UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended January 31, 2008

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-8877

CREDO PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

Colorado		84-0772991
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1801 Broadway, Suite 900, Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

303-297-2200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Act.)

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, net of treasury stock, as of the latest practicable date.

Date		Class		Outstanding
Mar.10, 2008		Common stock, $.10 par value		9,295,000

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Quarterly Report on Form 10-Q For the Period Ended January 31, 2008

TABLE OF CONTENTS

	PART I - FINANCIAL INFORMATION	Page No.

Item 1	Financial Statements

Consolidated Balance Sheets
As of January 31, 2008 (Unaudited) and October 31, 2007		3

Consolidated Statements of Operations
For the Three Months Ended January 31, 2008 and 2007 (Unaudited)		4

Consolidated Statements of Cash Flows
For the Three Months Ended January 31, 2008 and 2007 (Unaudited)		5

Notes to Consolidated Financial Statements (Unaudited)		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

Signatures		21

The terms “CREDO”, “Company”, “we”, “our”, and “us” refer to CREDO Petroleum Corporation and its subsidiaries unless the context suggests otherwise.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

	January 31,			October 31,
	2008			2007
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	5,708,000		$	7,285,000
Short-term investments	6,305,000			6,383,000
Receivables:
Accrued oil and gas sales	2,219,000			1,647,000
Trade	694,000			602,000
Derivative Assets	127,000			443,000
Other current assets	145,000			55,000
Total current assets	15,198,000			16,415,000

Long-term assets:
Oil and gas properties, at cost, using full cost method:
Unevaluated oil and gas properties	9,593,000			7,791,000
Evaluated oil and gas properties	52,732,000			51,691,000
Less: accumulated depreciation, depletion and amortization of oil and gas properties	(22,934,000		)	(22,108,000		)
Net oil and gas properties, at cost, using full cost method	39,391,000			37,374,000

Exclusive license agreement, net of amortization of $519,000 in 2008 and $466,000 in 2007	181,000			198,000
Compressor and tubular inventory to be used in development	1,066,000			1,090,000
Other, net	290,000			272,000
Total assets	$	56,126,000		$	55,349,000

LIABILITIES AND STOCKHOLDERS‘ EQUITY

Current Liabilities:
Accounts payable	$	870,000		$	1,639,000
Revenue distribution payable	1,005,000			979,000
Other accrued liabilities	194,000			852,000
Income taxes payable	486,000			434,000
Total current liabilities	2,555,000			3,904,000

Long Term Liabilities:
Deferred income taxes, net	9,718,000			9,204,000
Exclusive license obligation, less current obligations of $77,000 in 2008 and $70,000 in 2007	85,000			85,000
Asset retirement obligation	1,040,000			1,016,000
Total liabilities	13,398,000			14,209,000

Commitments

Stockholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued	—			—
Common stock, $.10 par value, 20,000,000 shares authorized, 9,510,000 shares issued in 2008 and in 2007	951,000			951,000
Capital in excess of par value	15,928,000			15,913,000
Treasury stock at cost, 215,000 shares in 2008 and 2007	(506,000		)	(506,000		)
Accumulated other comprehensive income	91,000			319,000
Retained earnings	26,264,000			24,463,000
Total stockholders’ equity	42,728,000			41,140,000
Total liabilities and stockholders’ equity	$	56,126,000		$	55,349,000

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

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	January 31,
	2008			2007

REVENUES:
Oil and gas sales	$	4,580,000		$	3,808,000
Investment income (loss) and other	(5,000		)	247,000
	4,575,000			4,055,000

COSTS AND EXPENSES:
Oil and gas production	852,000			913,000
Depreciation, depletion and amortization	853,000			958,000
General and administrative	332,000			278,000
Interest	1,000			6,000
	2,038,000			2,155,000

INCOME BEFORE INCOME TAXES	2,537,000			1,900,000

INCOME TAXES	(736,000		)	(536,000		)

NET INCOME	$	1,801,000		$	1,364,000

EARNINGS PER SHARE OF COMMON STOCK BASIC	$	.19		$	.15

EARNINGS PER SHARE OF COMMON STOCK DILUTED	$	.19		$	.15

Weighted average number of shares of Common Stock and dilutive securities:
Basic	9,295,000			9,261,000

Diluted	9,356,000			9,387,000

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

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended
	January 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,801,000		$	1,364,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	853,000			958,000
Deferred income taxes	514,000			328,000
(Gain) loss on short term investments	78,000			(231,000		)
Compensation expense related to stock options granted	15,000			57,000
Other	24,000			3,000
Changes in operating assets and liabilities:
Proceeds from short-term investments	—			719,000
Purchase of short-term investments	—			(1,000,000		)
Accrued oil and gas sales	(572,000		)	307,000
Trade receivables	(92,000		)	(367,000		)
Other current assets	(2,000		)	(69,000		)
Accounts payable and accrued liabilities	(1,045,000		)	(629,000		)
Income taxes payable	52,000			99,000

NET CASH PROVIDED BY OPERATING ACTIVITIES	1,626,000			1,539,000

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties	(3,200,000		)	(3,005,000		)
Changes in other long-term assets	(3,000		)	(56,000		)

NET CASH USED IN INVESTING ACTIVITIES	(3,203,000		)	(3,061,000		)

CASH FLOWS FROM FINANCING ACTIVITIES	—			—

NET CASH PROVIDED BY FINANCING ACTIVITIES	—			—

DECREASE IN CASH AND CASH EQUIVALENTS	(1,577,000		)	(1,522,000		)

CASH AND CASH EQUIVALENTS:
Beginning of period	7,285,000			4,577,000

End of period	$	5,708,000		$	3,055,000

Supplemental cash flow information:
Cash paid during the period for income taxes	$	100,000		$	—

Additions to oil and gas properties in current liabilities	$	356,000		$	—

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

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements (Unaudited)

January 31, 2008

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the company’s results for the periods presented. These consolidated financial statements should be read in conjunction with the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2007.

Certain 2007 amounts have been reclassified to conform to the current year presentation. Such reclassification had no effect on net income or shareholder equity.

2. SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The company bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances. Although actual results may differ from these estimates under different assumptions or conditions, the company believes that its estimates are reasonable and that actual results will not vary significantly from the estimated amounts, in the ordinary course of business.

3. STOCK-BASED COMPENSATION

The CREDO Petroleum Corporation 2007 Stock Option Plan (the 2007 Plan) is described in the Notes to Consolidated Financial Statements in the company’s Annual Report on Form 10-K for the year ended October 31, 2007. No options have been granted under the 2007 Plan. The CREDO Petroleum Corporation 1997 Stock Option Plan (the 1997 Plan) expired on July 29, 2007. No additional options can be granted under the 1997 Plan. However, all outstanding options granted under the 1997 Plan will continue to be governed by the terms of that Plan.

For the three months ended January 31, 2008 and 2007, the company recognized stock based compensation expense of $15,000 ($11,000 net of tax) and $57,000 ($41,000 net of tax) respectively. The estimated unrecognized compensation cost from unvested stock options as of January 31, 2008 was approximately $108,000 which is expected to be recognized over an average of 2.3 years.

No options were granted during the three months ended January 31, 2008. The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes option pricing model. The weighted average assumptions used in the option pricing model for the three months ended January 31, 2007 were: volatility, 50.84%; expected option term, 2.5 years; risk-free interest rate, 4.58%; and expected dividend yield, 0%.

4. NATURAL GAS PRICE HEDGING

The company periodically hedges the price of a portion of its estimated natural gas production when the potential for significant downward price movement is anticipated. Hedging transactions typically take the form of forward short positions and collars on the NYMEX futures market, and are closed by purchasing offsetting positions. Such hedges, which are accounted for as cash flow hedges, do not exceed estimated production volumes, are expected to have reasonable correlation between price movements in the futures market and the cash markets where the company’s production is located, and are authorized by the company’s Board of Directors. Hedges are expected to be closed as related production occurs but may be closed earlier if the anticipated downward price movement occurs or if the company believes that the potential for such movement has abated.

The company recognizes all derivatives (consisting solely of cash flow hedges) on its balance sheet at fair value at the end of each period. Changes in the fair value of a cash flow hedge are recorded in Stockholders’ Equity as Accumulated Other Comprehensive Income on the Consolidated Balance Sheets and then are transferred into the Consolidated Statement of Operations as the underlying hedged item affects earnings. Amounts reclassified into earnings related to natural gas hedges are included in oil and gas sales.

Hedging gains and losses are recognized as adjustments to gas sales as the hedged product is produced. The company had hedging gains of $847,000 ($601,000 net of income tax) and $396,000 ($284,000 net of income tax) in the three months ended January 31, 2008 and 2007, respectively. Any hedge ineffectiveness, which was not material for any period, is immediately recognized in gas sales.

Open hedge contracts are indexed to the NYMEX. Periodically, the company enters into contracts indexed to Panhandle Eastern Pipeline Company for Texas, Oklahoma mainline. For comparative purposes, hedges indexed to Panhandle Eastern Pipeline Company are expressed on a NYMEX basis. For hedges indexed to Panhandle Eastern Pipeline Company, the individual month price (basis) differentials between the NYMEX and Panhandle Eastern Pipeline Company range from minus $1.45 in the winter months to minus $0.90 in the spring months.

Unrecognized gains and losses on hedge contracts at January 31, 2008 totaled a gain of $127,000 ($91,000 after income tax) and were included in “Other Comprehensive Income”. These contracts covered 1,420 MMBtus at average monthly NYMEX basis prices ranging from $7.83 to $9.42.

Subsequent to January 31, 2008, the company entered into additional hedge contracts covering 620 MMBtus at NYMEX basis prices, ranging from $8.13 to $9.95 for the production months of October 2008 through October 2009.

The company has a hedging line of credit with its bank which is available, at the discretion of the company, to meet margin calls. To date, the company has not used this facility and maintains it only as a precaution related to possible margin calls. The maximum credit line is $5,900,000 with interest calculated at the prime rate. The facility is unsecured and has covenants that require the company to maintain $3,000,000 in cash or short term investments, none of which are required to be maintained at the company’s bank, and prohibits funded debt in excess of $500,000. It expires on November 15, 2010.

5. COMPREHENSIVE INCOME

Comprehensive income includes all changes in equity during a period except those resulting from investments by, and distributions to, stockholders. The components of comprehensive income for the three months ended January 31, 2008 and 2007 are as follows:

	Three Months Ended
	January 31,
	2008			2007

Net income	$	1,801,000		$	1,364,000
Other comprehensive income:
Change in fair value of derivatives	(316,000		)	(371,000		)
Income tax benefit	88,000			100,000
Total comprehensive income	$	1,573,000		$	1,093,000

6. EARNINGS PER SHARE

The company’s calculation of earnings per share of common stock is as follows:

	Three Months Ended January 31,
	2008					2007
				Net					Net
	Net			Income		Net			Income
	Income		Shares	Per Share		Income		Shares	Per Share
Basic earnings per share	$	1,801,000	9,295,000	$	.19	$	1,364,000	9,261,000	$	.15

Effect of dilutive shares of common stock from stock options	—		61,000	—		—		126,000	(.00		)

Diluted earnings per share	$	1,801,000	9,356,000	$	.19	$	1,346,000	9,387,000	$	.15

7. INCOME TAXES

The company uses the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate in effect at that time.

The total future deferred income tax liability is extremely complicated for any energy company to estimate due in part to the long-lived nature of depleting oil and gas reserves and variables such as product prices. Accordingly, the liability is subject to continual recalculation, revision of the numerous estimates required, and may change significantly in the event of such things as major acquisitions, divestitures, product price changes, changes in reserve estimates, changes in reserve lives, and changes in tax rates or tax laws.

On November 1, 2007 the company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). In implementing FIN 48, we found no significant uncertain tax positions. Our policy is to recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense, which is consistent with the recognition of these items in prior reporting periods. No interest and penalties related to uncertain tax positions were accrued at January 31, 2008

We have not had any material changes to our unrecognized tax benefits since adoption, nor do we

anticipate significant changes to the total amount of unrecognized tax benefits within the next twelve months.

As of January 31, 2008 we remain subject to examination of our Federal and state tax returns, except Colorado, for the tax years 2004 through 2006, and for the tax years 2003 through 2006 for our Colorado tax returns.

8. COMMITMENTS

The company has no material outstanding commitments at January 31, 2008.

9. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). This interpretation clarifies the application of SFAS 109 by defining the criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. The company adopted FIN 48 November 1, 2007.

In November 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combination (FAS 141(R)) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160). FAS 141(R) will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. FAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. FAS 141(R) and FAS 160 are effective for both public and private companies for fiscal years beginning on or after December 15, 2008 (fiscal 2010 for the Company). FAS 141(R) will be applied prospectively. FAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of FAS 160 will be applied prospectively. Early adoption is prohibited for both standards. Management is currently evaluating the requirements of FAS 141(R) and FAS 160 and has not yet determined the impact on its financial statements.

In December 2007, the FASB issued SFAS No.157 , Fair Value Measurements . This Statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. However, the application of this Statement may change how fair value is determined. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. As of December 1, 2007 the FASB has proposed a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Management is currently evaluating the requirements of FAS 159 and has not yet determined the impact on its financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this Quarterly Report on Form 10-Q, other than statements of historical facts, address matters that the company reasonably expects, believes or anticipates will or may occur in the future. Forward-looking statements may relate to, among other things:

· the company’s future financial position, including working capital and anticipated cash flow;

· amounts and nature of future capital expenditures;

· operating costs and other expenses;

· wells to be drilled or reworked;

· oil and natural gas prices and demand;

· existing fields, wells and prospects;

· diversification of exploration;

· estimates of proved oil and natural gas reserves;

· reserve potential;

· development and drilling potential;

· expansion and other development trends in the oil and natural gas industry;

· the company’s business strategy;

· production of oil and natural gas;

· matters related to the Calliope Gas Recovery System;

· effects of federal, state and local regulation;

· insurance coverage;

· employee relations;

· investment strategy and risk; and

· expansion and growth of the company’s business and operations.

LIQUIDITY AND CAPITAL RESOURCES

At January 31, 2008, working capital increased $3,192,000, or 34% to $12,643,000 compared to $9,451,000 at January 31, 2007. For the three months ended January 31, 2008, net cash provided by operating activities increased $87,000, or 6%, to $1,626,000 compared to net cash provided by operating activities of $1,539,000 for the same period in 2007. Net income increased $437,000 primarily due to an increase in revenues of $520,000, and a decrease in total costs and expenses of $117,000, offset by an increase in income taxes of $200,000.

For the three months ended January 31, 2008 and 2007, net cash used in investing activities was $3,203,000 and $3,061,000, respectively. Investing activities primarily included oil and gas exploration and development expenditures, including Calliope, totaling $2,844,000 and $3,005,000 respectively.

The average return on the company’s investments was a loss of 1.2% for the three months ended January 31, 2008 compared to 4.5% return for the same period last year. At January 31, 2008, approximately 46% of the investments were directly invested in mutual funds and were managed by professional money managers. Remaining investments are in managed partnerships (generally known as hedge funds) that use various strategies to minimize their correlation to stock market movements. Most of the investments are highly liquid and the company believes they represent a responsible approach to cash

management. In the company’s opinion, the greatest investment risk is the potential for negative market impact from unexpected, major adverse news.

Existing working capital and anticipated cash flow are expected to be sufficient to fund operations and capital commitments for at least the next 12 months. At January 31, 2008, the company had no lines of credit or other bank financing arrangements except for the hedging line of credit discussed in Note 4. Because earnings are anticipated to be reinvested in operations, cash dividends are not expected to be paid. The company has no defined benefit plans and no obligations for post retirement employee benefits.

The company’s earnings before interest, taxes, depreciation, depletion and amortization, (“EBITDA”) increased to $3,391,000 for the three months ended January 31, 2008 from $2,864,000 for the three months ended January 31, 2007. EBITDA is not a GAAP measure of operating performance. The company uses this non-GAAP performance measure primarily to compare its performance with other companies in the industry that make a similar disclosure. The company believes that this performance measure may also be useful to investors for the same purpose. Investors should not consider this measure in isolation or as a substitute for operating income, or any other measure for determining the company’s operating performance that is calculated in accordance with GAAP. In addition, because EBITDA is not a GAAP measure, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation between EBITDA and net income is provided in the table below:

	Three Months Ended January 31,
	2008		2007
RECONCILIATION OF EBITDA:
Net Income	$	1,801,000	$	1,364,000
Add Back:
Interest Expense	1,000		6,000
Income Tax Expense	736,000		536,000
Depreciation, Depletion and Amortization Expense	853,000		958,000
EBITDA	$	3,391,000	$	2,864,000

OFF-BALANCE SHEET FINANCING

The company has no significant off-balance sheet financing arrangements at January 31, 2008.

PRODUCT PRICES AND PRODUCTION

Although product prices are key to the company’s ability to operate profitably and to budget capital expenditures, they are beyond the company’s control and are difficult to predict. Since 1991, the company has periodically hedged the price of a portion of its estimated natural gas production when the potential for significant downward price movement is anticipated. Hedging transactions typically take the form of forward short positions, swaps and collars which are executed on the NYMEX futures market or by indexing to regional index prices associated with pipelines in proximity to the company’s production. The company’s current hedges are indexed to NYMEX. Refer to Note 4 of the Consolidated Financial Statements for a complete discussion on the company’s hedging activities.

Gas and oil sales volume and price realization comparisons for the indicated periods are set forth below. Price realizations include the sales price and the effect of hedging transactions.

Three Months Ended January 31,

2008

2007

Change%

Product