**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-QSB**




**For
      Annual and Transition Reports pursuant to Section 13 or 15(d) of
      the**


**Securities
      Exchange Act of 1934 (Mark One)**




**x**
            **Quarterly Report pursuant to Section 13 or 15(d) of the Securities
                Exchange Act of 1934**




**For
      the six month ended**


**June
      30, 2006**




** ̈**
            **Transition Report pursuant to Section 13 or 15(d) of the Securities
                Exchange Act of 1934**




**Commission
      File Number** **1-11248**




**SUNRISE
      ENERGY RESOURSES, INC.**


(Name
      of
      Registrant as specified in its charter)




**Delaware**
            
            **84-0938688**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                Number)





551
                Fifth Avenue, Suite 2020New
                York, New York
            
            10017(Address
                of principal executive office)
            
            (Zip
                Code)




**Registrant’s
      telephone number, including area code: (212) 973-0063**




Securities
      registered pursuant to Section 12(b) of the Act: None





Securities
      registered pursuant to Section 12(g) of the Act: Common stock







Check
      weather the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act  o




Note
      -
      Checking the box above will not relieve any registrant required to file reports
      pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
      under
      those Sections.




Check
      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  ̈




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of Registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part II of this Form 10-Q or any amendment to
      this
      Form 10-Q.  o




Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule 12b-2 of the Act).  Yes  ̈ ;
       No x




State
      issuer’s revenues for its most recent fiscal year: $1,762,631







1




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates as of August 14, 2006 within past 60 days:
      $14,229,341.




As
      of
      August 14, 2006, the Registrant had 17,161,014 shares of common stock $.001
      par
      value issued and outstanding.




Transitional
      Small Business Disclosure Format (Check one): Yes  ̈ ; No x




2




**SUNRISEENERGY
      RESOURCES, INC.**




**FORM
      10-QSB**


**TABLE
      OF CONTENTS**




**PART
                I. FINANCIAL INFORMATION**
            PageFinancial
                Statements (unaudited)Item
                1.Consolidated
                Balance Sheets - June 30, 2006 and December 31,
                2005
            4Consolidated
                Statement of Operations and Comprehensive Loss -
                for the six months ended June 30, 2006 and 2005
            5Consolidated
                Statements of Changes in Stockholder’s Equity
                (Capital Deficit) - June 30, 2006 and December 31,
                2005
            6Consolidated
                Statements of Cash Flows - for the six months
                ended June 30, 2006 and 2005
            7Notes
                to Unaudited Consolidated Financial
                Statements
            8Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations
            25Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            32Item
                4.
            Controls
                and Procedures
            33**PART
                II. OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            34Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            35Item
                3.
            Defaults
                upon Senior Securities
            35Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            35Item
                5.
            Other
                Information
            35Item
                6.
            Exhibits
                and Reports on Form 8-K
            35**SIGNATURES**
            36




3
 *Table
            of Contents*




**PART
      I.**




**SUNRISE
      ENERGY RESOURCES INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(Expressed
      in US Dollars)**


**June
                30,**
              **2006**
            
            **December
                31,**
              **2005**ASSETS
            
            **(UNAUDITED)**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            36,440
            
            $
            3,419Accounts
                receivable - related party
            
            
            255,299
            
            
            720,797Other
                accounts receivable and prepayments
            
            
            987,937
            
            
            760,797Other
                accounts receivable - related party
            
            
            -
            
            
            122,574Inventories
            
            
            542,530
            
            
            159,266Taxes
                receivable
            
            
            525,673
            
            
            185,736Total
                current assets
            
            
            2,347,879
            
            
            1,952,589NONCURRENT
                ASSETSProperty,
                plant and equipment, net
            
            
            2,126,366
            
            
            951,025Lease/concession
                acquisition cost
            
            
            188,499
            
            
            -Long-term
                financial investments
            
            
            1,980
            
            
            1,980Deferred
                tax asset
            
            
            79,210
            
            
            73,319**TOTAL
                ASSETS**
            
            **$**
            **4,743,934**
            
            **$**
            **2,978,913**LIABILITIES
                AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIESAccounts
                payable
            
            $
            225,143
            
            $
            218,104Accounts
                payable - related party
            
            
            187,719
            
            
            592,554Taxes
                payable
            
            
            1,002,325
            
            
            905,731Short
                term bank loans
            
            
            -
            
            
            514,851Short
                term notes payable
            
            
            19,598
            
            
            19,598Other
                accounts payable and accruals
            
            
            619,345
            
            
            414,577Other
                accounts payable - related party
            
            
            300,391
            
            
            244,191Prepayments
                for oil and gas
            
            
            312,262
            
            
            500,867Interest
                payable
            
            
            44,239
            
            
            17,711Profit
                interest payable
            
            
            17,997
            
            
            17,997Total
                current liabilities
            
            
            2,729,019
            
            
            3,446,181Long
                term notes payable
            
            
            1,882,347
            
            
            465,347Long-term
                payable to related party
            
            
            1,391,900
            
            
            279,900Commitments
                and Contingencies (Note 24)
            
            
            -
            
            
            -STOCKHOLDERS’
                EQUITYCommon
                Stock, $.001 par value, 75,000,000 authorized, 17,161,014 and 17,000,000
                issued and outstanding as of June 30, 2006 and December 31, 2005
            
            
            17,161
            
            
            17,000Additional
                Paid in Capital (Deficit)
            
            
            29,938
            
            
            (66,509
            )Retained
                earnings (Accumulated deficit)
            
            
            (1,274,239
            )
            
            (1,130,814
            )Accumulated
                other comprehensive (loss) - foreign currency
            
            
            (32,192
            )
            
            (32,192
            )Total
                stockholders' equity (deficit)
            
            
            (1,259,332
            )
            
            (1,212,515
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **4,743,934**
            
            **$**
            **2,978,913**


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


4
 *Table
          of Contents*





**SUNRISE
      ENERGY RESOURCES INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**


**(Expressed
      in US Dollars except share amounts)**


**UNAUDITED**


**For
                the six months ended****June
                30,****2006**
            
            **2005**REVENUESProduced
                oil & gas
            
            $
            815,184
            
            $
            904,128Purchased
                oil & gas
            
            
            120,174
            
            
            -Total
            
            
            935,358
            
            
            904,128COST
                OF SALES
            
            
            (116,637
            )
            
            -818,721
            
            
            904,128Operating
                expenses
            
            
            (328,506
            )
            
            (553,300
            )Depreciation
                expense
            
            
            (149,963
            )
            
            (128,717
            )Bad
                debt recovery
            
            
            21,144
            
            
            -Other
                operating income (expenses), net
            
            
            4,958
            
            
            (24,065
            )Sales,
                general and administrative expenses
            
            
            (352,664
            )
            
            (397,725
            )OPERATING
                INCOME (LOSS)
            
            
            13,690
            
            
            (199,679
            )OTHER
                INCOME (EXPENSE)Interest
                income (expense), net
            
            
            (92,403
            )
            
            (63,051
            )Foreign
                exchange (loss)
            
            
            (6,977
            )
            
            (33,083
            )Other
                expense
            
            
            -
            
            
            (2,308
            )LOSS
                BEFORE TAX
            
            
            (85,690
            )
            
            (298,121
            )INCOME
                TAX (Note 12)
            
            
            (57,735
            )
            
            (8,868
            )NET
                LOSS
            
            $
            (143,425
            )
            $
            (306,989
            )BASIC
                (LOSS) EARNINGS  PER SHARE
            
            $
            (0.008
            )
            $
            (0.018
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING
            
            
            17,143,369
            
            
            17,000,000


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


5
 *Table
            of Contents*





**SUNRISE
      ENERGY RESOURCES INC.**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**


**(CAPITAL
      DEFICIT)**


**(Expressed
      in US Dollars except share amounts)**


**UNAUDITED**


**Common
                Stock**
            
            **Additional**
            
            **Retained
                Earnings**
            
            **Accumulated
                Other**
            
            **Total
                Stockholder's Equity****Paid-in**
            
            **(Accumulated**
            
            **Comprehensive**
            
            **(Capital****Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit)**
            
            **(Loss)**
            
            **Deficit)****BALANCE,
                DECEMBER 31, 2003**
            
            
            **137,700**
            
            **$**
            **1,377**
            
            
            **-**
            
            **$**
            **48,462**
            
            
            -
            
            **$**
            **49,839**Common
                Stock, $0.001 par value, 75,000,000 issued and outstanding
            
            
            17,000,000
            
            
            17,000
            
            
            -
            
            
            -
            
            
            -
            
            
            17,000To
                give effect on the acquisition of EP as of December 31,
                2004
            
            
            (137,700
            )
            
            (1,377
            )
            
            -
            
            
            -
            
            
            -
            
            
            (1,377
            )Pre
                acquisition deficit of Sunrise Energy Resources, Inc.
            
            
            -
            
            
            -
            
            $
            (66,509
            )
            
            -
            
            
            -
            
            
            (66,509
            )Net
                (loss) for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            (592,481
            )
            
            -
            
            
            (592,481
            )**BALANCE,
                DECEMBER 31, 2004**
            
            
            **17,000,000**
            
            
            **17,000**
            
            
            **(66,509**
            **)**
            
            **(544,019**
            **)**
            
            **-**
            
            
            **(
                593,528**
            **)**Net
                (loss for the year)
            
            
            **-**
            
            
            **-**
            
            
            -
            
            
            (586,795
            )
            
            -
            
            
            (586,795
            )Other
                Comprehensive loss for the year
            
            
            **-**
            
            
            **-**
            
            
            -
            
            
            -
            
            $
            (32,192
            )
            
            (32,192
            )**BALANCE,
                DECEMBER 31, 2005**
            
            
            **17,000,000**
            
            
            **17,000**
            
            
            **(66,509**
            **)**
            
            **(1,130,814**
            **)**
            
            **(32,192**
            **)**
            
            **(
                1,212,515**
            **)**Common
                Stock, $0.001 par value, 161,014 issued in connection with Pari
                acquisition
            
            
            161,014
            
            
            161
            
            
            96,447
            
            
            -
            
            
            -
            
            
            96,608Net
                loss for the six months
            
            
            -
            
            
            -
            
            
            -
            
            
            (143,425
            )
            
            -
            
            
            (143,425
            )**BALANCE,
                JUNE 30, 2006**
            
            
            **17,161,014**
            
            **$**
            **17,161**
            
            **$**
            **29,938**
            
            **$**
            **(1,274,239**
            **)**
            **$**
            **(32,192**
            **)**
            **$**
            **(1,259,332**
            **)**


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


6
 *Table
            of Contents*





**SUNRISE
      ENERGY RESOURCES INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Expressed
      in US Dollars)**


**UNAUDITED**


**For
                the six months ended**
              **June
                30,****2006**
            
            **2005****CASH
                (USED IN) PROVIDED BY OPERATING ACTIVITIES:**Net
                loss from continuing operations for the period
            
            $
            (143,425
            )
            $
            (306,989
            )Adjustments
                to reconcile net loss from continuing operations to net cash in operating
                activities:Depreciation
                expense
            
            
            149,963
            
            
            128,717Supplier’s
                fines and penalties accruals
            
            
            -
            
            
            985Provision
                for doubtful accounts
            
            
            (21,145
            )
            
            23,340Deferred
                tax (gain)
            
            
            (5,891
            )
            
            (21,366
            )Net
                imputed interest expense (income)
            
            
            23,263
            
            
            (1,377
            )Changes
                in assets and liabilities:Decrease
                (increase) in accounts receivable
            
            
            486,840
            
            
            (35,765
            )(Increase)
                in other accounts receivable and prepayments
            
            
            (104,763
            )
            
            (188,483
            )(Increase)
                in inventories
            
            
            (383,264
            )
            
            (17,268
            )(Increase)
                decrease in taxes receivable
            
            
            (339,937
            )
            
            13,430(Decrease)
                increase in accounts payable
            
            
            (397,796
            )
            
            199,677Increase
                in taxes payable
            
            
            96,594
            
            
            69,160Increase
                in other accounts payable and accruals
            
            
            237,705
            
            
            94,714(Decrease)
                increase in prepayments for oil and gas
            
            
            (188,605
            )
            
            343,563Increase
                in interest payable
            
            
            26,528
            
            
            -NET
                CASH FLOW FROM OPERATING ACTIVITIES
            
            
            (563,933
            )
            
            302,338**CASH
                PROVIDED BY FINANCING ACTIVITIES:**Long
                term loans received
            
            
            1,112,000
            
            
            -Promissory
                notes issued
            
            
            1,417,000Short
                term loans repaid
            
            
            (514,851
            )
            
            -Cash
                inflow on the acquisition of Pari, Ltd.
            
            
            4,549
            
            
            -NET
                CASHFLOW FROM FINANCING ACTIVITIES
            
            
            2,018,698
            
            
            -**CASH
                USED IN INVESTING ACTIVITIES**Purchase
                of property, plant and equipment
            
            
            (1,311,840
            )
            
            (361,081
            )Preacquisition
                (deficit) of Pari, Ltd.
            
            
            (109,904
            )
            
            -NET
                CASH FLOW FROM INVESTING ACTIVITIES
            
            
            (1,421,744
            )
            
            (361,081
            )Effect
                of exchange rate changes
            
            
            -
            
            
            47,895**INCREASE
                (DECREASE) IN CASH**
            
            
            33,021
            
            
            (10,848
            )**CASH,
                at the beginning of the period**
            
            
            3,419
            
            
            15,082**CASH,
                at the end of the period**
            
            $
            36,440
            
            $
            4,234**INCOME
                TAX PAID**
            
            $
            (23,387
            )
            
            -**INTEREST
                PAID IN CASH**
            
            $
            (74,195
            )
            $
            (66,269
            )




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




7
 *Table
            of Contents*




**NOTES
      TO THE CONSOLIDATED STATEMENTS
      (UNAUDITED)**




**1.**
            **NATURE
                OF BUSINESS**




All
      of
      the operating activities of Sunrise Energy Resources, Inc. are conducted through
      the Company’s wholly owned subsidiaries, TOV Energy-Servicing Company Esko
      Pivnich (“Esko Pivnich”), a Ukrainian Closed Joint Stock Company (CJSC)
      established on January 20, 2000, and Pari, Ltd., (“Pari”) a Ukrainian Limited
      Liability company, established on July 5, 2000. The primary business activities
      of Esko Pivnich and Pari are oil and gas exploration, production and
      distribution in the country of Ukraine.





The
      current principal activities of Esko Pivnich and Pari are conducted in the
      form
      of production sharing agreements (PSA), which as of June 30, 2006 included
      the following:





**Operating
                Entity**
            
            **Principal
                Activity**
            
            **Country
                of incorporation**
            
            **Capital
                Contribution, %**
            
            **Profit
                Sharing, %*****Esko
                Pivnich***
            
            Marketing
                and distribution of crude oil and natural gas
            
            Ukraine
            
            -
            
            -PSA
                # 01-SD dated April 26, 2000
            
            Extraction
                of crude oil and natural gas
            
            Ukraine
            
            100%
            
            60%PSA
                # 35/970-SD dated August 19, 2004
            
            Extraction
                of crude oil and natural gas
            
            Ukraine
            
            80%
            
            80%***Pari***
            
            Marketing
                and distribution of crude oil and natural gas
            
            Ukraine
            
            -
            
            -PSA
                # 10-5/2000 dated July 20, 2000
            
            Extraction
                of crude oil and natural gas
            
            Ukraine
            
            75%
            
            75%PSA
                #02-CID dated October 20, 2004
            
            Extraction
                of crude oil and natural gas
            
            Ukraine
            
            25%
            
            50%




In
      addition, during the periods presented, the Company purchased and resold oil
      and
      gas and thus in effect acting as a trading company.




Sunrise
      Energy Resources Inc. is currently registered at the following address: 551
      Fifth Avenue, Suite 2020, New York, New York 10017. Esko Pivnich and Pari are
      registered at the following address: 10a Rileeva St., Kiev, Ukraine. The Company
      conducts its operations from the same address.





The
      number of employees of the Company at June 30, 2006 and December 31, 2005
      amounted to 22.





8
 *Table
            of Contents*





**2.**
            **PRESENTATION
                OF CONSOLIDATED FINANCIAL
                STATEMENTS**





***Basis
      of Presentation***  ***-*** These
      consolidated financial statements have been prepared by the Company in
      accordance with accounting principles generally accepted in the United States
      of
      America (“US GAAP”).




***Going
      concern -*** The
      Company’s consolidated financial statements have been presented on the basis
      that it is a going concern, which contemplates the realization of assets and
      satisfaction of liabilities in the normal course of business. As shown in the
      consolidated financial statements, the Company incurred a net loss of $143,425
      during the six months ended June 30, 2006, and, as of June 30, 2006 the
      Company's current liabilities exceeded its current assets by $381,140.
      Additionally, to fully develop the area covered by the Licenses, the Company
      would require substantial amounts in additional funding.




In
      view
      of the matters described in the preceding paragraph, recoverability of a
      substantial portion of the recorded asset amounts shown in the accompanying
      balance sheet is dependent upon continued operations of the Company, which
      in
      turn is dependent upon the Company’s ability to meet its financing requirements
      on a continuing basis. The Company’s ability to meet such financing requirements
      will be subject primarily to the Company’s capability to raise additional funds
      by way of additional equity and other investments into the Company, to maintain
      present financing, and to succeed in its future operations. The consolidated
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or amounts and
      classification of liabilities that might be necessary should the Company be
      unable to continue in operations or meet its obligations on a timely
      basis.




Management
      has taken the following steps to revise its operating and financial
      requirements, which it believes are sufficient to provide the Company with
      the
      ability to continue in operations.




· The
      Company plans to continue raising additional equity capital and considers such
      contributions as significant source of funding for the development of its
      Licenses.


· Based
      on
      its expected production capabilities from the expenditures that will be made
      as
      a result of equity and debt financing, the Company believes that it can generate
      adequate cash flows to support its operations.


· Nevertheless,
      additional funding requirements may be necessary before the Company is able
      to
      rely solely on the production from the licensed properties for the Company’s
      cash flow requirements.




***Use
      of Estimates and Assumptions***  ***-*** The
      preparation of consolidated financial statements in conformity with US GAAP
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities, revenues and expenses and the disclosure
      of
      contingent assets and liabilities. Due to the inherent uncertainty in making
      those estimates, actual results reported in future periods could differ from
      such estimates.





***Functional
      and Reporting Currency -*** The
      reporting currency of the accompanying consolidated financial statements is
      the
      US dollars. Ukrainian entities use Ukrainian Hrivna (UAH) as their functional
      currency since most of their revenues and operating expenses are denominated
      in
      Ukrainian Hrivnas. The Ukrainian Hrivna is not a fully convertible currency
      outside of Ukraine. The translation of Hrivna denominated assets and liabilities
      into US dollars for the purpose of these consolidated financial statements
      does
      not indicate that the Company could or will in the future realize or settle
      in
      US dollars the translated values of these assets and
      liabilities.





The
      prevailing exchange rates as at June 30, 2006 and December 31, 2005 were
      approximately 1 U.S. dollar to 5.0500 Ukrainian Hrivnas. For the periods
      ended June 30, 2006 and 2005, the average exchange rate for 1U.S. dollar was
      $5.0500 and $5.1994 Ukrainian Hrivnas, respectively.





**3.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





***Basis
      of Consolidation -*** The
      consolidated financial statements incorporate the financial statements of
      Sunrise Energy Resources Inc. and other enterprises, where the Company, directly
      or indirectly exercises control. Control is achieved where the Company has
      the
      power to govern the financial and operating policies of an investee enterprise
      so as to obtain benefits from its activities.





9
 *Table
            of Contents*





All
      significant intercompany transactions, balances and unrealized gains (losses)
      on
      transactions are eliminated on consolidation.





***Revenue
      Recognition*** **** ***-*** **** For
      revenue from product sales, the Company recognizes revenue in accordance with
      SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial
      Statements” (“SAB 104”). SAB 104 requires that four basic criteria must be met
      before revenue can be recognized: (1) persuasive evidence of an arrangement
      exists; (2) delivery has occurred; (3) the selling price is fixed and
      determinable; and (4) collectibility is reasonably assured.





Criterion
      (1) is met as every delivery is covered by a separate contract and the title
      passes to the customer only upon customer’s acceptance at point of destination,
      which is in compliance with criterion (2). Determination of criteria (3) and
      (4)
      are based on management's judgments regarding the fixed nature of the selling
      prices of the products delivered and the collectibility of those amounts.
      Provisions for discounts and rebates to customers, estimated returns and
      allowances, and other adjustments are provided for in the same period the
      related sales are recorded. The Company defers any revenue for which the product
      has not been delivered and accepted by its customers. In accordance with the
      Company’s standard contract terms, once delivered and accepted the product
      cannot be returned and no claims can be presented to the Company. The Company
      recognizes revenue on gross basis.




***Property,
      Plant and Equipment*** - Oil
      and gas properties are accounted for using the successful efforts method of
      accounting whereby property acquisitions, successful exploratory wells, all
      development costs, and support equipment and facilities are capitalized.
      Unsuccessful exploratory wells are expensed when a well is determined to be
      non-productive. Other exploratory expenditures, including geological and
      geophysical costs are expensed as incurred. Depreciation, depletion and
      amortization of capitalized costs of oil and gas properties is calculated using
      the unit-of-production method based upon proved reserves for the cost of
      property acquisitions and proved developed reserves for exploration and
      development costs. As of the date of these consolidated financial statements
      no
      such costs were incurred.




Production
      and related overhead costs are expensed as incurred. Depreciation of assets
      not
      directly associated with oil production and certain workover costs on properties
      subject to time limited licenses has been calculated on a straight-line basis
      over the economic lives of such assets, estimated to be in the following
      ranges:





Oil
                and Gas Facilities Improvements and Workover Costs
            2
                yearsOffice
                Improvements
            4
                -
                5 yearsComputer
                Equipment
            3
                years


The
      gain
      or loss arising on the disposal or retirement of an asset is determined as
      the
      difference between the sales proceeds and the carrying amount of the asset
      and
      is recognized in the income statement.





***Leasing***  ***-*** Leases
      are classified as finance leases whenever the terms of the lease transfer
      substantially all the risk and rewards of ownership to the lessee. All other
      leases are classified as operating leases.





There
      were no assets held under financial leases. Operating leases are expensed in
      the
      period in which they are incurred.





***Inventories***  ***-*** Inventories are stated at the lower of cost or net realizable value. Cost
      comprises direct cost of extracted oil and gas, its transportation and handling
      physically in the pipelines or storages prior to the delivery for sale.
      Inventory also includes various supplies and spare parts.





10
 *Table
            of Contents*





Cost
      is
      calculated using weighted average method. Net realizable value represents the
      estimated selling price less all estimated costs to completion and costs to
      be
      incurred in marketing, selling and distribution.





***Accounts
      Receivable -*** Accounts
      receivable are stated at their net realizable value after deducting provisions
      for uncollectible amounts.





***Cash
      and Cash Equivalents -*** Cash
      include petty cash and cash held on current bank accounts. Cash equivalents
      include short-term investments with an original maturity of three months or
      less
      that are readily convertible to known amount of cash which are subject to
      insignificant risk of changes in value. Cash and cash equivalents as of June
      30,
      2006 and December 31, 2005 consisted mainly of the UAH and USD denominated
      current accounts.




***Loans
      and Other Borrowings***  ***-*** All
      loans and borrowings are recorded at the proceeds received, net of direct issue
      costs.




***Borrowing
      Costs***  ***-*** Borrowing costs are recognized as an expense in the period in which they are
      incurred.





***Convertible
      Notes and Other Debt Instruments involving Company’s Common Stock
      -*** ****** Convertible
      notes payable by the Company are accounted for under Emerging Issues Task Force
      Release No. 00-27 which requires a beneficial conversion feature to be
      calculated. The value ascribed to the beneficial conversion feature is recorded
      as a debt discount. Upon conversion of the underlying debt into common stock,
      a
      pro-rata share of the unamortized debt discount is recorded as interest expense.
      Other debt settled with the Group’s common stock is marked to market at the date
      of settlement and respective gain or loss on its extinguishment is recognized.
      As of the date of this report no value was apportioned to beneficial conversion
      feature since the conversion price of the Notes is greater than the current
      market price for our common stock.





***Trade
      and Other Payables***  ***-*** Liabilities for trade and other amounts payable are stated at their nominal
      value.





***Value
      added tax on purchases and sales -*** Value
      added taxes (VAT) related to sales is payable to the Ukrainian tax authorities
      upon collection of receivables from customers. VAT on purchases is offset
      against VAT collected from sales. The tax authorities permit the settlement
      of
      VAT on a net basis. VAT related to sales and purchases which have not been
      settled at the balance sheet date, (VAT deferred) is recognized in the balance
      sheet on a gross basis and disclosed separately as a current asset and
      liability. Where provision has been made against debtors deemed to be
      uncollectible bad debt expense is recorded for the gross amount of the debtor,
      including VAT. The related VAT deferred liability is maintained until the debtor
      is settled or until the debtor is written off for statutory accounting
      purposes.





***Income
      Taxes***  ***-*** Income
      tax has been computed based on the results for the year as adjusted for items
      that are non-assessable or non-tax deductible.





The
      Company has adopted Financial Accounting Standards No. 109 (“SFAS 109”), under
      which the deferred tax is accounted for using the balance sheet liability method
      in respect of temporary differences arising from differences between the
      carrying amount of assets and liabilities in the consolidated financial
      statements and the corresponding tax basis used in the computation of taxable
      profit. Deferred tax liabilities are generally recognized for all taxable
      temporary differences and deferred tax assets are recognized to the extent
      that
      it is probable that taxable profits will be available against which deductible
      temporary differences can be utilized. Deferred tax assets and liabilities
      are
      offset when they relate to income taxes levied by the same taxation authority
      and the Company intends to settle its tax assets and liabilities on a net
      basis.





Deferred
      tax is calculated at rates that are expected to apply to the period when the
      asset is realized or the liability is settled. It is charged or credited to
      the
      income statement, except when it relates to items credited or charged directly
      to equity, in which case the deferred tax is also dealt with in
      equity.





***Fair
      value of Financial Instruments -*** The
      Company’s financial instruments consist of cash, accounts receivable, accounts
      payable and accrued liabilities. Unless otherwise noted, it is management’s
      opinion that the Company is not exposed to significant interest, currency or
      credit risks arising from these financial instruments. The fair value of
      financial instruments approximate their carrying values due to the immediate
      or
      short term maturity of these financial instruments.





11
 *Table
            of Contents*





***Earnings
      (Loss) per Share -*** Earnings
      (loss) per share are computed in accordance with SFAS No. 128, "Earnings Per
      Share". Basic earnings (loss) per share are calculated by dividing the net
      income (loss) available to common stockholders by the weighted average number
      of
      shares outstanding during the year. Diluted earnings per share reflect the
      potential dilution of securities that could share in earnings of an entity.
      In a
      loss year, dilutive common equivalent shares are excluded from the loss per
      share calculation as the effect would be anti-dilutive.




***Comprehensive
      Income (Loss) -*** Statement
      of SFAS 130, “Reporting Comprehensive Income,” establishes standards for
      reporting and displaying of comprehensive income, its components and accumulated
      balances. Comprehensive income (loss) is defined to include all changes in
      equity except those resulting from investments by owners and distributions
      to
      owners. Among other disclosures, SFAS 130 requires that all items that are
      required to be recognized under current accounting standards as components
      of
      comprehensive income (loss) be reported in a financial statement that is
      displayed with the same prominence as other financial statements. Foreign
      exchange translation gains and losses of the Company are reflected in
      Comprehensive gains and losses.




Prior
      to
      September 30, 2005, foreign exchange translation losses were immaterial and
      were
      included in net income and loss.




***Retirement
      Benefit Costs***  ***-*** The
      operating divisions of the Company situated in Ukraine contribute to the state
      pension, medical and social insurance and employment funds on behalf of all
      its
      current employees. Any related expenses are recognized in the income statement
      as incurred.




***Segment
      Reporting***  ***-*** The
      Company’s business operations are located in Ukraine and relate primarily to
      marketing and distribution of crude oil and natural gas products. Therefore,
      business activities are subject to the same risks and returns and addressed
      in
      the consolidated financial statements of the Company as one reportable
      segment.




***New
      accounting pronouncements*** *-* In
      May
      2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections.
      SFAS No. 154 replaces Accounting Principles Board Opinion No. 20, Accounting
      changes, and SFAS No. 3, Reporting Accounting Changes in Internal Financial
      Statements, and changes the requirements for the accounting for and reporting
      of
      a change in accounting principle. SFAS No. 154 requires retrospective
      application of changes in accounting principle to the prior periods` financial
      statements, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. SFAS No. 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006.
      Any impact on the Company’s consolidated results of operations and earnings per
      share will be dependent on the amount of any accounting changes or corrections
      of errors whenever recognized.




**4.**
            **PRODUCTION
                SHARING AGREEMENTS**




***PSA
      # 01-SD dated April 26, 2000 (Esko Pivnich)***





In
      August
      2000 the Company together with the state owned geological enterprise
      Poltavaneftegasgeologiya executed a production sharing agreement (“PSA”) to
      start exploration and development of the Karaikozovsk field located in the
      Krasnokutsk area of the Kharkov region. Under the terms of PSA
      Poltavaneftegasgeologiya acted as the holder of the main geological and
      exploration licenses allowing for the development of the Karaikozovsk field
      and
      the Company was a major investor, having contributed into the establishment
      of
      PSA approximately $628,146.





In
      November 2000 a subsidiary of JSC Ukrneft, Okhtirkaneftegas, joined the PSA.
      Okhtirkaneftegas owned two wells in Karaikozovsk area, the operational usage
      of
      which were contributed into the PSA. Also, Okhtirkaneftegas was to provide
      PSA
      with certain exploration and capital repair services to be paid at external
      market rates.





12
 *Table
            of Contents*





In
      May
      2003, due to the expiration of main geological and exploration licenses held
      by
      Poltavaneftegasgeologiya, all exploration and development activities on
      Karaikozovsk field were temporarily suspended.





***PSA
      # 35/970-SD dated August 19, 200 4 (Esko Pivnich)***





The
      Company filed an application with the Ukrainian State Committee of Mineral
      Resources to continue the exploration and development of the Karaikozovsk field
      and in July 2004 the Company obtained the main geological and exploration
      license for a period of 5 years.





In
      August
      2004 the Company together with Okhtirkaneftegas, contributed approximately
      $1,503 and $376 into the establishment of new PSA to continue exploration and
      development of Karaikozovsk field.





***PSA
      # 10-5/2000 dated July 20, 2000 (Pari)***





In
      July
      2000 Pari together with the state owned geological enterprise
      Poltavaneftegasgeologiya executed a production sharing agreement (“PSA”) to
      start exploration and development of the Sakhalinsk and Skvortsivsk fields
      located in the Krasnokutsk area of the Kharkov region. Under the terms of said
      PSA Poltavaneftegasgeologiya acted as the holder of the main geological and
      exploration licenses allowing for the development of the Sakhalinsk and
      Skvortsivsk fields and the Company was a major investor, having contributed
      into
      the establishment of the PSA approximately $31,152 (See also Note
      24).





Under
      the
      terms of the agreement Poltavaneftegasgeologiya was obliged to complete capital
      repairs on well#18 of the Sakhalin field. To the date of the expiration of
      the
      main geological and exploration license held by Poltavaneftegasgeologiya, a
      subsidiary of NAK Nadra Ukraini, a state owned company, no operating activities
      have been conducted. In accordance with the agreement, the Company moved to
      void
      its entire obligations under the PSA and obtain a refund of its initial
      investment in the amount of $31,152. As of the date of this report no resolution
      on this matter has been achieved. Accordingly, Pari’s investment was totally
      written off in 2003.





***PSA
      # 02-CID dated October 20, 2004 (Pari)***





In
      October 2004 Pari entered into a production sharing agreement with TOV “Intek
      Geo” and JSC “Agronaftogastekhservice” to start exploration of the Pilipivsk
      field located in the Kosivskiy and Kolomiiskiy districts of the
      Ivanovo-Frankivsk region, Western Ukraine. In conformity with the terms of
      PSA
      02-CID Pari acts as a holder of the main geological and exploration licenses
      to
      develop Pilipivsk field while JSC “Agronaftogastekhservice” acts as an operator
      and TOV “Intek Geo” performs project management and oversight function. No
      capital contributions have been made as of the date of the report.




**5.**
            **ACCOUNTS
                RECEIVABLE, related party**




Accounts
      receivable as of June 30, 2006 and December 31, 2005 consisted of $255,299
      and
      $720,797, respectively. These amounts were due from CJSC Infox, and resulted
      from several crude oil shipments which took place during 2003 and 2004. During
      the first half of 2006, Infox had partly repaid this balance. No provision
      for
      bad debts has been recorded for these accounts. Management of the Company
      believes this amount will be paid during 2006.




**6.**
            **OTHER
                ACCOUNTS RECEIVABLE AND
                PREPAYMENTS**




Other
      accounts receivable and prepayments as of June 30, 2006 and December
      31 **,** 2005
      consisted of the following:





13
 *Table
            of Contents*





**6/30/2006**
            
            **12/31/2005**Vixen
                JLM
            
            $
            495,030
            
            $
            511,069Okhtirkaneftegas
            
            
            198,880
            
            
            198,880Naftoservice
            
            
            194,668
            
            
            -Other
            
            
            99,090
            
            
            50,848**Total**
            
            **$**
            **987,937**
            
            **$**
            **760,797**




Other
      accounts receivable and prepayments as at June 30, 2006 and December 31, 2005
      are stated net of provision accrued for doubtful accounts and were comprised
      mostly of advances paid to Vixen JLM, Okhtirkaneftegas and Naftoservice, in
      the
      total amounts of $495,030 (2005: $511,069), $198,880 (2005: $198,880) and
      $194,668 (2005: $None), respectively.




The
      advance paid to Vixen JLM relates to well casings for construction workovers.
      The amount paid to Okhtirkaneftegas is currently pending litigation (Note 24)
      though no provision was accrued on it based on the management estimates of
      the
      possibility to offset this amount through cancellation of PSA# 01-SD agreement
      with Okhtirkaneftegas during 2006. Amount of $194,668 due from Naftoservice
      relates to expenses prepaid in connection with construction workovers on
      Peremishlyansk property.




**7.**
            **INVENTORIES**




Inventories
      as of as of June 30, 2006 and December 31, 2005 consisted of the
      following:





**6/30/2006**
            
            **12/31/2005**Crude
                oil - at cost
            
            $
            50,395
            
            $
            130,159Other
                consumables and spare parts
            
            
            492,135
            
            
            29,107**Total**
            
            **$**
            **542,530**
            
            **$**
            **159,266**





Inventories
      as of June 30, 2006 and December 31, 2005 are represented by the balances of
      crude oil produced internally in the total amount of 1,382 and 533 bbls, for
      the
      respective period, and crude oil purchased in the amounts of None and 2,188
      bbls, for the same periods. The amounts of $492,530 and $29,107, for the
      respective periods, represent certain spare parts destined for technical
      maintenance and construction of oil & gas facilities.




**8.**
            **TAXES
                RECEIVABLE**




Taxes
      receivable as of June 30, 2006 and December 31, 2005 consisted of the
      following:





**6/30/2006**
            
            **12/31/2005**VAT
                receivable
            
            $
            525,440
            
            $
            152,095Other
                prepaid tax
            
            
            233
            
            
            33,641**Total**
            
            **$**
            **525,673**
            
            **$**
            **185,736**




Taxes
      receivable balances are represented by VAT receivable and other advance tax
      payments. VAT receivable was discounted at 15% annual rate based on average
      six
      months turnover period.




14
 *Table
            of Contents*




**9.**
            **PROPERTY,
                PLANT AND EQUIPMENT**




Property,
      plant and equipment as of June 30, 2006 and December 31, 2005 consisted of
      the
      following:




**6/30/2006**
            
            **12/31/2005**Oil
                & gas facilities improvements and work over costs
            
            $
            1,746,302
            
            $
            1,761,265Office
                equipment
            
            
            37,896
            
            
            14,072Construction
                in progress
            
            
            1,466,668
            
            
            161,416Total
            
            
            3,250,866
            
            
            1,936,753Accumulated
                Depreciation
            
            
            (1,124,500
            )
            
            (985,728
            )**Net
                Book Value**
            
            **$**
            **2,126,366**
            
            **$**
            **951,025**




**10.**
            **LEASE
                /CONCESSION ACQUISITION
                COST**




As
      of
      June 30, 2006, the Lease/Concession acquisition cost of $188,499 is stated
      net
      of amortization accrued and represents the implied value of the exploration
      licenses for the Peremishlyansk, Niklovitsk, Chukvinsk, Sheremetivsk and
      Pilipivsk properties held by Pari, Ltd (Note 22).




**11.**
            **LONG-TERM
                FINANCIAL INVESTMENT**




Long-term
      investment as of June 30, 2006 and December 31, 2005 represents 10 common shares
      of JSC “Ukrneft” at par value of 0.25 UAH accounted for at cost, which
      approximates their fair market value.




**12.**
            **INCOME
                TAX**




The
      Company’s provision for income tax for the periods ended June 30, 2006 and
      December 31, 2005 is as follows:





**6/30/2006**
            
            **12/31/2005**Current
                tax
            
            $
            74,195
            
            $
            117,224Deferred
                tax gain
            
            
            (16,460
            )
            
            (54,760
            )**Total
                income tax expense (benefit)**
            
            **$**
            **57,735**
            
            **$**
            **62,464**





Deferred
      taxes reflect the net tax effects of temporary differences between the carrying
      amounts of assets and liabilities for financial reporting purposes and the
      amounts used for tax purposes.





The
      change for the periods ended June 30, 2006 and December 31, 2005 in the
      Company’s deferred tax position is as follows:





**6/30/2006**
            
            **12/31/2005**Net
                asset at the beginning of the period
            
            $
            73,319
            
            $
            17,218Charged
                to income for the period
            
            
            5,891
            
            
            56,101**Net
                asset at the end of the period**
            
            **$**
            **79,210**
            
            **$**
            **73,319**





The
      tax
      effect on any substantial temporary differences, which give rise to the deferred
      tax assets as at June 30, 2006 and December 31, 2005 is presented
      below:





15
 *Table
            of Contents*





**6/30/2006**
            
            **12/31/2005****Temporary
                differences that give rise to deferred tax assets**Provision
                for doubtful receivables
            
            $
            84,948
            
            $
            106,092Valuation
                of VAT receivable
            
            
            38,047
            
            
            13,442Low
                value items written off
            
            
            1,432
            
            
            9,175Difference
                in depreciable value of property, plant and equipment due to expensing
                in
                prior period allowed by Ukrainian low
            
            
            192,415
            
            
            164,565**Total**
            
            **$**
            **316,842**
            
            **$**
            **293,274**




The
      deferred tax assets as at June 30, 2006 and December 31, 2005, calculated at
      effective Ukrainian income tax rate of 25%, consists of the
      following:





**6/30/2006**
            
            **12/31/2005****Deferred
                tax assets**Provision
                for doubtful receivables
            
            $
            21,237
            
            $
            26,523Valuation
                of VAT receivable
            
            
            9,512
            
            
            3,361Low
                value items written off
            
            
            358
            
            
            2,294Difference
                in depreciable value of property, plant and equipment due to expensing
                in
                prior period under Ukrainian low
            
            
            48,103
            
            
            41,141**Total**
            
            **$**
            **79,210**
            
            **$**
            **73,319**





The
      taxation charge for the respective period is different from that which would
      be
      obtained by applying the Ukrainian statutory income tax rate to the net loss
      before income tax. Below is a reconciliation of theoretical income tax at 25%
      to
      the actual benefit recorded in the Company’s income statement:




**6/30/2006**
            
            **12/31/2005**(Loss)
                before income tax and minority interest
            
            $
            (93,184
            )
            $
            (315,834
            )Theoretical
                income tax benefit at statutory rate of 25%
            
            
            (23,296
            )
            
            (78,959
            )Adjustments
                due to:Tax
                effect of (expenses) that are not deductible in determining taxable
                profit
            
            
            81,031
            
            
            141,423**Income
                tax (benefit)**
            
            **$**
            **57,735**
            
            **$**
            **62,464**




As
      of
      June 30, 2006 and December 31, 2005 the Company had no loss carry forward for
      Ukrainian statutory income tax purposes. For United States income tax purposes,
      the Company has a net operating loss carry forward of over $1,000,000 which
      expires in periods from 2021 to 2024. As a result, the company has a deferred
      tax asset of approximately $340,000. This has been fully reserved because
      realization cannot be assured.




16
 *Table
            of Contents*




**13.**
            **ACCOUNTS
                PAYABLE**




Accounts
      payable as of June 30, 2006 and December 31, 2005 consisted of the
      following:





**6/30/2006**
            
            **12/31/2005**Accounts
                payable
            
            $
            225,143
            
            $
            218,104CJSC
                Infox, related party
            
            
            187,719
            
            
            592,554**Total**
            
            **$**
            **412,862**
            
            **$**
            **810,658**




Third
      party accounts payable balances as of June 30, 2006 and December 31, 2005 were
      comprised mostly of payments due to Okhtirkaneftegas and Kachanovsky GPZ for
      services provided in the amounts of $195,760 (2005: $180,707) and $29,383 (2005:
      $25,240), respectively.




The
      amounts of $187,719 and $592,554, payable to CJSC Infox (a related party),
      as of
      June 30, 2006 and December 31, 2005, respectively, generally relate to well
      reconstruction and repair services, provided by third party service companies
      and paid by CJSC Infox on behalf of the Company.




**14.**
            **TAXES
                PAYABLE**




Taxes
      payable as of June 30, 2006 and December 31, 2005 consisted of the
      following:





**6/30/2006**
            
            **12/31/2005**Fines
                and penalties
            
            $
            598,324
            
            $
            598,324VAT
            
            
            321,424
            
            
            233,149Profit
                tax
            
            
            36,681
            
            
            29,526Exploration
                tax
            
            
            30,581
            
            
            33,684Resource
                Tax
            
            
            10,258
            
            
            6,699Social
                insurance
            
            
            3,420
            
            
            4,237Other
                taxes
            
            
            1,637
            
            
            112**Total**
            
            **$**
            **1,002,325**
            
            **$**
            **905,731**




Taxes
      payable as of June 30, 2006 and December 31, 2005 represent fines and penalties
      accrued in connection with litigation proceedings described in Note 24. The
      Company has prevailed in litigation relating to this issue as well as in
      subsequent court proceedings relating to the dispute. However, the Ukrainian
      authorities continue to bring additional proceedings and have not reversed
      the
      charge. Consequently, the company has not reversed the liability and does not
      plan to do so until this issue is completely resolved.




VAT
      payable relates mostly to sales made in 2005 and the first half of 2006. Based
      on current Ukrainian legislation, VAT payable may not be offset against VAT
      receivable.




17
 *Table
            of Contents*




**15.**
            **SHORT-TERM
                BANK LOANS**




Short-term
      bank loans as of June 30, 2006 and December 31, 2005 consisted of the
      following:




**%,
                currency**
            
            **6/30/2006**
            
            **12/31/2005**AB
                Clearing House
            
            
            26%,
                Ukrainian Hrivnas
            
            
            -
            
            $
            514,851**Total
                dated Sept. 17, 2004 due March 9, 2006**
            
            
            
            
            
            **-**
            
            **$**
            **514,851**




The
      loan
      amount from AB Clearing House outstanding as at December 31, 2005 was secured
      by
      the Company’s title to well casings purchased under an agreement dated July 20,
      2004. Proceeds of the loan were used mainly for immediate working capital
      requirements.




Interest
      expense for the period ended June 30, 2006 was incurred in relation to the
      credit line facility obtained from AB Clearing House. The total interest payment
      for the above period consisted of $23,387, which represented an interest rate
      of
      26% per annum.




On
      March
      9, 2006, the Company had repaid in full the balance of short term loan and
      respective balance of interest payable in the amount of $11,369 that was accrued
      in 2005 and not repaid as of December 31, 2005 (Note 19).




**16.**
            **SHORT
                TERM NOTES PAYABLE**




Short
      term promissory notes outstanding as of June 30, 2006 and December 31, 2005,
      issued in November 2002 at no interest, were payable not earlier than
      November 5, 2005. These notes in the amounts of $14,258 and $5,340,
      are payable to Astark and Sipay, respectively. As of June 30, 2006 the issuers
      of the notes had not called for the repayment of the respective amounts. Any
      valuation adjustment due to the lack of interest has not been calculated,
      however, such amounts, if any, are not considered to have a material effect
      on
      these financial statements.




**17.**
            **OTHER
                ACCOUNTS PAYABLE AND
                ACCRUALS**




Other
      accounts payable and accruals as of June 30, 2006 and December 31, 2005
      consisted of the following:





**6/30/2006**
            
            **12/31/2005**ZakhidUkrGeology
            
            $
            162,545
            
            
            -Chernigovneftegasgeology
            
            
            122,295
            
            $
            126,851Other
            
            
            334,505
            
            
            287,726**Sub
                total**
            
            
            **619,345**
            
            
            **414,577**Advances
                from former shareholders
            
            
            300,391
            
            
            244,191**Total**
            
            **$**
            **919,736**
            
            **$**
            **658,768**





Other
      accounts payable and accruals as of June 30, 2006 and December 31, 2005
      consisted mostly of advances from former shareholders and other non-recurring
      research and development, geological and exploration works, as well as payroll,
      short-term advances to employees and other prepayments for repair and
      constructions services.





18
 *Table
            of Contents*




Amounts
      of $162,545 (2005: $None) and $122,295 (2005: $126,851) represents payables
      to
      ZakhidUkrGeology and Chernigovneftegasgeology for the recurring research and
      development, geological and exploration works.




The
      amount of $300,391 (2005: $244,191) represents advances from shareholders with
      no specific terms, which was paid to the Company in the most part during 2005
      (Note 19).




**18.**
            **PREPAYMENTS
                FOR OIL AND GAS**




Prepayments
      for oil and gas as of June 30, 2006 and December 31, 2005 consisted of $312,262
      and $500,867, respectively and consisted of $192,680 (2005: $248,303), $49,805
      (2005: $49,805), $19,746 (2005: $21,188) and $131 (2005: $195,733) payable
      to
      Angronafta, Atlantis Techno, Agrotemp and Torpeda PP, respectively.




**19.**
            **INTEREST
                PAYABLE**




Interest
      payable as of June 30, 2006 and December, 31 2005, consisted of the
      following:




**6/30/2006**
            
            **12/31/2005**Long
                term loan - Zaccam Trading, related Party
            
            $
            16,779
            
            $
            2,167Millington
                Solutions Limited - Convertible notes
            
            
            16,540
            
            
            -Interest
                accrued on advances received from former shareholders
            
            
            10,920
            
            
            4,175Short
                term loan - AB Clearing House
            
            
            -
            
            
            11,369**Total**
            
            **$**
            **44,239**
            
            **$**
            **17,711**





Long
      term
      loan from Zaccam Trading, related party, at 3% per annum (Note 21) was obtained
      in 2005. Interest accrued on amounts payable to former shareholders represents
      weighted average LIBOR rate for the periods ended June 30, 2006 and December
      31,
      2005 (Note 17).





Interest
      payable in amount of $16,540 was accrued on several traches of long term 10%
      convertible debt which were received during the second quarter of 2006
      (Note21).





As
      of
      December 31, 2005, interest payable to AB Clearing House which relates to the
      credit line facility with a 26% per annum interest rate (Note 15).




**20.**
            **PROFIT
                INTEREST PAYABLE**




As
      of
      June 30, 2006 and December 31, 2005, profit interest of $17,997 is payable
      to
      Poltavaneftegasgeologiya and represents an amount that was accrued and partially
      paid by the Company in respect to profits earned during 2002, and is calculated
      in accordance with PSA # 01-SD dated April 26, 2000 (Note 24).





19
 *Table
            of Contents*




**21.**
            **LONG
                TERM PAYABLES**




Long
      term
      payables as of June 30, 2006 and December 31, 2005 consisted of the
      following:





**Issue
                date/**
              **Effective
                date**
            
            **Due**
              **not
                earlier than**
            
            **6/30/2006**
            
            **12/31/2005**Zaccam
                Trading, Ltd.
            
            
            March
                5,2005
            
            
            March
                5, 2015
            
            $
            1,391,900
            
            
            279,900Millington
                Solutions Limited
            
            
            March
                30, 2006
            
            
            March
                30, 2009
            
            
            917,000
            
            
            -Millington
                Solutions Limited
            
            
            June
                6,2006
            
            
            June
                6,2009
            
            
            500,000
            
            
            -Fort
                Trade
            
            
            Nov-2004
            
            
            Nov-
                2009
            
            
            465,347
            
            
            465,347**Total**
            
            
            
            
            
            
            
            **$**
            **3,274,247**
            
            **$**
            **745,247**




Effective
      March 30 and June 6, 2006, Sunrise Energy Resources, Inc. executed a Convertible
      Note Subscription Agreements with Millington Solutions Limited to complete
      a
      $1.0 million and $2.0 million, respectively, private placement financing in
      the
      form of 10% convertible notes. As of June 30, 2006, the Company has received
      several amounts totaling $917,000, which were covered by the $1.0 million
      Subscription Agreement effective March 30, 2006, and an amount of $500,000,
      which was covered by the $2.0 million Subscription Agreement effective June
      6,
      2006. Each tranche will mature in 3 years of the receipt of funds. The interest
      is accrued at the rate of 10% per annum on the unconverted amount and is payable
      annually on each 12 month anniversary of each tranche until conversion or
      maturity (Note 19). The Notes can be converted into Common shares of the Company
      at a conversion price of $2.20 at the holder's option at any time until the
      maturity date of each tranche. For Notes converted between interest due dates,
      the interest would accrue pro-rata and would be paid in the form of additional
      shares of the Company's Common stock. The number of such additional shares
      would
      be calculated at the same conversion price.




As
      of
      June 30, 2006 and December 31, 2005, the amount of $465,347 represents interest
      free note payable for geological and research services rendered by Fort Trade
      during 2004.




Long
      term
      payable to Zaccam Trading, Ltd. (a related party) as of June 30, 2006 and
      December 31, 2005 represents an unsecured credit line facility with a limit
      of
      $5,000,000 bearing 3% per annum charged on actual amount of debt (Note
      19).




**22.**
            **SHAREHOLDERS’
                EQUITY**




On
      or
      about January 20, 2006, the Company executed a share purchase agreement with
      the
      shareholders of Pari, Ltd. The board of directors of Sunrise Energy Resources,
      Inc. approved the transaction on February 9, 2006. The shareholders of Pari
      sold
      100% of their holdings to Sunrise Energy Resources, Inc. for a consideration
      for
      161,014 newly issued Common shares of the Company, which at the time had an
      approximate market value of $96,608.




The
      current consolidated financial statements account for the transaction in
      accordance with SFAS 141 “Business Combinations” under the “acquisition”
treatment, whereby Sunrise Energy Resources, Inc. is considered to be the actual
      acquirer, and Pari, Ltd. is the acquired entity. Based on the market value
      of
      the stock issued, the excess of the value of the stock over the book value
      of
      the assets has been allocated to the drilling/production concessions owned
      by
      Pari. No goodwill was recognized on the acquisition.





20
 *Table
            of Contents*





Net
      assets of the acquired entity, Pari, Ltd. before the allocation of the balance
      to the drilling/production concessions as of December 31, 2005, were as
      follows:





**12/31/2005**Cash
            
            $
            4,549Accounts
                receivable and other current assets
            
            
            24,860Property,
                Plant and Equipment, net
            
            
            43,797Accounts
                Payable
            
            
            (166,580
            )Tax
                liabilities
            
            
            (11,981
            )**100%
                of Net Assets (Deficit)**
            
            **$**
            **(105,355**
            **)**Less
                cash balances held as at December 31, 2005
            
            
            (4,549
            )**Preacquisition
                deficit**
            
            **$**
            **(109,904**
            **)****Cash
                inflow on acquisition**
            
            **$**
            **4,549**




No
      dividends were declared or paid by the Company during the periods ended June
      30,
      2006 and December 31, 2005.




**23.**
            **RELATED
                PARTIES**




Related
      parties include shareholders and entities under common ownership. Transactions
      with related parties are performed on terms that are comparable to those
      available to unrelated parties. For details of related party balances
      outstanding as of June 30, 2006 and December 31, 2005 see Notes 4, 5, 13, 17,
      19
      and 21.




Our
      related parties include CJSC Infox and Zaccam Trading, Ltd. Although Pari,
      Ltd.
      was acquired in the first quarter of 2006, it is presented as a “related party”
in Company’s consolidated financial statements as of December 31,
      2005.




During
      the periods ended June 30, 2006 and December 31, 2005, we have received several
      tranches of long term loans from Zaccam Trading, Ltd. which resulted in total
      amounts of $1,391,900 and $ 279,900
      outstanding at the end of the respective periods .
      The
      proceeds received were used mainly for construction workovers on well #21 (Notes
      19 and 21).




As
      of
      June 30, 2006 and December 31, 2005, the total amounts of $255,299 and
      $ 720,797 were due
      from CJSC Infox, related party, and were comprised of several crude oil
      shipments which took place in 2004 and 2003. Similarly, the total amounts of
      $187,719 and $ 592,554,
      respectively, payable
      to CJSC Infox (a related party), were mostly on account of wells’ reconstruction
      and repair services, provided by third party service companies and paid by
      CJSC
      Infox on behalf of the Company’s subsidiaries EP and Pari.




**24.**
            **COMMITMENTS
                AND CONTINGENCIES**




***Licenses’
      commitments***




***Esko
      Pivnich -*** During
      2004 EP received geological and exploration license agreements to develop the
      Karaikozovsk, Rogan and Rakitnyansk fields. The following amounts of investments
      are to be incurred under the terms of those agreements during the periods
      indicated in the table below:




21
 *Table
            of Contents*





**Period**
            
            **Amount**Rogan
                field
            
            
            2005-2009
            
            $
            2,922,772Rakitnyansk
                field
            
            
            2005-2009
            
            
            3,938,614Karaikozovsk
                field
            
            
            2005-2009
            
            
            4,241,584**Total**
            
            
            
            
            **$**
            **11,102,970**




***Pari
      -*** During
      2004 Pari received geological and exploration license agreements to develop
      the
      Peremishlyansk, Chukvinsk, Scheremetivsk, Niklovitsks and Pilipivsk fields.
      The
      following amounts of investments are to be incurred under the terms of those
      agreements:





**Period**
            
            **Amount**Peremishlyansk
                field
            
            
            2004-2009
            
            $
            2,336,634Chukvinsk
                field
            
            
            2004-2009
            
            
            1,544,554Scheremetivsk
                field
            
            
            2004-2009
            
            
            712,872Niklovitsks
                field
            
            
            2004-2009
            
            
            594,059Pilipivsk
                field
            
            
            2004-2009
            
            
            475,248**Total**
            
            
            
            
            **$**
            **5,663,367**




***Environmental
      remediation -*** Under
      Ukrainian law, the Company is obligated to meet certain environmental
      remediation obligations related to its oil and gas production activities. This
      amount cannot be estimated at this time but is considered not to be a material
      amount.




***Lease
      commitments -*** The
      Company leases office space on a yearly basis and the rent is disclosed in
      other
      notes. The Company’s future lease commitments as of June 30, 2006 are as
      follows:





**2006**Office
                rent - Esko Pivnich
            
            $
            30,000Office
                rent - Pari
            
            
            10,400**$**
            **40,400**




***Litigation***  ***-*** The
      Company has been and continues to be the subject of legal proceedings and
      adjudications from time to time. Management believes that the resolution of
      all
      business matters which will have a material impact on the Company’s financial
      position or operating results have been recorded.




***Esko
      Pivnich***




*JSC
      Ukrneft, Okhtirkaneftegas*  *-* ****** In
      2003
      the Company filed a claim against JSC Ukrneft, Okhtirkaneftegas, with respect
      to
      the advance paid by the Company in 2002 in the amount of $198,880 to complete
      certain capital construction works under PSA # 01-SD dated April 26, 2000 (Notes
      4 and 6). In April 2004 after a number of hearings by courts of different
      circuits, the Supreme Court of Ukraine ordered Okhtirkaneftegas to pay the
      outstanding balance to the Company without further delays. Despite this final
      ruling of the Supreme Court, as of August 14, 2006 the balance has not been
      paid. The Company plans to void PSA # 01-SD and to offset the amount due to
      it
      against amounts payable to JSC Ukrneft and its subsidiary Okhtirkaneftegas
      in
      2006.




22
 *Table
            of Contents*




*DP
      NAK Nedra Ukraini Poltavnaftogasgeologiya -* In
      2006
      The Company sued Poltavneftegasgeologiya for expected profits in the amount
      of
      $474,053 resulting from a refusal of Poltavneftegasgeologiya to execute its
      obligations under the terms of PSA # 01-SD. The Court of Poltavskiy region
      has
      ruled in the Company’s favor and obliged Poltavneftegasgeologiya to pay the
      Company amount of $356,994. Poltavneftegasgeoligia has filed a appeal with
      inter-regional court of Kiev city. As of August 14, 2006, no new hearings took
      place and according to management’s estimates there is a high possibility of
      wining the case. Pending final resolution of this matter, the Company has not
      recorded this as income.




*Taxes
      -* During
      2004 the Company was audited by the State Tax Inspection of Podolsk region,
      Kiev, and was assessed additional VAT and Profit tax fines and penalties thereon
      in the aggregate amount of $598,324 related to FY2003 and FY2002. The amounts
      were accrued in the consolidated financial statements in full. Esko Pivnich
      appealed against the decision to the Civil Court of Kiev and the matter was
      ruled in favor of Esko Pivnich. However, the tax authorities have filed a
      counter-appeal with the Supreme Civil Court of Kiev. The Supreme Civil Court
      resolved that the matter be referred back to Civil Court of Kiev and appointed
      a
      committee to conduct an accounting investigation which was completed in February
      2006. The tax liability has not been removed or reversed pending the final
      resolution of the matter.




***Pari***




*Poltavaneftegasgeologiya* - Under
      the
      terms of the PSA # 10-5/2000 dated July 20, 2000, Poltavaneftegasgeologiya
      (Note
      4) acted as the holder of the main geological and exploration licenses to
      develop the Sakhalin and Skvortsovsk field and Pari was a major investor, having
      contributed into the establishment of PSA approximately $31,152. No operating
      activities have ever been conducted under this agreement and Pari moved to
      void
      all its obligations under PSA and obtain a refund of its initial investment
      in
      the amount of $31,152. As of the date of this report the matter has not been
      resolved. Therefore, Pari’s investment amount was written off in
      2003.




*Cabinet
      of Ministers of Ukraine* - During
      the first half of 2006 the Cabinet of Ministers of Ukraine mandated a review
      of
      the procedures of issuance of approximately 500 production and exploration
      licenses granted by the Ministry of National Resources of Ukraine in 2004.
      The
      Company’s properties Rogan, Rakitnyansk and Karaikozovsk held by Esko Pivnich,
      and Peremishlyansk, Chukvinsk, Niklovitsk and Pilipovsk held by Pari were also
      subject to review as part of this process. The purpose of the review was to
      determine the effectiveness of the procedures involved in the issuance of the
      licenses. The
      preliminary findings of the review were referred to the Supreme Court of Ukraine
      which issued a preliminary conclusion that all of the Company’s licenses were
      properly issued and are to remain valid. At present, the review is being
      officially finalized and we expect to receive a final approval upon the
      conclusion of this review in 2006.




***Ukrainian
      Tax and Regulatory Environment***  ***-*** The
      government of Ukraine continues to reform the business and commercial
      infrastructure in its transition to a market economy. As a result laws and
      regulations affecting businesses continue to change rapidly. These changes
      are
      from time to time characterized by poor drafting, different interpretations
      and
      arbitrary application of laws and regulations by the authorities. In particular,
      taxes are subject to review and investigation by a number of authorities enabled
      by law to impose fines and penalties. While the Company believes it has provided
      adequately for all tax liabilities based on its understanding of the tax
      legislation, the above facts may create tax risks for the Company.




**25.**
            **RISK
                MANAGEMENT POLICIES**




Management
      of risk is an essential element of the Company’s operations. The main risks
      inherent to the Company’s operations are those related to credit risk exposures,
      market movements in foreign exchange rates and in interest rates. A description
      of the Company’s risk management policies in relation to those risks is provided
      below.




23
 *Table
            of Contents*




***Credit
      risk*** **** ***-*** **** The
      Company is exposed to credit risk which is the risk that one party to a
      financial instrument will fail to discharge an obligation and cause the other
      party to incur a financial loss.




The
      Company structures the levels of credit risk it undertakes by placing limits
      on
      the amount assigned or transacted in relation to a particular customer, or
      groups of customers. Limits on the level of credit risk by customer are approved
      quarterly by the Credit Committee.




Our
      sales
      to customers in excess of 5% were as follows:




**06/30/2006**
            
            **06/30/2005**Agrotemp
                (oil produced)
            
            $
            396,312
            
            $
            98,530Nafta
                Soyuz (oil produced)
            
            
            221,193
            
            
            -Torpeda
                (oil resold)
            
            
            120,174
            
            
            -Torpeda
                (oil produced)
            
            
            65,076
            
            
            -Spago
                TOV (oil produced)
            
            
            51,396
            
            
            -Soyuz
                NPK (oil produced)
            
            
            42,410
            
            
            -Okhtirkaneftegas
                (gas produced)
            
            
            12,990
            
            
            -Ukrtatnafta
                (oil produced)
            
            
            -
            
            
            274,286Angronafta
                (oil produced)
            
            
            -
            
            
            210,036Varadero
                (oil produced)
            
            
            -
            
            
            160,258Other
            
            
            25,807
            
            
            161,018**Total**
            
            **$**
            **935,358**
            
            **$**
            **904,128**




***Currency
      risk -*** Currency
      risk is defined as the risk that the value of a financial instrument will
      fluctuate due to changes in foreign exchange rates.




The
      Credit Committee sets limits on the level of exposure to a single currency
      (primarily Ukrainian Hrivna and US Dollar), by entities and in
      total.




***Interest
      rate risk -*** Interest
      rate risk arises from the possibility that changes in interest rates will affect
      the value of a financial instrument.




Currently,
      the Company’s approach to the interest risk limitation is borrowing at fixed
      rates and for short periods.




**26.**
            **CONCENTRATION
                OF BUSINESS RISK**




The
      Company’s operating activities are limited to Ukraine. Laws and regulations
      affecting businesses operating in Ukraine are subject to rapid changes and
      the
      Company’s assets and operations could be at risk due to negative changes in the
      political and business environments.




**27.**
            **SUBSEQUENT
                EVENTS**




Effective
      July 26, 2006, Sunrise Energy Resources, Inc. (the "Company") executed a
      Convertible Note Agreement to complete a $1,000,000 private placement financing
      in the form of 6% notes convertible into the Company's common stock at the
      conversion price of $1.40 per share. The placement proceeds are expected to
      be
      made available to the Company in several tranches until September 30, 2006.




24
 *Table
            of Contents*




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS**




**Discussion
      and Analysis of Financial Condition**




**Introduction**




The
      following discussion and analysis addresses changes in our financial condition
      and results of operations during the year ended December 31, 2005 and periods
      ended June 30, 2006 and 2005.




Management’s
      key objectives for the first half of 2006 were:




·
            Drill
                approximately 50% of the projected depth of Well #21 of the Company’s
                Karaikozovsk property;


·
            Drill
                approximately 10% of the projected depth of Well #1 of the Company’s
                Peremyshlyansk property;


·
            Complete
                the acquisition of Pari Ltd.;


·
            Commence
                geological and research works on Rogan and Rakitnyansk properties;


·
            Commence
                the construction of access roads and other infrastructure on the
                Company’s
                Chukvinsk property.




We
      believe that these key objectives were achieved during the first half of 2006.
      Our 2006 strategy for the Karaikozovsk field includes the completion and launch
      of Well #21. We also intend to conduct limited reservoir stimulation on Well
      #2
      to increase the production. We will also focus on the exploration drilling
      on
      the Peremishlyansk field and construction of infrastructure on the Chukvinsk
      property.




In
      addition, we will continue the exploration activities on the Rogan and
      Rakitnyansk properties aiming to establish the optimal reservoir development
      scenarios.




**Current
      Activities**




Although
      the Company completed scheduled workovers and repairs on Well #3 on or around
      June 21, 2005,  during
      2005 and six month of 2006, our production was primarily limited to Well #2
      of
      the Karaikozovsk deposit. The reduced production from Well #3 was caused by
      a
      reservoir pressure maintenance difficulties as well as increased downtime and
      lower flow rates caused by an exceptionally cold weather in January of
      2006.




On
      or
      around May 31, 2005 Esko-Pivnich, the Company’s wholly-owned operating
      subsidiary, completed the construction of a new storage and separation facility
      with a total storage capacity of approximately 200 tons (1,460 bbls). The new
      facility commenced operations on July 15, 2005 and was designed to decrease
      the
      Company’s operating expenses, resulting from reduced fees that were previously
      paid to Okhtirkaneftegaz, the state-owned Oil&Gas Company for similar
      services. In addition, the launch of the new facility will enable the Company
      to
      reduce crude losses during extraction, separation and storage.




On
      March
      20, 2006, Pari, Ltd., a wholly owned subsidiary of Sunrise Energy Resources,
      Inc., commenced the preparatory work to drill its first exploration well on
      the
      Peremishlyansk block which has possible gas reserves of approximately 420 BCF.
      The drilling contract has been signed with GP "ZakhidUkrGeologiya", a Ukrainian
      drilling contractor. The well is designed to be approximately 3700m (12,139
      ft)
      deep. As of June 30, 2006, the Company has drilled approximately 390m (1281ft)
      of Well #1 of the Peremishlyansk property which represents approximately 11%
      of
      its design depth.




According
      to the Ukrainian Government Reserve Report, Pari, Ltd. has proven reserves
      of
      approximately 106.2 BCF of gas in the Niklovitsk field located in the Lviv
      region of Western Ukraine and 4.1 BCF in the Sheremetivsk field located in
      the
      Chernovtsi region of Western Ukraine. Pari, Ltd. holds an exploration licenses
      that expires in July 2009 for the above properties and the following other
      undeveloped properties located in Western Ukraine: Peremishlyansk, Chukvinsk
      in
      Lviv region, and Pilipivsk in Ivano-Frankivsk region. In total, the possible
      reserves of Pari, Ltd. amount to approximately 24 MMBbls.




25
 *Table
            of Contents*




**Results
      of Operations**




Oil
      and gas production and revenue




The
      crude
      oil balances as of June 30, 2006 and December 31, 2005 amounted to 1,382 and
      533
      Bbls, respectively.




During
      the six months ended June 30, 2006 and 2005, Esko Pivnich produced 15,904 (2005:
      23,979) barrels (“Bbls”) of crude oil and 14,222 (2005: 39,060) thousands of
      cubic feet (“MCFs”) of natural gas, respectively.




We
      recognize revenue from the sale of oil when the purchaser takes delivery of
      the
      oil at the field. During the six months period ended June 30, 2006 and 2005,
      Esko Pivnich sold its internally produced 15,088 (2005: 23,875) Bbls of crude
      oil at the average prices of $53.2 (2005: $36.4) per barrel translating into
      net
      revenues from sales of internally produced oil of $802,194 (2005: $868,647).
      Also for the six months ended June 30, 2006 and 2005 the Company sold 14,178
      (2005: 39,060) MCFs of internally produced gas at average prices of $0.92 (2005:
      $0.90) per MCF translating into revenues of $12,990 (2005:
      $35,482).




Additionally
      during the six month ended June 30, 2006 we sold 2,188 bbls of purchased crude
      oil at the average price of $54.87 per barrel translating into revenues of
      $120,174. Cost of sales amounted to $116,637.




All
      sales
      agreements were short-term in nature, with the extension option by mutual
      agreement of the parties. Our crude oil and natural gas are sold at the pipeline
      measuring node and are subject or free of any transportation costs depending
      on
      the terms of specific customer agreements.




Exploration




Exploration
      expense, which includes geological and geophysical expense and the cost of
      unsuccessful exploratory wells, is recorded as an expense in the period incurred
      under the successful efforts method of accounting. During the periods ended
      June
      30, 2006 and 2005 we incurred $88,708 and $175,753, respectively in exploration
      expenses. The Company expects significant exploration expense in 2005-2008
      due
      to the new operating licenses obtained in 2004-2005, and significant investment
      obligations attached to them, based on the concluded license agreement with
      the
      Ministry of Resources of Ukraine (see above).




During
      the periods ended June 30, 2006 and 2005, the Exploration and Resource taxes,
      amounted to $157,692 and $222,606, respectively.




Other
      operating income for the period ended June 30, 2006 was mostly due to change
      in
      provision for doubtful accounts of $21,144 which resulted from the repayment
      of
      amount receivable from Vector NDI for office rent services prepaid by the
      company during 2004.




Depreciation,
      depletion and amortization




Depreciation,
      depletion and amortization (“DD&A”) of oil and gas properties is calculated
      under units of production method, following the successful efforts method of
      accounting, as described in Note 1 of the Notes to Consolidated Financial
      Statements.  As
      at the
      date of this report no such costs were incurred.




Oil
      and
      gas production equipment and workover costs were the main contributor into
      the
      depreciation expense for the periods ended June 30, 2006 and 2005 in the total
      amounts of $149,963 and $128,717. The increase in the depreciation expense
      in
      the first half of 2006 as compared to the respective period of 2005 is primarily
      due to the launching of storage and separation facility as well as due to
      workover costs capitalized in the second half of 2005.




26
 *Table
            of Contents*




Sales,
      general and administrative expenses




Sales,
      general and administrative expenses for the periods ended June 30, 2006
      decreased to $352,664 from $397,725 for the period ended June 30, 2005 mainly
      due to the decrease in insurance expenses of $303 (2005: $68,641), professional
      services expenses of $58,425 (2005: $71,003) and transportation expenses of
      $37,765 (2005: $41,931). Although there was a significant increase in payroll
      and payroll related taxes amounting to $136,054 (2005: $62,685) and legal and
      audit services of $64,812 (2005: $30,552).




In
      March
      2005 the Company insured its business continuity risks. The above insurance
      premium was paid in respect to March - June 2005 period only.




Interest
      income (expense)




Interest
      expense (net) for the periods ended June 30, 2006 and 2005, amounted to $92,605
      and $63,051, respectively.




Interest
      expense for the period ended June 30, 2005 related primarily to the credit
      line
      facility obtained from AB Clearing House at 26% per annum. During the six months
      ended June 30, 2006 the interest expense was primarily due to amounts received
      by the Company under a 10% convertible note in the second quarter, as well
      as to
      a long term loan obtained from Zaccam Trading (a related party) at 3% and
      interest accrued on amounts received from former shareholders at weighted
      average LIBOR rate for the respective period.




Long
      term credit line facility




On
      March
      5, 2005 the Company entered into an agreement with Zaccam Trading, Ltd. (a
      related party) to obtain a long term credit line with indebtedness limit of
      up
      to $5 million, bearing interest at 3% per annum and due on March 5, 2015.
      Interest is charged on the actual amount of debt for the period of using the
      funds. Proceeds were mainly used to finance construction workovers on Well#21
      of
      the Karaikozovsk property.




Convertible
      Notes




Effective
      March 30 and June 6, 2006, Sunrise Energy Resources, Inc. executed two separate
      Convertible Note Subscription Agreements with Millington Solutions Limited
      to
      complete a $1.0 million and $2.0 million private placement financing in the
      form
      of 10% convertible notes. As of June 30, 2006, the Company has received several
      tranches aggregating to $917,000, which are covered by the $1.0 million
      Subscription Agreement effective March 30, 2006 and a tranche of $500,000
      covered by the $2.0 million Subscription Agreement effective June 6, 2006.
      Each
      tranche will mature in 3 years of the receipt of funds. The interest will accrue
      at the rate of 10% per annum on the unconverted amount and will be payable
      annually on each 12 month anniversary of each tranche until conversion or
      maturity. The Notes can be converted to the Company's Common stock at a
      conversion price of $2.20 at the holder's option, at any time until the maturity
      date of each tranche. For Notes converted between interest due dates, the
      interest will be accrued pro-rata and paid in the form of additional shares
      of
      the Company's Common stock. The number of such additional shares will be
      calculated at the same conversion price. The Convertible Note Subscription
      Agreements are filed together with this form.




**Liquidity
      and Capital Resources**




Since
      inception, we have financed our operations from private sources. We anticipate
      continuing losses in the near future while Esko Pivnich and Pari establish
      steady production of oil and gas in Ukraine. As at June 30, 2006, the Company
      had total current assets of $2,347,879and total current liabilities of
      $2,729,019, respectively. As at June 30, 2006, the Company had cash balances
      of
      $36,440 and a working capital deficit of $381,140, respectively.




27
 *Table
            of Contents*




We
      are
      currently discussing various financing options with private investors, including
      with certain of the Company’s shareholders, however, no assurance can be given
      as to if, when and under what terms such new financing may be received by the
      Company. Failure to timely receive such financing may cause us to significantly
      curtail or altogether suspend our capital expenditure program. This may, in
      turn, have material adverse effect on our production activities




Cash
      flow




Cash
      (used in)/provided by operating activities during the periods ended June 30,
      2006 and 2005 amounted to $(563,933) and $302,338, respectively. Significant
      cash outflow in the first half of 2006, as compared to the respective period
      of
      2005, was primarily caused by the increase in inventory balance of $383,264
      (2005: increase of $17,268), taxes receivable of $339,937 (2005: decrease of
      $13,430) as well as due to the reduction of accounts payable of $397,796 (2005:
      decrease of $199,677) and prepayments for oil and gas of $188,605 (2005:
      increase of $343,563). The above items overweighed the cash inflows that were
      mostly due to decrease in accounts receivable of $486,840 (2005: increase of
      $35,765) and increase in other accounts payable of $237,705 (2005: increase
      of
      $94,714).




During
      the six months ended June 30, 2006 cash provided by financing activities in
      an
      amount of $2,018,698 was due to financing obtained under the convertible notes
      received in the amount of $1,417,000 and long term loan received in an amount
      of
      1,112,000, and mainly was used to finance construction workovers, as well as
      to
      repay short term loan payable to AB Clearing House resulting in cash outflow
      of
      $514,851. In addition, such amounts were partly used to service the negative
      cash flow from operations. For the respective period of 2005 there were no
      operations affecting cash flows from financing activities.




During
      the six months ended June 30, 2006 and 2005, the Company invested in workovers
      a
      total amount of $1,311,840 and $361,081, respectively, which was financed by
      the
      above mentioned convertible notes and the long term loan. Additional increase
      in
      capital expenditure in 2006 was also caused by the acquisition of Pari, Ltd.,
      the Company’s operating subsidiary which had a pre acquisition deficit of
      $109,904.  Cash
      inflow recorded on the transaction amounted to $4,549 and effected cash flow
      from financing activities .




Cash
      Requirements




The
      Company anticipates it will require approximately $4,000,000 to implement its
      capital expenditure program for the properties covered by the licenses and
      for
      the drilling of Well #21 on the Karaikozovsk property and Well#1 on the
      Peremishlyansk property. The Company believes it will be able to raise these
      funds through equity, debt and convertible debt financing; however, there is
      no
      assurance that such funds will be raised and no certainty as to when such funds
      may be raised or on what terms.




**Income
      Taxes, Net Operating Losses and Tax Credits**




Currently,
      the Company is liable for Ukrainian income tax at a rate of 25% of the pre-tax
      earnings as defined by applicable tax regulations under the Ukrainian income
      tax
      legislation. The taxation system in Ukraine is evolving as the central
      government transforms itself from a command to a market-oriented economy. Based
      on current tax law and the United States — Ukraine income tax treaty, the income
      tax paid in Ukraine may be credited against the Company’s tax liability when
      determining the Company’s US income taxes payable, if any.




**Critical
      Accounting Policies and Recent Accounting Pronouncements**




We
      have
      identified the policies below as critical to our business operations and the
      understanding of our financial statements. The impact of these policies and
      associated risks are discussed throughout Management’s Discussion and Analysis
      where such policies affect our reported and expected financial results. A
      complete discussion of our accounting policies is included in Note 1 of the
      Notes to Consolidated Financial Statements.




28
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            of Contents*




**Going
      Concern**




The
      Company’s consolidated financial statements have been presented on the basis
      that it is a going concern, which contemplates the realization of assets and
      satisfaction of liabilities in the normal course of business. As shown in the
      consolidated financial statements, the Company incurred a net loss of $143,425
      during the period ended June 30, 2006, and, as of June 30, 2006, the Company’s
      current liabilities exceeded its current assets by $381,140. Additionally,
      to
      fully develop the area covered by the Licenses, the Company needs substantial
      additional funding.




In
      view
      of the matters described in the preceding paragraph, recoverability of a
      substantial portion of the assets shown in the accompanying balance sheet is
      dependent upon continued operations of the Company, which in turn is dependent
      upon the Company’s ability to meet its financing requirements on a continuing
      basis. For the Company to meet its financing requirements, it would have to
      raise additional funds, primarily by way of equity contributions, and to succeed
      in its future operations. The consolidated financial statements do not include
      any adjustments relating to the recoverability and classification of recorded
      asset amounts or amounts and classification of liabilities that might be
      necessary should the Company be unable to continue its operations.




Management
      has taken the following steps to revise its operating and financial
      requirements, which it believes are sufficient to provide the Company with
      the
      ability to continue in its operations as a going concern:




o
            The
                Company plans to continue to raise additional capital in the equity,
                debt
                and convertible debt markets as significant source of funding its
                development of the properties covered by the Licenses.




o
            Based
                on its expected production capabilities from the expenditures that
                will be
                made as a result of equity and debt financing, the Company believes
                that
                it could generate adequate cash flow.




o
            Additional
                funding requirements may also be necessary before the Company is
                able to
                rely solely on the cash flow resulting from the production achived
                on its
                licensed properties. .




Accordingly,
      our independent auditors included an explanatory paragraph in their report
      on
      the December 31, 2005 consolidated financial statements expressing concerns
      about our ability to continue as a going concern. Our financial statements
      contain additional note disclosures describing the circumstances that lead
      to
      this disclosure by our independent auditors.




Functional
      and Reporting Currency




The
      reporting currency of the accompanying consolidated financial statements is
      the
      US dollars. Ukrainian entities use Ukrainian Hrivna (UAH) as their functional
      currency since most of their revenues and operating expenses are denominated
      in
      Ukrainian Hrivnas. The Ukrainian Hrivna is not a fully convertible currency
      outside of Ukraine. The translation of Hrivna denominated assets and liabilities
      into US dollars for the purpose of these consolidated financial statements
      does
      not indicate that the Company could or will in the future realize or settle
      in
      US dollars the translated values of these assets and liabilities.




The
      prevailing exchange rates as at June 30, 2006 and December 31, 2005 were
      approximately 1 U.S. dollar to $5.0500 and $5.0500 Ukrainian Hrivnas,
      respectively. For the periods ended June 30, 2006 and 2005, the average exchange
      rate for 1 U.S. dollar was $5.0500 and $5.1994 Ukrainian Hrivnas,
      respectively.




Principles
      of Consolidation




The
      consolidated financial statements incorporate the financial statements of
      Sunrise Energy Resources Inc. and other enterprises, where the Company, directly
      or indirectly exercises control. Control is achieved where the Company has
      the
      power to govern the financial and operating policies of an invested enterprise
      so as to obtain benefits from its activities.




29
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            of Contents*




All
      significant intercompany transactions, balances and unrealized gains (losses)
      on
      transactions are eliminated on consolidation.




Use
      of
      Estimates




The
      preparation of financial statements in accordance with United States generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosures of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could materially differ from these
      estimates.




Oil
      and Gas Reserve Information




The
      information regarding our oil and gas reserves, the changes thereto and the
      estimated future net cash flows are dependent upon engineering, price and other
      assumptions used in preparing our annual reserve study. These estimates were
      prepared by the Company and have not been certified by an independent petroleum
      engineering firm. The Company plans to engage such appropriately qualified
      engineering firm to certify the estimates of our oil and gas reserves in
      accordance with applicable engineering standards and in accordance with the
      Securities and Exchange Commission guidelines. Changes in prices and cost
      levels, as well as the timing of future development costs, may cause actual
      results to vary significantly from the data presented. Our oil and gas reserve
      data represent estimates only and are not intended to be a forecast or fair
      market value of our assets.




Our
      oil
      and gas reserve data and estimated future net cash flows have been prepared
      assuming we are successful in timely renewal of operating license agreements
      and
      negotiating production sharing terms which will allow constant production rates
      for the expected 10 year period. In accordance with the effective PSA, the
      profit sharing rate payable by the Company after the initial investment has
      been
      recovered equals 20%. (See above detailed description of the main terms of
      the
      standardized production sharing agreements concluded with the State of Ukraine).
      Also in 2005 the Company had completed construction of its own gas separation
      facilities that allows the Company to reduce significantly its cost for services
      currently purchased under the production sharing agreement (PSA) from the
      state-owned entity, Okhtirkaneftegas, which is the counter party to the
      PSA.




Production
      sharing agreements are customarily awarded upon determination that the field
      is
      capable of producing commercial rates of production and that the applicant
      has
      complied with all other terms of its license and exploration contract. However,
      we are not guaranteed the right to a license renewal and production sharing
      agreements in the future. If we are not successful in negotiating operating
      license renewal and a production sharing agreements on acceptable terms, it
      would materially change our oil and gas reserve data and estimated future net
      cash flows.




Successful
      Efforts Method of Accounting




We
      will
      follow the successful efforts method of accounting for our investments in oil
      and gas properties, as more fully described in Note 1 of the Notes to
      Consolidated Financial Statements, following the completion of construction
      works on well #21 and launching it into commercial production. This accounting
      method has a pervasive effect on our reported financial position and results
      of
      operations.




Revenue
      Recognition




For
      revenue from product sales, the Company recognizes revenue in accordance with
      SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial
      Statements” (“SAB 104”). SAB 104 requires that four basic criteria must be met
      before revenue can be recognized: (1) persuasive evidence of an arrangement
      exists; (2) delivery has occurred; (3) the selling price is fixed and
      determinable; and (4) collectibility is reasonably assured.




30
 *Table
            of Contents*




Criterion
      (1) is met as every delivery is covered by a separate contract and the title
      passes to the customer only upon customer’s acceptance at point of destination,
      which is in compliance with criterion (2). Determination of criteria (3) and
      (4)
      are based on management’s judgments regarding the fixed nature of the selling
      prices of the products delivered and the collectibility of those amounts.
      Provisions for discounts and rebates to customers, and other adjustments are
      provided for in the same period the related sales are recorded. The Company
      defers any revenue for which the product has not been delivered and accepted
      by
      its customers. In accordance with the Company’s standard contract terms, once
      delivered and accepted the product cannot be returned and no claims can be
      presented to the Company. The Company recognizes revenue on gross
      basis.




31
 *Table
            of Contents*




**ITEM
      3. Quantitative and Qualitative Disclosures about Market
      Risk**




**Oil
      and Gas prices**




The
      demand for, and price of, oil and gas is highly dependent on a variety of
      factors, including international supply and demand, the level of consumer
      demand, weather conditions, the price and availability of alternative fuels,
      actions taken by governments and international cartels, and global economic
      and
      political developments. International oil prices have fluctuated widely in
      recent years and may continue to fluctuate significantly in the future. The
      Company believes it may benefit significantly due to the recent changes in
      the
      Ukrainian market for gas. In addition, and although not foreseen, the Ukrainian
      government may oblige domestic producers to sell oil or gas to the state or
      domestic purchasers at prices well below international levels for indeterminate
      periods of time.




**Currency
      Exchange Risk** ****




Domestic
      sales of oil and gas in Ukraine are made in local currency (Hryvna) and then
      converted to US$. The US$ - Hryvna exchange rate may move adversely to affect
      oil and gas prices. In addition, there can be no assurance that the Ukrainian
      authorities may not introduce price stabilization mechanisms which adversely
      affect oil and gas prices in US$ terms for EP. While many of Sunrise’s financial
      obligations are denominated in United States dollars, a number of foreign
      currency effects may arise from exchange rate movements. Sunrise does not engage
      in active speculative hedging to minimize exchange rate risk.




**Disclosure
      regarding Forward-Looking Statements**




This
      quarterly Report contains forward looking statements (as such term is defined
      in
      the Private Securities Litigation Reform Act of 1995). All statements, other
      than statements of historical fact, contained in this report are forward looking
      statements, including, without limitation, statements regarding the future
      financial position, business strategy, proposed acquisitions, budgets,
      litigation, projected costs and plans and objectives of or involving Sunrise
      or
      EP. Sunrise Shareholders can identify many of these statements by looking for
      words such as “believe”, “expects”, “will”, “intends”, “projects”,
“anticipates”, “estimates”, “continues” or similar words or the negative
      thereof. There can be no assurance that the plans, intentions or expectations
      upon which these forward looking statements are based will occur. Forward
      looking statements are subject to risks, uncertainties and assumptions,
      including those discussed elsewhere in this report. Although Sunrise believes
      that the plans, intentions and expectations represented in such forward looking
      statements are reasonable, there can be no assurance that such plans, intentions
      and expectations will prove to be correct. Some of the risks which could affect
      future results and could cause results to differ materially from those expressed
      in the forward looking statements contained herein include: risks inherent
      in
      the future prices for oil and natural gas, political and regulatory risks,
      risks
      inherent in currency exchange rates, risks inherent in the prices for services
      and government fiscal regimes and the risk that actual results will vary from
      the results forecasted and such variations may be material.




The
      information contained in this report, including the information set forth under
      “Risk Factors”, identifies additional factors that could affect the operating
      results and performance of Sunrise. We urge you to carefully consider those
      factors.




The
      forward looking statements contained herein are expressly qualified in their
      entirety by this cautionary statement. The forward looking statements included
      in this Report are made as at the date of this Annual Report and Sunrise
      undertakes no obligation to publicly update such forward looking statements
      to
      reflect new information, subsequent events or otherwise.




As
      used
      in this annual report, the terms “we”, “us”, “our”, “Company” and “Sunrise”
means Sunrise Energy Resources, Inc. and its consolidated subsidiary, unless
      otherwise indicated.




All
      dollar amounts refer to US dollars unless otherwise indicated.




32
 *Table
            of Contents*




The
      above
      discussion should be read in conjunction with our financial statements and
      the
      related notes that appear elsewhere in this annual report.




**ITEM
      4. CONTROLS AND PROCEDURES**




The
      Company’s Principal executive officers and principal financial officer, based on
      their evaluation of the Company’s disclosure controls and procedures (as defined
      in Rules 13a-15(e) of the Securities Exchange Act of 1934) as of June 30, 2006
      have concluded that the Company’s disclosure controls and procedures are
      adequate and effective to ensure that material information relating to the
      Company’s and its consolidated subsidiaries is recorded, processed , summarized
      and reported within the time periods specified by the SEC’s rules and forms,
      particularly during the period in which this quarterly report has been
      prepared.




The
      Company’s principal executive officers and principal financial officer have
      concluded that there were no significant changes in the Company’s internal
      controls or in other factors that could significantly affect these controls
      as
      of the end of the period covered by this report based on such evaluation, and
      that there was no significant deficiencies or material weaknesses in the
      Company’s internal controls.




33
 *Table
            of Contents*




**PART
      II - OTHER INFORMATION**




**ITEM 1.
      LEGAL PROCEEDINGS**




Other
      than as set forth below, there are no outstanding legal proceedings material
      to
      the Company to which the Company or any of its assets are subject, nor are
      there
      any such proceedings known to be contemplated. Management believes that the
      resolution of all business matters which would have a material impact on the
      Company’s financial position or operating results have been
      recorded.




***Esko
      Pivnich***




*JSC
      Ukrneft, Okhtirkaneftegas*  *-* ****** In
      2003
      the Company filed a claim against JSC Ukrneft, Okhtirkaneftegas, with respect
      to
      the advance paid by the Company in 2002 in amount of $198,880 to complete
      certain capital construction works under PSA # 01-SD dated April 26, 2000 (Notes
      4 and 6). In April 2004 after a number of hearings by courts of different
      circuits, the Supreme Court of Ukraine ordered Okhtirkaneftegas to pay the
      outstanding balance to the Company without further delays. Despite this final
      ruling of the Supreme Court, as of August 14, 2006 the balance has not been
      paid. The Company plans to void PSA # 01-SD and to offset the amount due to
      it
      against amounts payable to JSC Ukrneft and its subsidiary Okhtirkaneftegas
      in
      2006.




*DP
      NAK Nedra Ukraini Poltavnaftogasgeologiya -* In
      2006
      The Company sued Poltavneftegasgeologiya for expected profits in the amount
      of
      $474,053 resulting from a refusal of Poltavneftegasgeologiya to execute its
      obligations under the terms of PSA # 01-SD. The Court of Poltavskiy region
      has
      ruled in the Company’s favor and obliged Poltavneftegasgeologiya to pay the
      Company amount of $356,994. Poltavneftegasgeoligia has filed a appeal with
      inter-regional court of Kiev city. As of August 14, 2006, no new hearings took
      place and according to management’s estimates there is a high possibility of
      wining the case. Pending final resolution of this matter, the Company has not
      recorded this as income.




*Taxes
      -* During
      2004 the Company was audited by the State Tax Inspection of Podolsk region,
      Kiev, and was assessed additional VAT and Profit tax fines and penalties thereon
      in the aggregate amount of $598,324 related to FY2003 and FY2002. The amounts
      were accrued in the consolidated financial statements in full. Esko Pivnich
      appealed against the decision to the Civil Court of Kiev and the matter was
      ruled in favor of Esko Pivnich. However, the tax authorities have filed a
      counter-appeal with the Supreme Civil Court of Kiev. The Supreme Civil Court
      resolved that the matter be referred back to Civil Court of Kiev and appointed
      a
      committee to conduct an accounting investigation which was completed in February
      2006. Since the investigation no additional hearings have been held. Since
      the
      appeal has been won and became effective, it is highly likely that the Company
      will prevail in these proceedings. Nevertheless, the respective tax liability
      has not been removed or reversed pending the final resolution of the
      matter.




***Pari***




*Poltavaneftegasgeologiya* - Under
      the
      terms of PSA # 10-5/2000 dated July 20, 2000 Poltavaneftegasgeologiya (Note
      4)
      acted as the holder of the main geological and exploration licenses to develop
      the Sakhalin and Skvortsivsk field and Pari was a major investor, having
      contributed into the establishment of PSA approximately $31,152. No operating
      activities have ever been under this agreement and Pari moved to void all its
      obligations under PSA and obtain a refund of its’ initial investment in amount
      of $31,152. As of the date of this report the matter has not been resolved.
      Respectively, the Pari’s investment amount was totally written off in
      2003.




*Cabinet
      of Ministers of Ukraine* - During
      the first half of 2006 the Cabinet of Ministers of Ukraine mandated a review
      of
      the procedures of issuance of approximately 500 production and exploration
      licenses granted by the Ministry of National Resources of Ukraine in 2004.
      The
      Company’s properties Rogan, Rakitnyansk and Karaikozovsk held by Esko Pivnich,
      and Peremishlyansk, Chukvinsk, Niklovitsk and Pilipovsk held by Pari were also
      subject to review as part of this process. The purpose of the review was to
      determine the effectiveness of the procedures involved in the issuance of the
      licenses. The preliminary findings of the review were referred to the Supreme
      Court of Ukraine which issued a preliminary conclusion that all of the Company’s
      licenses were properly issued and are to remain valid. At present, the review
      is
      being officially finalized and we expect to receive a final approval upon the
      conclusion of this review in 2006.




34
 *Table
            of Contents*





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




None




**Item
      3. Defaults upon Senior Securities**





None





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





None





**Item
      5. Other Information**





None




**Item
      6. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON
      FORM 8-K**




***Reports
      on Form 8-K***




A
      Current
      Report on Form 8-K filed by the Company on June 28, 2005, and Schedule 14F-1
      filed by the Company on January 6, 2005.




The
      following Consolidated Financial Statements pertaining to Sunrise Energy
      Resources are filed as part of this quarterly report:




Consolidated
      Balance Sheets as of June 30, 2006  and
      December 31, 2005




Consolidated
      Statements of Changes in Stockholders’ Equity (Capital Deficit) for the six
      months ended June 30, 2006




Consolidated
      Statements of Operations and Comprehensive Loss for the six months ended June
      30, 2006 and 2005




Consolidated
      Statements of Cash Flows for the six months ended June 30, 2006 and
      2005




Notes
      to
      the Consolidated Financial Statements for the periods ended June 30,
      2006  and
      December 31, 2005




**Exhibit
                  Number******
              
              **Description******
              
              **Incorporation
                  by Reference******10.1
              
              10%
                  Subordinated Note Due March 30, 2009
              
              Filed
                Herewith10.2
              
              10%
                  Subordinated Note Due June 6, 2009
              
              Filed
                Herewith31.1
              
              Rule
                  13a-14(a) Certification of Chief Executive Officer
              
              Filed
                  Herewith31.2
              
              Rule
                  13a-14(a) Certification of Chief Financial Officer
              
              Filed
                  Herewith32.1
              
              Section
                  1350 Certification of Chief Executive Officer
              
              Filed
                  Herewith32.2
              
              Section
                  1350 Certification of Chief Financial Officer
              
              Filed
                  Herewith
 35
 *Table
              of Contents*


Also
      filed with this form are:




Convertible
      Debenture Subscription Agreement dated March 30, 2006




Convertible
      Debenture Subscription Agreement dated June 6, 2006




**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned thereunto duly
      authorized.




Sunrise
                Energy Resources, Inc./s
                Konstantin
                TsirulnikovDate:
                August 14 , 2006
            Konstantin
                TsirulnikovPresident
                and Chief Executive Officer






36