2007 Results of Operations

We lost approximately $8.6 million in 2007 compared to losses of $0.9 million in 2006 and $9.7 million in 2005.  Total revenue was $11.0 million in 2007 compared to revenues of $4.9 million in 2006 and $12.5 million in 2005.  In 2007 and 2005 we had comparatively high levels of both revenue and loss due in large part to our execution of large scale drilling projects during those years.

Revenues

General and administrative costs were $4.3 million higher this year than last year due in large part to the increased stock issuance expense and the increased activity in the rig operations segment of the Company. Increased salaries expense, insurance expense and legal and accounting expense were higher due to a general increase in the Company activity level. In 2007, we recognized impairment costs of about $482,000 primarily from the Onyx Ranch and Wildwood prospects. This was a $23,000 increase from 2006. The total Company interest expense for 2007 was $259,000 versus $397,000 during 2006. The decrease was attributed to a decrease in debt. Investment expense was $204,000 during the year. The expense was attributable to additional cost of buying back minority interest in GVPS and GVDC during 2007 above par value. There was no investment expense in 2006 or 2005.

We expect our costs and expenses to increase significantly in 2008 primarily due to proposed drilling and workover activities on the Pleasant Valley, Moffat Ranch and Belridge properties in advance of production revenue.

Costs / Expenses

Total Revenues from the oil and gas segment were 14% lower in 2007 than in 2006. Sales of oil and gas decreased from $1,030,000 in 2006 to 761,000 in 2007. The decrease of $270,000 in oil revenue was a result of declining production in the Martin-Severins, Webb Tract and Hanson wells being partially offset by an increase in production in the Pleasant Valley and Belridge wells. Revenues from oil and gas operations were 17% higher in 2006 than 2005. Nearly all of this increase resulted from a rise in average gas prices. Other income from consulting increased by $248,000 in 2007 compared to $80,000 in 2006. Interest income increased $210,000 to $283,000 in 2007. This was due to maintaining higher average cash balances. Overall interest income decreased from about $121,000 in 2005 to about $73,000 in 2006. This decrease was due to a decreased average cash balance during the year.

In 2006, we acquired drilling rigs and began rig operations through our subsidiaries, GVPS and GVDC. Our revenue from our rig operations in 2007 was $2.9 million compared to $1.0 million in 2006. We had no rig operations or revenues in 2005.

Financial Condition

Balance Sheet

At December 31, 2007, we had $7.7 million in cash compared to $15.6 million at December 31, 2006. $3.7 million of the cash at year end 2007 is restricted for use by the OPUS I drilling partnership. The decrease was due primarily to an increase in property and equipment of $3.6 million for the current period compared to last year primarily because of the increase of $1.4 million in rigs and a $2.4 million increase in other property and equipment. The increase in OPUS I drilling partnership cash was related to increase funding into our partnership program by investors. Deposits increased about $29 thousand in 2007 compared to 2006. Investment in marketable securities increased by $440 thousand because of the Company receiving Duluth Metals common stock for providing executive and geological services. There were no marketable securities held in previous years.

Notes payable decreased from $1.1 million in 2006 to $0.4 million in 2007. This was due to the payoff and paydown of our notes payable.

Accounts payable and accrued expenses increased to $5.7 million from $2.2 million in 2006. The increase was all due to purchases for our recently accelerated drilling and production activities. Advances from joint venture participants, net decreased $1.7 million, from 5.4 million in 2006 to $3.7 million in 2007. This was due to the increase in drilling activity for our joint venture participants.

Shareholder equity increased from $11.2 million in 2006 to $12.1 million for 2007. This increase was due mainly to the net proceeds from issuance of common stock in the amount of $8.4 million and additional paid in capital from warrants and stock options in the amount of $1.1 million offset by a net loss for 2007 of $8.6 million. In 2007, the Company bought back interest in GVPS and GVPC. The buyback was recorded at the par value of $5.0 million in the minority interest section of the balance sheet.

Commitments

Generally, our financial commitments arise from selling interests in our drilling prospects to third parties, which result in obligations to drill and develop the prospect. If we are unable to sell sufficient interests in a prospect to fund its drilling and development, we must either amend our agreements to drill the prospect or locate a substitute prospect acceptable to the participants.

Delay rentals for oil and gas leases amounted to $501,000 in 2007. Advance royalty payments and gold mining claims maintenance fees were $247,000 for the same period. We expect that approximately equal delay rentals and fees will be paid in 2008 from operating revenues.

Operating Activities

Net cash used by operating activities was $3.9 million for 2007, compared to $2.1 million in 2006. Net income decreased from a $8.6 million loss in 2007 to a $0.9 million loss in 2006. Stock based compensation costs decreased from $1.3 million in 2006 to $0.9 million in 2007. We adopted SFAS No. 123R “Shared Based Payment” on January 1, 2006 which required expensing of stock options.

Warrant cost increased from $247,000 in 2006 to $384,000 in 2007. In 2007 and 2006, we did not have any expense for property, mining claims & services paid with common stock, and while in 2005 we expensed $5.7 million. We had $3.7 million provided by an increase in accounts payable, compared to $0.6 million used by an increase in accounts payable in 2006. The 2007 increase is due to the increase in accounts payable balances due to the increase drilling activity near year end.

Investing Activities

Cash used by investing activities in 2007 was $11.1 million compared to cash provided of $8.3 million for the same period in 2006. In 2007, $5.0 million in cash was used to buy back 39% of the outside third party interest in GVPS and all of the outside third party interest in GVDC. In 2006, $13.8 million in cash was provided by the sale of our interest in Tri-Western Resources and the sale of our industrial minerals site.

Financing Activities

Cash provided by financing activities was $7.0 million in 2007 compared to $4.5 million for the period ending December 31, 2006. Proceeds from long-term debt decreased to zero to 2007 from $2.2 million in 2006. Principal payments on long term debt used $1.1 million in cash in 2007 compared to $4.9 million in 2006. This change was due primarily to the payoff of long term debt in conjunction with the sale of Tri-Western Resources in 2006. The net proceeds from the issuance of common stock increased from $2.4 million in 2006 to $7.9 million in 2007. The net proceeds from the issuance of warrants increase from zero in 2006 to $268 thousand in 2007 due to the number of warrants issued.

Liquidity and Capital Resources

The recoverability of our oil and gas reserves depends on future events, including obtaining adequate financing for our exploration and development program, successfully completing our planned drilling program, and achieving a level of operating revenues that is sufficient to support our cost structure. At various times in our history, it has been necessary for us to raise additional capital through private placements of equity financing. When such a need has arisen, we have met it successfully. It is management’s belief that we will continue to be able to meet our needs for additional capital as such needs arise in the future. We may need additional capital to pay for our share of costs relating to the drilling prospects and development of those that are successful, and to acquire additional oil and gas leases, drilling equipment and other assets. The total amount of our capital needs will be determined in part by the number of prospects generated within our exploration program and by the working interest that we retain in those prospects.

During 2008, we expect to expend approximately $25 million on drilling activities. Funds for the majority of these activities will be provided by sales of partnership interests in the Opus-I drilling partnership, which will still be raising funds for development purposes. Tri-Valley’s portion is expected to be approximately $6 million. We are evaluating and finalizing results of recently drilled Pleasant Valley and Moffat Ranch in order to design the optimum development plan for the property. We expect to drill several wells there in 2008. Our ability to complete our planned drilling activities in 2008 depends on some factors beyond our control, such as availability of equipment and personnel. Our actual capital commitments for fiscal year 2008 are less than $4 million, but to expend $25 million we will require additional capital from the OPUS partnership or other outside parties.

In 2008, we expect expenditures of approximately $ 0.8 million on mining activities, including mining lease and exploration expenses.

Should we choose to make an acquisition of producing oil and gas properties, such an acquisition would likely require that some portion of the purchase price be paid in cash, and thus would create the need for additional capital. Additional capital could be obtained from a combination of funding sources. The potential funding sources include:

• Cash flow from operating activities,
• Borrowings from financial institutions (which we typically avoid),
• Debt offerings, which could increase our leverage and add to our need for cash to service such debt (which we typically avoid),
• Additional offerings of our equity securities, which would cause dilution of our common stock,
• Sales of portions of our working interest in the prospects within our exploration program, which would reduce future revenues from its exploration program,
• Sale to an industry partner of a participation in our exploration program,
• Sale of all or a portion of our producing oil and gas properties, which would reduce future revenues.

Our ability to raise additional capital will depend on the results of our operations and the status of various capital and industry markets at the time such additional capital is sought. Accordingly, there can be no assurances that capital will be available to us from any source or that, if available, it will be on terms acceptable to us. The Company has no off balance sheet arrangements.