ended December 31, 2006.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented have been included.  Operating results for the interim periods are not necessarily indicative of the results that may be expected for the respective full year.

2. Income Taxes

The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  A valuation allowance, if necessary, is provided against deferred tax assets, based upon management's assessment as to their realization.

The difference between the 35% federal statutory income tax rate and amounts shown in the accompanying interim financial statements is primarily attributable to the utilization of net operating loss carry-forwards and a valuation allowance recorded against net deferred tax assets.

3. Stock Warrants

The Company has periodically issued incentive stock warrants to executives, officers, directors and employees to provide additional incentives to promote the success of the Company’s business and to enhance the ability to attract and retain the services of qualified persons.  Warrants have also been issued as part of capital financing transactions.  The issuances of such warrants are approved by the Board of Directors.  The exercise price of a warrant granted is determined by the fair market value of the stock on the date of grant.  The Company issues shares of authorized common stock upon the exercise of the warrant.

In December 2004, the FASB issued SFAS 123(R), which is a revision of SFAS 123.  SFAS 123(R) requires all share-based payments to employees, including grants of employee stock warrants, to be recognized as stock-based compensation expense in the Company’s Consolidated Statements of Operations based on their fair values.  For purposes of determining compensation expense associated with stock warrants, the fair value of the Company’s stock was determined based upon the Black-Scholes option pricing model.

For warrants granted during 2007 and 2006, the fair value of such warrants was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:

	2007	2006
Dividend yield	-0-	-0-
Expected volatility	105%	98%
Risk free interest	4.52%	3.00%
Expected lives	4 years	2-4 years

7

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

A summary of the Company’s stock warrant activity and related information for the nine months ended September 30, 2007 follows:

								Weighted			Total
								Average			Intrinsic
	Number of					Weighted		Grant			Value
	Shares					Average		Date Fair			Warrant
	Under			Exercise		Exercise		Value			Exercises
	Warrant			Price		Price		($/share) (2)				(1	)
										��
Warrants outstanding at December 31, 2006		14,147,690		$	0.92-$9.75	$	1.88
Issued		5,225,000		$	1.40	$	1.40	$	0.51
Expired		(1,050,007	)	$	4.88-$9.75	$	7.95
Warrants outstanding at September 30, 2007		18,322,683		$	0.92-$2.00	$	1.40

All outstanding stock warrants are exercisable at September 30, 2007.  A summary of outstanding stock warrants at September 30, 2007 follows:

					Weighted
Number of			Remaining		Average			Weighted
Common			Contracted		Remaining			Average		Aggregate
Stock		Expiration	Life		Contractual	Exercise		Exercise		Intrinsic
Equivalents		Date	(Years)		Term (Years)	Price		Price		Value (1)
	150,000	March 2008		.50		$	1.95	$	1.95
	20,000	August 2008		.92		$	1.95	$	1.95
	4,851,969	November 2008		1.17		$	0.98-$1.95	$	1.93
	1,060,714	February 2010		2.42		$	2.00	$	2.00
	5,225,000	January 2011		3.33		$	1.40	$	1.40
	575,000	October 2011		4.08		$	.92	$	.92
	6,440,000	December 2011		4.25		$	.92	$	.92
	18,322,683				3.03					$1,964,200

⁽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 nine months ended September 30, 2007, and 2006:

8

	Nine Months Ended
	September 30,
	2007			2006
Restricted stock – Interest Expense	$	352,834		$	-
Restricted stock – General and Administrative		108,383			-
Restricted stock – Property Costs		645,000			545,000
Committed restricted stock		222,062			23,075
Total stock-based compensation	$	1,328,279		$	568,075
Less amounts capitalized – Property Costs		(645,000	)		(545,000	)
Stock compensation expense, net of amounts capitalized	$	683,279		$	23,075

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.

4. Related Party Transactions

During the three months and nine months ended September 30, 2007 there were no related party transactions.

5. Non-Cash Investing and Financing Activities

During the nine months ended September 30, 2007 and 2006, the Company engaged in non-cash financing and investing activities as follows:

	Nine Months Ended
	September 30,
	2007		2006
Reduction of prepaid drilling for development of oil and gas Properties		-	$	24,846
Issuance of common stock for acquisition of property	$	645,000		-
Increase in accounts payable and accrued liabilities for property costs		-	$	5,197,114
Increase in accounts payable for JIB receivable - Kallina		-	$	4,925,289
Beneficial conversion feature on convertible debt	$	2,667,968		-
Issuance of warrants with debt	$	2,667,968		-
Issuance of convertible debt for financing costs	$	450,000		-

6. Earnings Per Share

The Company has adopted SFAS No. 128, which provides for calculation of "Basic" and "Diluted" earnings per share.  Basic earnings per share includes no dilution and is computed by dividing net income available to common shareholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. Following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2007 and 2006:

9

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Basic EPS:
Net income (loss)	$	(1,426,048	)	$	(653,214	)	$	(4,658,687	)	$	(1,180,240	)
Less: Preferred stock dividends		(9,668	)		(9,668	)		(29,005	)		(29,005	)
Net income (loss) available to common stockholders	$	(1,435,716	)	$	(662,882	)	$	(4,687,692	)	$	(1,209,245	)
Weighted average shares of common stock		39,553,131			31,115,168			39,181,688			30,527,998
Basic net income (loss) per share	$	(0.04	)	$	(0.02	)	$	(0.12	)	$	(0.04	)
Diluted EPS:
Income (loss) available to common stockholders	$	(1,435,716	)	$	(662,882	)	$	(4,687,692	)	$	(1,209,245	)
Plus assumed conversions		9,668			9,668			29,005			29,005
Net income (loss) used for diluted EPS	$	(1,426,048	)	$	(653,214	)	$	(4,658,687	)	$	(1,180,240	)
Weighted average shares used for Diluted EPS		39,553,131			31,115,168			39,181,688			30,527,998
Diluted net income (loss) per share	$	(0.04	)	$	(0.02	)	$	(0.12	)	$	(0.04	)

For the three and nine month periods ended September 30, 2007 and 2006, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.  For the nine month period ended September 30, 2006, these securities included in-the-money warrants for the purchase of 84,280 common shares and preferred stock convertible into 94,218 common shares.    For the three month period ended September 30, 2006, these securities included preferred stock convertible into 94,218 common shares.    For the three and nine months ended September 30, 2007, these securities included in-the-money warrants for the purchase of 1,954,346 and 2,013,511 common shares, respectively, and preferred stock convertible into 94,218 common shares.

7. Convertible Debt

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“ EITF 00-19”).

SFAS 133 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments in accordance with EITF 00-19. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of SFAS 133. SFAS 133 and EITF 00-19 also provide an exception to this rule when the host instrument is deemed to be conventional (as that term is described in the implementation guidance to SFAS 133 and further clarified in EITF 05-2 “The Meaning of “Conventional Convertible Debt Instrument” in Issue No. 00-19).

10

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with the provisions of EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments.” Accordingly, the Company records when necessary discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts associated with beneficial conversion features under these arrangements are amortized over the term of the related debt.

On February 1, 2007 the Company executed a Note and Warrant Purchase Agreement with an Institutional Investor for the sale of a $10,000,000, 8% Senior Secured Convertible Promissory Note and a four-year warrant to purchase 5,000,000 shares of common stock at an exercise price of $1.40 per share for total proceeds of $10,000,000.  At the option of the investor, the three-year Convertible Note will be convertible into shares of common stock at a price of $1.00 per share after the earlier of one year from the closing of the transaction or three months after a registration statement relating to this transaction becomes effective.  The Warrant is exercisable one year after the closing of the transaction.

The Company  may  elect  to redeem part or all of the outstanding Convertible Note at the later  of  (i) such time as RCH Petro Investors, L.P. (RCH) has the right to convert; and (ii) twelve months from  the  date  of  closing, at one-hundred ten percent (110%) of the principal amount of the Convertible Note, provided however that such redemption right only applies  if,  upon  receiving notice of redemption, the lender has the right to convert all  the  shares  the Company intends to redeem at the applicable conversion price and the applicable  registration statement for the resale of such shares of common stock is  effective.

The Convertible Note is collateralized by a security interest in twenty five percent of the membership interest of the Company’s wholly owned subsidiary, Exploration Holding Co., LLC, which owns one-hundred percent of Barnett Petrosearch, LLC.  Barnett Petrosearch is the subsidiary which owns a 5.54% interest in DDJET, Ltd, LLP, and participates in the Barnett Shale Project.

The Convertible Note meets the definition of conventional convertible debt in EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. We have evaluated each of the features of the Convertible Note and concluded that none of these features constitute embedded derivatives that must be bifurcated from the host contract and accounted for as derivatives in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities.

The Company allocated the debt proceeds to the warrants and the debt based on the relative fair value of each. In accordance with EITF 98-5 and EITF 00-27, the Company recorded a discount of $2.7 million to the convertible note for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The fair value assigned to the warrants of $2.7 million was also recorded as a debt discount.

11

8. Legal Proceedings

The Company is subject to certain legal proceedings and claims which arose in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the Company’s financial position, results of operations or cash flows.

9. Subsequent Events

Convertible Debt Agreement

On November 9, 2007, we executed a Note and Warrant Purchase Agreement with several institutional investors and high net worth individuals for the sale of a series of 8% Senior Secured Convertible Promissory Notes and three year warrants to purchase an aggregate of 1,928,575 shares of our common stock at an exercise price of $1.50 per share for total gross proceeds to us of $8,100,000   We completed the transaction and received funding on November 13, 2007.  Upon closing, we issued the Convertible Notes and the Warrants.  As part of the transaction, we executed a Pledge and Security Agreement and a Registration Rights Agreement.  At closing, we paid Scarsdale Equities, LLC a placement agent fee equal to $461,500.

The Convertible Notes will mature three years from the date of issuance and will accrue interest payable quarterly in arrears in cash or common stock, at our option, at the rate of eight percent per annum if paid in cash, or eight and one-half percent if paid in common stock of the Company (subject to certain equity conditions being met).  At the option of the Purchasers, the Convertible Notes are convertible into shares of our common stock at a price per share of $1.05 at any time and from time to time after the original issue date.    The Convertible Note is collateralized by a security interest in five percent of the membership interest of our wholly owned subsidiary, Exploration Holding Co., LLC, which owns one-hundred percent of Barnett Petrosearch, LLC.  Barnett Petrosearch is our subsidiary which owns a 5.54% interest in DDJET, Limited, LLP.

12

Item 2.Management’s Discussion and Analysis or Plan of Operation

FORWARD LOOKING STATEMENTS

Statements contained herein and the information incorporated by reference herein may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements can be identified by the use of forward-looking terminology such as, but not limited to, "may," "will," "expect," "anticipate," "estimate," "would be," "believe," or "continue" or the negative or other variations of comparable terminology.  We intend such forward-looking statements to be covered by the safe harbor provisions applicable to forward-looking statements contained in Section 21E of the Exchange Act. Such statements (none of which is intended as a guarantee of performance) are subject to certain assumptions, risks and uncertainties, which could cause our actual future results, achievements or transactions to differ materially from those projected or anticipated. Such risks and uncertainties are set forth herein.

Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance and underlying assumptions and other statements, which are other than statements of historical facts. These statements are subject to uncertainties and risks including, but not limited to, product and service demands and acceptance, changes in technology, economic conditions, the impact of competition and pricing, and government regulation and approvals. Petrosearch cautions that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. Some of the key factors which could cause actual results to vary from those Petrosearch expects include changes in natural gas and oil prices, the timing of planned capital expenditures, availability of acquisitions, uncertainties in estimating proved reserves and forecasting production results, operational factors affecting the commencement or maintenance of producing wells, the condition of the capital markets generally, as well as our ability to access them, and uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business.

Our expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis, including without limitation, our examination of historical operating trends, data contained in our records and other data available from third parties. There can be no assurance, however, that our expectations, beliefs or projections will result, be achieved, or be accomplished. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no duty to update these forward-looking statements.

OVERVIEW – CORPORATE STRATEGY

In the third quarter of 2007 we have continued to make significant progress in ramping up the development of our high quality portfolio of oil and gas assets, particularly the Barnett Shale Project. Gas production from the Barnett Shale Project, which began in the first quarter of 2007, averaged approximately 233 million cubic feet per month in the third quarter which is over 10 million cubic feet per month net to our share. In addition, we have continued to increase our acreage position in the project (now approximately 26,300 acres).  As disclosed in previous filings, in March 2007, Metroplex Barnett Shale, LLC (“Metroplex” - wholly owned subsidiary of Exxon Mobil Corporation) completed the final transition as Operator of our Barnett Shale Project from the previous Operator, taking control and responsibility of drilling operations, completion operations and gathering system operations for the project. Also, in July, 2007 we added a second deep drilling rig and one shallow rig to the Barnett Shale Project with a third deep rig planned for early next year.  (See “Barnett Shale Project” below)

We have continued to evaluate the financing options for the initiation of the development of our North Texas Panhandle Water Flood Project (“Water Flood”) as well as financings for future capital needs in our Barnett Shale Project.   We are in late stage negotiations to obtain a joint venture partner in the Water Flood Project which would add capital resources and technical expertise to that Project.  We are also close to finalizing an agreement for a secure source of salt water which requires limited capital input from us.

13

We believe our high quality oil and gas projects will allow us to have multiple year growth and allow us to effectively align our financing needs with the capital needs of each project.  Our core assets are resource plays, which allow us to re-invest our capital into our projects to enhance the rates of return, revenue growth and reserve growth.  Our interest in the Barnett Shale Partnership is unique in that it is, in effect, an interest in an integrated natural gas company.  The Barnett Shale Partnership owns the mineral leases, the gas wells, the pipeline gathering system that brings the natural gas to the market and has access to multiple drilling rigs.  Rigs will be added to the project based on leasing requirements and drilling location availability.

Management continues to believe that the development of our core assets should have a significant impact on our production, revenues and cash flows throughout the remainder of 2007.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have primarily financed our operating and investing cash flow needs through private offerings of equity securities, sales of crude oil and natural gas, and the use of debt instruments such as convertible notes and revolving credit facilities.  The proceeds from, and the utilization of, all these methods have been, and Management believes will continue to be, sufficient to keep the operations funded and the business plan moving forward.  We plan to continue to utilize these methods to access capital in order to implement our business plan, which we believe will be an effective vehicle to carry out our business plan.

Convertible Securities

On November 9, 2007 we executed a series of Notes and Warrant Purchase Agreements with several Institutional Investors and high net worth individuals for the sale of $8,100,000, 8% Senior Secured Convertible Promissory Notes and 3 year warrants to purchase 1,928,575 shares of common stock at an exercise price of $1.50 per share for total proceeds of $8,100,000.  At the option of the investor, the three-year Convertible Notes will be convertible into shares of common stock at a price of $1.05 per share. We completed the transaction and received funding on November 13, 2007.

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 and a 4 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.  We subsequently filed the required initial registration statement that became effective on August 1, 2007.

Private Equity Placements

In December 2006, we completed sales of $3.2 million of our common stock in a private offering.  We received net proceeds of approximately $3.0 million which were used for general corporate purposes.

In February 2006, we completed sales of $2.7 million of our common stock in a private offering.  We received net proceeds of approximately $2.56 million which were used for general corporate purposes, including the drilling of projects in our prospect inventory.

Project Financings

In November 2006, we signed a Securities Purchase Agreement and Secured Term Note with Laurus Master Fund, Ltd to provide financing for the drilling of our Kallina 46 #1 well and payment of the future completion costs for the Kallina 46 #1 well.   We formed a subsidiary, Garwood Petrosearch Inc. (“Garwood”), to hold our interest in the Kallina Lease and the Kallina 46 #1 well.  Also, as a part of the financing arrangement, Garwood  issued Laurus a Warrant to acquire, upon payout of the Note indebtedness, 45% of Garwood’s outstanding common stock such that upon exercise of the Warrant, Garwood would be owned 55% by us and 45% by Laurus.  The collateral for this financing is recourse to the Kallina 46 #1 well and the associated lease acreage only.

14

Revolving Credit Agreement

On October 16, 2006, we amended our existing revolving credit facility with Fortuna Energy, LP (“Fortuna”).   The principal available under the revolving borrowing base remains $10,000,000, with a current outstanding balance of $2,312,500 as of November 10, 2007.  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 commenced 180 days after the issuance of the amendment. Additionally, as part of the transaction, we agreed to issue 100,000 new warrants, which expire five 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.  We do not intend to draw down any more funds from this credit facility.

Joint Ventures

We continue to strive to develop relationships with institutional investors and venture partners 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 joint venture relationships with terms that are standard in the oil and gas industry.

CURRENT PROJECTS AND CAPITAL REQUIREMENTS

Barnett Shale Project - Our Barnett Shale Project is part of the Barnett Shale natural gas play in the Fort Worth Basin, which is arguably one of the most exciting plays to emerge in the lower 48 in the past decade. In December 2006, through our wholly owned subsidiary, Barnett Petrosearch LLC, we joined in the formation of a partnership, DDJET Limited LLP (“Partnership), for the development of the integrated venture. We own a 5.54% interest in the Partnership along with partners Metroplex Barnett Shale LLC (“Metroplex” - a wholly owned subsidiary of Exxon Mobil Corporation), which is directing operations, and Cinco County Barnett Shale LLC (a privately held Dallas-based company).

The Partnership’s assets include all leases acquired to-date within a contract area that includes parts of eight counties, comprising approximately two million acres. Partnership assets also include associated facilities that include nearly 100 miles of pipeline, 100 miles of additional pipeline rights of way and an option on a separate 80 mile pipeline right-of-way. Approximately 80 miles of pipeline facilities have been completed and are operational. We believe the Partnership’s ownership of these pipeline assets is a decided strategic advantage in this urban area.  An aggressive leasing program within the contract area and a multi-rig drilling program are in progress for 2007, 2008 and beyond.

Through the end of October 2007, the Partnership holds leases covering approximately  26,300 net acres, and has drilled, or is in the process of drilling sixteen wells. There are currently two deep rigs running in the drilling program and one shallow rig that is being utilized to drill and set the surface casing on the wells in an effort to reduce costs on the upper section of the wells.  A third deep rig is planned for early 2008.  Also, there have been  30 drilling permits obtained to date for Partnership wells,  16 of which have been or are being drilled.

Status	Well Count
Producing		6
Awaiting Completion / Testing		4
Drilling		2
Under Evaluation		1
Abandoned		2
Total		15

15

As of  October 31, 2007  six Partnership wells, in Ellis and Tarrant Counties, have been completed and are selling gas through the Partnership-owned pipeline. The average peak daily volume for these  six wells exceeded 4.0 MMcfpd per well.  An additional five wells in Ellis and Tarrant Counties have been drilled; completion of  four of these wells is expected  by the end of the fourth quarter of 2007;  one well  is being evaluated after poor post-stimulation testing results that we believe were caused by the proximity of a previously unrecognized fault; and two wells with mechanical difficulties were drilled prior to Metroplex taking over as operator of the project and have been abandoned due to mechanical difficulties; (one after an unsuccessful attempt was made to repair parted casing and one that experienced mechanical problems while drilling and did not reach the Barnett formation and is currently being re-drilled).  These results have reinforced our interest in this area of the Barnett Shale and we are continuing nearby development activities.

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 30 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 had a program to enter each of the 20 existing wells that have not been plugged. So far, we have entered seven of these older wells to determine their mechanical status and establish potential productivity. Two of these wells have been equipped and are now capable of producing although the reservoir has insufficient pressure to produce until the water flood is installed. As of December 31, 2006, our independent engineers, Ryder Scott, have estimated our share of proved oil reserves recoverable by water flood at 1.6 million barrels of oil equivalent.  Slightly deeper than the water flood target zone, the Moore County Lime formation has undrilled exploration potential that may be tested in a future well.

To provide adequate water for injection, in November, 2006 we executed a water supply agreement with a landowner in the leasehold, which allows us to draw 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 Colorado 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.

At present, we are close to finalizing our negotiations with an international oilfield service company for them to install a water treatment facility on the leasehold that will provide us with a secure, continuous, economical source of at least 5,000 barrels per day of treated and filtered produced water from third parties that we can use for injection.  This will alleviate the need to use fresh water as our primary source of injection fluids although fresh water will remain available as a back-up source to be used as needed.  The facility will also treat our own produced water later in the life of the flood.  Our capital investment in the facility would be minimal.  At present we are also in late stage negotiations with a potential industry venture partner to allow for the commencement of the flood to begin before the end of the year.

SW Garwood, Colorado County, Texas - The Wilcox Trend, SW Garwood field has had three wells drilled with one of these in the process of being completed.  Two additional locations are on current leases.   The initial well on this prospect, the Pintail #1, completed in the Upper Wilcox in December 2004, paid out in April of 2006.  As of payout, we began participating in the production from the well with a 16% working interest.   In October 2007, the well produced an average of 363 Mcfpd and  5 bopd.

The second well, the Pintail Flats #1, was completed and fracture stimulated in May 2005 from 15,950 feet to 16,010 feet in the Lower Wilcox.  In July 2006 we re-completed and fracture stimulated an up-hole zone at 15,135 feet. The well flowed back frac fluids with a 2000 Mcfpd gas rate into the sales line in August 2006. In October, 2007, the well flowed an average of 134 Mcfpd. We are continuing to analyze several options to improve well performance. We have a 16% working interest in the well after payout. The well has four additional potentially productive zones in the Lower Wilcox and five additional potentially productive zones in the Upper Wilcox.

16

A third well, the Kallina 46 #1 began drilling in June 2006 and reached its targeted depth of 16,230 feet in August 2006. Data available while drilling and from open-hole logs indicated several potentially productive Wilcox sands from 10,400 feet to 16,100 feet. Gross prospective interval was believed to exceed 250 feet of pay. We have tested and abandoned as non-commercial, several zones up to the top of the Lower Wilcox at 13,456’.  We are finalizing plans to perforate and test a good gas show during drilling in a Middle Wilcox sand package from 12,135’ to 12,185’.  We have an 87.5% working interest in the Kallina lease and the Kallina 46 #1 well before payout and a 75.5% interest after payout.

In order to finance the Kallina 46 #1 well and future wells on the Kallina lease, we signed a Securities Purchase Agreement and Secured Term Note with Laurus Master Fund, Ltd.  (“Laurus”) for Laurus to provide financing for the drilling of the Kallina 46 #1 well and payment of the future completion costs for the  Kallina 46 #1 well which is in process of being completed.   We formed a subsidiary, Garwood Petrosearch Inc., (“Garwood”) to hold our interest in the Kallina Lease and the Kallina 46 #1 well.  Also, as a part of the financing arrangement, Garwood  issued Laurus a Warrant to acquire, upon payout of the Note indebtedness, 45% of Garwood’s outstanding common stock such that upon exercise of the Warrant, Garwood would be owned 55% by us and 45% by Laurus and the sole asset is the Kallina lease.

In the SW Garwood Project, in addition to the working interest in the wells noted above, we currently own a 16% after payout working interest in 960 acres of undeveloped leases; and an 87.5% before payout and 75.5% after payout working interest in 438 acres.

OTHER PROJECT AREAS:

Gruman Prospect, Stark County, North Dakota – In April 2006 we reached a total depth of 9,890 feet on the Gruman 18-3 well.  This well was completed as an injection well.

In October 2006, we undertook certain remedial work on the Gruman 18-1 which initially improved the production from the well. We have continually experienced “down hole” production problems which have resulted in producing 76%, 41% and 47% of the days in the first, second and third quarters of 2007, respectively.  The production problems have been caused by mechanical problems with the down-hole submersible pump, and what appears to be erratic reservoir pressure, that has hindered achieving stabilized production from the well.  In late August 2007, we again pulled and replaced the three tandem submersible pumps, lowered the pumps 180’ closer to the producing open hole interval, and changed out several surface control modules. Since that work, and with more frequent chemical/fresh water treatments to control down hole salt build up, the well has produced with much less downtime. In October 2007, production averaged 127 boepd on and 394 bwpd on producing days, with only three days down during the month.

On February 1, 2007, we began injecting produced water into the Gruman 18-3 well. The result has been to reduce the cost of operating the Gruman 18-1 by eliminating the need to truck produced water to a disposal facility. Disposing produced water into the Lodgepole formation will assist pressure maintenance in the mound  making flow from the reservoir more consistent and  improving the run time of the pump. We have established that the Gruman 18-3 is in pressure communication with the Gruman 18-1.

Proved developed reserves in the prospect to our share of the well as of December 31, 2006, were 252 Mbo and 54.4 MMcf of natural gas, as estimated by a third party engineering firm, McCartney Engineering, LLC.

Mississippi Tuscaloosa Prospects -- We have identified five Tuscaloosa oil prospects in the Mississippi Inland Salt Basin, in Yazoo County, comprising a maximum of 2,295 acres and up to 18 potential drilling locations.  The company currently holds approximately 725 net acres and we are in initial discussions with a potential industry partner to co-develop these prospects.   We plan to initially drill 8 locations, ranging from 6,150 feet to 7,500 feet in depth. Seismic data on the prospects has been reprocessed and confirmed our original geological analysis. We currently own 100% of the prospect.

17

Rodney Island, Tensas Parish, Louisiana - In October 2005, we took over operations of the Harper Z-1 well on the Rodney Island prospect from the previous operator after casing was set and cemented. Down hole mechanical difficulties hindered our attempt to complete the well, which was directionally drilled to a measured depth of 11,701 feet (vertical depth = 9,373 feet) and logged approximately 19 feet of oil pay in the Tuscaloosa Massive Sand.

As the operator, and with the agreement of the other working interest owners, we initiated litigation in February 2006 against the previous operator for non-payment of their share of drilling and completion costs.  We had made the decision, along with all the other working interest owners, to allow the leases associated with this project to expire in May 2007 and pursue the lawsuit against the previous operator.

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing elsewhere in this filing.

The factors that most significantly affect our results of operations are: (i) the sale prices of crude oil and natural gas; (ii) the amount of production sales; and (iii) the amount of lease operating expenses. Sales of production and level of borrowings are significantly impacted by our ability to maintain or increase production and reserves from existing oil and gas properties through exploration and development activities.

For the three months ended September 30, 2007 Compared to the three months ended September 30, 2006

Revenues

Consolidated oil and gas production revenue for the three months ended September 30, 2007 was $426,931 versus $335,711 for the three months ended September 30, 2006.  This represented a 27% increase in revenue in the third quarter of 2007 over the third quarter of 2006.  As expected, this increase is the result of $179,000 of revenue from the 4 producing wells in the Barnett Shale.  The effects of this increase were partially offset by a decline in revenue from our Gruman North Dakota well of approximately $30,000 or 16%.  We continue to work on improving the reliability of the daily production for our North Dakota well, and expect to continue to grow revenues for our Barnett Shale Project in the fourth quarter of 2007.

See below for revenue detail from the third quarter of 2006 compared to the third quarter of 2007.

	2007		% of			2006		% of
	3rd Qtr		Total			3rd Qtr		Total
Barnett Shale	$	179,161		42	%	$	-		0	%
Gruman - North Dakota		160,963		38	%		190,616		57	%
SW Garwood		40,037		9	%		51,453		15	%
Panhandle - Water Flood		1,573		0	%		28,024		8	%
Oklahoma		36,766		9	%		34,412		10	%
Other		8,431		2	%		31,206		9	%
Total	$	426,931		100	%	$	335,711		100	%

18

Lease Operating and Production Tax Expense

Lease operating and production tax expenses for the quarters ended September 30, 2007 and 2006 were $146,400 and $240,977, 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 significant increase in production from the three months ended September 30, 2006 to the three months ended September 30, 2007, the lease operating expenses decreased 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 quarters ended September 30, 2007, and 2006, were $222,871 and $79,614, respectively.  The significant increase is mainly due to a significant increase in the amortizable costs at September 30, 2007 as compared to the same period in 2006 as well as an 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 third quarter of 2007 was significantly higher than the depletion for the same period in 2006.

General and Administrative Expenses

General and administrative expenses for the quarters ended September 30, 2007 and 2006, were $631,925 and $550,075, respectively.  The difference of $81,850 is mainly related an increase in legal fees, professional fees attributed to a special project related to our land department, an increase in third party investor relations consulting, and an increase in expenditures for reserve engineer studies.   A summary listing of general and administrative expenses is provided below.

	3rd Quarter		3rd Quarter
	2007		2006
Personnel Costs	$	273,498	$	265,005
Travel, Meals, and Entertainment		1,503		15,843
Corporate Expenses		81,165		45,117
Accounting, Legal, and Professional Fees		143,379		112,554
Third Party Consultants and Contractors		71,955		46,695
Office Expenses		40,272		48,582
Other		20,153		16,279
Total General and Administrative	$	631,925	$	550,075

Net Operating Loss

We generated a net operating loss of $(574,265) or $(0.01) per share, for the quarter ended September 30, 2007, compared to a net operating loss of $(534,955) or $(0.02) per share, for the quarter ended September 30, 2006.  The $39,310 variance is related mainly to an increase in DD&A expense and general and administrative expenses for the quarter ended September 30, 2007 as compared to the quarter ended September 30, 2006.  The effect of these increased expenses on net operating loss was mostly offset by an increase in revenue and a decrease in lease operating expense in the third quarter of 2007.

19

Other Income (Expense)

The $733,524 increase from $118,259 in Other Expense for the quarter ended September 30, 2006 to $851,783 in Other Expense for the quarter ended Sepember 30, 2007 is due to a significant increase in interest expense and amortization of debt discount related to 1) the non-recourse financing with Laurus Master Fund Ltd for the Kallina #46-1 well, and 2) the $10 million Convertible note with RCH Petro Investors.

For the nine months Ended Sepember 30, 2007 Compared to the nine months Ended September 30, 2006

Revenues

Consolidated oil and gas production revenue for the nine months ended September 30, 2007 was $1,163,451 versus $827,311 for the nine months ended September 30, 2006.   The increase in revenue is from the Barnett Shale Project which did not account for any of the revenue for the nine months ended September 30, 2006 and accounted for approximately 36% of the revenue for the nine months ended September 30, 2007.  In addition, our 16% reversionary interest in one SW Garwood wells was in effect for all of the nine month period ended September 30, 2007, and only a portion of the same period in the prior year.  The increase in revenue from the Barnett producing properties and our reversionary interest in one of the SW Garwood wells was partially offset by decreased production from our Gruman North Dakota well.  See below for revenue detail from the nine months ended September 30, 2006 compared to the same period in 2007.

	9/30/2007		% of			9/30/2006		% of
	YTD		Total			YTD		Total
Barnett Shale	$	414,862		36	%	$	-		0	%
Gruman - North Dakota		404,889		35	%		503,547		61	%
SW Garwood		179,689		15	%		65,858		8	%
Panhandle - Water Flood		9,145		1	%		66,774		8	%
Oklahoma		102,654		9	%		114,627		14	%
Other		52,212		4	%		76,505		9	%
Total	$	1,163,451		100	%	$	827,311		100	%

Lease Operating and Production Tax Expense

Lease operating and production tax expenses for the nine months ended September 30, 2007 and 2006 were $489,291 and $658,859, 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 significant increase in production from the nine months ended September 30, 2006 to the nine months ended September 30, 2007, the lease operating expenses decreased 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 nine months ended September 30, 2007, and 2006, were $595,660 and $214,242, respectively.  This increase is mainly due to a significant increase in the amortizable costs at September 30, 2007 as compared to the same period in 2006 as well as an 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 nine months ended September 30, 2007 was significantly higher than the depletion for the same period in 2006.

20

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2007 and 2006, were $2,072,397 and $1,845,396, respectively.  The difference of $227,001 is mainly related an increase in legal fees, professional fees attributed to a special project related to our land department, an increase in third party investor relations consulting, and an increase in expenditures for reserve engineer studies.   A summary listing of general and administrative expenses is provided below.

	YTD September 30,		YTD September 30,
	2007		2006
Personnel Costs	$	957,870	$	940,794
Travel, Meals, and Entertainment		38,091		81,500
Corporate Expenses		241,908		166,718
Accounting, Legal, and Professional Fees		414,261		320,315
Third Party Consultants and Contractors		210,453		158,540
Office Expenses		148,560		152,255
Other		61,254		25,274
Total General and Administrative	$	2,072,397	$	1,845,396

Net Operating Loss

We generated a net operating loss of $(1,993,897) or $(0.05) per share, for the nine months ended September 30, 2007, compared to a net operating loss of $(1,891,186) or $(0.06) per share, for the nine months ended September 30, 2006.  The $102,711 variance is related mainly to an increase in DD&A and general and administrative expenses, offset partially with an increase in revenues and a decrease in lease operating expenses.

Other Income (Expense)

The $3,375,736 change from $710,946 in Other Income for the nine months ended September 30, 2006 versus ($2,664,790) in Other Expense for the nine months ended September 30, 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 nine months ending September 30, 2006 that did not occur in the nine months ending September 30, 2007.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements during the fiscal quarter ended September 30, 2007.

Item 3.Controls and Procedures

Richard D. Dole, our Chief Executive Officer, and David J. Collins, our Chief Financial Officer, have concluded that our disclosure controls and procedures are appropriate and effective.  They have evaluated these controls and procedures as of September 30, 2007.  During the last fiscal quarter there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

21

PART II--OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2007, we completed the following transactions in reliance upon exemptions from registration under the Securities Act of 1933, as amended (the "Act") as provided in Section 4(2) thereof. All certificates issued in connection with these transactions were endorsed with a restrictive legend confirming that the securities could not be resold without registration under the Act or an applicable exemption from the registration requirements of the Act. We believe that each person was a “qualified” investor within the meaning of the Act and had knowledge and experience in financial and business matters, which allowed them to evaluate the merits and risks of our securities.  We believe each person was knowledgeable about our operations and financial condition.

On July 3, 2007 we issued 157,407 restricted common shares to RCH Petro Investors, the Holder of our $10 million convertible note, as an interest payment for the second quarter of 2007 related to the convertible note.

On July 3, 2007 we issued 10,863 restricted common shares to William O’Malley, the Holder of our $450,000 convertible note (previously issued to Scarsdale Equities LLC), as an interest payment for the first and second quarter of 2007 related to the convertible note.

22

Item 6.Exhibits

Exhibit Number	Description of Exhibit
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

23

SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Petrosearch Energy Corporation

Date:   November 13, 2007

By:	/s/ Richard Dole
	Richard Dole
	Chief Executive Officer, President and Chairman
By:	/s/ David Collins
	David Collins
	Chief Financial Officer and Principal Financial Officer

24