UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-QSB

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITITES
      EXCHANGE ACT OF 1934.

                  For the quarterly period ended June 30, 2007

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                            BASELINE OIL & GAS CORP.
                 (Name of small business issuer in its charter)

           Nevada                                                 30-0226902
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                      11811 North Freeway (I-45), Suite 200
                              Houston, Texas 77060
                     (Address of principal executive office)

                                 (281) 591-6100
                           (Issuer's telephone number)

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

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes |_| No |X|

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

      As of August 9, 2007, there were 33,054,150 shares of common stock, $0.001
par value, outstanding.

Transitional Small Business Disclosure Format (Check one). Yes |_| No |X|

<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                            BASELINE OIL & GAS CORP.
                                 BALANCE SHEETS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  June 30,       December 31,
                                                                                    2007            2006
                                                                                    ----            ----
<S>                                                                             <C>              <C>
    ASSETS

 CURRENT ASSETS
   Cash and marketable securities                                               $    156,396     $    123,678
   Cash - restricted                                                               1,131,107               --
   Accounts receivable, trade                                                      1,175,289               --
   Prepaid and other current assets                                                  123,661          125,000
                                                                                ------------     ------------
         Total current assets                                                      2,586,453          248,678
                                                                                ------------     ------------
OIL AND NATURAL GAS PROPERTIES - using successful efforts
   method of accounting
       Proved properties                                                          27,416,424               --
       Unproved properties                                                         8,092,302        7,810,135
   Less accumulated depletion, depreciation
      and amortization                                                              (514,580)              --
                                                                                ------------     ------------
         Oil and natural gas properties, net                                      34,994,146        7,810,135
                                                                                ------------     ------------
OTHER ASSETS
   Deferred acquisition costs                                                             --           99,631
    Property acquisition - deposit                                                        --        1,000,000
   Deferred loan costs, net of accumulated amortization of $2,141,832
      and $237,192, respectively                                                   3,767,604           88,947
   Other property and equipment, net of accumulated
      depreciation of $3,125 at June 30, 2007                                         37,635               --
                                                                                ------------     ------------
         Total other assets                                                        3,805,239        1,188,578
                                                                                ------------     ------------
         TOTAL ASSETS                                                           $ 41,385,838     $  9,247,391
                                                                                ============     ============
</TABLE>

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


                                       2
<PAGE>

                            BASELINE OIL & GAS CORP.
                                 BALANCE SHEETS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  June 30,       December 31,
                                                                                    2007            2006
                                                                                    ----            ----
<S>                                                                             <C>              <C>
    LIABILITIES AND STOCKHOLDERS' EQUITY

 CURRENT LIABILITIES
   Accounts payable - trade                                                          599,074           82,873
   Accrued expenses                                                                  417,575          172,750
   Royalties payable                                                                 508,440               --
   Short term notes to related parties                                               100,000               --
   Short term debt and current portion of long-term debt                           2,257,450        1,996,751
   Derivative liability - short term                                                 956,463          104,896
                                                                                ------------     ------------
         Total current liabilities                                                 4,839,002        2,357,270
                                                                                ------------     ------------
NONCURRENT LIABILITIES
   Long-term debt                                                                 30,218,224               --
   Asset retirement obligations                                                      450,779               --
   Derivative liability - long term                                                  834,490               --
                                                                                ------------     ------------
         Total noncurrent liabilities                                             31,503,493               --
                                                                                ------------     ------------
         Total liabilities                                                        36,342,495        2,357,270
                                                                                ------------     ------------
COMMITMENTS AND CONTINGENCIES                                                             --               --
STOCKHOLDERS' EQUITY
   Common stock, $0.001 par value per share; 140,000,000 shares
      authorized; 32,210,238 and 31,342,738 shares issued and
      outstanding, respectively                                                       32,211           31,343
   Additional paid-in capital                                                     31,629,156       28,423,418
   Accumulated other comprehensive income                                         (1,691,686)              --
   Accumulated deficit                                                           (24,926,338)     (21,564,640)
                                                                                ------------     ------------
         Total stockholders' equity                                                5,043,343        6,890,121
                                                                                ------------     ------------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $ 41,385,838     $  9,247,391
                                                                                ============     ============
</TABLE>

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


                                       3
<PAGE>

                            BASELINE OIL & GAS CORP.
                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                 Three Months Ended June 30,
                                                                                -----------------------------
                                                                                    2007             2006
                                                                                    ----             ----
<S>                                                                             <C>              <C>
REVENUES
   Oil and gas sales                                                            $  2,819,739     $         --
                                                                                ------------     ------------

OPERATING EXPENSES
   Production                                                                      1,309,387               --
   General and administrative                                                        563,823          839,019
   Depreciation, depletion and amortization                                          517,705               --
   Accretion expense                                                                  12,332               --
                                                                                ------------     ------------
         Total operating expenses                                                  2,403,247          839,019
                                                                                ------------     ------------

Net income (loss) from operations                                                    416,492         (839,019)

OTHER INCOME (EXPENSE)
   Other income                                                                       23,366               --
   Interest income                                                                       102           37,513
   Interest expense                                                               (2,954,872)        (354,418)
   Unrealized gain (loss) on derivative instruments                                  (40,806)         433,650
                                                                                ------------     ------------

         Total other expense, net                                                 (2,972,210)         116,745
                                                                                ------------     ------------

NET LOSS                                                                        $ (2,555,718)    $    722,274
                                                                                ============     ============

OTHER COMPREHENSIVE INCOME (LOSS)
  Unrealized gain (loss) on derivative instruments                                (1,691,686)              --
                                                                                ------------     ------------

Total comprehensive loss                                                        $ (4,247,404)    $   (722,274)
                                                                                ============     ============

NET LOSS PER SHARE - Basic and Diluted                                          $      (0.08)    $      (0.02)
                                                                                ============     ============

WEIGHTED AVERAGE NUMBER OF
   SHARES OUTSTANDING BASIC AND DILUTED                                           31,641,960       39,303,227
                                                                                ============     ============
</TABLE>

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


                                       4
<PAGE>

                            BASELINE OIL & GAS CORP.
                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  Six Months Ended June 30,
                                                                                -----------------------------
                                                                                    2007             2006
                                                                                    ----             ----
<S>                                                                             <C>              <C>
REVENUES
   Oil and gas sales                                                            $  2,819,739     $         --
                                                                                ------------     ------------

OPERATING EXPENSES
   Production                                                                      1,309,387               --
   General and administrative                                                        851,929        1,265,274
   Depreciation, depletion and amortization                                          517,705               --
   Accretion expense                                                                  12,332               --
                                                                                ------------     ------------

         Total operating expenses                                                  2,691,353        1,265,274
                                                                                ------------     ------------

Net income (loss) from operations                                                    128,386       (1,265,274)

OTHER INCOME (EXPENSE)
   Other income                                                                       23,366               --
   Interest income                                                                       860           59,543
   Interest expense                                                               (3,519,939)        (764,257)
   Unrealized gain on derivative instruments                                           5,629          333,677
                                                                                ------------     ------------

         Total other expense, net                                                 (3,490,084)        (371,037)
                                                                                ------------     ------------

NET LOSS                                                                        $ (3,361,698)    $ (1,636,311)
                                                                                ============     ============

OTHER COMPREHENSIVE INCOME (LOSS)
  Unrealized gain (loss) on derivative instruments                                (1,691,686)              --
                                                                                ------------     ------------

Total comprehensive loss                                                        $ (5,053,384)    $ (1,636,311)
                                                                                ============     ============

NET LOSS PER SHARE - Basic and Diluted                                          $      (0.11)    $      (0.04)
                                                                                ============     ============

WEIGHTED AVERAGE NUMBER OF
   SHARES OUTSTANDING BASIC AND DILUTED                                           31,514,831       37,440,583
                                                                                ============     ============
</TABLE>

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


                                       5
<PAGE>

                            BASELINE OIL & GAS CORP.
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  Six Months Ended June 30,
                                                                                -----------------------------
                                                                                     2007             2006
                                                                                     ----             ----
<S>                                                                             <C>              <C>
 CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                                     $ (3,361,698)    $ (1,636,311)
   Adjustments to reconcile net loss to net cash
      provided by operating activities
         Share based compensation                                                     55,371               --
         Common stock issued for consulting fees                                     150,000               --
         Depreciation, depletion and amortization expense                            517,705               --
         Amortization of debt discount                                               426,999          118,596
         Amortization of deferred loan costs                                       2,047,140          637,243
         Derivative gain (loss)                                                       (5,629)        (333,677)
         Accretion expense                                                            12,332               --
   Changes in operating assets and liabilities
         Cash - restricted                                                        (1,131,107)              --
         Accounts receivable, trade                                               (1,175,289)              --
         Prepaid and other current assets                                            101,050          (37,500)
         Accounts payable - trade                                                    516,201          (27,486)
         Accrued liabilities                                                         368,263          387,774
         Royalties payable                                                           508,440               --
                                                                                ------------     ------------
            Net cash used in operating activities                                   (970,222)        (891,361)
                                                                                ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Acquisition of proved oil and gas properties                                  (28,195,001)              --
   Development costs incurred                                                       (361,345)              --
   Additions to unproved properties                                                 (282,167)      (4,664,723)
   Purchase of property and equipment, other                                         (40,760)              --
                                                                                ------------     ------------
            Net cash used in investing activities                                (28,879,273)      (4,664,723)
                                                                                ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from long-term debt                                                   30,013,224               --
   Proceeds from short term debt                                                   1,700,000               --
   Proceeds from short tern notes to related parties                                 100,000               --
   Repayments of short term debt                                                  (1,761,011)         (16,496)
   Proceeds from common stock sales, net                                                  --        8,284,109
   Deferred loan costs incurred                                                     (170,000)              --
                                                                                ------------     ------------
            Net cash provided by financing activities                             29,882,213        8,267,613
                                                                                ------------     ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                             32,718        2,711,529
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                       123,678          206,489
                                                                                ------------     ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                        $    156,396     $  2,918,018
                                                                                ============     ============

SUPPLEMENTAL DISCLOSURES:
   Cash paid for interest                                                       $    474,641     $         --
   Cash paid for income taxes                                                             --               --
NON-CASH ACTIVITIES
   Unrealized gain/(loss) on derivative liability                                 (1,686,057)         333,677
   Warrants issued in conjunction with debt                                        2,687,797               --
   Stock issued for note extension                                                   190,000               --
   Asset retirement obligation incurred                                              400,298               --
   Warrants issued in conjunction with stock issuance                                     --          505,671
   Stock issued on conversion of debt                                                     --          350,000
   Stock issued in lieu of cash interest                                              93,750               --
</TABLE>

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


                                       6
<PAGE>

                            Baseline Oil & Gas Corp.
                     Notes to Unaudited Financial Statements
                                  June 30, 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Organization

Baseline Oil & Gas Corp. ("Baseline" or the "Company") is an independent
exploration and production company primarily engaged in the acquisition,
development, production and exploration of oil and natural gas properties
onshore in the United States.

Basis of Presentation

The accompanying unaudited interim financial statements of Baseline have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange Commission
(the "SEC"), and should be read in conjunction with Baseline's audited financial
statements for the year ended December 31, 2006, and notes thereto, which are
included in the Company's annual report on Form 10-KSB filed with the SEC on
April 17, 2007. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods presented have
been reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the financial statements, which would substantially duplicate the disclosure
required in Baseline's 2006 annual financial statements have been omitted.

Use of Estimates

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

Oil and Natural Gas Properties

Baseline uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, to
drill and equip development wells and related asset retirement costs are
capitalized. Costs to drill exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed.

Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of the impairment by providing an impairment allowance. Capitalized costs
of producing oil and gas properties, after considering estimated residual
salvage values, are depreciated and depleted by the unit-of-production method.
Support equipment and other property and equipment are depreciated over their
estimated useful lives.

On the sale or retirement of a complete unit of proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.


                                       7
<PAGE>

On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.

Asset Retirement Obligations

The Company records a liability for legal obligations associated with the
retirement of tangible long-lived assets in the period in which they are
incurred in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 143 "Accounting for Asset Retirement Obligations." Under this method, when
liabilities for dismantlement and abandonment costs, excluding salvage values,
are initially recorded the carrying amount of the related oil and natural gas
properties are increased. Accretion of the liability is recognized each period
using the interest method of allocation, and the capitalized cost is depleted
over the useful life of the related asset. Revisions to such estimates are
recorded as adjustments to the ARO, capitalized asset retirement costs and
charges to operations during the periods in which they become known. At the time
the abandonment cost is incurred, the Company will be required to recognize a
gain or loss if the actual costs do not equal the estimated costs included in
ARO.

Revenue and Cost Recognition

The Company uses the sales method of accounting for natural gas and oil
revenues. Under this method, revenues are recognized based on the actual volumes
of gas and oil sold to purchasers. The volume sold may differ from the volumes
to which the Company is entitled based on our interest in the properties. Costs
associated with production are expensed in the period incurred.

NOTE 2 - CONCENTRATION OF RISK

At June 30, 2007, Baseline's cash in financial institutions exceeded the
federally insured deposits limit by $1,087,503. Restricted cash in the amount of
$1,131,107 represents cash in a bank account controlled by an administrative
agent under a credit agreement (see NOTE 4).

NOTE 3 - ACQUISITION OF NORTH TEXAS PROPERTIES

On April 12, 2007, Baseline acquired an interest in producing oil and gas
properties from Statex Petroleum I, L.P. and Charles W. Gleeson LP. The
properties consist of a 100% working interest in approximately 4,600 acres in
Stephens County in North Texas (the "North Texas Assets"). The purchase price
was $28,000,000, plus interest from January 15, 2007 until the date of closing
and an adjustment for cash flow from the properties from the effective date
until the date of closing. In addition, Baseline has capitalized $1,551,106 in
costs associated with the transaction and $438,447 related to the asset
retirement obligations associated with the properties. Upon execution of the
Purchase and Sale Agreement Baseline paid a $1,000,000 non-refundable deposit to
be credited against the purchase price. Baseline entered into an amendment to
the agreement, whereby for an additional deposit of $300,000, the deadline to
close on the purchase was extended. The effective date for the transfer of the
assets was February 1, 2007. Baseline funded the adjusted purchase price, less
the deposits previously paid, and a portion of the costs associated with the
transaction through borrowings under a newly created credit agreement (see Note
4).


                                       8
<PAGE>

NOTE 4 - DEBT

Total debt at June 30, 2007 and December 31, 2006 consisted of the following:

                                                June 30, 2007  December 31, 2006
                                                -------------  -----------------
    Short term notes to related parties         $    100,000     $         --
    Other short term notes                            87,450           48,750
    Convertible notes, net of discount
    of $0 and $426,999                             2,375,000        1,948,001
    Term loans under credit agreement              9,713,224               --
    Revolving loans under credit agreement        20,300,000               --
                                                ------------     ------------
                                                  32,575,674        1,996,751
    Less short term debt and current portion
         of long-term debt                        (2,357,450)      (1,996,751)
                                                ------------     ------------
    Long-term debt                              $ 30,218,224     $         --
                                                ============     ============

Long-term Debt

On April 12, 2007, Baseline entered into a $75 million Credit Agreement (the
"Credit Agreement") with Drawbridge Special Opportunities Fund LP
("Drawbridge"), as Administrative Agent and various named lenders (the
"Lenders"). The Credit Agreement provides for a revolving credit commitment of
up to $54.7 million and a Term Loan Commitment of $20.3 million. Revolving Loans
must be paid on or before April 12, 2010 and Term Loans on or before October 12,
2010. The Revolving Loans accrue interest at the Prime Rate and the Term Loans
accrue interest at the Prime Rate or 7.5%, whichever is greater, plus 3%.
Additionally, Baseline granted the Lenders an overriding royalty interest
ranging between 2% and 3% in its existing oil and gas properties and any
properties that it acquires while the Credit Agreement is in effect. The Credit
Agreement requires Baseline's revenues to be deposited into a lockbox account
controlled by the Administrative agent. Funds in the lockbox account on the last
business day of the month are utilized, in order of priority, to pay any amounts
due for the overriding royalty interest granted under the Credit Agreement,
amounts due to third parties under swap agreements, lease operating costs
approved by the Administrative agent, interest due on the Term Loans and
Revolving loans and general and administrative expenses up to $225,000 per
quarter. Any amounts remaining in the lockbox account in excess of $250,000 are
to be used to repay outstanding principal, to be applied first to the Term
Loans. Baseline's obligations under the Credit Agreement are secured by a first
lien on all of its existing oil and gas properties, including the North Texas
Assets, and any properties acquired while the Credit Agreement is in effect. On
April 12, 2007 Baseline drew down $9.7 million as a Revolving Loan. In addition,
Baseline drew down $20.3 million as a Term Loan. The funds were utilized to
repay the bridge loan financing, including accrued interest and fees, and to
fund the adjusted purchase price and a portion of the capitalized transaction
costs for the acquisition of the North Texas Assets.

The Company recorded a discount of $2,678,000 related to the conveyance of the
overriding royalty interest to the Lenders as discussed above. As of June 30,
2007, $44,633 of this discount has been amortized as a component of interest
expense. This discount is being amortized over the expected term of the Credit
Agreement using the effective interest method.

On May 30, 2007 holders of Baseline's 10% convertible notes unanimously agreed
to extend the maturity date of the notes from May 15, 2007 to November 15, 2007.
As consideration for the extension of the notes, Baseline issued 380,000 shares
in aggregate to the holders of the notes and increased the coupon rate on the
notes from 10% to 12% per annum effective May 16, 2007.

Bridge Loan Financing

On March 15, 2007, Baseline borrowed $1,700,000 from a single accredited
investor, Lakewood Group, LLC ("Lakewood"). Baseline issued to Lakewood a Senior
Secured Debenture ("Debenture") bearing interest at 16%, a common stock purchase
warrant to purchase up to 3,000,000 shares of Common Stock at an exercise price


                                       9
<PAGE>

of $0.50 per share, and entered into a security agreement collateralized by the
assets of Baseline. In addition Baseline was required to pay Lakewood a closing
fee of $170,000 on April 12, 2007, when the outstanding principal and accrued
interest were paid. The proceeds from the Lakewood financing were used to pay an
additional deposit of $300,000 on the North Texas Assets (see NOTE 3), to
partially satisfy a capital call in the New Albany-Indiana LLC (see NOTE 6), to
pay expenses related to the ongoing financing and acquisition efforts, and to
pay a $170,000 fee to Casimir Capital, the placement agent. Additionally, The
Company issued Casimir Capital a warrant exercisable for up to 340,000 shares of
Common Stock at an exercise price of $0.50 per share. On April 12, 2007, the
Debenture was fully paid from proceeds received under the Credit Agreement.

Loans From Founders

On January 26, 2007, Barrie Damson our former Chairman and CEO and Alan Gaines
our Vice Chairman and a director each made a loan of $50,000 to the Company to
be used for short term working capital needs. The loans, in the form of
promissory notes, bear interest at an annual rate of 6% and mature on the
earlier to occur of the date on which Baseline closes a financing transaction in
which it obtains proceeds in excess of $5,000,000 or July 26, 2007.

On April 10, 2007, Messrs. Gaines and Damson agreed to extend the maturity of
their promissory notes to the earlier of October 10, 2010 or the date on which
Baseline closes an equity offering in which it obtains gross proceeds in excess
of $3,000,000.

NOTE 5 - STOCKHOLDERS' EQUITY

Common Stock

On March 31, 2007, Baseline issued an aggregate of 93,750 shares of common
stock, with a value of $46,875, in payment of accrued interest through February
15, 2007, to holders of 10% convertible promissory notes issued by Baseline in
privately negotiated transactions involving the offer and sale of $2.375 million
in units consisting of such notes and Common Stock.

On May 15, 2007, Baseline issued an aggregate of 93,750 shares of common stock,
with a value of $46,875, in payment of accrued interest through May 15, 2007, to
holders of 10% convertible promissory notes issued by Baseline in privately
negotiated transactions involving the offer and sale of $2.375 million in units
consisting of such notes and Common Stock.

On May 30, 2007, Baseline issued 380,000 shares to holders of 10% convertible
promissory notes in consideration of the holders' agreement to extend the
maturity of the notes by six months. Baseline's 10% convertible notes will now
mature on November 15, 2007. Such shares were valued at $190,000 which has been
charged to interest expense.

On June 22, 2007, Baseline issued 300,000 shares to an outside consultant as
compensation for services valued at $150,000.

Stock Options and Warrants

On January 4, 2007, Baseline granted a five year stock option to Richard Cohen,
CFO, exercisable for up to 100,000 shares of Common Stock at an exercise price
of $0.56 per share. Such option had a fair value of $55,371.


                                       10
<PAGE>

On March 15, 2007, concurrently with the closing of the bridge loan financing
(see NOTE 4), Alan Gaines, Baseline's Vice-Chairman, and Barrie Damson, a former
officer and director of Baseline, each cancelled stock options to purchase
1,670,000 shares of Baseline's common stock at an exercise price of $0.05 per
share.

In connection with our entry into the Credit Agreement, on April 12, 2007 we
issued warrants to Drawbridge and D.B. Zwirn Special Opportunities Fund, L.P.,
another lender participating therein, which warrants are each exercisable for up
to 1.6 million shares of our Common Stock, at an exercise price of $0.50 per
share. Pursuant to certain warrant agreements executed with these two lenders,
any unexercised warrants expire on April 11, 2014. The warrants also afford the
holders certain anti-dilution protection. In connection with the issuance of the
warrants we also entered into a registration rights agreement dated April 12,
2007 with each of the holders of the warrants, under which we granted piggy-back
registration rights, demand registration rights and shelf registration rights to
these holders. Such warrants had a fair value of $1,209,085 which has been
capitalized as a deferred loan cost and is being amortized over the term of the
Credit Agreement.

On April 12, 2007, concurrently with the execution of the Credit Agreement (see
Note 4), Alan Gaines, our Vice Chairman, and Barrie Damson, a former officer and
director of our Company, each surrendered additional stock options to purchase
1,670,000 shares of Common Stock at an exercise price of $0.05 per share,
resulting in the cancellation of options for an aggregate of 3,340,000 million
shares of Common Stock.

NOTE 6 - INVESTMENT IN JOINT VENTURE AND REDEMPTION OF MEMBERSHIP INTEREST

On March 16, 2007, Baseline paid $300,000 to New Albany-Indiana LLC ("New
Albany") to pay a portion of the outstanding capital calls that it, as a member
of New Albany, was required to make. Pursuant to a Membership Interest
Redemption Agreement between the Company and New Albany, Baseline then redeemed
its membership interest in New Albany for the direct assignment to the Company
of an undivided 40.423% working interest in and to all oil and gas properties,
rights, and assets of New Albany. Such assets were then pledged to Lakewood
under a mortgage to secure Lakewood's Debenture.

The reduction in our membership interest of 50% to a 40.423% direct working
interest reflected an adjustment of our membership interest in New Albany at the
time of our redemption, as a result of outstanding capital calls owed by us but
assumed by the affiliates and/or assigns of Rex Energy, the other joint venture
partner.

After redeeming its membership interest in New Albany on March 16, 2007,
Baseline now owns the following assets:

      o 19.7% working interest in the Aurora/Wabash Area of Mutual Interest
(AMI), consisting of approximately 122,000 gross acres (approximately 24,400
acres net to us), seven New Albany natural gas pilot wells (four horizontal and
three vertical wells), one natural gas compression/treating facility, two salt
water disposal wells, three Devonian Reef gas wells (5% working interest to us)
and three horizontal wells currently scheduled to be drilled in 2007;

      o 18.2% working interest in the Rex Knox County AMI, consisting of
approximately 41,000 total acres (approximately 7,380 acres net to us) acquired
from Source Rock, and five horizontal wells currently scheduled to be drilled in
2007; and


                                       11
<PAGE>

      o 6.9% working interest in the El Paso AMI, consisting of approximately
8,000 acres (560 acres net to us) and one horizontal well drilled in 2007.

NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

On April 12, 2007, in accordance with a requirement of the Credit Agreement,
Baseline also entered into a Swap Agreement ("Swap Agreement") with Macquarie
Bank Limited, which provides that Baseline puts in place, for each month through
the third anniversary of April 12, 2007, separate swap hedges with respect to
approximately 75% of the projected production from Proved Developed Producing
Reserves. The swap hedges provide for a fixed price of $68.20 per barrel for a
three year period, commencing June 1, 2007. The hedging arrangement is based
upon a minimum of 11,000 barrels in the first year and provides for monthly
settlements.

During July 2007, Baseline modified its hedge from a fixed price swap to a
collar with a floor of $68.20 and a ceiling of $74.20 for the period from August
2007 through December 2008. Subsequent to December 2008 it reverts to a swap
agreement at $68.20. In exchange for the near term switch from a fixed price
swap to a collar, Baseline provided a right to the hedge provider to purchase
7,000 barrels per month at $73.20 per barrel from June 2010 through December
2011.

SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of each derivative is recorded each
period in current earnings or other comprehensive income, depending on whether
the derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. To make this determination, management formally
documents the hedging relationship and its risk-management objective and
strategy for undertaking the hedge, the hedging instrument, the item, the nature
of the risk being hedged, how the hedging instrument's effectiveness in
offsetting the hedged risk will be assessed, and a description of the method of
measuring effectiveness. This process includes linking all derivatives that are
designated as cash-flow hedges to specific cash flows associated with assets and
liabilities on the balance sheet or to specific forecasted transactions.
Baseline also formally assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting cash flows of hedged items. A derivative that is highly
effective and that is designated and qualifies as a cash-flow hedge has its
changes in fair value recorded in other comprehensive income to the extent that
the derivative is effective as a hedge. Any other changes determined to be
ineffective do not qualify for cash-flow hedge accounting and are reported
currently in earnings.

Baseline discontinues cash-flow hedge accounting when it is determined that the
derivative is no longer effective in offsetting cash flows of the hedged item,
the derivative expires or is sold, terminated, or exercised, the derivative is
redesignated as a non-hedging instrument because it is unlikely that a
forecasted transaction will occur, or management determines that designation of
the derivative as a cash-flow hedge instrument is no longer appropriate. In
situations in which cash-flow hedge accounting is discontinued, Baseline
continues to carry the derivative at its fair value on the balance sheet and
recognizes any subsequent changes in its fair value in earnings.

When the criteria for cash-flow hedge accounting are not met, realized gains and
losses (i.e., cash settlements) are recorded in other income and expense in the
Statements of Operations. Similarly, changes in the fair value of the derivative
instruments are recorded as unrealized gains or losses in the Statements of
Operations. In contrast cash settlements for derivative instruments that qualify
for hedge accounting are recorded as additions to or reductions of oil and gas
revenues while changes in fair value of cash flow hedges are recognized, to the
extent the hedge is effective, in other comprehensive income until the hedged
item is recognized in earnings.


                                       12
<PAGE>

Based on the above, management has determined the swaps qualify for cash-flow
hedge accounting treatment. For the period ended June 30, 2007, Baseline
recognized a derivative liability of $1,691,686 with the change in fair value
reflected in other comprehensive income/loss.

NOTE 8 - SUBSEQUENT EVENTS

On July 3, 2007, Baseline issued 300,000 shares to a consultant for services
rendered valued at $150,000.

On July, 5, 2007 non-employee option holders exercised options to purchase
200,000 shares of Common Stock at $ .05 per share on a "cashless" basis. As a
result Baseline issued 185,714 shares.

On July 13, 2007, a consultant exercised an option to purchase 100,000 shares of
Common Stock at $0.30 per share on a "cashless" basis. As a result, Baseline
issued 56,522 shares.

During July 2007 holders of $150,000 of Baseline's 10% Convertible Promissory
Notes converted such notes into 301,676 shares.

On August 3, 2007, the Board of Directors (i) granted five-year options
exercisable for up to an aggregate of 370,000 shares of common stock to several
employees, which options vest in equal one-third installments on each of the
first, second and third anniversary dates from the date of grant, (ii) granted a
five-year stock option to Richard d'Abo, an outside director, exercisable for up
to 150,000 shares of common stock and (iii) authorized the payment of a
transaction bonus to Alan Gaines, our vice-chairman, in an amount equal to 0.25%
of the gross proceeds raised by Baseline in its next debt and/or equity
offering, if any. All such options are exercisable at $0.55 per share.

On August 3, 2007 the Company entered into a two year employment agreement with
Mr Patrick McGarey to become Chief Financial Officer effective August 16, 2007.
Mr McGarey succeeds Richard Cohen who will continue to serve through August 15,
2007. Concurrently with the entry into the employment agreement with Mr.
McGarey, Baseline granted to Mr. McGarey five-year options, exercisable for (i)
up to 500,000 shares of common stock, at an exercise price equal to $0.55, (ii)
up to 500,000 shares, at an exercise price of $0.825 per share, and (iii) up to
500,000 shares, at an exercise price of $1.10 per share. Each option grant
provides for the following vesting schedule: (i) 166,666 shares on August 3,
2007, (ii) 166,667 shares on August 3, 2008 and (iii) 166,667 shares on August
3, 2009, provided that Mr. McGarey remains in the employ of the Company through
such dates.


                                       13
<PAGE>

Item 2. Management's Discussion and Analysis or Plan of Operation.

Cautionary Notice Regarding Forward Looking Statements

Baseline Oil & Gas Corp. (referred to herein as "we" or the "Company") desires
to take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This report contains a number of forward-looking
statements that reflect management's current views and expectations with respect
to our business, strategies, future results and events and financial
performance. All statements made in this annual report other than statements of
historical fact, including statements that address operating performance, events
or developments that management expects or anticipates will or may occur in the
future, including statements related to future reserves, cash flows, revenues,
profitability, adequacy of funds from operations, statements expressing general
optimism about future operating results and non-historical information, are
forward-looking statements. In particular, the words "believe," "expect,"
"intend," " anticipate," "estimate," "may," "plan," "will," variations of such
words and similar expressions identify forward-looking statements, but are not
the exclusive means of identifying such statements and their absence does not
mean that the statement is not forward-looking.

These forward-looking statements are subject to certain known and unknown risks
and uncertainties, which may cause our actual results, performance or
achievements to differ materially from historical results as well as those
expressed in, anticipated or implied by these forward-looking statements. We do
not undertake any obligation to revise these forward-looking statements to
reflect any future events or circumstances. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and as are those set forth in our annual reports filed with the Securities
and Exchange Commission, together with the risks discussed in our press releases
and other communications to shareholders issued by us from time to time, which
attempt to advise interested parties of the risks and factors that may affect
our business. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include, but are
not limited to, our ability to raise capital as and when required, the timing
and extent of changes in prices for oil and gas, the availability of drilling
rigs, competition, environmental risks, drilling and operating risks,
uncertainties about the estimates of reserves, the prices of goods and services,
legislative and government regulations, political and economic factors in
countries in which we operate and implementation of our capital investment
program.

Overview

We were incorporated as a Nevada corporation in February 2004 under the name of
College Oak Investments, Inc., and changed our name to Baseline Oil & Gas Corp.
on January 17, 2006.

On April 12, 2007, Baseline acquired an interest in producing oil and gas
properties from Statex Petroleum I, L.P. and Charles W. Gleeson LP. The
properties consist of a 100% working interest in approximately 4,600 acres in
Stephens County in North Texas (the "North Texas Assets"). Prior to the
acquisition of the North Texas Assets, we had conducted only nominal operations
and had only nominal assets. Accordingly, we have no operating history upon
which our operations plan or future prospects can be evaluated.

With the acquisition of the North Texas Assets, Baseline has become an
independent oil and gas operator located in Houston, Texas. We are currently
adding to our administrative and technical staff to manage, develop, and operate
its properties. We also intend to take a more active role in the evaluation and
enhancement of our New Albany Shale acreage and to find and evaluate additional
acquisitions.


                                       14
<PAGE>

Our business and prospects must be also considered in light of the risks and
uncertainties frequently encountered by companies in the oil and gas industry.
The successful development of oil and gas fields is highly uncertain and we
cannot reasonably estimate or know the nature, timing and estimated expenses of
the efforts necessary to complete the development of, or the period in which
material net cash inflows are expected to commence from, any oil and gas
production from our existing fields or other fields, if any, acquired in the
future. Risks and uncertainties associated with oil & gas production include:

o     reservoir performance and natural field decline;

o     changes in operating conditions and costs, including costs of third party
      equipment or services such as drilling rigs and shipping;

o     the occurrence of unforeseen technical difficulties, including technical
      problems that may delay start-up or interrupt production;

o     the outcome of negotiations with co-venturers, governments, suppliers, or
      other third party operators;

o     our ability to manage expenses successfully;

o     regulatory developments, such as de-regulation of certain energy markets
      or restrictions on exploration and production under laws and regulations
      related to environmental or energy security matters; and changes in oil,
      gas and petrochemical prices and by changes in margins on gasoline and
      other refined products based upon supply and demand for oil and gas
      affected by general economic growth rates and conditions, supply
      disruptions, new supply sources and the competitiveness of alternative
      hydrocarbon or other energy sources.

Results of Operations

Financial results for the three-month period ended June 30, 2007 are not
directly comparable to either the three-month period ended March 31, 2007 or the
corresponding period from the prior year. We completed the acquisition of the
North Texas Assets on April 12, 2007. Prior to such time we have only conducted
nominal operations and have had only nominal assets. Presented below is key
operating data from the


                                       15
<PAGE>

operations of the North Texas Assets which are included in our results of
operations for the three-month period ended June 30, 2007.

                                                   Three Months
                                                       Ended
                                                   June 30, 2007
                                                   -------------
                  Production volumes -
                     Oil (Bbls)                         44,041
                     Natural Gas (Mcf)                   6,760
                  Average sales prices -
                     Oil (per Bbl)                  $    63.53
                     Natural gas (per Mcf)                3.24
                  Operating revenue
                     Oil                            $2,797,858
                     Natural gas                        21,881
                                                    ----------
                                                    $2,819,739
                                                    ----------
                  Production expense -
                     Total                          $1,309,387
                     Per equivalent BBL             $    23.01

In addition, included in interest expense for the periods included in this
quarterly report are certain non-cash components as follows:

                                                     Three Months Ended June 30,
                                                     ---------------------------
                                                        2007             2006
                                                        ----             ----

    Amortization of debt discount                    $  143,332       $   59,298
    Amortization of debt issuance costs               1,796,657          294,726
    Interest paid through the issuance of stock          46,875               --
                                                     ----------       ----------
    Total non-cash components of interest expense    $1,986,864       $  354,024
                                                     ==========       ==========

                                                       Six Months Ended June 30,
                                                     ---------------------------
                                                        2007              2006
                                                        ----              ----

    Amortization of debt discount                    $  426,999       $  118,596
    Amortization of debt issuance costs               2,002,507          637,243
    Interest paid through the issuance of stock          93,750               --
                                                     ----------       ----------
    Total non-cash components of interest expense    $2,523,256       $  755,839
                                                     ==========       ==========

Plan of Operation

Our intended strategy in the next twelve months will be to focus on oil and gas
exploration, development and production within our two existing core areas: one
located in southern Indiana and the other a waterflood in north Texas, which we
acquired in April 2007. We believe that the north Texas waterflood can provide
us with long life oil reserves and the southern Indiana resource play can
provide us with long life, natural gas reserves. We also believe that these two
fields provide us with significant growth potential through the drilling of new
infill wells and the workover of existing wells. However, the success or
potential of either of these asset bases cannot be assured.


                                       16
<PAGE>

We will manage our operations and evaluate our fields from our new office
location in Houston, Texas. While the majority of the effort will be spent on
developing our existing two core areas, we will continue to pursue acquisitions
in the vicinity of our two core properties, and, in addition, we will continue
to evaluate acquisition opportunities in the gulf coast, north Texas and
mid-continent regions where we could acquire existing oil and gas production
with significant development potential.

New Albany Shale Asset Base.

Our acreage is grouped into three separate Areas of Mutual Interest (AMIs),
where we have varying working interests. Management anticipates the booking of
proved reserves coupled with initial revenue from its New Albany Shale acreage
by year-end 2007. To date, we have invested $8.1 million in the New Albany Shale
asset base. As discussed below, we participated in the drilling of 7 horizontal
wells during the first half of 2007, and previously (in 2006) participated in
the drilling of 7 pilot wells and 3 Devonian Reef wells in this southern Indiana
region.

We have an 18.2% working interest in the Rex Knox County AMI, consisting of
approximately 41,000 total acres (approximately 7,380 acres net to us) acquired
from Source Rock. Management believes that Knox County represents our most
highly prospective New Albany Shale acreage, as it is located between Noble
Energy's production to the north (southern Sullivan County) and El Paso's
production to the southeast (in Knox and Davies Counties). Thus far in 2007, we
have participated in the drilling of 4 wells in Knox County: Holscher 1h, Bond
1h, Taylor 1h, and the Scott 1h. All 4 of these wells were drilled horizontally
using a foam drilling fluid system, and all encountered numerous fractures based
upon the formation water and natural gas encountered during drilling. These 4
wells are presently being completed with pumping units installed in order to
remove initial formation water and to allow longer term testing of the wells.
Management is very encouraged with results experienced to date in this area. We
and our partners are planning the installation of a gathering and compression
system, as well as the drilling of 3 additional horizontal wells in the same
area of this AMI later this year.

In Greene County, we have a 19.7% working interest in the Aurora/Wabash Area of
Mutual Interest (AMI), consisting of approximately 122,000 gross acres
(approximately 24,400 acres net to us). Also in Greene County, Baseline has a
6.9% working interest in an El Paso AMI (approximately 8,000 acres of which we
have 560 acres net to our interest). In 2006, Baseline participated in seven New
Albany natural gas pilot wells (four horizontal and three vertical wells), one
natural gas sales facility, two salt water disposal wells, three Devonian Reef
gas wells (5% working interest to us). To date in 2007, we have participated in
the drilling of 3 New Albany Shale horizontal wells in Greene County. Of these 3
horizontal wells, the Corbin 1h (19.7% WI) just recently completed drilling,
another of the 3 wells was drilled in southern Greene County in the El Paso AMI
tested natural gas and has been temporarily shut-in waiting on pipeline
infrastructure (6.9% WI), and the third of these 3 wells encountered mechanical
problems during drilling and operations were suspended 19.7% WI). With regard to
the Corbin 1h, our partners and us utilized the foam drilling fluid approach,
which was successfully utilized in Knox County. This well has had very
encouraging early test results and, based on the Corbin 1h, we and our partners
are further evaluating and high-grading the prospective areas of this large
acreage position as testing is completed and additional drilling and gas sales
infrastructure are assessed.

We intend to continue to participate in the New Albany Shale development and,
based on the results of the wells drilled during 2007, will work with our
partners to evaluate and prioritize future drilling. We anticipate that as many
as 500 to 1,000 horizontal wells could be eventually drilled on the current
leasehold, depending on the productivity and reserve potential of the horizontal
wells.

The industry has reported a range of natural gas production rate reserve
potential in the New Albany Shale Play; however, because there is not extensive
production history from horizontal wells completed in the New Albany Shale, we


                                       17
<PAGE>

have no proven reserves booked to its acreage position. Currently available
public information indicates that each horizontal well should drain 160 to 320
acres at a depth of 1500 to 2500 feet. Estimated reserves are in the range of
0.7 bcf to nearly 2 bcf per well, depending on initial production rates. Wells
have had reported test rates of 50 mcfpd to 1,000 mcfpd, and `typical' wells are
currently expected to produce 300 mcfpd or more.

The ability to better predict production rates and reserves per well, as well as
establishing the best methodology to drill and complete the horizontal wells,
will allow us and our partners to better understand the economics of each well,
and the overall play in general. We believe that a more complete understanding
and longer term production histories will drive the future drilling activity and
accelerated development potential of the New Albany Shale play, as well as will
influence our continuing participation and funding needs in 2008 and beyond.

North Texas Assets

The North Texas Assets acquired by us in Stephen's County, Texas consists of a
100% working interest (78% net revenue interest) on a contiguous 4,600 acre
waterflood which presently produces 660 Boe/d gross(520 Boe/d net). There are 81
oil wells producing in the field, and it is an active waterflood with 54
injection wells. There are two central operating facilities and three tank
batteries. After the waterflood was initiated in the 1980's, oil production
peaked at 1500 bopd from the central six leases. The two western leases have not
been incorporated into the waterflood with the central leases and it is planned
to expand the waterflood to the western leases. We believe the Stephens County
Transaction provides immediate development opportunities. Last year, the
property generated $6.5 million of field level cash flow. The entirety of
current production and proved reserves are contained within the existing
producing Caddo Lime formation, located at a depth of approximately 3,300 feet.
Of the total 4,600 acres, the central and eastern 2,800 acres are under existing
waterflood while the western 1,800 acres have yet to be extensively developed.
During the second quarter Stephens County and its environs experienced very
heavy rains, numerous strong electrical storms, and flooding. Despite the
adverse weather conditions resulting in periodic downtime, we experienced no
meaningful damage to our facilities, and have been able to maintain production
rates in the field while initiating our development plans to expand the existing
waterflood. We have worked over and completed 8 wells, each producing 5-10 BO/D.
This increase in production offset the aforementioned periodic weather related
shut-ins. Production currently averages 660 BOE/D (gross), or 520 BOE/D net.
Since the closing of the acquisition of the North Texas Assets, we have
commenced a field study of existing wells. Coupled with the very favorable
results (100% success rate) of the first eight workovers, management has
identified 20 to 25 additional workovers to perform during 2007. As weather
conditions return to normal, we intend to accelerate our workover activity in
the field, and expect to begin infill drilling in the field by the end of the
third quarter of 2007. Management believes this should have a significant
positive impact on cash flow generated by this property during the remainder of
2007 and beyond.

Proved reserves have been estimated by a third party engineering firm to be 3.6
million boe (net) with a pre-tax PV10 value of $49.9 million at field product
prices of $58/bbl and $1.77/mcf. Of the proved reserves, 70% are PDP, 10% PDNP
and 20% are PUD reserves.

We will be evaluating and finalizing further development plans for the
significant expansion of the waterflood to the western leases, which are
presently producing oil from the Caddo Lime, but not under waterflood.
Management believes that this western expansion could add up to 2.0 MMbbls of
incremental proved reserves. In addition, we believe the Caddo Lime oil
formation is a good candidate for an Alkaline Surfactant Polymer (ASP) flood,
and this enhanced oil recovery technique will be evaluated in 2007. There also
is shallow gas production in this region, and the natural gas potential for the
Marble Falls and Duffer gas formations will be evaluated during 2007, together
with the identification of additional leases which may be attractive in the


                                       18
<PAGE>

area. In addition, the Barnett Shale is located at approximately 4900 feet in
this area, and the production potential of the Shale in this region has not been
evaluated.

Liquidity and Source of Capital

We currently believe, based upon our forecasts and our liquidity and capital
requirements for the near-term future, that the combination of our expected
internally-generated cash, the borrowings under our revolving credit facility
entered into in April 2007 and our working capital, we have adequate funds for
our anticipated capital and liquidity requirements for the next twelve months in
connection with our above plan of operations.

On April 12, 2007, we entered into a $75 million revolving credit commitment and
term loan under the Credit Agreement (as defined below), of which approximately
$45 million was available to be drawn down by us at May 12, 2007, subject to and
only in the event that we satisfied various financial and other covenants
contained in the credit agreement. On April 12, 2007, we drew down approximately
$9.7 million as a Revolving Loan and $20.3 million as a Term Loan in connection
with acquisition of the North Texas Assets and our repayment of the Lakewood
Financing (as defined below).

We also expect to receive proceeds during 2007 from production associated with
those wells operating in north Texas that we acquired as part of the North Texas
Assets. During the second quarter of 2007 our net revenues attributable to
production from these wells were approximately $2,800,000.

Should our estimated capital needs be erroneous and our costs and expenses prove
to be greater than we currently anticipate, or should we change our current
operations plan in a manner that will increase or accelerate our anticipated
costs and expenses, the depletion of our working capital would be accelerated.
Although we anticipate that adequate funds will remain available to us under the
Credit Agreement, if we were unable to access such funding by reason of our
failure to satisfy borrowing covenants under the credit agreement we would have
to use other alternative resources. To the extent it becomes necessary to raise
additional cash in the future if our current cash and working capital resources
are depleted, we will seek to raise it through the public or private sale of
debt or our equity securities, funding from joint venture or strategic partners,
or a combination of the foregoing. We may also seek to satisfy indebtedness
without any cash outlay through the private issuance of debt or equity
securities. The sale of additional equity securities or convertible debt
securities would result in dilution to our shareholders. We cannot give you any
assurance that we will be able to secure the additional cash or working capital
we may require to continue our operations in such circumstances.

On April 12, 2007, we entered into a $75 million Credit Agreement (the "Credit
Agreement") with Drawbridge Special Opportunities Fund LP, as Administrative
Agent and various named lenders (the "Lenders"). The Credit Agreement provides
for a revolving credit commitment of up to $54.7 million and a Term Loan
Commitment of $20.3 million. Revolving Loans must be paid on or before April 12,
2010 and Term Loans on or before October 12, 2010. The Revolving Loans accrue
interest at the Prime Rate and The Term Loans accrue interest at the Prime Rate
or 7.5%, whichever is greater, plus 3%. Additionally, we granted the Lenders an
overriding royalty interest ranging between 2% and 3% in its existing oil and
gas properties and any properties that it acquires while the Credit Agreement is
in effect. The Credit Agreement requires our revenues to be deposited into a
lockbox account controlled by the Administrative agent. Funds in the lockbox
account on the last business day of the month are utilized, in order of
priority, to pay any amounts due for the overriding royalty interest granted
under the Credit Agreement, amounts due to third parties under swap agreements,
lease operating costs approved by the Administrative Agent, interest due on the
Term Loans and Revolving loans and general and administrative expenses up to
$225,000 per quarter. Any amounts remaining in the lockbox account in excess of


                                       19
<PAGE>

$250,000 are to be used to repay outstanding principal, to be applied first to
the Term Loans. Baseline's obligations under the Credit Agreement are secured by
a first lien on all of its existing oil and gas properties, including the North
Texas Assets, and any properties acquired while the Credit Agreement is in
effect. On April 12, 2007 Baseline drew down $9.7 million as a Revolving Loan.
In addition, Baseline drew down $20.3 million as a Term Loan. The funds were
utilized to repay the $1,700,000 principal amount loaned to us by Lakewood
Group, LLC (the "Lakewood Financing"), including related accrued interest and
fees, and to fund the adjusted purchase price and a portion of the capitalized
transaction costs for the acquisition of the North Texas Assets.

In accordance with a requirement of the Credit Agreement, on April 12, 2007, we
also entered into a Swap Agreement ("Swap Agreement") with Macquarie Bank
Limited, which Swap Agreement provides that we put in place, for each month
through the third anniversary thereof, separate swap hedges, as adjusted from
time to time as specified therein, with respect to notional volumes which are
approximately 75% of the reasonably anticipated projected production from Proved
Developed Producing Reserves (as defined in the credit agreement) for each of
crude oil and natural gas, calculated separately pursuant to the requirements of
the Credit Agreement. Immediately subsequent to the credit facility transaction,
we entered into a hedging arrangement under the Swap Agreement with Macquarie
Bank Limited, providing for a fixed price of $68.20 per barrel for a three year
period, commencing June 1, 2007. The hedging arrangement is based upon a minimum
of 11,000 barrels in the first year and provides for monthly settlements.

During July 2007, Baseline modified its hedge from a fixed price swap to a
collar with a floor of $68.20 and a ceiling of $74.20 for the period from August
2007 through December 2008. Subsequent to December 2008 it reverts to a swap
agreement at $68.20. In exchange for the near term switch from a fixed price
swap to a collar, Baseline provided a right to the hedge provider to purchase
7,000 barrels per month at $73.20 per barrel from June 2010 through December
2011.

On May 30, 2007 holders of our 10% convertible promissory notes unanimously
agreed to extend the maturity date of the notes from May 15, 2007 to November
15, 2007. As consideration for the extension of the notes, Baseline issued
380,000 shares in aggregate to the holders of the notes and increased the coupon
rate on the notes from 10% to 12% per annum effective May 16, 2007. The 10%
convertible promissory notes, in the aggregate principal amount of $2.375
million, were initially issued in November 2005. Under the notes, the holders
(i) may elect to receive interest in cash or in shares of common stock valued at
$0.50 per share and (ii) at any time prior to maturity may convert the principal
and accrued but unpaid interest on their note into such number of shares of
common stock equal to the outstanding principal amount plus accrued but unpaid
interest, divided by $0.50, or a total of 4,750,000 shares, excluding interest.

Contractual Obligations

Except for the Swap Agreement, as discussed above in connection with the Credit
Agreement, which is to be settled on a monthly basis commencing June 1, 2007,
the Credit Agreement, on which interest and principal is to be paid on a monthly
basis and the convertible notes issued in privately negotiated transactions
involving the offer and sale of $2.375 million in units consisting of 10%
convertible promissory notes and shares of common stock, which provide for us to
make quarterly interest payments of approximately $59,000, payable either in
cash or shares of our Common Stock, we do not currently have any contractual
obligations.


                                       20
<PAGE>

Off-Balance-Sheet Arrangements

We have no off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources that is material to any investor in our
securities.

Item 3. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-15(e). In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

At the end of the period covered by this Quarterly Report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2007, the disclosure controls
and procedures of the Company were effective to ensure that the information
required to be disclosed in the Company's Exchange Act reports was recorded,
processed, summarized and reported on a timely basis.

There were no changes in internal controls over financial reporting that
occurred during the fiscal quarter ended June 30, 2007, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


                                       21
<PAGE>

                                     PART II
                                OTHER INFORMATION

Item 5. Other Information.

(a) Reports on Form 8-K

During the period covered by this Report, we filed Current Reports on Form 8-K
on each of the following dates: (i) April 18, 2007 (announcing entry into a
credit agreement and unregistered sales of securities) and (ii) June 6, 2007
(announcing an extension of a loan agreement and unregistered sales of
securities.

Item 6. Exhibits.

      Exhibit Number        Description
      --------------        -----------

      31.1                  Certification of Chief Executive Officer pursuant to
                            Section 302 of the Sarbanes-Oxley Act of 2002

      31.2                  Certification of Chief Financial Officer pursuant to
                            Section 302 of the Sarbanes-Oxley Act of 2002

      32.1                  Certification pursuant to 18 U.S.C. 1350, adopted
                            pursuant to Section 906 of the Sarbanes-Oxley Act of
                            2002, by Chief Executive Officer

      32.2                  Certification pursuant to 18 U.S.C. 1350, adopted
                            pursuant to Section 906 of the Sarbanes-Oxley Act of
                            2002, by Chief Financial Officer


                                       22
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                    BASELINE OIL & GAS CORP.


Date: August 14, 2007               By: /s/ Thomas Kaetzer
                                        ----------------------------------------
                                        Name: Thomas Kaetzer
                                        Title: Chairman, Chief Executive Officer


Date: August 14, 2007               By: /s/ Richard M. Cohen
                                        ----------------------------------------
                                        Name: Richard M. Cohen
                                        Title: Chief Financial Officer


                                       23