About Us

Dear Shareholders and Interested Parties:

During 2009, the Company took steps to address liquidity concerns arising from weaker commodity prices and severely limited access to the capital markets. We have been able to improve our working capital position throughout the year despite a significant drop in natural gas prices. We achieved this by accessing capital in a timely manner despite poor market conditions and have managed to keep ahead of the curve and maintain a sufficient treasury so we can best position ourselves to execute on our business plan. The Company raised $1.8 million by issuing promissory notes and $5.5 million last year, net of offering costs, through the issuance of Series B Convertible Preferred Stock to accredited investors. In September, we sold certain idle equipment related to the Madisonville Gas Treatment Plant (the "Plant") for a sale price of $2.5 million of which $1.1 million was applied toward a reduction of the principal balance on the Bank of Oklahoma term loan.

In March of 2010, we announced the successful sale of our Alaskan Cook Inlet leases ("Alaskan Leases") for cash and a significant retained royalty position. This transaction is consistent with our business strategy of gaining control of key acreage in projects which individually have the potential to be 'company makers,' performing extensive geologic and geophysical evaluations thereon, and leveraging through strategic transactions with other resource companies.

GeoPetro is actively seeking industry partners to fund costs associated with drilling test wells on its Madisonville Deep and California projects. If GeoPetro is able to continue to execute farmout arrangements on attractive terms, doing so will reduce the Company's capital exposure and allow it to receive reimbursement of some or all of its sunk costs associated with these projects.

Cook Inlet (Alaska) Project

From 2005 to 2010, GeoPetro acquired a 100% working interest in approximately 123,000 acres onshore in the Cook Inlet region of Alaska. The leasehold position consists of two separate target areas, the Point MacKenzie Prospect and the Trading Bay Prospect, which have been selected for oil and gas exploration. GeoPetro sold its entire working interest in the leases to Linc Energy (Alaska) Inc. ("Linc"). Linc is a wholly-owned subsidiary of Linc Energy Ltd., an Australian-based company publicly traded on the Australian Stock Exchange (ASX: LNC). Linc has a market capitalization of approximately US $650 million.

We will receive a cash payment of US $1.0 million upon approval of assignment of the leases to Linc, and an additional US $4.0 million from the first 75% of 8/8ths of the proceeds from any oil and gas production from the leases discovered and produced by Linc. Thereafter we will receive an overriding royalty interest of 10% of 8/8ths in and to the Alaskan Leases issued by the State of Alaska and the Alaska Mental Health Trust (which comprise over 99% of the Alaskan Leases), and an overriding royalty interest of 7% of 8/8ths in and to the Alaskan Leases issued by Cook Inlet Region, Inc. on oil and gas production.

Linc has also committed to the drilling of the Frontier Spirit #1 exploration well to evaluate a significant conventional oil and gas prospect identified and developed by GeoPetro on the acreage. The prospect covers approximately eighteen sections (11,500 acres) under structural closure, and will target conventional gas reserves in the Middle and Lower Tyonek Formations reaching to a depth of approximately 8,000 feet. Preliminary log analysis and seismic data indicate the Point MacKenzie and Trading Bay Blocks may contain conventional accumulations of natural gas reserves in Tertiary sandstones in addition to the prospect identified at the Frontier Spirit #1 location. Additional potential on the Alaskan Leases may be realized from the development of coal bed methane reserves.

Linc's significant commitment to the exploration and development of the Cook Inlet Project has confirmed our belief in the resource potential of this significant acreage position. The significant resource potential of this Project coupled with our retained interest positions us for a significant enhancement of shareholder value upon a commercial discovery.

Madisonville Project, East Texas

We began 2009 with the acquisition of the natural gas treatment plant from Madisonville Gas Processing, LP ("MGP"), in exchange for shares of GeoPetro's common stock, assumption of related debt and cash ("the Acquisition") on December 31, 2008. The Plant processes natural gas produced from the Madisonville Project located in Madison County, East Texas. We have reconfigured idle equipment and implemented operating efficiencies in the Plant to reduce the inlet pressure into the Plant and improve our natural gas production. Additionally, we continue to look at ways to manage our costs in this challenging environment and are making significant progress in reducing operating expenses associated with the Plant.

Lokern Project, California

We own a 100% working interest in 1,280 acres in the Lokern Project, located in the southern San Joaquin basin, near Bakersfield, California. The primary exploration objectives are the Miocene Stevens formation and the deeper Carneros member of the Temblor formation. The secondary objectives include the Miocene Reef Ridge and Pliocene Etchegoin sands.

The prospect was originally developed in part as a result of positive results from the Machii-Ross Ackerman show well drilled on acreage currently controlled by GeoPetro. Based on log analysis, the Company believes this well may have approximately 240 feet of potential net pay in the Stevens zone. There may be an additional 150 feet of potential pay in the Upper Stevens turbidite channel in the Ackerman well; however, due to hole washout an accurate log analysis could not be done. The Machii-Ross Ackerman well was drilled to a depth of 15,078 feet. The Company believes, based on our log analysis, that the well may have been a bypassed producer.

We expect that a well will be drilled, either by us or through a farmout arrangement with a third party, to a depth sufficient to test the Stevens and possibly deeper Carneros zones sometime in 2011. We are in the process of permitting up to three drilling locations on our leasehold.

The Lokern leasehold is in proximity to the recent hydrocarbon discovery announced by Occidental Petroleum in July 2009. Our prospect is on trend with and located immediately north of the prolific Elk Hills and Tule Elk fields, which have combined reserves greater than 1.5 billion barrels of oil equivalent. On Wednesday July 22, 2009, Occidental Petroleum Corp. announced it has made what could be the largest oil and natural gas discovery in California in 35 years. Occidental, one of the largest U.S. independent oil and gas producers, said early indications suggest there are between 150 million and 250 million gross barrels of oil equivalent reserves in the newly defined area.

We were able to assemble the land position in our Lokern Project with a modest investment well ahead of Occidental's announcement. We believe industry interest in this area, on the heels of the recently announced Occidental discovery, should allow us to secure an industry partner or otherwise obtain the necessary capital to undertake drilling and evaluation of our acreage position. Subject to permitting, this should take place in 2011.

Bengara-II Block, Indonesia

In 2009 we received approval from the Indonesian government for a three year extension of additional time under the Bengara-II PSC until December 3, 2011. This extension is expected to allow us and our partners to more fully appraise, assess, and justify the economic feasibility of commercial development of the Bengara-II Block, onshore Kalimantan, Indonesia. In addition, our 12% owned subsidiary Continental-GeoPetro (Bengara-II) Ltd. ("CGB2") awarded a contract to a local seismic acquisition contractor to conduct a seismic acquisition program in the Bengara-II Block. CGB2 intends to acquire a total of 120 square kilometers of 3D seismic and 844 line kilometers of 2D seismic at an estimated acquisition cost of US$ 28,500,000. The primary objective of the 3D seismic program is to further define and delineate the Seberaba oil discovery and the Makapan gas/condensate discovery. CGB2 is eyeing a joint development of Makapan gas with Seberaba oil to achieve economies of scale and provide a gas source for fuel, pressure maintenance, and artificial lift of oil. A large part of the 2D seismic program is also intended to provide additional definition of other exploration prospects in the Bengara-II Block to firm up new exploration drilling targets for the 2011 drilling program. These prospects include the Galiadap structure underneath the "oil lake" seep in the southern region of the block.

Outlook for 2010

Looking to fiscal 2010, increasing shareholder value will remain our top priority. We plan to accomplish this goal in five ways. We intend to increase the production at Madisonville by placing two additional wells on production, the Mitchell #1 and the Wilson #1 wells; we will focus on evaluating the reserve potential of our exploration prospects through strategic farmouts; we will continue to pursue options to strengthen our balance sheet; and, we will continue to focus on cost reductions. Finally, we will continue to explore business opportunities that may be available from time to time.

Madisonville Production Enhancements. During 2010, we plan to conduct a workover of the Mitchell #1 well with the objective to increase production. Subsequent to the Mitchell #1 workover and subject to capital availability, we plan to frac, and if successful, connect via gathering line the Wilson #1 well to the Plant. We believe natural gas prices have recovered sufficiently from their lows in 2009 to justify proceeding with these well workovers.
Strategic Farmouts. As mentioned previously, we are seeking industry partners to fund costs associated with drilling test wells on our Madisonville Deep and California projects pursuant to farmout agreements. We believe we have made significant progress to date in this effort, and will provide further updates on events as they occur.
Working Capital and Liquidity. We will continue to focus on strengthening our working capital position and maintaining debt at serviceable levels.
Cost Reductions. We have implemented significant cost reductions in our field operations since acquiring the Plant at Madisonville. We continue to explore additional cost reduction measures in an ongoing effort to restore our operating margins to previous levels. At the corporate level, we have implemented general and administrative cost reductions that were reflected in 2009 results of operations and are expected to be further reflected in our results of operations going forward.
Business Opportunities. Management evaluates business opportunities in the oil and gas industry that could potentially be beneficial to our shareholders. We regularly evaluate all such opportunities in the context of the rapidly evolving industry environment, and we remain committed to pursuing iniatives that provide an enhanced value for all our shareholders.

Summary

Commodity-based businesses are cyclical by their very nature. We believe that oil and gas prices are at the bottom of the current cycle primarily due to a reduction in demand caused by the deep recession seen around the globe. During such times, the prudent, near-term strategy for GeoPetro is to focus on cost reductions, improve our balance sheet, maximize the value of our proven producing Madisonville Project through production enhancements and seek opportunities to optimize our remaining portfolio of assets through strategic farmouts. We are pleased with the progress being made on all these fronts. Your management and Board are being proactive to ensure that GeoPetro remains well situated to return to growth as the economy and commodity prices continue to recover.

I would like to take this opportunity to thank all employees of GeoPetro for another year of hard work and dedicated service; to our shareholders for their loyal support and patience; and to our directors and officers who have maintained strong belief and focus in what we are trying to accomplish. We look forward to a prosperous 2010 as we continue to explore and develop our projects and implement strategies to increase shareholder value.

Sincerely,
Stuart J. Doshi
Chairman of the Board, President and Chief Executive Officer