GEOI Georesources, Inc. (MM)

General

GeoResources, Inc. (the “Company”, “we”, “us”, “our”), a Colorado corporation formed in 1958, is an independent oil and gas company engaged in the acquisition and development of oil and gas reserves through an active and diversified program which includes purchases of reserves, re-engineering, development and exploration activities primarily focused in three core U.S. areas — the Southwest and Gulf Coast, the Rocky Mountains and the Williston Basin. As a result of several related transactions described below in “Recent Developments,” the Company underwent a substantial change in ownership, management, assets and business strategy, all effective as of April 17, 2007.

Information contained in this Form 10-KSB contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of words such as “may,” “will,” “expect,” “anticipate,” “estimate” or “continue,” or variations of these words or comparable terminology. In addition, all statements other than statements of historical facts that address activities, events or developments that we expect, believe or anticipate will or may occur in the future, and other such matters, are forward-looking statements. Our future results may vary materially from those anticipated by management and may be affected by various trends and factors, which are beyond our control. Please review some of the more significant risks we face under the heading “Risk Factors” presented at the end of Item 1 of this report.

Recent Developments

Merger – Change in Management, Control and Business Strategy

On April 17, 2007, the Company merged with Southern Bay Oil & Gas, L.P. (“Southern Bay”) and a subsidiary of Chandler Energy, LLC (“Chandler”) and acquired certain Chandler-associated oil and gas properties in exchange for 10,690,000 shares of common stock (collectively, the “Merger”). As a result of the Merger, the former Southern Bay partners received approximately 57% of the then outstanding common stock of the Company and thus acquired voting control. Although GeoResources was the legal acquirer, for financial reporting purposes the Merger was accounted for as a reverse acquisition of GeoResources by Southern Bay and an acquisition of Chandler and its associated properties.

As part of the Merger, Frank A. Lodzinski assumed the role of Chief Executive Officer, President and Director, Collis P. Chandler, III became Executive Vice President, Chief Operating Officer of the Northern Division and a Director, and Francis M. Mury became Executive Vice President, Chief Operating Officer of the Southern Division. In addition, Howard E. Ehler became Vice President and Chief Financial Officer and Robert J. Anderson became Vice President, Business Development, Acquisitions & Divestitures. The Board of Directors was reconstituted to include a majority of directors appointed by Southern Bay and Chandler. See Part III of this report for information concerning our officers and directors.

Our operations are managed through a Southern and Northern divisional structure. The Southern Division and corporate offices are headquartered in Houston, Texas and the Northern Division is headquartered in Denver, Colorado.

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Since the Merger, our new management team has implemented its business strategy designed to:

During the course of 2007 we transitioned from a small regional North Dakota-based company producing 375 BOE per day with 3.0 million BOE of proved reserves, to a full-scale exploration and production company with operations in multiple basins. As of December 31, 2007, we estimated we had 15.7 million BOE of proved reserves, which were approximately 69% oil and 85% developed. See Item 2 of this report for our estimates of our oil and gas reserves at December 31, 2007. Our December 2007 production totaled 111.7 MBOE or 3,603 BOE per day of which 60% was oil.

Acquisitions and Development

In February 2007, we acquired properties located in the Giddings Field of the Austin Chalk trend of Texas. In conjunction with this acquisition, a partnership was formed with a large institutional investor as limited partner. A wholly-owned subsidiary of the Company acquired both a direct 8% working interest and a 2% general partner interest in this partnership. Our share of the acquisition purchase price of $82 million was $6.6 million, and our general partner contribution was $1.6 million. These amounts were funded with additional capital contributions of $5 million from former Southern Bay partners, borrowings under our bank credit agreement of $3 million and working capital of $196,000.

In October 2007, we acquired all of the limited partnership interest in AROC Energy, L.P., an affiliated limited partnership for which we served as general partner. This interest was acquired from a non-affiliated limited partner for $91.1 million. As a result we owned 100% of this limited partnership which held oil and gas property interests in Louisiana, the Gulf Coast, South Texas, the Permian Basin and the Black Warrior Basin. The partnership was dissolved in November 2007 and the oil and gas properties were integrated into our operations. This acquisition effectively doubled our reserves and was funded with proceeds from a senior secured credit agreement which is discussed below.

Bank Credit Agreement

On October 16, 2007, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wachovia Bank, National Association, (the “Bank”) which provides for a line of credit for three years. Pursuant to the Credit Agreement, we secured an Amended and Restated Senior Secured Revolving Credit Facility (the “Amended Credit Facility”), which is available to provide financing of up to $200 million. The Credit Agreement is secured by a first lien on substantially all of our assets. The initial borrowing base of the Amended Credit Facility is $110 million and is subject to redetermination on June 1 and December 1 of each year. As of December 31, 2007, the borrowing base was $110 million and long-term debt outstanding was $96.0 million. As of March 24, 2008, the debt balance had been reduced to $86 million. Amounts borrowed under the Credit Agreement bear interest at either (1) the LIBOR rate plus 1.50% to 2.25% or (b) the Bank’s prime rate plus .5% to 1.25%, depending on the amount borrowed under the Amended Credit Facility. The Amended Credit Facility contains a number of covenants that, among

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other things, restrict, subject to certain exceptions, our ability to incur additional indebtedness, create liens on assets, make investments, enter into sale and leaseback transactions, pay dividends and distributions or repurchase our capital stock, engage in mergers or consolidations, sell certain assets, sell or discount any notes receivable or accounts receivable and engage in certain transactions with affiliates. The Amended Credit Facility also requires the maintenance of certain financial ratios. We are in compliance with those covenants.

Business Strategy

Upon closing the Merger in April 2007, our new management implemented its business strategy, which includes:

This fundamental operating and technical strategy is complemented by management’s commitment to:

The key to management’s approach is that the business strategy first focuses on building reserves and cash flows and then expands acreage, development and exploration inventory . In the opinion of management, its strategy and approach to operations and financial management is a preferable strategy for us because:

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Each component of our business strategy and related matters are briefly discussed below.

Acquisitions and Divestitures. Acquisitions of oil and gas properties and/or companies in conjunction with exploration and development activities are designed to allow us to assemble a portfolio of properties with the potential for meaningful economic returns resulting from 1) the application of operational and technical attention, 2) development of non-producing reserves, and 3) realization of exploration upside. Acquired interests will generally have the characteristics of manageable risk, fairly predictable production and value enhancement potential. An ongoing part of our portfolio approach is the divestiture of non-core assets in order to streamline and high-grade our oil and gas property portfolio. Divestitures of this type of properties are expected to be an active part of any acquisition and asset high-grading program.

Development Activities. We are also focused on development and exploitation of non-producing reserves. We conduct comprehensive field studies, which usually result in:

Exploration. We expect to expand our exploration activities as our asset size increases. Management has a demonstrated ability to generate prospects and drilling opportunities and expand acreage positions. In addition, we have committed a significant portion of our capital budget to exploration. See Item 6. Management’s Discussion and Analysis or Plan of Operation for information regarding our capital budget. Further, we believe we have the requisite geological, geophysical, engineering and land capabilities, through our internal staff and dedicated consultants, to expand acreage positions and drilling inventory. This strategy has three distinct purposes:

While we will dedicate a meaningful portion of our budget to exploration and drilling, as the geological objectives move to a higher risk and cost profile, industry or institutional partners may be solicited on a basis where we recoup some or all of our costs and sell off part of a project to them in exchange for a carried interest.

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Corporate Mergers and Acquisitions. As a distinct part of our overall strategy, we continue to pursue corporate merger and acquisition opportunities. Criteria might include, but are not limited to:

In summary, we believe these diversified business strategies and methodical processes will maintain the reserve and production base and lead to growth in reserves, production, cash flow and, consequently, in per share values.

Oil and Gas Exploration and Development

Our oil and gas exploration and production efforts are concentrated on oil and gas properties in our areas of operations. We typically generate prospects for our own exploitation, but when we believe a prospect may have substantial risk or cost, we may attempt to raise all or a portion of the funds necessary for exploration or development through farmouts, joint ventures, or other similar types of cost-sharing arrangements. The amount of interest retained by us in a cost-sharing arrangement varies widely and depends upon many factors, including the exploratory costs and the risks involved.

Marketing of Production

Our oil and gas production is marketed to third parties consistent with industry practices. Typically, oil is sold at the wellhead at field posted prices or market indices, plus or minus adjustments for quality and transportation. Natural gas is usually sold under a contract at a negotiated price based upon factors normally considered in the industry, such as gas quality, distance from the well to the pipeline and liquid hydrocarbon content, and prevailing supply/demand conditions.

Backlog Orders, Research and Development

We do not have any long-term contracts to supply crude oil or natural gas. However, from time to time, we enter into short-term contracts to deliver quantities of oil or gas; however, no significant backlog exists. Our oil and gas division order contracts and any off-lease-marketing arrangements are typical of those in the industry with 30 to 90 day cancellation notice provisions. These contracts generally do not require long-term delivery of fixed quantities of oil or gas. We have not spent any material time or funds on research and development and do not expect to do so in the foreseeable future. In addition, as discussed elsewhere, we have entered into long-term commodity hedge contracts to mitigate the effects of price declines of oil and natural gas.

Competition

In addition to being highly speculative, the oil and gas business is intensely competitive among the many independent operators and major oil companies in the industry. Many competitors possess financial resources and technical facilities greater than those available to us and they may, therefore, be able to pay more for desirable properties or find more potentially productive prospects.

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Environmental Regulations

All of our operations are generally subject to numerous stringent federal, state and local environmental regulations under various acts including the Comprehensive Environmental Response, Compensation and Liability Act, the Federal Water Pollution Control Act, and the Resources Conservation and Recovery Act.

For example, our oil and gas operations are affected by diverse environmental regulations including those regarding the disposal of produced oilfield brines, other oil-related wastes, and additional wastes not directly related to oil and gas production. Additional regulations exist regarding the containment and handling of crude oil as well as preventing the release of oil into the environment. It is not possible to estimate future environmental compliance costs due in part to the uncertainty of continually changing environmental initiatives. While future environmental costs can be expected to be significant to the entire oil and gas industry, we do not believe that our costs would be any more of a relative financial burden than others in our industry and environmental compliance costs will be recovered in the marketplace.

Foreign Operations and Export Sales

We have no production facilities or operations in foreign countries.

Employees

As of December 31, 2007, we had 61 full-time employees, 33 of which are management, technical and administrative personnel, and 28 are field employees. Contract personnel operate some of our producing fields under the direct supervision of our employees. We consider all relations with our employees to be good.

Glossary of Terms

The following are abbreviations and definitions of terms used in this report and generally used in the oil and gas industry. Technical terms included herein may have further expanded meanings within the industry.

3-D Seismic — A technology method by which a three-dimensional image of the earth’s subsurface is created through the interpretation of reflective seismic data collected over a surface grid. 3-D seismic surveys may provide for a more detailed understanding of the subsurface than do conventional surveys and may contribute significantly to field appraisal, development and production.

Annulus — The space around a pipe in a wellbore.

Anomaly — An entity or property that differs from what is typical or expected, or which differs from that predicted by a theoretical model. It may be the measurement of the difference between an observed or measured value and the expected values of a physical property.

Bbl — One barrel, or 42 U.S. gallons of liquid volume.

Bcfe — One billion cubic feet of natural gas equivalent.

Bcf — One billion cubic feet.

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Boe — One barrel of oil equivalent.

Bopd — One barrel of oil per day.

Butane — A gaseous hydrocarbon of the paraffin series.

Completion — The installation of well and production equipment for the production of oil or natural gas.

Compression — A force that tends to shorten or squeeze, decreasing volume or increasing pressure.

Development Activities — Activities following exploration including the installation of facilities and the drilling and completion of wells for production purposes.

Development Costs — All costs incurred in bringing a field to commercial production.

Development Well — A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

Division Order — A contract setting forth the interest of each owner of a natural gas and oil property, which serves as the basis on which the purchasing company pays each owner’s respective share of the proceeds from the natural gas and oil purchased.

Down-Hole Equipment — Equipment physically located in a wellbore.

Down-Hole Lift Methods — Use of different equipment to aid in the production of a well whose own reservoir energy is not sufficient to economically produce the well.

Dry Hole — A well found to be incapable of producing hydrocarbons in sufficient quantities to justify completion as an oil or natural gas well.

Ethane — A colorless, gaseous compound of the paraffin series contained in the gases given off by petroleum and in illuminating gas.

Exploitation — The act of making an oil and gas producing property more profitable, productive or useful.

Exploration — The initial phase in petroleum operations that includes generation of a prospect or play or both, and drilling of an exploration well.

Exploratory Well — A well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new productive reservoir in a field previously found to be productive of oil or natural gas in another reservoir, or to extend a known reservoir.

Extensions and Discoveries — As to any period, the increases to proved reserves from all sources other than the acquisition of proved properties or revisions of previous estimates.

Finding Costs — The ratio of capital cost necessary to establish production, divided by the reserves discovered usually reported in $/boe or $/mcfe.

Flow Lines — The pipe through which oil or gas travels from well processing equipment to storage or sales.

Formation or Interval — The fundamental unit of lithostratigraphy. A body of rock that is sufficiently distinctive and continuous that it can be mapped. In stratigraphy, a formation is a body of strata of predominantly one type or combination of types.

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Frac or Fracture — High pressure or explosive methods of breaking rock formations to facilitate production of oil and natural gas.

Gas Lift — The process of raising or lifting fluid from a well by injecting gas down the well through tubing or through the tubing-casing annulus. Injected gas aerates the fluid resulting in less pressure than the formation; the resulting higher formation pressure forces the fluid out of the wellbore. Gas may be injected continuously or intermittently, depending on the producing characteristics of the well and the arrangement of the gas-lift equipment.

Gathering System — The flowline network and process facilities that transport and control the flow of oil or gas from the wells to a main storage facility, processing plant or shipping point. A gathering system includes pumps, headers, separators, emulsion treaters, tanks, regulators, compressors, dehydrators, valves and associated equipment.

Geophysical Work — The use of seismic surveys and the interpretation of these surveys to better estimate the subsurface environment.

Gross Wells — Refers to the total acres or wells in which a working interest is owned.

Horizontal Drilling — A drilling technique that permits the operator to contact and intersect a larger portion of the producing horizon than conventional vertical drilling techniques that may, depending on the horizon, result in increased production rates and greater ultimate recoveries of hydrocarbons.

Hydrostatic Pressure — The force exerted by a body of fluid at rest. It increases directly with the density and the depth of the fluid and is expressed in many different units, including pounds per square inch or kilopascals.

Injection Well — A well in which fluids are injected rather than produced, the primary objective typically being to maintain reservoir pressure. Two common types of injection are gas and water. Separated gas from production wells or possibly imported gas or carbon dioxide may be reinjected into the upper gas section of the reservoir. Water-injection wells are common, where filtered and treated water is injected to increase production of the reservoir.

Lithostratigraphy — The study and correlation of strata to elucidate earth history on the basis of its lithology, or the nature of the well log response, mineral content, grain size, texture and color of rocks.

Low Pressure Gathering System — Small diameter pipelines interconnected in order to combine gas from producing wells which generally have pressures form 0-500 psa.

MBbls — One thousand barrels.

MBoe — One thousand barrels of oil equivalent.

Mcfe — One thousand cubic feet of natural gas equivalent, based on a ratio of 6 Mcf for each barrel of oil, which reflects the relative energy content.

Mcf — One thousand cubic feet.

Mcfpd — One thousand cubic feet per day.

MMboe — One million barrels of oil equivalent.

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MMbtu — One million British thermal units. One British thermal unit is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

MMcfd or MMcfpd — One million cubic feet per day.

MMcfe — One million cubic feet of natural gas equivalent.

MMcf — One million cubic feet.

Multiple Stacked Reservoirs — Productive formations at different depths in a well or a field. As used in exploration, may be referred to as “multiple stacked objectives.” Can occur over a few feet or hundreds of feet in thickness.

Natural Gas Liquids — Liquid hydrocarbons extracted from natural gas, such as ethane, propane, butane and natural gasoline.

Natural Gas — A highly compressible, highly expansible mixture of hydrocarbons with a low specific gravity and occurring naturally in a gaseous form.

Net Acres or Wells — Refers to gross acres or wells multiplied, in each case, by the percentage working interest owned.

Net Production — Natural gas and oil production owned, less royalties and production due others.

Net Revenue Interest — A share of production after all burdens, such as royalty and overriding royalty, have been deducted from the working interest. It is the percentage of production that each party actually receives.

Oil — Crude oil or condensate.

Operator — The individual or company responsible for the exploration, development and production of an oil or natural gas well or lease.

Over-Pressurized — Subsurface pressure that is abnormally high, exceeding hydrostatic pressure at a given depth.

P-waves — An elastic body wave or sound wave in which particles oscillate in the direction the wave propagates.

Perforate — To pierce the casing wall and cement of a wellbore to provide holes through which formation fluids may enter or to provide holes in the casing so that materials may be introduced into the annulus between the casing and the wall of the borehole.

Porosity — (1) The condition of being porous (such as a rock formation). (2) The ratio of the volume of empty space to the volume of solid rock in a formation indicating how much fluid a rock can hold.

Present Value of Proved Reserves — The present value of estimated future revenues, discounted at 10% annually, to be generated from the production of proved reserves determined in accordance with Securities and Exchange Commission guidelines. This value is net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to (i) estimated future abandonment costs, net of the estimated salvage value of related equipment, (ii) non-property related expenses such as general and administrative expenses, debt service and future income tax expense, or (iii) depreciation, depletion and amortization.

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Primary Recovery — The first stage of oil production in which natural reservoir drives are used to recover oil, although some form of artificial lift may be required to exploit declining reservoir drives.

Propane — A gaseous hydrocarbon of the paraffin series.

Prospect — An area of exploration in which hydrocarbons have been predicted to exist in economic quantity. A prospect is commonly an anomaly, such as a geologic structure or a seismic amplitude anomaly, that is recommended by explorationists for drilling a well. Justification for drilling a prospect is made by assembling evidence for an active petroleum system, or reasonable probability of encountering reservoir-quality rock, a trap of sufficient size, adequate sealing rock, and appropriate conditions for generation and migration of hydrocarbons to fill the trap. A single drilling location is also called a prospect, but the term is more properly used in the context of exploration. A group of prospects of a similar nature constitutes a play.

Proved Developed Non-Producing Reserves — Reserves that consist of (i) proved reserves from wells which have been completed and tested but are not producing due to lack of market or minor completion problems which are expected to be corrected, and (ii) proved reserves currently behind the pipe in existing wells and which are expected to be productive due to both the well log characteristics and analogous production in the immediate vicinity of the wells.

Proved Developed Producing Reserves — Proved reserves that can be expected to be recovered from currently producing zones under the continuation of present operating methods.

Proved Developed Reserves — The combination of proved developed producing and proved developed non-producing reserves.

Proved Reserves — The estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, such as prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.

Proved Undeveloped Reserves (“PUDs”) — Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

Recompletion — A recompletion occurs when the operator reenters a well to complete (i.e., perforate) a new formation from that in which a well has previously been completed.

Reprocessing — Refers to taking older seismic data and performing new mathematical techniques to refine subsurface images or to provide additional ways of interpreting the subsurface environment.

Rod-Pump — Used in connection with a pumping unit in order to aid in the production of a well. The rod-pump moves up and down with the pumping unit and helps lift fluids from the wellbore.

Royalty — An interest in an natural gas and oil lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.

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S-waves — An elastic body wave in which particles oscillate perpendicular to the direction in which the wave propagates.

Salt Water Disposal Wells — A well used for the purpose of injecting produced water back into the ground.

Sand — An abrasive material composed of small quartz grains formed from the disintegration of pre-existing rocks.

Secondary Recovery — (1) The use of water-flooding or gas injection to maintain formation pressure during primary production and to reduce the rate of decline of the original reservoir drive. (2) Water-flooding of a depleted reservoir. (3) The first improved recovery method of any type applied to a reservoir to produce oil not recoverable by primary recovery methods.

Seismic — Pertaining to waves of elastic energy, such as that transmitted by P-waves and S-waves, in the frequency range of approximately 1 to 100 Hz. Seismic energy is studied by scientists to interpret the composition, fluid content, extent and geometry of rockformations in the subsurface.

Side-Track Drilling — An operation where a new well bore is drilled from an existing well bore.

Slick Water Fracture Stimulation — The use of water to treat the well in order to improve rate and reserves. Fluids are pumped into the wellbore at high pressure and rate causing a fracture to open in the rock and extending away from the wellbore.

Spud — To start the well drilling process by removing rock, dirt and other sedimentary material with the drill bit.

Standardized measure of discounted future net cash flows — Present value of proved reserves, as adjusted to give effect to estimated future abandonment costs, net of the estimated salvage value of related equipment, and estimated future income taxes.

Stratigraphic — Refers to a zone or strata and is typically used in terms of how the hydrocarbon is trapped in the reservoir. A stratigraphic trap is where the rock type changes due to some geologic event, such as thinning of the zone, and allows for the hydrocarbons to remain in place.

Stratigraphy — The study of the history, composition, relative ages and distribution of strata, and the interpretation of strata to elucidate earth history.

Test Well — An exploration well.

Tubing – A relatively small-diameter pipe that is run into a well to serve as a conduit for the passage of oil and gas to the surface.

Undeveloped Acreage — Leased acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil, regardless of whether such acreage contains proved reserves.

Waterflood — A method of secondary recovery in which water is injected into the reservoir formation to displace residual oil. The water from injection wells physically sweeps the displaced oil to adjacent production wells. Potential problems associated with waterflood techniques include inefficient recovery due to variable permeability, or similar conditions affecting fluid transport within the reservoir, and early water breakthrough that may cause production and surface processing problems.

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Wellbore — A borehole or the hole drilled by a drilling bit. A wellbore may have casing in it or it may be open (uncased); or part of it may be cased while part of it may be open.

Working Interest — An interest in an natural gas and oil lease that gives the owner of the interest the right to drill for and produce natural gas and oil on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The net production to which a working interest is entitled will be smaller than the share of costs that the working interest owner is required to bear to the extent of any royalty burden.

Workover — Mechanical and chemical operations on a producing well intended to restore or increase production. May include reservoir stimulation.

Risk Factors

Set forth below are risks with respect to our company. Readers should review these risks, together with the other information contained in this report. The risks and uncertainties we have described in this report are not the only ones facing our company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also adversely affect our business. Any of the risks discussed in this report or that are presently unknown or immaterial, if they were to actually occur, could result in a significant adverse impact on our business, operating results, prospects and/or financial condition.

We are dependent upon the services of our Chief Executive Officer and other executive officers.

We are dependent upon a limited number of personnel, including Frank A. Lodzinski, our Chief Executive Officer and President, and other management personnel and key employees. Failure to retain the services of these persons, or to replace them with adequate personnel in the event of their departure or termination, may have a material adverse effect on operations. No employment agreements with any of our officers currently exist, but we may consider such agreements in the future. We have no key-man life insurance on the lives of any of our executive officers.

We must successfully acquire or develop additional reserves of oil and gas.

Our future production of oil and gas is highly dependent upon our level of success in acquiring or finding additional reserves. The rate of production from our oil and gas properties generally decreases as reserves are depleted. We may not be able to acquire or develop oil and gas properties economically due to a lack of capital and inability to obtain adequate financing, which may be required to fund prospect generation, drilling operations and property acquisitions. To the extent financing is obtained, it may not be on terms beneficial to us.

Intense competition in the oil and gas exploration and production segment could adversely affect our ability to acquire desirable properties prospective for oil and gas, as well as producing oil and gas properties.

The oil and gas industry is highly competitive. We compete with major integrated and independent oil and gas companies for the acquisition of desirable oil and gas properties and leases, for the equipment and services required to develop and operate properties, and in the marketing of oil and gas to end-users. Many competitors have financial and other resources that are substantially greater than ours, which could in the future make acquisitions of producing properties at economic prices difficult for us. In addition, many

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larger competitors may be better able to respond to factors that affect the demand for oil and natural gas production, such as changes in worldwide oil and natural gas prices and levels of production, the cost and availability of alternative fuels and the application of government regulations. We also face significant competition in attracting and retaining experienced, capable and technical personnel, including geologists, geophysicists, engineers, landmen and others with experience in the oil and gas industry.

We may be faced with shortages of personnel and equipment, thereby adversely affecting operations and financial results.

Our operations and financial results may be adversely impacted due to difficulties in attracting and retaining qualified and experienced personnel in our oil and gas exploration and production business. Additional personnel are likely to be required in connection with our expansion plans, and the domestic oil and gas industry is currently experiencing significant shortages of qualified personnel in all areas of operations. Similarly, our expansion plans will require access to services and oil field equipment, both of which are currently in short supply.

Volatile oil and natural gas prices could adversely affect our financial condition and results of operations.

Our success will be largely dependent on oil and natural gas prices, which are volatile and have recently been at historically high levels. Any substantial or extended decline in the price of oil and natural gas will have a negative impact on our business operations and future revenues. Moreover, oil and natural gas prices depend on factors that are outside of our control, such as:

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Lower oil and natural gas prices may not only decrease revenues on a per unit basis, but also may reduce the amount of oil and natural gas that we can produce economically. Lower prices will also negatively impact estimates of our proved reserves. A substantial or extended decline in oil or natural gas prices may materially and adversely affect our financial condition, results of operations, liquidity or ability to finance operations and planned capital expenditures.

Industry changes may adversely affect various financial measurements and negatively affect the market price of our common stock.

Although we believe that the Merger will allow us to seek to accelerate growth and increase operating efficiencies, unforeseen costs and industry changes, as listed below, could potentially have an adverse effect on return of capital and earnings per share. Future events and conditions could cause any such changes to be significant, including, among other things, adverse changes in:

We may incur substantial losses and be subject to substantial liability claims as a result of our oil and natural gas operations.

Oil and natural gas exploration, drilling and production activities are subject to numerous operating risks including the possibility of:

Any of these operating hazards could cause damage to properties, serious injuries, fatalities, oil spills, discharge of hazardous materials, remediation and clean-up costs, and other environmental damages, which could expose us to liabilities. Although we believe that we are adequately insured for replacement

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costs of our wells and associated equipment, the payment of any of these liabilities could reduce the funds available for exploration, development, and acquisition, or could result in a loss of our properties. Also, as is customary in the oil and gas business, we do not carry business interruption insurance.

The insurance market in general and the energy insurance market in particular have experienced cost increases. It is possible that we will determine not to purchase some insurance because of high insurance premiums. If we incur substantial liabilities and the damages are not fully covered by insurance or are in excess of policy limits, then our business, results of operations and financial condition would likely be materially adversely affected.

We have hurricane associated risks in connection with our operations in the Texas and Louisiana Gulf Coast.

We could be subject to production curtailments resulting from hurricane damage to certain fields or, even in the event that producing fields are not damaged, production could be curtailed due to damage to facilities and equipment owned by oil and gas purchasers, or vendors and suppliers, because a portion of our oil and gas properties are located in or near coastal areas of the Texas and Louisiana Gulf Coast. In August 2005, Hurricane Katrina caused significant damage to the facilities at four of our oil and gas properties located in southeast Louisiana and southeast Texas. These properties accounted for approximately 13% of the former Southern Bay’s oil production in 2005 (approximately 20,000 barrels). In connection to these damages to the facilities at the four properties, .03 net wells were shut in for 250 days, 2.35 net wells were shut in for 381 days, .22 net wells were shut in for 385 days, and .71 net wells commenced production in early 2007 after being shut in since August 25, 2005. Additional wells continue to be phased in. As of March 2008, production from the affected fields was near pre-Hurricane Katrina levels.

The nature of our business and assets may expose us to significant compliance costs and liabilities.

Our operations involving the exploration, production, storage, treatment, and transportation of liquid hydrocarbons, including crude oil, are subject to stringent federal, state, and local laws and regulations governing the discharge of materials into the environment. Our operations are also subject to laws and regulations relating to protection of the environment, operational safety, and related employee health and safety matters. Compliance with all of these laws and regulations may represent a significant cost of doing business. Failure to comply with these laws and regulations may result in the assessment of administrative, civil, and criminal penalties; the imposition of investigatory and remedial liabilities; the issuance of injunctions that may restrict, inhibit or prohibit our operations; or claims of damages to property or persons.

Revisions of oil and gas reserve estimates could adversely affect the trading price of our common stock. Oil and gas reserves and the standardized measure of cash flows represent estimates, which may vary materially over time due to many factors.

The market price of our common stock may be subject to significant decreases due to decreases in estimated reserves and our estimated cash flows. Estimated reserves may be subject to downward revision based upon future production, results of future development, prevailing oil and gas prices, prevailing operating and development costs and other factors. There are numerous uncertainties and uncontrollable factors inherent in estimating quantities of oil and gas reserves, projecting future rates of production, and timing of development expenditures.

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In addition, the estimates of future net cash flows from proved reserves and the present value of proved reserves are based upon various assumptions about prices and costs and future production levels that may prove to be incorrect over time. Any significant variance from the assumptions could result in material differences in the actual quantity of reserves and amount of estimated future net cash flows from estimated oil and gas reserves.

Our hedging activities may prevent us from realizing the benefits in oil or gas price increases.

In an attempt to reduce our sensitivity to oil and gas price volatility, we have, and will likely continue to, enter into hedging transactions which may include fixed price swaps, price collars, puts and other derivatives. In a typical hedge transaction, we may fix the price, a floor or a range, on a portion of our production over a predetermined period of time. It is expected that we will receive from the counter-party to the hedge payment of the excess of the fixed price specified in the hedge contract over a floating price based on a market index, multiplied by the volume of the production hedged. Conversely, if the floating price exceeds the fixed price, we would be required to pay the counter-party such price difference multiplied by the volume of production hedged. There are numerous risks associated with hedging activities such as the risk that reserves are not produced at rates equivalent to the hedged position, and the risk that production and transportation cost assumptions used in determining an acceptable hedge could be substantially different from the actual cost. In addition, the counter-party to the hedge may become unable or unwilling to perform its obligations under hedging contracts, and we could incur a material adverse financial effect if there is any significant non-performance. While intended to reduce the effects of oil and gas price volatility, hedging transactions may limit potential gains earned by us from oil and gas price increases and may expose us to the risk of financial loss in certain circumstances.

Engaging in hedging activities may prevent us from realizing the benefits of price increases above the levels of the hedges during certain time periods. As of the date of this report, we were a party to five oil hedge contracts and eight natural gas hedge contracts, all of which we have designated as cash flow hedges. These contracts were entered into for the purpose of mitigating the effects of a potential decline in oil and gas prices.

In an attempt to reduce our exposure to interest rate increases, we have also entered into an interest rate swap contract with our bank.

Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that could adversely affect our financial condition and results of operations.

Our success will depend on the results of our exploitation, exploration, development and production activities. Oil and natural gas exploration and production activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or natural gas production. Decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data, and engineering studies, the results of which are often inconclusive or subject to varying interpretations. Costs of drilling, completing and operating wells are often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Furthermore, many factors may curtail, delay or cancel drilling, including:

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Existing debt and use of debt financing may adversely affect our business strategy.

We use debt to fund a portion of our acquisition activities and we will likely use debt to fund a portion of our future acquisition activities. Any temporary or sustained inability to service or repay debt will materially adversely affect our results of acquisitions and financial condition and will materially adversely affect our ability to obtain other financing.

On October 16, 2007, we entered into an Amended and Restated Credit Agreement (the “Amended Credit Facility”) with Wachovia Bank, National Association, as Administrative Agent, Issuing Bank, Sole Lead Arranger and Sole Bookrunner (the “Lender”) which provides for financing of up to $200.0 million, subject to borrowing base limitations.

The initial borrowing base of the Amended Credit Facility is $110.0 million, which will be reduced to $100 million on September 30, 2008, and it is subject to redetermination on June 1 and December 1 of each year. The amounts borrowed under the Amended Credit Facility bear interest at either (a) the London Interbank Offered Rate (“LIBOR”) plus 1.50% to 2.25% or (b) the prime lending rate of Wachovia plus .5% to 1.25%, depending on the amount borrowed. Principal amounts outstanding under the Amended Credit Facility, up to $100 million, are due and payable in full at maturity, October   16, 2010. Any principal balance in excess of $100 million is due and payable at September 30, 2008.

Additional payments due under the Amended Credit Facility, include paying a commitment fee to the Lender in respect of the unutilized commitments thereunder. The commitment rate is 0.375% to 0.50% per year depending on the amount of borrowing base utilization. We are also required to pay customary letter of credit fees. All of the obligations under the Amended Credit Facility, and the guarantees of those obligations, are secured by substantially all of our assets.

The Amended Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to incur additional indebtedness, create liens on assets, make investments, enter into sale and leaseback transactions, pay dividends and distributions or repurchase our capital stock, engage in mergers or consolidations, sell certain assets, sell or discount any notes receivable or accounts receivable and engage in certain transactions with affiliates.

In addition, the Amended Credit Facility requires us to maintain certain customary financial ratios. The Amended Credit Facility also contains customary affirmative covenants and defines events of default for facilities of this type. Upon the occurrence and continuance of an event of default, the Lender has the right to accelerate repayment of the loans and exercise its remedies with respect to the collateral.

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We are obligated to comply with financial and other covenants in our existing Amended Credit Facility that could restrict our operating activities, and the failure to comply could result in defaults that accelerate the payment under our debt.

Our Amended Credit Facility generally contains customary covenants, including, among others, provisions:

In addition, our Amended Credit Facility requires us to maintain financial covenants, including, but not limited to the following:

As of the date of this report, we were in compliance with all such covenants. If we were to breach any of our debt covenants and not cure the breach within any applicable cure period, the Lender could require us to repay the debt immediately, and, if the debt is secured, could immediately begin proceedings to take possession of the properties securing the Amended Credit Facility. Any such properties loss would materially and adversely affect our cash flow and results of operations.

Our properties may be subject to influence by third parties that do not allow us to proceed with planned explorations and expenditures.

We are the operator of a majority of our properties, but for many of our properties we own less than 100% of the working interests. Joint ownership is customary in the oil and gas industry and is generally conducted under the terms of a joint operating agreement (“JOA”), where a single working interest owner is designated as the “operator” of the property. For properties where we own less than 100% of the working interest, whether operated or non-operated, drilling and operating decisions may not be within our sole control. If we disagree with the decision of a majority of working interest owners, we may be required, among other things, to postpone the proposed activity or decline to participate. If we decline to participate we might be forced to relinquish our interest through “in-or-out” elections or may be subject to certain non-consent penalties, as provided in a JOA. In-or-out elections may require a joint owner to participate, or forever relinquish its position. Non-consent penalties typically allow participating working interest owners to recover from the proceeds of production, if any, an amount equal to 200% to 500% of the non-participating working interest owner’s share of the cost of such operations.

If oil and gas prices decrease or exploration efforts are unsuccessful, we may be required to write- down the capitalized cost of individual oil and gas properties.

A writedown of the capitalized cost of individual oil and gas properties could occur when oil and gas prices are low or if we have substantial downward adjustments to our estimated proved oil and gas reserves, if operating costs or development costs increase over prior estimates, or if exploratory drilling is unsuccessful. A writedown could adversely affect the trading prices of our common stock.

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We use the successful efforts accounting method. All property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending the determination of whether proved reserves are discovered. If proved reserves are not discovered with an exploratory well, the costs of drilling the well are expensed. All geological and geophysical costs on exploratory prospects are expensed as incurred.

The capitalized costs of our oil and gas properties, on a field-by-field basis, may exceed the estimated future net cash flows of that field. If so, pursuant to generally accepted accounting principles, we are required to record impairment charges to reduce the capitalized costs of each such field to its estimate of the field’s fair market value, even though other fields may have increased in value. Unproved properties are evaluated at the lower of cost or fair market value. These types of charges will reduce earnings and shareholders’ equity.

We periodically assess our properties for impairment based on future estimates of proved and risk-adjusted probable reserves, oil and gas prices, production rates and operating, development and reclamation costs based on operating budget forecasts. Once incurred, an impairment charge cannot be reversed at a later date even if we experience increases in the price of oil or gas, or both, or increases in the amount of its estimated proved reserves.

There are a substantial number of shares of our common stock eligible for future sale in the public market. The sale of a large number of these shares could cause the market price of our common stock to fall.

There were 14,703,383 shares of our common stock outstanding as of March 24, 2008.

Members of our management and other affiliates owned approximately 7,322,822 shares of our common stock, representing 49.8% of our outstanding common stock as of March 24, 2008. Sale of a substantial number of these shares would likely have a significant negative affect on the market price of our common stock, particularly if the sales are made over a short period of time. These shares may be sold publicly pursuant to an effective registration statement with the SEC.

If our stockholders, particularly management and their affiliates, sell a large number of shares of our common stock, the market price of shares of our common stock could decline significantly. Moreover, the perception in the public market that our management and affiliates might sell shares of our common stock could depress the market price of those shares.

Recovery of Investments.

We cannot assure that we would recover the costs we incur in acquiring oil and gas properties.

While the acquisition and development of oil and gas properties is based on engineering, geological and geophysical assessments, such data and analysis is inexact and inherently uncertain. There can be no assurance that any properties we acquire will be economically produced or developed. Re-engineering operations pose the risk that anticipated benefits, which may include reserve additions, production rate improvements or lower recurring operating expenses, may not be achieved, or that actual results obtained may not be sufficient to recover investments. Drilling activities, whether exploratory or developmental, are subject to mechanical and geological risks, including the risk that no commercially productive reservoirs will be encountered. Unsuccessful acquisitions, re-engineering or drilling activities could have a material adverse effect on our results of operations and financial condition.

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We cannot assure we would be able to achieve continued growth in assets, production or revenues.

Although GeoResources was the legal acquirer, in accordance with generally accepted accounting principles, the Merger was accounted for as a reverse acquisition and, accordingly, the financial information for years prior to 2007 are those of Southern Bay, which commenced operations in September 2004. Our growth since that time, particularly in 2007, may not be indicative of future results. There can be no assurance that we will continue to experience growth in revenues, oil and gas reserves or production. Any future growth in oil and gas reserves, production and operations will place significant demands on us and our management and personnel. Our future performance and profitability will depend in part on our ability to successfully integrate acquired properties into our operations, develop such properties, hire additional personnel and implement necessary enhancements to its management systems. Although management has substantive prior experience, there can be no assurance that we will continue to be successful in our growth strategy.

Compliance with environmental laws and regulations may require us to spend significant resources.

Environmental laws and regulations may: (1) require the acquisition of a permit before well drilling commences; (2) restrict or prohibit the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities; (3) prohibit or limit drilling activities on certain lands lying within wetlands or other protected areas; and (4) impose substantial liabilities for pollution resulting from past or present drilling and production operations. Moreover, changes in Federal and state environmental laws and regulations could occur and may result in more stringent and costly requirements which could have a significant impact on our operating costs. In general, under various applicable environmental regulations, we may be subject to enforcement action in the form of injunctions, cease and desist orders and administrative, civil and criminal penalties for violations of environmental laws. We may also be subject to liability from third parties for civil claims by affected neighbors arising out a pollution event. Laws and regulations protecting the environment may, in certain circumstances, impose strict liability rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. Such laws and regulations may expose us to liability for the conduct of or conditions caused by others, or for our acts which were in compliance with all applicable laws at the time such acts were performed. We believe we are in compliance with applicable environmental and other governmental laws and regulations. There can be no assurance, however, that significant costs for environmental regulatory compliance will not be incurred by us in the future, thereby having an adverse effect on our ability to conduct our business profitably.