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

FORWARD LOOKING INFORMATION

Looking forward into the balance of fiscal 2012, crude oil prices have decreased by $8.15 per barrel.

During the second quarter, the Company attempted to improve production on the Santa Fe #20, a development well drilled during this year's first quarter in Pyramid's Carneros Creek Field in Kern County, California. The well has produced only nominal oil volumes to date, and the Company has continued efforts to correct what it believes is a blockage in the well bore that occurred after the well was fracked. A variety of technical procedures have yielded limited results, and the Company may ultimately elect to re-perforate the well or plug and abandon it.

The Company also is attempting to secure a contract drilling rig, which it hopes to deploy late in the second half of the year for drilling an additional well on its Kern County leases. However, contract rig availability in Kern County remains tight, and there are no guarantees the Company will be successful in locating a rig before the end of the year. Meantime, Pyramid has further enhanced its balance sheet, and will continue to evaluate strategic opportunities to increase reserves and production volumes. At June 30, 2012, the Company's balance sheet was free of long-term debt and included cash, cash equivalents and short-term investments of $5.3 million, up from $4.9 million at December 31, 2011. Pyramid also held long-term assets in the form of certificates of deposit of $1.1 million.

Pyramid has maintained a strong balance sheet and working capital position, and management continues to seek and evaluate opportunities within the energy sector to enhance the value of the Company. Pyramid's growth during the balance of 2012 will be highly dependent on the level of success the Company has in its operations and capital investments, including the outcome of wells that have not yet been drilled. The Company's capital investment program may be modified during the year due to exploration and development successes or failures, market conditions and other variables. The production and sales of oil and gas involves many complex processes that are subject to numerous uncertainties, including reservoir risk, mechanical failures, human error and market conditions.

The Company has positioned itself, over the past several years, to withstand various types of economic uncertainties, with a program of consolidating operations on certain producing properties and concentrating on properties that provide the major revenue sources. The drilling of a new well and several limited work-overs of certain wells have allowed the Company to maintain its crude oil reserves for the last three years. The Company expects to maintain its reserve base in 2012 by drilling new wells and routine maintenance of its existing wells.

The Company may be subject to future costs necessary for compliance with the new implementation of air and water environmental quality requirements of the various state and federal governmental agencies. The requirements and costs are unknown at this time, but management believes that costs could be significant in some cases. As the scope of the requirements become more clearly defined, management may be better equipped to determine the true costs to the Company.

The Company continues to absorb the costs for various state and local fees and permits under new environmental programs, the sum of which were not material during 2011. The Company retains outside consultants to assist the Company in maintaining compliance with these regulations. The Company is actively pursuing an ongoing policy of upgrading and restoring older properties to comply with current and proposed environmental regulations. The costs of upgrading and restoring older properties to comply with environmental regulations have not been determined. Management believes that these costs will not have a material adverse effect upon its financial position or results of operations.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Portions of this Quarterly Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: the timing and extent of changes in commodity prices of oil, gas and electricity, environmental risk, drilling and operational costs, uncertainties about estimates of reserves and government regulations.

ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2012 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2011

REVENUES

The decrease in oil and gas sales of $208,715 is due primarily to lower crude oil production combined with lower average sales prices for the second quarter of 2012. The Company's net revenue share of crude oil production/sales decreased by approximately 1,800 barrels for the second quarter of 2012. The average sales price of the Company's oil and gas for the second quarter of 2012 decreased by approximately 72 cents per equivalent barrel when compared to the same period of 2011. The decline in production for the second quarter of 2012 is not attributable to any one property. Most of the oil and gas leases had lower production due primarily to natural decline.

OPERATING EXPENSES

Operating expenses increased by $11,909 for the second quarter of 2012. The cost to produce an equivalent barrel of crude oil during the second quarter of 2012 was approximately $37.07 per barrel, an increase of approximately $5.62 per barrel when compared with production costs for the second quarter of 2011. The net increase in lease operating expenses is caused by many offsetting factors. These include higher costs for equipment fuel, gas engine repairs and parts and supplies. This was offset by lower costs for contract operations, equipment rental and labor.

Equipment fuel costs increased by $16,532 due primarily to an increase in average fuel costs for gasoline and diesel and higher volumes purchased during the second quarter of 2012. In 2011, the Company recorded the purchase of approximately $8,900 of fuel costs as rig maintenance costs for the Pike 1-H well. Gas engine repairs increased by $12,861 due primarily to maintenance activities on the Santa Fe and Anderson wells. Parts and supplies increased by $10,408 due to higher maintenance activities for the second quarter of 2012.

Contract operations decreased by $13,057 due primarily to lower operating costs for the New York gas properties and the Texas joint venture. Equipment rental costs decreased by $9,371 due primarily to lower costs on the Pike lease during the second quarter of 2012. The Company leased the surface pumping unit and a crude oil storage tank for the new 1-H well that was drilled in the first quarter of 2011.

Labor costs decreased by $4,836 due primarily to fewer overtime hours worked during the second quarter of 2012 when compared with the same period of 2011.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased by $9,806 for the second quarter of 2012 when compared with the same period for 2011. General expenses increased by $10,000 due to a donation the Company made during the second quarter of 2012 to a local medical facility. Computer supplies increased by $6,821 due to greater utilization of IT consultants. Legal fees increased by $5,716 due primarily to general corporate matters. This was offset by lower cost for accounting services. Accounting services decreased by $18,399 due to lower audit fees and lower fees paid to a third-party individual who has assisted with the training and implementation of a new oil and gas accounting software that was effective January 1, 2011. The remaining net increase in general and administrative costs of $5,668 is attributable to many different cost categories, none of them significant in amount.

STOCK BASED COMPENSATION

Effective June 2, 2011, the Company's board of directors approved the issuance of options to purchase 5,000 shares of the Company's common stock to the Company's two outside directors. These options vest immediately and must be exercised within ninety days after the director leaves office. The Company recorded $43,743 in stock based compensation during the second quarter of 2011, based on a valuation performed using a Black-Scholes option-pricing model.

PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION

The provision for depletion, depreciation and amortization decreased by $39,157 for the second quarter of 2012, when compared with the same period for 2011. The decrease is due primarily to a decrease in the amortization of oil and gas leaseholds. The amortization of Texas oil and gas leaseholds decreased by approximately $41,000 during the second quarter of 2012 when compared with the same period for 2011. The Texas leaseholds were fully amortized as of June 30, 2011.

VALUATION ALLOWANCES

On March 21, 2011, the Company participated in the drilling of a joint venture well in Menard County, Texas. Log analysis of this well indicated that the well would not be commercially viable, and was plugged and abandoned. The Company owns a 30% interest in the joint venture. The Company recorded a valuation allowance of $5,851 against the costs incurred for the drilling of this well during the second quarter of 2011. There was no valuation allowance recorded in the first quarter of 2012.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2011

REVENUES

The decrease in oil and gas sales of $165,955 is due primarily to lower crude oil sales volumes offset by higher average sales prices for the six months ended June 30, 2012. The Company's net revenue share of crude oil production/sales decreased by approximately 3,200 barrels for the six months ended June 30, 2012. The decline in production for the first half of 2012 is not attributable to any one property. Most of the oil and gas leases had lower production due primarily to natural decline. The average sales price of the Company's oil and gas for the six months ended June 30, 2012 increased by approximately $6.60 per equivalent barrel when compared to the same period of 2011.

OPERATING EXPENSES

Operating expenses increased by $28,194 for the six months ended June 30, 2012. The cost to produce an equivalent barrel of crude oil during the six months ended June 30, 2012 was approximately $36.02 per barrel, an increase of approximately $5.13 per barrel when compared with production costs for the same period of 2011. The increase in lease operating expenses is caused by many factors. These include higher costs for equipment fuel, gas engine repairs, parts and supplies, professional services and chemicals. This was offset by lower costs for outside services, insurance expense, equipment rental and labor.

Equipment fuel costs increased by $27,388 due to an increase in average fuel costs for gasoline and diesel and higher volumes purchased during the first half of 2012. In 2011, the Company recorded the purchase of approximately $8,900 of fuel costs as rig maintenance costs for the Pike 1-H well. Gas engine repairs increased by $14,802 due primarily to maintenance activities on the Santa Fe and Anderson wells. Parts and supplies increased by $10,596 due to higher maintenance activities for the second quarter of 2012. Professional services increased by $8,388 due to a review of the Company's Pike #1-H well that was conducted by a third-party petroleum engineering firm. Chemicals increased by $5,479 due to higher usage on certain oil producing properties.

Outside services decreased by $12,185 due to lower demand for third-party repair and maintenance services. Insurance expense decreased by $11,037 due to lower premiums for auto, health and workers' compensation insurance. Equipment rental costs decreased by $8,608 due primarily to lower costs on the Pike lease during the second quarter of 2012. The Company leased the surface pumping unit and a crude oil storage tank for the new 1-H well that was drilled in the first quarter of 2011. Labor costs decreased by $7,406 due primarily to fewer overtime hours worked during the first six months of 2012 when compared with the same period of 2011.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased by $3,898 for the six months ended June 30, 2012 when compared with the same period for 2011. Accounting services decreased by $27,871 due to lower audit fees and lower fees paid to a third-party individual who has assisted with the training and implementation of a new oil and gas accounting software that was effective January 1, 2011. General expenses increased by $8,000 due to a donation the Company made during the second quarter of 2012 to a local medical facility. Computer supplies increased by $4,920 due to greater utilization of IT consultants. General liability insurance increased by $4,398 due to an increase in the allocation of insurance costs to general and administrative expense from operating expenses during 2012. Administrative salaries increased by $3,825 due primarily to a 7.5% annual salary increase that was effective May 1, 2012. The remaining net increase in general and administrative costs of $2,818 is attributable to many different cost categories, none of them significant in amount.

PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION

The provision for depletion, depreciation and amortization decreased by $43,528 for the six months ended June 30, 2012, when compared with the same period for 2011. The amortization of Texas leaseholds decreased by approximately $48,000 during the second quarter of 2012, when compared with the same period for 2011. The Texas leaseholds were fully amortized as of June 30, 2011.

VALUATION ALLOWANCES

On March 21, 2011, the Company participated in the drilling of a joint venture well in Menard County, Texas. Log analysis of this well indicated that the well would not be commercially viable, and was plugged and abandoned. The Company owns a 30% interest in the joint venture. The Company recorded a valuation allowance of $54,384 against the costs incurred during the six months ended June 30, 2011 for the drilling of this well. No valuation allowances were recorded during the six months ended June 30, 2012.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $450,347 for the six months ended June 30, 2012. During the six months ended June 30, 2012, operating activities provided cash of $1,271,043. Cash was used for capital spending of $769,820 and principal payments on long-term debt of $32,285. See the accompanying Statements of Cash Flows for additional detailed information. The Company had available a line of credit of $500,000 and short-term and long-term investments of $3,218,955 at June 30, 2012 that provided additional liquidity during the first six months of 2012.

IMPACT OF CHANGING PRICES

The Company's revenue is affected by crude oil prices paid by the major oil companies. Average crude oil prices for the six months ended June 30, 2012 increased by approximately $6.60 per equivalent barrel when compared with the same period of 2011. The Company cannot predict the future course of crude oil prices.