**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 three month ended**
 **March
        31, 2006**
  o
              **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 incorporation or organization)
              
              (I.R.S.
                  Employer Identification Number)
 
 551
                  Fifth Avenue, Suite 601New
                  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.
 SEC
                    2334 (3-06)
                PERSONS
                    WHO ARE TO RESPOND TO THE COLLECTION OF INFORMATION CONTAINED
                    IN THIS FORM
                    ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A CURRENTLY
                    VALID OMB
                    CONTROL NUMBER.
  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 o
  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 o 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 May 12, 2006 within past 60 days: $15,474,396.
  Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Act).  Yes oNox
  As
        of May
        12, 2006, the Registrant had 17,161,014 shares of common stock $.001 par
        value
        issued and outstanding, or committed for issuance, of which, issuance of
        10,640,914 and 161,014 shares is subject to the closing of the transactions
        to
        acquire Registrant’s operating subsidiaries.
  Transitional
        Small Business Disclosure Format (Check one): Yes o ; No x
  2
  **SUNRISE
        ENERGY RESOURCES, INC.FORM**
 **10-QSB**
 **TABLE
        OF CONTENTS**
 
 **PART
                    I. FINANCIAL INFORMATION**
                PageFinancial
                    Statements (unaudited)Item
                    1.Consolidated
                    Balance Sheets - March 31, 2006 and December
                    31, 2005Consolidated
                    Statement of Operations and Comprehensive Loss -
                    for the three months ended March 31, 2006 and 2005Consolidated
                    Statements of Changes in Stockholder’s Equity
                    (Capital Deficit) - March 31, 2006 and December 31,
                    2005Consolidated
                    Statements of Cash Flows - for the three months
                    ended March 31, 2006 and 2005Notes
                    to Unaudited Consolidated Financial
                    StatementsItem
                    2.
                Management’s
                    Discussion and Analysis of Financial Condition
                    and Results of OperationsItem
                    3.
                Quantitative
                    and Qualitative Disclosures About Market
                    RiskItem
                    4.
                Controls
                    and Procedures**PART
                    II.**
                **OTHER
                    INFORMATION**Item
                    1.
                Legal
                    ProceedingsItem
                    2.
                Unregistered
                    Sales of Equity Securities and Use of
                    ProceedsItem
                    3.
                Defaults
                    upon Senior SecuritiesItem
                    4.
                Submission
                    of Matters to a Vote of Security
                    HoldersItem
                    5.
                Other
                    InformationItem
                    6.
                Exhibits
                    and Reports on Form 8-K**SIGNATURES**
  3
 *Table
            of Contents*
  **PART
        I.**
  **SUNRISE
        ENERGY RESOURCES INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(Expressed
        in US Dollars)UNAUDITED**
 
 
 **March
                  31, 2006**
              
              **December
                  31, 2005**ASSETSCURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              296,491
              
              $
              3,419Accounts
                  receivable - related party
              
              
              690,104
              
              
              720,797Other
                  accounts receivable and prepayments
              
              
              800,992
              
              
              760,797Other
                  accounts receivable - related party
              
              
              -
              
              
              122,574Inventories
              
              
              121,169
              
              
              159,266Taxes
                  receivable
              
              
              239,094
              
              
              185,736Total
                  current assets
              
              
              2,147,850
              
              
              1,952,589NONCURRENT
                  ASSETSProperty,
                  plant and equipment, net
              
              
              1,067,167
              
              
              951,025Lease/concession
                  acquisition cost
              
              
              201,963
              
              
              -Long-term
                  financial investments
              
              
              1,980
              
              
              1,980Deferred
                  tax asset
              
              
              69,017
              
              
              73,319**TOTAL
                  ASSETS**
              
              **$**
              **3,487,977**
              
              **$**
              **2,978,913**LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              250,747
              
              $
              218,104Accounts
                  payable - related party
              
              
              606,415
              
              
              592,554Taxes
                  payable
              
              
              927,140
              
              
              905,731Short
                  term bank loans
              
              
              -
              
              
              514,851Short
                  term notes payable
              
              
              19,598
              
              
              19,598Other
                  accounts payable and accruals
              
              
              340,974
              
              
              414,577Other
                  accounts payable - related party
              
              
              272,091
              
              
              244,191Prepayments
                  for oil and gas
              
              
              353,316
              
              
              500,867Interest
                  payable
              
              
              14,342
              
              
              17,711Profit
                  interest payable
              
              
              17,997
              
              
              17,997Total
                  current liabilities
              
              
              2,802,620
              
              
              3,446,181Long
                  term notes payable
              
              
              465,347
              
              
              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 March 31, 2006 and December 31, 2005
              
              
              17,161
              
              
              17,000Additional
                  Paid in Capital (Deficit)
              
              
              29,938
              
              
              (66,509
              )Retained
                  earnings (Accumulated deficit)
              
              
              (1,186,797
              )
              
              (1,130,814
              )Accumulated
                  other comprehensive (loss) - foreign currency
              
              
              (32,192
              )
              
              (32,192
              )Total
                  stockholders' equity (deficit)
              
              
              (1,171,890
              )
              
              (1,212,515
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              **$**
              **3,487,977**
              
              **$**
              **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 three months ended****March
                  31,****2006**
              
              **2005**REVENUES
              
              
              
              -Produced
                  oil & gas
              
              $
              285,452
              
              $
              514,591Purchased
                  oil & gas
              
              
              120,174
              
              
              -Total
              
              
              405,626
              
              
              514,591COST
                  OF SALES
              
              
              (116,637
              )
              
              -288,989
              
              
              514,591Operating
                  expenses
              
              
              (130,603
              )
              
              (282,676
              )Depreciation
                  expense
              
              
              (69,970
              )
              
              (52,349
              )Bad
                  debt recovery
              
              
              26,293
              
              
              -Other
                  operating income (expenses)
              
              
              14,263
              
              
              (973
              )Sales,
                  general and administrative expenses
              
              
              (118,214
              )
              
              (223,173
              )OPERATING
                  INCOME (LOSS)
              
              
              10,758
              
              
              (44,580
              )OTHER
                  INCOME (EXPENSE)Interest
                  income (expense), net
              
              
              (41,899
              )
              
              (31,300
              )Foreign
                  exchange (loss)
              
              
              -
              
              
              (2,828
              )Other
                  expense
              
              
              -
              
              
              (2,266
              )LOSS
                  BEFORE TAX
              
              
              (31,141
              )
              
              (80,974
              )INCOME
                  TAX (Note 12)
              
              
              (24,842
              )
              
              (12,452
              )NET
                  LOSS
              
              $
              (55,983
              )
              $
              (93,426
              )BASIC
                  (LOSS) EARNINGS  PER SHARE
              
              $
              (0,003
              )
              $
              (0,005
              )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**
              
              **Accumulated**
              
              **Retained**
              
              **Additional**
              
              **Total****Stock**
              
              **Other**
              
              **Earnings**
              
              **Paid-in**
              
              **Stockholder's****Comprehensive**
              
              
              
              **Capital**
              
              **Equity****Shares**
              
              **Amount**
              
              **(Loss)**
              
              **(Accumulated
                  Deficit)**
              
              
              
              **(Capital
                  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**
              
              
              **-**
              
              
              **(544,019**
              **)**
              
              **(66,509**
              **)**
              
              **(
                  593,528**
              **)**Net
                  (loss for the year)
              
              
              **-**
              
              
              **-**
              
              
              -
              
              
              (586,795
              )
              
              -
              
              
              (586,795
              )Comprehensive
                  loss for the year
              
              
              **-**
              
              
              **-**
              
              $
              (32,192
              )
              
              -
              
              
              -
              
              
              (32,192
              )**BALANCE,
                  DECEMBER 31, 2005**
              
              
              **17,000,000**
              
              
              **17,000**
              
              
              **(32,192**
              **)**
              
              **(1,130,814**
              **)**
              
              **(66,509**
              **)**
              
              **(
                  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 three months
              
              
              -
              
              
              -
              
              
              -
              
              
              (55,983
              )
              
              -
              
              
              (55,983
              )**BALANCE,
                  MARCH 31, 2006**
              
              
              **17,161,014**
              
              **$**
              **17,161**
              
              **$**
              **(32,192**
              **)**
              **$**
              **(1,186,797**
              **)**
              **$**
              **29,938**
              
              **$**
              **(1,171,890**
              **)**
 
 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 three months ended March 31,****2006**
              
              **2005****CASH
                  PROVIDED BY (USED IN) OPERATING ACTIVITIES:**Net
                  loss from continuing operations for the period
              
              $
              (55,983
              )
              $
              (93,426
              )Adjustments
                  to reconcile net loss from continuing operations to net cash in
                  operating
                  activities:Depreciation
                  expense
              
              
              69,970
              
              
              52,349Supplier’s
                  fines and penalties accruals
              
              
              -
              
              
              759Loss
                  on disposal of fixed assent
              
              
              -
              
              
              4,822Provision
                  for doubtful accounts
              
              
              (26,293
              )
              
              -Deferred
                  tax loss (gain)
              
              
              4,302
              
              
              (7,594
              )Net
                  accrued interest
              
              
              2,520
              
              
              31,231Changes
                  in assets and liabilities:Decrease
                  in accounts receivable
              
              
              57,183
              
              
              18,591Decrease
                  (increase) in other accounts receivable and prepayments
              
              
              82,182
              
              
              (17,461
              )Decrease
                  (increase) in inventories
              
              
              38,097
              
              
              (21,090
              )(Increase)
                  in taxes receivable
              
              
              (53,358
              )
              
              (29,298
              )Increase
                  in accounts payable
              
              
              46,504
              
              
              210,734Increase
                  in taxes payable
              
              
              21,409
              
              
              81,253Decrease
                  in other accounts payable and accruals
              
              
              (48,223
              )
              
              (46,913
              )(Decrease)
                  increase in prepayments for oil and gas
              
              
              (147,551
              )
              
              374(Decrease)
                  in interest payable
              
              
              (3,369
              )
              
              -(12,610
              )
              
              184,331**CASH
                  PROVIDED BY FINANCING ACTIVITIES:**Long
                  term loans received
              
              
              1,112,000
              
              
              -Short
                  term loans repaid
              
              
              (514,851
              )
              
              -Cash
                  inflow on the acquisition of Pari, Ltd.
              
              
              4,549
              
              
              -601,698
              
              
              -**CASH
                  USED IN INVESTING ACTIVITY:**Purchase
                  of property, plant and equipment
              
              
              (186,112
              )
              
              (142,508
              )Reacquisition
                  (deficit) of Pari, Ltd.
              
              
              (109,904
              )
              
              -Effect
                  of exchange rate changes
              
              
              -
              
              
              4,504**INCREASE
                  IN CASH**
              
              
              293,072
              
              
              46,327**CASH,
                  at the beginning of the period**
              
              
              3,419
              
              
              15,082**CASH,
                  at the end of the period**
              
              $
              296,491
              
              $
              61,409**INCOME
                  TAX PAID**
              
              $
              (31,109
              )
              $
              (20,186
              )**INTEREST
                  PAID IN CASH**
              
              $
              (23,387
              )
              $
              (31,564
              )
 
 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
        its wholly owned subsidiaries, TOV Energy-Servicing Company Esko Pivnich
        (“Esko
        Pivnich”), a Ukrainian Closed Joint Stock Company (CJSC) and Pari, Ltd., a
        Ukrainian Limited Liability company, established on January 20 and July 5,
        2000,
        respectively, under the laws of Ukraine. 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 March 31, 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 as a trading company.
  Sunrise
        Energy Resources Inc. is currently registered at the following address: 551
        Fifth Avenue, Suite 601, 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 March 31, 2006 and December 31, 2005
        amounted to 22.
 
 **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”).
  8
 *Table
            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 $55,983
        during the three months ended March 31, 2006, and, as of March 31, 2006 the
        Company's current liabilities exceeded its current assets by $654,770.
        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
        major
        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, primarily by the Company’s ability to raise additional funds in equity
        markets, 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 existence.
  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 existence.
  · The
        Company plans to continue to raise additional capital in the equity markets
        as
        significant source of funding the development of the 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 could
        generate adequate cash flow. Additional funding requirements may also be
        necessary before the Company is able to rely solely on the production from
        the
        licensed properties for the cash flow of the Company.
  ***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 their most revenues and operating expenses are denominated
        in
        Ukrainian Hrivnas. The Ukrainian Hrivna is not a fully convertible currency
        outside of the territory of the 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 March 31, 2006 and December 31, 2005 were
        approximately 1 U.S. dollar to $5.0500 and $5.0500 Ukrainian Hrivnas,
        respectively. For the periods ended March 31, 2006 and 2005, the average
        exchange rate for 1U.S. dollar was $5.0500 and $5.2946 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.
 
 All
        significant intercompany transactions, balances and unrealized gains (losses)
        on
        transactions are eliminated on consolidation.
  9
 *Table
            of Contents*
 
 ***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.
 
 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.
  10
 *Table
            of Contents*
 
 ***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 March
        31, 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.
  ***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 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.
 
 ***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.
  11
 *Table
            of Contents*
  ***Comprehensive
        Income -*** Statement
        of SFAS 130, “Reporting Comprehensive Income,” establishes standards for
        reporting and displaying of comprehensive income, its components and accumulated
        balances. Comprehensive income 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 be reported in a financial statement that is displayed with the same
        prominence as other financial statements. Foreign exchange measurement gains
        and
        losses of the Company are reflected in Comprehensive gains and
        losses.
  Prior
        to
        September 30, 2005, foreign exchange measurement losses were immaterial.
        They
        have been included in net income and loss as of March 31, 2005.
  ***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 adopts 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 Karaikozovsk’s field located in Krasnokutsk
        area of Kharkov region. Under the terms of PSA Poltavaneftegasgeologiya acted
        as
        the holder of the main geological and exploration licenses to develop
        Karaikozovsk’s field and the Company was a major investor, having contributed
        into the establishment of PSA approximately $596,188.
 
 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.
 
 In
        May
        2003, due to the expiration of main geological and exploration licenses held
        by
        Poltavaneftegasgeologiya, all exploration and development activities on
        Karaikozovsk’s 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 Karaikozovsk’s field
        and in July 2004 the Company obtained the main geological and exploration
        license for the 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.
  12
 *Table
            of Contents*
 
 ***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 Sakhalinsk and Skvortsivsk fields located
        in Krasnokutsk area of Kharkov region. Under the terms of PSA
        Poltavaneftegasgeologiya acted as the holder of the main geological and
        exploration licenses to develop Sakhalinsk and Skvortsivsk field and the
        Company
        was a major investor, having contributed into the establishment of 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 Sakhalin’s field. Until 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, and 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 Pilipivsk’s field
        located in Kosivskiy and Kolomiiskiy districts of 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’s
        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 March 31, 2006 and December 31, 2005 consisted of the
        following:
 
 **3/31/2006**
              
              **12/31/2005**CJSC
                  Infox, related party
              
              $
              690,104
              
              $
              720,797**Total**
              
              **$**
              **690,104**
              
              **$**
              **720,797**
  Accounts
        receivable as of March 31, 2006 and December 31, 2005 consisted of $690,104
        and
        $720,797, respectively, receivable from CJSC Infox, a related party that
        resulted from several crude oil shipments which took place in 2004 and 2003.
        During the first quarter 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 March 31, 2006 and December
        31 **,** 2005
        consisted of the following:
 
 **3/31/2006**
              
              **12/31/2005****Other
                  accounts receivable and prepayments, net**
              
              **$**
              **800,992**
              
              **$**
              **760,797**
  13
 *Table
            of Contents*
  Other
        accounts receivable and prepayments as at March 31, 2006 and December 31,
        2005
        are stated net of provision accrued for doubtful accounts and were comprised
        mostly of advances paid to Vixen JLM and Okhtirkaneftegas in amounts of $511,069
        and $198,880, 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.
  **7.**
              **INVENTORIES**
  Inventories
        as of as of March 31, 2006 and December 31, 2005 consisted of the
        following:
 
 **3/31/2006**
              
              **12/31/2005**Crude
                  oil - at cost
              
              $
              19,989
              
              $
              130,159Other
                  consumables and spare parts
              
              
              101,180
              
              
              29,107**Total**
              
              **$**
              **121,169**
              
              **$**
              **159,266**
 
 Inventories
        as of March 31, 2006 and December 31, 2005 are represented by the balances
        of
        crude oil produced internally in amounts of 902 and 533 bbls, respectively,
        and
        crude oil purchased in amounts of None and 2,190 bbls, respectively. The
        amounts
        of $101,180 and $29,107, respectively, represent certain spare parts destined
        for technical maintenance of oil & gas facilities.
  **8.**
              **TAXES
                  RECEIVABLE**
  Taxes
        receivable as of March 31, 2006 and December 31, 2005 consisted of the
        following:
 
 **3/31/2006**
              
              **12/31/2005**VAT
                  receivable
              
              $
              239,053
              
              $
              152,095Other
                  tax prepaid
              
              
              41
              
              
              33,641**Total**
              
              **$**
              **239,094**
              
              **$**
              **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 March 31, 2006 and December 31, 2005 consisted
        of the
        following:
  **3/31/2006**
              
              **12/31/2005**Oil
                  & gas facilities improvements and work over costs
              
              $
              1,739,336
              
              $
              1,761,265Office
                  equipment
              
              
              36,773
              
              
              14,072Construction
                  in progress
              
              
              349,048
              
              
              161,416Total
              
              
              2,125,157
              
              
              1,936,753Accumulated
                  Depreciation
              
              
              (1,057,990
              )
              
              (985,728
              )**Net
                  Book Value**
              
              **$**
              **1,067,167**
              
              **$**
              **951,025**
  **10.**
              **LEASE
                  /CONCESSION ACQUISITION
                  COST**
  As
        of
        March 31, 2006, the Lease/Concession acquisition cost of $201,963 represents
        the
        implied value of the exploration licenses for Peremishlyansk, Niklovitsk,
        Chukvinsk, Sheremetivsk and Pilipivsk properties held by Pari, Ltd (Note
        22).
  **11.**
              **LONG-TERM
                  FINANCIAL INVESTMENT**
  Long-term
        investment as of March 31, 2006 and December 31, 2005 represented 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 March 31, 2006 and
        December 31, 2005 is as follows:
 
 **3/31/2006**
              
              **12/31/2005**Current
                  tax
              
              $
              31,109
              
              $
              117,224Deferred
                  tax gain
              
              
              (6,267
              )
              
              (54,760
              )**Total
                  income tax expense (benefit)**
              
              **$**
              **24,842**
              
              **$**
              **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 March 31, 2006 and December 31, 2005 in the
        Company’s deferred tax position is as follows:
 
 **3/31/2006**
              
              **12/31/2005**Net
                  asset at the beginning of the period
              
              $
              73,319
              
              $
              17,218Charged
                  to income for the period
              
              
              (4,302
              )
              
              56,101**Net
                  asset at the end of the period**
              
              **$**
              **69,017**
              
              **$**
              **73,319**
  15
 *Table
            of Contents*
 
 The
        tax
        effect on the major temporary differences that give rise to the deferred
        tax
        assets as at March
        31,
        2006 and December 31, 2005 is presented below:
 
 **3/31/2006**
              
              **12/31/2005****Temporary
                  differences that give rise to deferred tax assets**Provision
                  for doubtful receivables
              
              $
              79,799
              
              $
              106,092Valuation
                  of VAT receivable
              
              
              17,304
              
              
              13,442Low
                  value items written off
              
              
              484
              
              
              9,175Difference
                  in depreciable value of property, plant and equipment due to expensing
                  in
                  prior period allowed by Ukrainian low
              
              
              178,482
              
              
              164,565**Total**
              
              **$**
              **276,069**
              
              **$**
              **293,274**
 
 The
        deferred tax assets as at March 31, 2006 and December 31, 2005, calculated
        at
        effective Ukrainian income tax rate of 25%, is consisted of the
        following:
 
 **3/31/2006**
              
              **12/31/2005****Deferred
                  tax assets**Provision
                  for doubtful receivables
              
              $
              19,950
              
              $
              26,523Valuation
                  of VAT receivable
              
              
              4,326
              
              
              3,361Low
                  value items written off
              
              
              121
              
              
              2,294Difference
                  in depreciable value of property, plant and equipment due to expensing
                  in
                  prior period under Ukrainian low
              
              
              44,620
              
              
              41,141**Total**
              
              **$**
              **69,017**
              
              **$**
              **73,319**
 
 The
        taxation charge for the periods 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:
 
 **3/31/2006**
              
              **12/31/2005**(Loss)
                  before income tax and minority interest
              
              $
              (6,324
              )
              $
              (315,834
              )Theoretical
                  income tax benefit at statutory rate of 25%
              
              
              (1,581
              )
              
              (78,959
              )Adjustments
                  due to:Tax
                  effect of (expenses) that are not deductible in determining taxable
                  profit
              
              
              26,423
              
              
              141,423**Income
                  tax (benefit)**
              
              **$**
              **24,842**
              
              **$**
              **62,464**
  16
 *Table
            of Contents*
  As
        of
        March 31, 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.
  **13.**
              **ACCOUNTS
                  PAYABLE**
  Accounts
        payable as of March 31, 2006 and December 31, 2005 consisted of the
        following:
 
 **3/31/2006**
              
              **12/31/2005**Accounts
                  payable
              
              $
              250,747
              
              $
              218,104CJSC
                  Infox, related party
              
              
              606,415
              
              
              592,554**Total**
              
              **$**
              **857,162**
              
              **$**
              **810,658**
  Third
        parties accounts payable balances as of March 31, 2006 and December 31, 2005
        were comprised mostly of payable to Okhtirkaneftegas and Kachanozovsky GPZ
        for
        services in amounts of $185,080 (2005: $180,707) and $26,510 (2005: $25,240),
        respectively.
  The
        amounts of $606,415 and $592,554, payable to the related party, CJSC Infox,
        as
        of March 31, 2006 and December 31, 2005, respectively, are mostly related
        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 March 31, 2005 and December 31, 2005 consisted of the
        following:
 
 **3/31/2006**
              
              **12/31/2005**Fines
                  and penalties
              
              $
              598,324
              
              $
              598,324VAT
              
              
              265,564
              
              
              233,149Profit
                  tax
              
              
              31,162
              
              
              29,526Exploration
                  tax
              
              
              17,450
              
              
              33,684Resource
                  Tax
              
              
              10,078
              
              
              6,699Social
                  insurance
              
              
              3,121
              
              
              4,237Other
                  taxes
              
              
              1,441
              
              
              112**Total**
              
              **$**
              **927,140**
              
              **$**
              **905,731**
  Taxes
        payable as of March 31, 2006 and December 31, 2005 represent fines and penalties
        accrued in connection with litigation described in Note 24. The Company has
        prevailed in litigation about this issue and in subsequent reviews relating
        to
        the dispute. However, the government continues to appeal and has not reversed
        the liability. 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. Based on the current Ukrainian
        law
        VAT payable may not be offset against VAT receivable.
  17
 *Table
            of Contents*
  **15.**
              **SHORT-TERM
                  BANK LOANS**
  Short-term
        bank loans as of March 31, 2005 and December 31, 2005 consisted of the
        following:
  **%,
                  currency**
              
              **3/30/2006**
              
              **12/31/2005**AB
                  Clearing House
              
              
              26%,
                  Ukrainian Hrivnas
              
              
              -
              
              $
              514,851**Total
                  dated Sept. 17, 2004 due March, 2006**
              
              
              
              
              
              **-**
              
              **$**
              **514,851**
  The
        loan
        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 March 31, 2005 was incurred in respect of the
        credit line facility obtained from AB Clearing House in the amount of $23,387,
        which represented the 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 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 at March 31, 2006 and December 31, 2005,
        issued in November 2002 at no interest were payable not earlier than
        November 5, 2005. Notes represent amounts of $14,258 and $5,340
        payable to Astark and Sipay, respectively. As of March 31, 2006, Astark and
        Sipay, 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, but it is not considered to have a material effect on the
        financial statements.
  **17.**
              **OTHER
                  ACCOUNTS PAYABLE AND
                  ACCRUALS**
  Other
        accounts payable and accruals as of March 31, 2006 and December 31, 2005
        consisted of the following:
 
 **3/31/2006**
              
              **12/31/2005**Other
                  accounts payable and accruals
              
              $
              340,974
              
              $
              414,577Advances
                  from former shareholders
              
              
              272,091
              
              
              244,191**Total**
              
              **$**
              **613,065**
              
              **$**
              **658,768**
 
 Other
        accounts payable and accruals as of March 31, 2006 and December 31, 2005
        mostly
        consisted 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.
  The
        amount of $272,091 (2005: $244,191) represents advances from shareholders
        with
        no specific terms paid to the Company mostly during 2005 (See also Note
        19).
  18
 *Table
            of Contents*
  **18.**
              **PREPAIMENTS
                  FOR OIL AND GAS**
  Prepayments
        for oil and gas as of March 31, 2006 and December 31, 2005 consisted of the
        following:
  **3/31/2006**
              
              **12/31/2005****Prepayments
                  for oil and gas**
              
              **$**
              **353,316**
              
              **$**
              **500,867**
  As
        at
        March 31, 2006 and December 31, 2005 prepayments for oil and gas were mostly
        comprised of $192,680 (2005: $248,303), $49,805 (2005: $49,805), $45,346
        (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 March 31, 2005 and December, 31 2005, consisted of the
        following:
  **3/31/2006**
              
              **12/31/2005**Long
                  term loan - Zaccam Trading, related Party
              
              $
              7,290
              
              $
              2,167Interest
                  accrued on advances received from former shareholders
              
              
              7,052
              
              
              4,175Short
                  term loan - AB Clearing House
              
              
              -
              
              
              11,369**Total**
              
              **$**
              **14,342**
              
              **$**
              **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 March 31, 2006 and December
        31, 2005 (Note 17). As of December 31, 2005, interest payable to AB Clearing
        House relates to credit line facility at 26% per annum (See also Notes 15
        and
        27)
  **20.**
              **PROFIT
                  INTEREST PAYABLE**
  As
        at
        March 31, 2006 and December 31, 2005, profit interest of $17,997 is payable
        to
        Poltavaneftegasgeologiya and represent amount that was accrued and partially
        paid by the Company in respect to profits earned for 2002 year in accordance
        with PSA # 01-SD dated April 26, 2000 (Note 24).
  19
 *Table
            of Contents*
  **21.**
              **LONG
                  TERM PAYABLE**
  Long
        term
        payable as of March 31, 2006 and December 31, 2005 consisted of the
        following:
 
 **Issue
                  date/ Effective date**
              
              **Due
                  not earlier than**
              
              **3/31/2006**
              
              **12/31/2005**Zaccam
                  Trading, Ltd.
              
              
              March
                  5, 2005
              
              
              March
                  5, 2015
              
              
              1,391,900
              
              
              279,900Fort
                  Trade
              
              
              Nov-2004
              
              
              Nov-
                  2009
              
              $
              465,347
              
              $
              465,347**Total**
              
              
              
              
              
              
              
              $
              1,857,247
              
              $
              745,247
  As
        of
        March 31, 2006 and December 31, 2005, 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., related party as of March 31, 2005 and December
        31, 2005 represents uncollateralized credit line facility with limit of
        indebtedness 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
        of
        $96,608 payable in 161,014 newly issued shares of the Company.
  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
              )**Reacquisition
                  deficit**
              
              **$**
              **(109,904**
              **)****Cash
                  inflow on acquisition**
              
              **$**
              **4,549**
  No
        dividends were declared or paid by the Company during the periods ended March
        31, 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 March 31, 2006 and December 31, 2006 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 March 31, 2006 and December 31, 2005, we have received
        a
        several tranches of long term loan from Zaccam Trading, Ltd. which resulted
        in
        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
        March 31, 2005 and December 31, 2005, amounts of $690,104 and $ 720,797 receivable from CJSC Infox, related party, was comprised from several crude
        oil
        shipments which took place in 2004 and 2003 while amounts of $606,415 and
        $ 592,554,
        respectively, payable
        to the related party, CJSC Infox, relates mostly to 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 the Company received geological and exploration license agreements to
        develop 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 the Company received geological and exploration license agreements to
        develop 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
        the
        laws of Ukraine the Company is obligated to meet certain environmental
        remediation obligations related to the oil and gas production activities.
        This
        amount cannot be estimated at this time but is considered to not be
        material.
  ***Lease
        commitments -*** The
        Company leases office space on a year by year basis and the rent is disclosed
        in
        other notes. The Company’s future lease commitments as of March 31, 2006 are as
        follows:
 
 **2006**Office
                  rent - Esko Pivnich
              
              $
              45,000Office
                  rent - Pari
              
              
              15,600**$**
              **60,600**
  ***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 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 May 12, 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*
  *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 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, there is a 100% of winning the case. 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
        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.
 
 ***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 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. Market
        prices
        for oil and gas under Ukrainian law are considerably below world market prices.
  **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 follows.
  ***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 of risk accepted in relation to one 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:
  **03/31/2006**
              
              **3/31/2005**Ukrtatnafta
                  (oil produced)
              
              
              -
              
              $
              305,878Agrotemp
                  (oil produced)
              
              $
              187,933
              
              
              185,233Torpeda
                  (oil resold)
              
              
              120,174
              
              
              -Torpeda
                  (oil produced)
              
              
              65,076
              
              
              -Soyuz
                  NPK (oil produced)
              
              
              21,903
              
              
              -Okhtirkaneftegas
                  (gas produced)
              
              
              10,540
              
              
              23,480**Total**
              
              **$**
              **405,626**
              
              **$**
              **514,591**
  23
 *Table
            of Contents*
  ***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 by currencies (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 the financial instruments.
  Currently,
        the Company management 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 environment.
  **27.**
              **SUBSEQUENT
                  EVENTS**
  Effective
        March 30, 2006, Sunrise Energy Resources, Inc. executed a Convertible Note
        Subscription Agreement to complete a $1.0 million private placement financing
        in
        the form of 10% convertible notes. In accordance with the subscription
        agreement, the Company shall receive the funding in several tranches until
        June
        30, 2006. The Company has received the first tranche in the amount of $387,000
        on or about April 7, 2006. Each tranche will mature in 3 years of the receipt
        of
        funds. The interest shall accrue at the rate of 10% per annum on the unconverted
        amount and shall be payable annually on each 12 month anniversary of each
        tranche until conversion or maturity. The Notes can be converted into the
        shares
        of the Company's common stock at the 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 shall be accrued pro-rata and paid
        in
        the form of additional shares of the Company's common stock. The number of
        such
        additional shares shall be calculated at the same conversion price. Because
        the
        first funding did not occur until April 7, 2006, the company considers the
        agreement not to be final or recordable until that date and therefore neither
        the asset or the liability are reflected in these financial statements.
  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 March 31, 2006 and 2005.
  Management’s
        key objectives for the first quarter of 2006 were:
  ·
              Complete
                  the workovers on Well #2 and Well#3 of the Karaikozovsk
                  field;
  ·
              Drill
                  half of the projected depth of Well#21 of Karaikozovsk field to
                  the depth
                  of around 2500m which represents roughly half of the projected
                  depth;
  ·
              Complete
                  the acquisition of Pari Ltd.;
  ·
              Commence
                  conduction of geological and research works on Rogan and Rakitnyansk
                  properties;
  We
        believe that these key objectives were achieved in the first quarter of 2006.
        Our 2006 strategy for Karaikozovsk field includes completion and launch of
        Well
        #21. We will also focus on the exploration drilling on the newly acquired
        Peremishlyansk field.
  In
        addition, we will continue the exploration activities on 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 three month of 2006, our production was primarily limited to Well
        #2 of
        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
        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 facilities 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
        Peremishlyansk block which has possible gas reserves of approximately 420
        BCF.
  The
        well
        construction project has been prepared and the drilling rig is currently
        being
        installed at the planned well site. The drilling contract has been signed
        with
        GP "ZakhidUkrGeologiya", a Ukrainian drilling contractor. The well is designed
        to be approximately 3700 m (12,139 ft) deep.
  According
        to the Ukrainian Government Reserve Report, Pari, Ltd. has proven reserves
        of
        approximately 106.2 BCF of gas in Niklovitsk field located in Lviv region
        of
        Western Ukraine and 4.1 BCF in Sheremetivsk field located in 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 March 31, 2006 and December 31, 2005 amounted to 902 and
        533
        Bbls, respectively.
  During
        the three months ended March 31, 2006 and 2005, Esko Pivnich produced 5,987
        (2005: 14,526) barrels (“Bbls”) of crude oil and 8,645 (2005: 27,475) 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 three months period ended March 31, 2006 and
        2005,
        Esko Pivnich sold its internally produced 5,651 (2005: 14,346) Bbls of crude
        oil
        at the average prices of $49 (2005: $34.23) per barrel translating into net
        revenues from sales of internally produced oil of $274,912 (2005: $491,111).
        Also for the three months ended March 31, 2006 and 2005 the Company sold
        8,645
        (2005: 27,475) MCFs of internally produced gas at average prices of $1.2
        ($0.85)
        per MCF translating into revenues of $10,540 (2005: $23,480).
  Additionally
        during three month ended March 31, 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
        March 31, 2006 and 2005 we incurred $39,830 and $78,852, respectively in
        exploration expenses.
  The
        Company expects significant exploration expense in 2005-2008 due to the new
        operating licenses obtained in 2005, including licenses for two new fields,
        Rogan and Rakitnyansk, 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 March 31, 2006 and December 31, 2005, the Exploration and
        Resource taxes, amounted to $51,449 and $132,926, respectively.
  Other
        operating income (expense) for the period ended March 31, 2006 was mostly
        due to
        change in provision for doubtful accounts of $26,293 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.
  26
 *Table
            of Contents*
  Oil
        and
        gas production equipment and workover costs were the main contributor into
        the
        depreciation expense for the periods ended March 31, 2006 and 2005 in total
        amounts of $69,970 and $52,349. The increase in the depreciation expense
        in the
        first quarter 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.
  Sales,
        general and administrative expenses
  Sales,
        general and administrative expenses for the periods ended March 31, 2006
        decreased to $118,214 from $223,173 in the period ended March 31, 2005 mainly
        due to the decrease in insurance expenses (2006:2005 - $none and $67,118),
        transportation expenses (2006:2005 - $16,129 and $23,638) and legal, audit
        and
        other professional services (2006:2005 - $21,915 and $68,518), although there
        was an increase in office rent (2006:2005 - $15,571and $13,512), as well
        as in
        payroll and related taxes (2006:2005 - $53,809 and $26,232).
  In
        March
        2005 the Company insured its business continuity risks. The above insurance
        premium was paid in respect to March - June 2005 period only. Legal and
        professional services decreased mainly due to the absence of hearings related
        to
        recurring legislation disputes in the first quarter of 2006.
  Interest
        income (expense)
  Interest
        expense (net) for the periods ended March 31, 2006 and 2005, amounted to
        $41,899
        and $31,300, respectively.
  Interest
        expense for the period ended March 31, 2005 related primarily to the credit
        line
        facility obtained from AB Clearing House at 26% per annum. During three months
        ended March 31, 2006 the interest expense was primarily due to tranches of
        long
        term loan obtained from Zaccam Trading, 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 the agreement with Zaccam Trading, Ltd.,
        related party, to obtain a long term credit line with indebtedness limit
        of $5
        million bearing 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 Karaikozovsk’s
        property.
  **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 establishes
        steady production of oil and gas in Ukraine. As at March 31, 2006, the Company
        had total current assets of $2,147,850 and total current liabilities of
        $2,802,620, respectively. As at March 31, 2006, the Company had cash balances
        of
        $296,491 and a working capital deficit of $654,770, respectively.
  We
        are
        currently discussing various financing options with private investors that
        include Company shareholders however, no assurance can be provided as to
        if,
        when and in what amount 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 March
        31,
        2006 and 2005 amounted to $(12,610) and $184,331, respectively. Significant
        cash
        outflow in the first quarter of 2006, as compared to the respective period
        of
        2005, was primarily caused by the decrease in prepayments for oil and gas
        of
        $147,551 (2005: increase of $374), increase in tax rebates receivable of
        $53,358
        (2005: increase of $29,298), and the reduction in other accounts payable
        and
        accruals of $48,223 (2005: reduction of $46,913). The above items outweighed
        the
        cash inflows resulting from the decrease in accounts receivable of $57,183
        (2005: $18,591), the reduction of other accounts receivable and prepayments
        of
        $82,182 (2005: increase of $17,461), and the reduction of inventories balances
        of $38,097 (2005: increase of $21,090).
  27
 *Table
            of Contents*
  During
        three months ended March 31, 2006 cash provided by financing activities in
        amount of $1,112,000 was due to the tranche of long term loan received from
        Zaccam Trading, related party, 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. Also it was 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
        three months ended March 31, 2006 and 2005, the Company invested in workovers
        a
        total amount of $186,112 and $142,508, respectively, which was financed by
        shareholder loans and long term loan. Significant 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 around $4,000,000 to implement its capital
        expenditure program for Karaikozovsk property including the completion of
        separators and drilling of Well #21. The Company believes it will be able
        to
        raise these funds through equity, debt and convertible debt financing; however,
        there is no guarantee that such funds will be raised and no certainty as
        to when
        such funds may be raised.
  **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 the Ukrainian income tax law. 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 will be creditable
        tax
        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.
  **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 $55,983
        during the period ended March 31, 2006, and, as of March 31, 2006, the Company’s
        current liabilities exceeded its current assets by $654,770. 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
        major
        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, primarily by the Company’s ability to raise additional funds in equity
        markets, 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
        existence.
  28
 *Table
            of Contents*
  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 existence:
  o
              The
                  Company plans to continue to raise additional capital in the equity,
                  debt
                  and convertible debt markets as significant source of funding the
                  development of 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. Additional funding requirements
                  may
                  also be necessary before the Company is able to rely solely on
                  the
                  production from the licensed properties for the cash flow of the
                  Company.
  Accordingly,
        our independent auditors included an explanatory paragraph in their report
        on
        the December 31, 2005 consolidated financial statements regarding 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 their most revenues and operating expenses are denominated
        in
        Ukrainian Hrivnas. The Ukrainian Hrivna is not a fully convertible currency
        outside of the territory of the 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 rate at March 31, 2006 and December 31, 2005 was
        approximately 1 U.S. dollar to 5.050 Ukrainian Hrivnas. For the periods ended
        March 31, 2006 and 2005, the average exchange rate for 1U.S. dollar was 5.050
        and 5.2946, 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.
  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.
  29
 *Table
            of Contents*
  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 a qualified 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
        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 own gas separation
        facilities that allows to reduce significantly the cost of services currently
        purchased under the production sharing agreement (PSA) from the state-owned
        entity with which we are a contract partner, Okhtirkaneftegas.
  Production
        sharing agreements are customarily awarded upon determination that the field
        is
        capable of commercial rates of production and that the applicant has complied
        with the 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 will 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.
  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.
  30
 *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
        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 (Hryvnia) and
        then
        converted to US$. The US$:Hryvnia exchange rate may move adversely to affect
        oil
        and gas prices. In addition, there can be no assurance that the Ukrainian
        authorities may not introduce price stabilization mechanisms which adversely
        affect oil and gas prices in US$ 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.
  31
 *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-14 ( c ) of the Securities Exchange Act of 1934) as of March
        31,
        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 their consolidated subsidiary 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.
  32
 *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 Sunrise or any of Sunrise’s 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, Okhtyrkaneftegaz
  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 May 12, 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.
  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 (See Note 24).
        Esko Pivnich appealed against the decision to 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. Although
        the appeal has been won and became effective, and the company believes there
        is
        a 100% of winning the case, 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
        Sakhalinsk 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.
  We
        know
        of no other material, active or pending legal proceedings against us, nor
        are we
        involved as a plaintiff in any material proceedings or pending litigation.
        There
        are no proceedings in which any of our directors, officers or affiliates,
        or, to
        the best of our knowledge, any registered or beneficial shareholders are
        an
        adverse party or have a material interest adverse to us in a matter concerning
        Sunrise or our operations.
  33
 *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 March 31, 2006  and
        December 31, 2005
  Consolidated
        Statements of Changes in Stockholders’ Equity (Capital Deficit) for the three
        month ended March 31, 2006
  Consolidated
        Statements of Operations and Comprehensive Loss for the three month ended
        March
        31, 2006 and 2005
  Consolidated
        Statements of Cash Flows for the three month ended March 31, 2006 and
        2005
  Notes
        to
        the Consolidated Financial Statements for the periods ended March 31,
        2006  and
        December 31, 2005
  **Exhibit
                    Number******
                
                **Description******
                
                **Incorporation
                    by Reference******31.1
                
                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 ChiefFinancial
                    Officer
                
                Filed
                    Herewith
  34
 *Table
            of Contents*
  **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:
                  May 12 , 2006
              Konstantin
                  TsirulnikovPresident
                  and Chief Executive Officer
   35